Need Advice! Buying a Web Hosting Business

[bluesteam]

Hi All,

I always follow these boards but hardly ever post. I just need some advice.

I have been running my own hosting business for the past 8years. I have a friend who also started a hosting business not long after me. He has decided he wants to sell and I have never bought one of these businesses before and wouldn't know where to start.

Any advice would be welcome.

Questions I have are:

1. How much do web hosting business usually sell for?
2. How do you determine the buying/selling price?
3. What legal documents and processes should I follow to make this purchase final?
4. Is there anything specific I must watch out for?

Thanks in advance

BlueSteam

 

[paullopez]

How much does web hosting business usually sell for?

Well, it depends on the size of the infrastructure.

How do you determine the buying/selling price?

Total number of customers' + yearly income – operational cost= actual profit.

What legal documents and processes should I follow to make this purchase final?

You better hire a lawyer regarding this issue. It would be much safer.

Is there anything specific I must watch out for?

First, before you acquire your friend’s web hosting business, make sure there are not too many complicated (specifically abusive) support tickets on the board.

Second, once you acquire a web hosting company, make sure you notify all the customers about ownership change.

Third, if you are also going to acquire the whole website, then you may need to make several changes in the shopping cart area. You better make a good plan about it. Discuss this whole thing with your website development team and billing department as well. Make sure no issue will occur in the future when invoices generate.

Fourth, check his contracts with the data center service provider or with a primary web hosting company if he is a reseller. Make sure, there are no due payments or cover this while making the final deal.

Fifth, before you make a final decision think about risk and profit behind the acquisition. Discuss this with your management team properly.

Six, make a proper plan in case of the hosting accounts migration. If you are going to use the same existing facilities then it might be not an issue.

Seven: If he is ready to transfer all the hosting accounts to your servers, then let him do it. He should take care about it. Just make sure he informed his customers about the transition.

Note: May be I forget to mention some important points here or maybe my suggestions are overwhelming, but I am sure forum members of HD will guide you furthermore properly.

 

[bluesteam]

This is a great reply! Thank you....

one question: You said, "Total number of customers' + yearly income – operational cost= actual profit."

Would the buying price of the business be equal to whatever the annual profit is then? because profit and gross are two different things.

 

[ughosting]

Having purchased a few smaller "hobby hosts" from people who gave it a go, but found it wasn't for them I would say, check how many users have paid yearly, and how long ago.

i.e. are all the existing customers on year long subscriptions and have only just paid. (your mate's doing a runner with the cash and leaving you to host them for free).

It's doubtful, but whereas I charge "pro rata" for monthly accounts, some hosts charge "pro rata" for yearly accounts so they all renew in January, if your friends company does this, you could be out of pocket.

Also remember an account is only worth the profit made, not the money paid, one of the hosts I purchased didn't considered this and made a rod for his own back he couldn't sustain.

Make sure you get control of the paypal accounts and domains etc., otherwise you will have to get all of your customers to resubscribe to your account.
Change the passwords immediately and delete any email accounts from gateways that you don't control, otherwise you could become the next hostrail.

 

[eric1212]

I've heard a lot of different ways to calculate a company's selling price.
Average is around 80% of the annual profit.

Revenue - Expenses = Profit

If the business makes $50,000 profit in the last 12 months, it could sell for $40,000. You also have to add in if they own anything, such as servers, infrastructure, and if they have some advantages that you couldn't go out and get yourself, such as special contracts / agreements with providers, unique hosting market, etc.

Good luck!

 

[HostColor]

Here are my answers:

How much do web hosting business usually sell for?
A: Buyers want to pay between 0.6 and 1.5 times annual revenue. This is a robbery when it comes to selling however. You either buy accounts/clients or a brand/business.

How do you determine the buying/selling price?
A: Depends of the revenue, plus anything else that company posses which would bring value.

What legal documents and processes should I follow to make this purchase final?
A: It is like purchasing or selling any other business. You;d better use a lawyer.

Is there anything specific I must watch out for?
A: Yes. When buying you'd be more concerned on how would you keep the customers, instead of calculating the future profits. When the ownership changes, you;d better try to keep the previous owners and managers engaged for at least 6 months to 1 year.

 

[bluesteam]

Here are my answers:

How much do web hosting business usually sell for?
A: Buyers want to pay between 0.6 and 1.5 times annual revenue. This is a robbery when it comes to selling however. You either buy accounts/clients or a brand/business.

What's the difference between buying accounts/clients vs a brand/business? you also mentioned Annual revenue but most people I have discussed this with has mentioned Annual Profits which is Revenue - Expenses which equals Profits.

Can you elaborate?

 

[MBotelho]

I have a question: do you also buy the hardware or just the clients? Because if you just buy the clients then you will need to transfer them to your systems and they can get pretty upset with that

 

[bluesteam]

I have a question: do you also buy the hardware or just the clients? Because if you just buy the clients then you will need to transfer them to your systems and they can get pretty upset with that

Transfer doesn't need to happen immediately. If managed right, you can manage this and communicate properly you can have minimal interruption.

Your first question is also a question I need an answer on.

 

[HostedInside]

I have a question: do you also buy the hardware or just the clients? Because if you just buy the clients then you will need to transfer them to your systems and they can get pretty upset with that

I would recommend you to stay with the current servers. Unless you can perfect the transfer and the clients are happy then change servers.

 

[HostZealot]

hardware is the base of hosting service

Transfer doesn't need to happen immediately. If managed right, you can manage this and communicate properly you can have minimal interruption.

Your first question is also a question I need an answer on.

You NEED to acquire all hardware, or clients will experience interruption of service until you move them to your servers.

Pricing... is difficult. Why would anyone want to sell a business, generating $100 000 annually for $60 000 only? The terms should be convenient fro both sides, IMHO. $120 000 looks like a much more interesting offer, but are you ready to pay more with a risk to earn less?

There are not enough details on the state of his business. Is his client base growing in numbers or decreasing? How many new clients does he get a month? Is his service rated well by Google? If not - why? What can be done to improve the situation, will the SEO be worth the time and money spent?

What I want to say - you need dynamich analyses and comprehension of the state of events to form the price.

p.s. Hardware must be included into the price, or expenses may double, while profit may lover.

 

[raindog308]

Pricing... is difficult. Why would anyone want to sell a business, generating $100 000 annually for $60 000 only? The terms should be convenient fro both sides, IMHO. $120 000 looks like a much more interesting offer,

I'm not sure where those numbers came from, but "generates" can mean two different things. A business that "generates" $100,000 a year could be worth $0 if you mean $100K in gross and profit is zero.

A business with a profit of $100K a year is a different conversation. Keep in mind that there's other things you could do with your money - I wouldn't spend $1 million to make $100K a year because I could do as well in the typical mutual fund (at much, much lower risk).

 

[HostColor]

What's the difference between buying accounts/clients vs a brand/business? you also mentioned Annual revenue but most people I have discussed this with has mentioned Annual Profits which is Revenue - Expenses which equals Profits.

Can you elaborate?

Those who "buy customers" do not care about the efforts and money any particular business spent in establishing reputation. They do not calculate the costs of doing business. One who buys accounts, calculates only the revenue one would get from paying customers. Annual revenue is important figure as a profit depend very much on how a certain company is managed.

 

[romes]

Everyone made good points but research is the key. You need to have your buddy open everything to you so you can make sure you are getting what you paying for.

1. Roughly 60%-80% of annual profit is what you would expect to buy it for, but other factors can decrease or increase that figure. It all depends on the number of clients, infrastructure and the packages each client is on. I suggest not buying the clients if your buddy oversells (I don't know so don't get mad) or if his packages are not that good meaning the pricing vs space/bandwidth is off. You will definitely lose clients due to fixing their packages to your standards.

2. Buying out other hosting companies is a good way to expand. I did that once and it turned out ok but be ready to lose some clients. Not everyone likes a regime change so expect to lose a few people. It won't be the end of the world but be happy with those that stay and work hard to earn their trust.

3. IF you consider doing this again, I suggest just buying clients as buying the whole business will mean more money spent. Though, if a brand is profitable it might be worth considering operating under two names and making your main host the parent company. But, buying clients off kiddie hosts will help increase your revenue but try to do it slowly as spending too much money to fast can lead to problems.

4. My last point (sorry for my ramble). The reason you never pay full price for the business is because you are gonna lose people during the move. As I said before, a regime change is not something some people like and will ditch to find someone else. So paying $25k for $25k in profits doesn't make sense as after the move it might drop down to $15k or it might not. You never know so paying 60%-80% is fair. It covers you from the drop rate.

 

[mehulagrawaal]

I hope you have got the convinced answer but it would be better if you go to some Lawyer and CA. Having this kind of discussion practically is gonna help you a lot and you will be more clear.