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Math: Revenues of Monthly vs. Annual Hosting Accounts

A question we often deal with is whether annual accounts affect the sale of a hosting business.  We deal with the bulk of those issues in a post here.  In this post we are going to look at the revenue a base of monthly accounts produces vs. a base of annual accounts.

The point we'd like to highlight is that there are no revenue differences between a base of annual vs monthly accounts as long as the renewal dates are spread out evenly and they are paying the same price. A base made up of monthly customers gets 1/12th of total annual revenue each month when all customers pay their monthly bill. A base made up of annual customers gets 1/12th of the total annual revenue of the company each month when 1/12th of the customer base renews for another year. For some reason this gets confused and I hope the table below is helpful.

Assume: Two customer bases of 12 customers each.  One is all monthly and the other is all annual.  Renewals are evenly distributed and the price is $10/mo or $120/yr.

       Annual Base      Monthly Base

Month# Renew Revenue# Renew Revenue

Jan    1 $     120     12 $     120

Feb    1 $     120     12 $     120

Mar    1 $     120     12 $     120

Apr    1 $     120     12 $     120

May    1 $     120     12 $     120

Jun    1 $     120     12 $     120

Jul    1 $     120     12 $     120

Aug    1 $     120     12 $     120

Sep    1 $     120     12 $     120

Oct    1 $     120     12 $     120

Nov    1 $     120     12 $     120

Dec    1 $     120     12 $     120

Total $   1,440  $   1,440


However, there can be very meaningful differences in revenue if the distribution of customer renewal dates is not uniform. For example, take a company that has all annual customers and they all renew in March. If you are looking to buy the company in April, you must be aware that you will get $0 of cash from the customer base for the next 11 months even while GAAP accounting says you have revenue.

As always, if you have any questions please do not hesitate to contact us.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed.  Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.