What to consider before selling your hosting business
There are many reasons you might be interested in selling some or all of your hosting business. Some of the typical ones include general fatigue, alternative opportunities, a strategic shift in business concentration resulting in a change in services offered (for example no longer offering shared hosting), a partnership that has gone sideways and many more. Once you’ve made the decision to part with what might be your baby, this may be more than just a rational choice and may also involve some emotional aspects. If you are going to sell your hosting business, you should immediately start to think about valuation and how to maximize this.
In terms of what you can expect to get for your business, generally you will be looking at somewhere around 1X the annual revenues for the customers you currently have. This is very much an average figure and there are many aspects which will move this higher or lower. For example, if your shared hosting customers generate $100,000 in sales monthly, this equals $1.2M per year and your business would therefore be worth somewhere around $1.2M.
This is a very simplistic way of looking at things but is a good ball park calculation to help you understand what your business might be worth. The many factors that can adjust this amount upwards or downwards will need to be covered in another post.
You, of course, want to ensure you get the best price, that you attract your ideal buyer and that the sales process goes as smoothly as possible to ensure a successful transaction. Here are a few things you should think about…
- Ensure that your financials are sound: They should be accurate and current and separate out multiple lines of business if relevant. This means a separate financial statement and identifying line items for each source of income. E.g. if you offer design and development or sell non-recurring services such as domains, SSL certificates etc. or have multiple brands.
- Long-term financials: Have available financial statements going back ideally three years and have a current year to date. Hopefully this shows growth or is at least flat.
- Address different product offerings: If you offer shared hosting, dedicated servers, hosted exchange etc. you should break the revenue down for each of these services by type of hosting as well as any direct (variable) costs.
- Full customer disclosure: It’s important that you are able to produce reports on customers, as needed, in terms of a breakdown by client that outlines how many users you have for each product, how much they pay, the frequency of payment, how they pay (credit card, PayPal, check etc.) when they signed up and their renewal dates as well as bandwidth usage, disk space, any special supported services etc. Include any client details that would be of interest to the buyer.
- Consider your assets: Prepare a list of capital equipment as well as the specs for each that would be available to a buyer, assuming this is relevant. Think about what domains and assets would be included in the sale such as servers, equipment, websites, toll free phones numbers, licenses etc.
- Proprietary technology is not valued as highly: If your business has created its own control panel, for example, it would not be valued as highly as a control panel solution that is well understood and easily migratable, such as cPanel. This is true for billing systems as well – WHMCS is very popular and a customer base using this combination would generally be more attractive and therefore be worth more than a solution you may have created yourself. Think about whether you want to retain ownership of this or if it would be included.
- Flexibility is key: Your willingness to be accommodating in terms of including staff, if relevant, equipment, terms (timelines) for the deal etc. could spell the difference between a quick and painless sale process and one that either never completes or takes much more time. Of course, much of this is also driven by the desires of a buyer.
- Be up front and transparent: If there are any red flags, they should be brought up early in a conversation. The last thing you want in a negotiation is for a buyer to uncover something on their own, especially in the final stages of a transaction.
- Looking to the future: Give some thought to your desired role and if you are willing to sign a non-compete agreement. Many buyers want a non-compete signed which will often state that you have to remain out of the hosting business for some period of time.
- Existing relationships: Are there any contracts with data centers or leasing companies etc. that would be broken and if so, what are the implications of this? If possible, try not to get into these contracts if you plan to sell before they expire.
- Due diligence: Be prepared to provide reports from your billing system and closer to the final stages of the due diligence process, bank statements and possibly tax returns.
- Asset sale or Stock sale: If you are wanting to do a stock sale, make sure your minute book is up to date. The vast majority of deals done are asset deals however.
The above list covers some of the most important things that should be considered during the process of selling your hosting business. We have included additional information to help those in the market to sell on our FAQ’s for Sellers.