Since we have been approached by several race registration companies to either partner or be acquired, I thought it would be worthwhile to write a blog about registration company valuation. This builds on our Race Registration Market Analysis and Future Trends in Race Registration. This is an important topic for companies in the registration business as many think they are building businesses with value (probably not as much as they think), and for companies thinking about acquiring registration businesses (you don’t have to acquire – you can partner). However, it is most important for races since they are putting an increasing amount of faith in their registration company being able to securely store their customer data, process money quickly and be their marketing engine for driving participation. If you take our premise from the earlier blogs that all 100 registration companies will not be here in several years, then a lot of customers are going to have to figure out alternatives and understanding the market can be helpful.
Note: I’ve included a section at the bottom on my (Bob) experience in the area of valuations.
There are three primary ways a company can build value:
- Technology Value
- Installed Base Value
- People Value
I will also give some perspective on how RunSignUp is really bringing havoc to the market from a registration company perspective.
Everyone who builds something is proud of it. They spend a lot of time and money building their registration system. And it is a LOT harder than it looks requiring at least a dozen person years of focused development to get a decent system in place. A competent developer costs about $100K fully burdened so every decent registration system out there has spent at least $1M building the darn thing.
So you would expect an acquirer to pay at least $1M of technology value, especially because there is value in getting a product to market. The problem is that a potential acquirer has 100 different choices of companies to buy. And if the acquirer already has technology, then the company being acquired has no real value from a technology perspective.
This has been one of the big issues when registration companies have come to us. Their expectation is they are worth far more than $1M because they spent that much on developing this great software. Well, certainly from a RunSignUp perspective, it is not really worth anything because we already have it. And there are limited new companies that want to get into the ownership of a registration business and they have 99 companies they could potentially acquire so they have leverage in driving down the price.
Installed Base Valuation
There is tangible value here. If your registration business is doing 200,000 registrations per year, then there is value in acquiring those customers.
Different acquirers will have different ways of valuing those registrations. At the base is how much are those registrations worth in the business model and pricing model of the acquirer. The key measure here is the “Gross Profit” – meaning after paying credit card fees and any channel partner fees – how much is left to run the business. Meaning to pay for the computers, ongoing software development, customer support, sales, finance and corporate structure and overhead. This is strongly influenced by the pricing model of the acquirer. For a high priced registration company like Active it is probably over $2.00 per registration, while for RunSignUp it is around $1.00.
If they have other businesses like selling timing chips and they think they can capture some of those registrations to increase chip sales, then it can add to the gross profit calculation.
Once the acquirer makes an estimate of the gross profit value per year of the registration company, then comes the negotiation on how many years and how much per year should go to which party. In one proposal we made, it was a declining % of the gross profit over 3 years and then a set % for any customer continuing indefinitely. We felt this was a valid proposal since the registration company gets their full gross profit this year (unless they have high prices and the business is forced to decline to the RunSignUp pricing level), and gets to unburden all of their costs of development, customer service and sales.
I think a fair number is probably 2X Gross Profit that gets paid out over a period of time. So a 500,000 registration business is probably worth $400K to a company like RunSignUp assuming the 500,000 registrations continue into the future.
The final part of the value is the people that will become part of the new organization. If the acquirer has a high need for those people, then this can work out very well for both sides. The future compensation of the people should be part of the calculation in terms of looking at total deal value. My personal recommendation is to break out the people value separate from the deal value. Meaning if you want to hang onto people as an acquirer put in the budget and potentially contracts bonuses over a period of time – essentially golden handcuffs. These can even be performance based so that future goal alignment is assured (just make sure you pick the right goals that will last a few years).
RunSignUp is Taking the Oxygen Out of the Market
RunSignUp has made the market harder for other race registration providers in several ways:
- Low transaction based pricing forces other vendors to match our price in competitive situations (even if you are staying with your vendor, threaten a move to RunSignUp and you will probably save some $).
- Fast Payment takes the “Float” away. Since we pay races directly from the credit card network, we are hurting the old business model of making race payments once or twice a month or after a race is over. Many registration companies use this float to finance their business.
- Advanced Technology. The current RunSignUp system compares very favorably to any of the other vendors in the market today, and we are clearly not sitting still. This development and implementation takes time and money. Since we are now the #2 vendor in the race registration market, we generate more Gross Profit to plow back into development than other vendors and we have the track record of efficient continuing development.
- No Unicorn Ambitions. The goal of our business is to be here for a longggg time. I have financed this business personally, so there are no outside investors to tell us what to do. My role model is Alan Jones, who is 20 years older than me – I want to be running RunSignUp when I am his age still. This is a solid business where our employees can make a decent living and I can make a decent return on my investment of money and time over a period of many years.
RunSignUp’s Partnership and Acquisition Interests
As we signaled earlier this year with our acquisitions of The Race Director and RaceJoy, we are interested in building a portfolio of race related software based technology businesses. It is important to restate SOFTWARE based. We are NOT interested in hardware and timing equipment.
Right now, we are primarily interested in creating partnerships with other companies who need a registration platform. We have been creative with several timing equipment companies in partnerships of our scoring, results and registration technology. We also have a couple of former registration companies who are now white labeling our technology and taking it to their customers along with some of their own value added race management and marketing services.
We are also willing to talk with registration companies who may not have reached critical mass in market adoption or technology advancement. As the above makes clear, we are not going to be over-payers in this area, but are very open to scenarios where customers and employees have a great path forward into the future as we continue to grow.
Bob’s Valuation & Acquisition Background
I have been fortunate to be a part of a number of fast growing companies. I have been a significant contributor to 7 companies who have been acquired including Bluestone (by HP for $450M), JBoss (by Red Hat for $350M), and Hyperic/Spring (by VMWare for $420M). I have also led the acquisition of over 10 companies into the various companies I have worked with. I also have been (and am) on the boards and an investor in over 10 companies. In addition, I have been hired by various venture capital companies to do technical and market due diligence on dozens of potential companies for them over the past 14 years. These experiences have given me a lot of experience about what works and what does not when it comes to acquisitions on both sides, and how companies are valued.