How to Transfer Ownership

[CaptainBlueBear]

I have someone who wants to sell me his hosting business.

I don't know him but he seems like an honest person via email and phone. All that he has said about his business, and some personal things he said, I have been able to confirm via a bit of cyber-research. For example, he says his business is 5 years old and I found him asking questions about hosting 5 years ago on an email list and his domains were registered 5 years ago. I haven't been able to find anything, actually, to indicate he may be lying.

He showed me his WHMCS and it looks like he says, regarding income and clients. So, in short, it certainly appears to be a legitimate (and good) deal.

Question ONE is how do I make the transfer? He said someone else had mentioned paying 75% up front, then he transfers everything and then the last 25% is paid.

Question TWO is what needs to be transferred? I have a small hosting business but I resell one account at a time--now I am getting his dedicated server with WHMCS (which I never used before). I made this list and put it in a little contract:

Included in the sale are:

1. Ownership (via registrar records) of the following domain names:
a. hismainsite.com
b. hisdomainserverdomainname.com
2. Ownership and full control of the dedicated server leased from SomeProvider at IP address xx.xx.xx.xx
3. Ownership and full control of the leased WHMCS license on that dedicated server
4. Exclusive rights to all income generated by this business from this day and forward

Does this look good? Any other advice? I am quite nervous because I never purchased a business before and we are talking about well over $10K for the first check...

Thank you.

 

[HostMantis]

Are you writing the contract yourself or having an attorney do it for you? It sounds like you are writing it yourself, but maybe I'm wrong?

Considering the amount of money you are talking about, I wouldn't even consider the purchase unless a legal team that has experience in Internet related business purchases was involved.

 

[CaptainBlueBear]

I thought about that and that was my first plan too. But, and maybe I need a sanity check here, the seller is even less of a businessman than I. He actually gave me his master login to WHCMS now to look around. He's a graphic artist and was hosting his clients but now he wants to stop dealing with it and just do his artwork--he's an artist not a businessman and has no intention, AFAICT, to trick anybody.

So it SEEMS that I can trust him. He also said it would be fine with him to use escrow or if I would find a lawyer in his city and have the lawyer hold the check while he makes the transfer--then I'm very protected.

But since he appears so easy going about it, I thought to just save a few dollars and skip the lawyer. That's why I also did some research on him, to try to ascertain his veracity, and what that I can find coincides with everything he has said. So I think he is an honest person.

 

[HostMantis]

I thought about that and that was my first plan too. But, and maybe I need a sanity check here, the seller is even less of a businessman than I. He actually gave me his master login to WHCMS now to look around. He's a graphic artist and was hosting his clients but now he wants to stop dealing with it and just do his artwork--he's an artist not a businessman and has no intention, AFAICT, to trick anybody.

So it SEEMS that I can trust him. He also said it would be fine with him to use escrow or if I would find a lawyer in his city and have the lawyer hold the check while he makes the transfer--then I'm very protected.

But since he appears so easy going about it, I thought to just save a few dollars and skip the lawyer. That's why I also did some research on him, to try to ascertain his veracity, and what that I can find coincides with everything he has said. So I think he is an honest person.

It's possible that he is truly an honest person, but as much theft we see on a daily basis from shady people that appear honest until they get what they want and then disappear, is a huge chance to take with that amount of money.

It's possible the WHMCS account he gave you login info for is an account that has been compromised and the owner is unaware at this point.

 

[hosthop]

If you are serious about it, I would ask him to see income tax returns, and his books see if the income coming is is all hosting or also his art business.

WHMCS is a good management tool we use it, you will like it too. Just make sure before you do the transfer you have a no compete with the guy in terms of owning a hosting company and any existing customers for at least 2 years (for hosting purposes only not development).

You say he is a graphic designer and not a business man? What is a business man other than someone who sees a need and fills it, and from the sounds of it he did that. But now he wants out of the "hosting" end of things and wants to focus on his core business. We would have to agree with him. There are so many facets to this business you can get overwhelmed. If you are serious about growing your own portfolio of hosting customers and it sounds like a designed site. Then you are half way there.

I would not worry so much about the WHMCS as much as the server itself. Do you know how to admin it? or are you going to pay a 3rd party to do that? What are the costs for maintenance on the server? It also sounds like it the server is 5 years old? That is about the time we would be looking for a new one. So ask questions about that too, not just the customers but also the equipment itself.

You have to also ask yourself, where is it located (the server) and what are your expectations? What is the ROI if you keep all the current customers? or how long will it take you at the current receivables level to get your money back plus be able to pay for the server itself.

Personally we have built our business one customer at a time, but there is nothing wrong with buying someone else's hard work if you do your due diligence and see if it is a fair deal to you.

If you are not sure how to do due diligence and are not sure what you are getting into, if it is a substantial amount of money you said first check is 10k then I would get a CPA to look at the books at the minimum. They can help you determine whether is it a good deal.

If you have any more questions do not hesitate to ask.

 

[Hostigation]

Couple of things not mentioned, and it sounds like a sizable purchase. Pay out of income, and if income declines, so do payments. People (customers) hate change, not saying you will be a worse provider, but some people just really hate change, and you should not have to pay for a customer that leaves.

 

[CaptainBlueBear]

Interesting thoughts, hosthop. Non-compete is a good idea but anyway he says he wants to get out of web work altogether and do non-web design and art. I will add a non-compete anyway in the contract. Truth is that I think were he to get a web job, he would send them to me for hosting. That's the kind of person he appears to be.

As far as the server, SoftLayer is the provider and owner of the hardware. They provide limited upkeep apparently however. So this is a good question.

As far as new customers, I don't expect to get much. His site is dismally ugly and I don't think that's how he got his clients. But I am paying 1 year's profit (meaning income minus server costs minus WHMCS costs) so as long as things stay more or less the same for 2 years, then I'm fine.

I understand the basic numbers just fine and he has also explained what part of the income was design work and what is not. I'm not 100% clear how to see that in WHMCS but I asked him about that now.

I also run my own hosting business but I don't really have any books to show anyone. When I get a new client, I purchase an account from my supplier for $X and charge the client my client X times three. They pay me first and then I pay one third of that to my supplier. Works quite well and is so simple I don't have any "books."

He says his income is X from hosting, and his costs are Y and Z for server and WHMCS. Seems to me he has a more simple approach than a proper business like you guys have with books etc.

He says he gets around one support request a week, which I think is reasonable for simple sites.

Hostigation, hi. I suggested to pay half up front and the other half in income and he said he wants it all now and explained why--he wants to invest in a studio. I can understand that as well. I think most sales are a one-time fee--that's certainly how Flippa works and how corporate takeovers work AFAIK.

Of course a customer may leave, but in my experience, most won't because it's a big headache for a non-techie to move a site and change DNS and recreate emails etc. For example, he has clients who have restaurants or a hand-made game manufacturer or a Kung-Fu school etc. Most of these people don't want nor know how to change hosts. Many don't even know how to create an email account on cPanel, he says, and they ask him.

Thank you for your replies!

 

[CaptainBlueBear]

I just heard back from him now.

The report "Recurring Income Summary" (admin/reports.php?report=recurring_income) has for "Total Income" exactly what he claims. He also said he is making screenshots of his bank statements and will send me those as they corroborate his claims.

What I don't understand is that on "Income Forecast" (admin/reports.php?report=income_forecast) it shows 25 months (Jan '11 thru Jan '13) and the total there is only 10% more than the total income of the "Recurring Income Summary" report. But if this is meant to be for 25 months then it should be over double. This seems odd.

Now the "Annual Income Report for 2010" (admin/reports.php?report=annual_income_report&year=2010&currencyid=1) shows additional $6K income, which actually makes sense because that would be the design work money that he collected via WHCMS.

Another confusing report however is "Server Revenue Forecasts" (admin/reports.php?report=server_revenue_forecasts) where it shows Total Income as a lot less than the other reports...

One more small point--while I am duly unimpressed with his site, he does have more clients than I do and while some may leave, some more sign up! We all know that the best advertising is references, and those work even with an ugly site. I can also make his site look nicer once it's mine.

Thanks.