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Hillary Stiff Cheval Capital, Inc. April 27, 2007

How Much is Your Company Worth?. Hillary Stiff Cheval Capital, Inc. April 27, 2007. Agenda. Cheval Capital, Inc. Valuation Methodology Multiples-Historical, Current and Projected Terms-Price Versus Risk Factors in Valuation Deal Volume Summary. Cheval Capital, Inc. Who we are.

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Hillary Stiff Cheval Capital, Inc. April 27, 2007

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  1. How Much is Your Company Worth? Hillary Stiff Cheval Capital, Inc. April 27, 2007

  2. Agenda • Cheval Capital, Inc. • Valuation Methodology • Multiples-Historical, Current and Projected • Terms-Price Versus Risk • Factors in Valuation • Deal Volume • Summary How Much Is Your Company Worth – Cheval Capital, Inc.

  3. Cheval Capital, Inc. • Who we are. • Boutique investment bank active in hosting/ISPs since 1996. • Completed over 85 Hosting/ISP acquisitions, 20 in 2006 and 6 in the first few months of 2007. • Who we work for. • Endurance International Group, Verio, Rackspace, Nextel, etc. • Clearinghouse for small and mid sized companies. • What we do. • Use our contacts, market knowledge & experience to get the best terms and increase the likelihood for success. • Distribute a weekly deal listing with over 30 sellers, creating a deal marketplace. How Much Is Your Company Worth – Cheval Capital, Inc.

  4. Valuation I • Generally quoted as a multiple of recurring revenues. • Multiples can be calculated based on historic recurring revenues; trailing twelve months or trailing six/three months annualized. • Multiples typically calculated on current annualized recurring revenue basis. • Non-recurring revenues are typically not included or if included will be calculated at a lower multiple with payments made post close. How Much Is Your Company Worth – Cheval Capital, Inc.

  5. Annualized Recurring Revenue • Annualized Recurring Revenue is the most commonly used revenue base for valuation purposes. • Illustration of how to calculate Annualized Recurring Revenue. • 10,000 customers @ $10/mo x 12 pmts = $1,200,000 • 15,000 customers @ $15/mo x 12 pmts = $2,700,000 • 25,000 customers @ $25/qtr x 4 pmts = $2,500,000 • 3,000 customers @ $100/yr x 1 pmt = $ 300,000 • Total Annualized Revenues = $6,700,000 How Much Is Your Company Worth – Cheval Capital, Inc.

  6. Market Conditions – Buyer Types • Consolidators • Makes up the bulk of all buyers. • Looking to add customers to their existing infrastructure. • Concerned with profitability of acquired customers on their infrastructure. • Platform/Strategic buyers • Looking for a base of operations for a new product line or company. • Concerned with systems, processes, network, employees & profitability. How Much Is Your Company Worth – Cheval Capital, Inc.

  7. Valuation II • Consolidating buyers concerned with their profitability not the seller’s. • Buyers look at a variety of things to determine profitability of seller’s revenues to them. • Bandwidth usage • ARPU • Customer growth and churn rates • Support & infrastructure intensity • Assets used to produce revenues are not separately valued – they are part of the revenue valuation. How Much Is Your Company Worth – Cheval Capital, Inc.

  8. Market Conditions - Multiples digitalNation Multiple of Annual Revenue 2.5x – 7.0x 2x – 4x 1.0x – 2.5x 0.5x-1.2x How Much Is Your Company Worth – Cheval Capital, Inc.

  9. Terms - Price Versus Risk • Price paid (and when) is a direct function of; • How profitable the business is to the buyer; and • How much risk there is of realizing that profit. • Two examples • 100% paid upfront in cash means more risk for the buyer and thus a lower price. • 100% paid over time based on profits means more risk for the seller and thus a higher price. How Much Is Your Company Worth – Cheval Capital, Inc.

  10. Market Conditions – Future Multiples • Lower industry growth rates • High churn • Pricing pressure • Noisy advertising environment • No big new buyers • Google, Yahoo, etc. • No barriers to entry 10x 1x Hosting Transaction Multiples 1999 2007 How Much Is Your Company Worth – Cheval Capital, Inc.

  11. Valuation III – Other Factors • Control Panel • Billing Systems • Credit Card Information • OS (Linux)‏ • Responsive Seller • US Based • Clean Records • Type of Hosting • Deal Size (under $100,000 or larger)‏ • ARPU • Pure Play How Much Is Your Company Worth – Cheval Capital, Inc.

  12. Market Conditions – Deal Volume • Sharp increase in numbers of buyers. • Buyers looking to offset difficulties in organic growth (churn, advertising noise, etc). • More companies have matured and have the systems and management to do an acquisition. • Most are small to medium sized hosters buying out of cash flow. • Sharp increase in numbers of sellers. • Customer base growth slows/stops/declines. • Management or investor fatigue. • Static multiples. • Out of space or power. How Much Is Your Company Worth – Cheval Capital, Inc.

  13. Summary • Good News • Transaction values stable. • More companies buying & selling. • Transactions fairly easy to accomplish for mainstream sellers at market multiples. • Deal volume increasing. • Not so Good News • Transaction values at risk if big players reduce industry profitability. • Unique companies difficult to sell. • Few well financed large buyers. How Much Is Your Company Worth – Cheval Capital, Inc.

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