Acquiring another hosting company...

[beley]

Okay, we've been growing recently (Yay!) and I've recently begun negotiations with a few small hosts (mainly resellers) about buying their client base. I don't really care about websites, billing systems, etc. other than to gather the neccessary data.

Anyway, I know it's been discussed before but there are several different ways to valuate a hosting company, but due to the volitility of the industry I wanted to get your opinions on what the best method is...

I've heard to take the averaged monthly income and multiply by 3 or 4 months to come up with a selling price but is that too low? Remember, these are not full-blown companies with employees, assets, etc. This would be an acquisition of nothing more than a client base (and would even be taking over payments on the reseller accounts).

Any thoughts or insights into valuating the businesses? Input appreciated.

[beley]

I'm sorry, I just realized this should probably have gone in another forum. Mods, please move as you deem neccessary. Thanks!

<<ADMIN NOTE: Moved -:chicken:>>

[Andrew]

Hi Beley,

We just went through this. Mostly just to try it out and determine if its a good strategy for growth.

We bought a small hosting company - around 40 customers, and included taking over their dedicated server payments.

We payed 4 times their monthly revenue. To me, this seemed low at first. However, our plan was to buy the customers, move them to our servers, then cancel his dedicated server.

Things to consider:

Control Panel they are presently on and Control Panel you will be moving them too.

Size of their existing plans and size of the plans you will be moving them too.

Overall, the acquisition turned out ok for us...

But, it was a serious amount of work and not sure it was worth it.

In the future, I will only buy a hosting company that uses the same Control Panel as us and has "similar" plans.

The guy who we bought the business from was seriously a great guy. Without his cooperation with his ecisting customers, it may not have turned out as good.

Hope this helps, and dont hesitate in contacting me if you have any questions.

Thanks
Andrew

[noncompare]

This is getting to be the average... but is that 4-5 months worth of "revenue" or "net income"?

[Andrew]

Well, in hindsight, probably shouldve done 4-5 months worth of "net income" :)

But - we paid 4 months worth of revenue.

The thought process was....

Move to our servers, drop their dedicated server and the associated cost, then the reulting revenue is essentially profit (less support costs, etc... since we still had capacity to give on our servers)

Problem is, the host we bought, was offering ALOT more resources on their plans then we offer.

Some customers left because of the difference in resources offered (even though we kept their pricing the same and even though they werent coming near the resource limits we were offering)

Others left because of the change in control panel.

Overall, we kept 80% of the clients after all was said and done.

It couldve been alot lower if it wasnt for the cooperation of the host we purchased the business from.

Its not a bad way to grow, my only advise is to make sure you have analyzed all the variables and make sure the person you're buying the business from is willing to see it through and help you with their customers.

my $0.02

[noncompare]

Andrew, heh, charge it to "transitional costs" then... I was wondering about that, would it have "helped" keep those clients if you kept the old control panel instead (in a separate server or so.. and maybe subtlely egg them into moving to your other CP later)? This is a "matter of fact" question not a backhanded advice... because I'd reckon your concerns would be the overall cost (and hassle) of keeping the old CP, etc... and of course there are just those customers who would switch the moment ownership changed hands (even if it's a move "up"). So I'm wondering about the different implications with situations like that...

[noncompare]

Originally posted by beley:
Remember, these are not full-blown companies with employees, assets, etc. This would be an acquisition of nothing more than a client base

Wouldn't that make the acquisition just as valuable (if not more so)?


Though the expertise of the staff and hard assets (though if computer equipment, with rapid obsolescence) would be of importance, wouldn't this customer purchase (where the $$$ come from after all) even add to their "value" because after all, you're getting the part that directly generates your revenues.

[beley]

I was just referring to the formula to use to come up with worth. Obviously if a datacenter, dedicated servers, or even a few support techs were involved a completely different calculation would have had to been used to come up with the value of the business (or the selling price)

[noncompare]

Indeed that would require a different set of valuations, and that's exactly what I'm more curious about, how the different aspects of a web hosting operation would be valuated, which factors are significant for inclusion in valuation, and how they stack up in prioritization over the others.

There's of course the customer base, which so far is the prime basis of anyone wanting to purchase an existing host. But I've heard of cases where the sticky points actually amounted to other areas like hardware for example, because the previous owner wanted to be compensated for what he spent on purchasing (or set-up) of a dedi, and the buyer wants none of it because he'll just merge the customer base with existing customers, etc.

[Robert]

I've always found it difficult to aquire another web hosting company. Besides determining the cost, you have to factor in how will you take control over the new clients. Will you move them? Will you continue to use the existing server and take over the payments?

If you move them, how will you handle the downtime? What if they leave?

[Jag]

Most acquisition deals should include a churn rate of how many (estimated) will leave . And I promise some will simply leave becuase of new ownership.

[shost]

Jag is right, you have to think about how many will leave just due to a company changing owners. Usually, you can figure that 10% will leave just due to that fact.


If all else remains the same, (servers, cpanels, plans, and service) you should be able to get a 90% stay on rate.

I have bought 8 smaller hosts, and usually keep between 70 and 90% of the customers over a 6 month term. After that, I haven't kept track, but we have a small loss ratio.

I can't figure out if there is a sure fire way to evaluate hosting companies. All of them are different in one way or another, and I have had to pay a different price per account in each case. if you find a price that is good for you and the seller, then you both got a good deal.

Tim L

[Adam]

Never bought a hosting company, but im investing in a few and the market is stable if you do it right.

About acquisition, i've never bought one out but when im purchasing a company of some-sort i usually pay anything between 9months and 1yr3mths of turnover (thats just incoming money, not profit etc..).

Remember the main thing though is not to set a price and stay afixed to it. Think of a price your willing to offer, then bid a just a bit lower to what you was thinking of acquiring the company for. Then if you are told it may be too low... you raise it to the amount you personally evaluated it at. Works as a dual purpose, - it could save you costs, and if it doesnt it will let the owner you're serious about acquisition as you are appearing to stretch your resource to get a hold of the company in question.