You might come to the point where you would like grow by acquiring another web hosting business or maybe you want to sell your own business and retire from the industry. It is easy to find a buyer and it is also not difficult to find sellers who want to get out. But how do you put a fair value onto a web hosting business? This part of the process is the most difficult step. The seller always wants the highest prices while the buyer only wants to pay a small amount of money. The gap between those two expectations will either make or break a deal.
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Here are a few consideration and recommendations about how to determine what a web hosting business is worth and what people are willing to pay for clients.
Clients - what are they worth at all (money-wise) when buying a web hosting business? How do you determine the value? What do you have to keep in mind?
The first thing to consider and to find out - what payment terms are in place for the client payments? Do the clients pay monthly, quarterly, semi-annual, or even yearly? This is important to know, as it will affect your cash flow right away. Imagine you pay for clients that have yearly payments in place. In the worst case you would have to work almost 12 months before seeing any money. Clients with yearly payments in place are much less worth for the buyer compared to clients who pay on a monthly base. If a web host has different payment models in place you should split the clients into groups according to their payment schedule. Then work out a price for each group.
You also have to keep in mind that very often clients do not like change. They will be leaving the new web host very soon after the deal has been closed and the announcements to the clients have been made. From what we have seen - the percentage of this can go up to 15% in some cases - though 5% to 10% is a more reliable number. This should be considered when working out the deal.
Now it comes down to determine - how much are the clients worth?! Common values put on clients in the web hosting industry range from 3 to 9 months of the monthly revenue. In some cases even up to 12 months revenue has been recorded. It really depends on the business model and the quality of the clients. Small business clients are to leave the hosting company less likely than a customer with a personal website.
What else needs to be considered? If you are buying just the clients to integrate them into your business and under your business brand name, you'll be fine with the model introduced above. But what if you buy the complete business - including the name? Building a brand is a difficult and time-consuming process. Buying an existing brand gives the buyer a short cut. The result is that the business brand name is worth quite a bit. How much is it worth? It depends on each single case. One way to determine the value of a brand name is to see what the expected number of sign-ups per month is. 50 new clients per month on average will give you a good ballpark number. As it is more difficult to get new clients compared to keeping existing ones, the value put on these possible clients is less than the value put on existing clients. A 3 to 6 month value of the expected revenue from this seems to be a fair value to determine the brand name value. But again - this might vary and each case needs to be looked at separately.
If a complete business is being sold, it might include hardware and software licenses. Determine the value of these items per age (especially hardware) and what kind of software licenses you would sell/buy.
Buying a business (not just the customer base) might also bring liabilities. Are there any employees to take onboard? Are there existing contracts with vendors (data center, software, etc.) that need to be served? Determine the outstanding $$$ amount per item. Make sure that the supply cost is reasonable and that you are allowed to buy/sell the contract/agreement. Under normal circumstances this should not pose a problem. But if the cost or contractual agreement is limiting your way of taking advantage of the business this should be considered when making an offer for a business.
How about the terms of the payment when selling a web hosting business? Paying for everything 100% is not a good thing. The seller walks away and you just have to hope that everything will go on as 'advertised'. A 60% payment when the deal closes gives the seller security to get his money. The buyer also knows that he is not risking 100% of his investment right away. The outstanding amount should be split into smaller payments. Depending on the overall amount of the outstanding money, the time frame for the payment should be split between 3 to 12 months before 100% are paid out. The smaller the amount is, the shorter the time frame should be.
A good way for the buyer to make sure he gets what he is paying for is to keep the seller around for 3 to 6 months. The contract should clearly state that the seller is available a certain amount of time or the outstanding price is not being paid. The seller should also sign a non-compete agreement and eventually a no-disclosure agreement to protect the buyer.
Buying an existing business also requires a good strategy upfront. Would you be integrating the clients into your business or run the new business under its old name? Do you want to move the clients to your hardware and consolidate or leave them where they are? How about support? Does your staff have the skills and knowledge to support the different environment? Do you have staff at all or do you eventually need to hire someone? Would you rather buy one big business or maybe many smaller ones? Consider these things when being in the market for buying a web hosting business.
