The credit crunch has taken its toll and you finally have to face facts… It’s time to bail. There’s nothing sadder – the years of sacrifice… putting your family on the backburner… long days and working weekends… It is gut wrenching. But if it has to be this way, you owe it to yourself to put the final ounce of effort into ensuring you get the very best return you can for your web hosting business. This month we talk to Hartland Ross, our resident expert on all matters related to selling web hosting companies. We ask Hartland one simple question: “What should a company do to prepare before being put up for sale?”
HOSTSEARCH: Hartland, nice to meet you again. For the benefit of the people who haven’t read your previous interviews with us, perhaps you can introduce yourself and your organization.
HARTLAND ROSS: Our focus is working with small to medium sized technology companies in the B2B space helping them to grow their businesses through online sales and lead generation programs as well as through acquisitions. As a result of our work and connections in the hosting industry, a number of years ago we had a few clients stating that although they were growing through marketing initiatives, they wondered if we knew of anyone interested in selling their client base and virtually simultaneously, we had others who were interested in leaving the industry or exiting part of it such as moving out of shared hosting to focus on dedicated or managed, etc. As a result, we began our brokerage service as an alternative or supplement to help our clients grow their client bases.
HOSTSEARCH: Things have changed somewhat since the last time we spoke…
HARTLAND ROSS: Yes, things have changed in the hosting industry and indeed the world. I am however pleasantly surprised at how well our clients seem to be doing despite the gloom and doom we hear too much of everyday. There have been some positive things that have come from the current climate. For example some of our clients are reporting it easier to find qualified staff and some costs such as power have reportedly come down in price. On the flip side, some are holding back on their budgets – seemingly more because they are on a wait and see approach than due to pressing financial constraints. We have been concerned however that the tightening of credit will reduce the financial capacity of buyers putting downward pressure on valuations. So far this is only a concern and hasn’t materialized. This is perhaps in part due to buyers with cash reserves on hand or due to access to equity investors as alternatives to bank debt.
HOSTSEARCH: So, you are seeing more companies up for sale? More mergers?
HARTLAND ROSS: I wouldn’t say more companies are for sale or that we are being approached by more sellers than normally – in fact the numbers of new listings are actually down somewhat. This is not a true reflection of what is happening in the industry however but rather more as a result of us being less proactive in searching for new sellers given the current climate and the ability to find buyers.
HOSTSEARCH: So, how do you expect things to pan out? Or is it too difficult to predict?
HARTLAND ROSS: I think things will return to “normal” at some point however it will take some time before buyers will be as aggressive as they have been in the past. This may result in fewer offers – particularly for those sellers with a less attractive business – i.e. proprietary or less popular control panels, support for obscure technologies, outdated software or legacy systems. These sellers could see reduced valuations.
HOSTSEARCH: About 10 years ago I was in a position where a company I was a part of was sold. To be honest, I found the whole affair akin to losing a child. I was glad I wasn’t directly involved in its sale because I don’t really think I could have managed it. I was too emotionally attached. I guess that’s a pretty common reaction?
HARTLAND ROSS: Yes, it is important for those who consider their business to be their “baby” that they be mentally prepared to give up “their baby”. This ties into other issues that any potential seller should consider. Although there are some things to be concerned about in this scenario, as a buyer, this can also be a good situation since often times the seller is very connected with their clients knowing many of them personally and in many cases are concerned as much about the dollar value they receive for their business as the history of the buyer and their ability to successfully pull off the sale, migration, etc.
HOSTSEARCH: And when there is emotional involvement, it’s probably more important to bring in a professional to oversee things?
HARTLAND ROSS: I would like to think so, yes. Certainly there are lots of reasons to bring someone in but this is definitely one of those. Having someone impartial will help to ensure that all considerations are well balanced and evaluated (the buyer’s ability and resources, the financial offer, structure of the deal, appropriate steps being followed, etc.)
HOSTSEARCH: If you had to come up with a checklist for people selling a Web hosting business, what would it include?
HARTLAND ROSS: I think that any seller should give serious consideration to what is involved with selling their business. It’s amazing how many sellers feel that they can simply offer a few pieces of information and wait for the offers to come in. Even once there is an agreement in place, the seller needs to play at least a small role and often times large role in the transition in terms of migration, training etc and this doesn’t include the internal changes on their end to data center or support contracts, staffing, legal and accounting implications, leases, etc. The following are a few top areas that should be considered. To the extent that you follow these suggestions, your company will be more attractive to buyers and you will receive more offers and better offers. It all comes down to trust and how much work is involved for a buyer to evaluate the business and get their questions answered quickly and easily.
Financial housekeeping: Ensure that you have your books in order and if at all possible, you have only the one business you are selling included in your financial statements. If you have your consulting practice, hosting business, design business and your family’s restaurant all in one set of books, this will make it impossible for a buyer to understand what they are buying unless they are buying the whole package.
Employee considerations: Are the employees going with the business and do they know about the potential sale? What will you do if the buyer doesn’t need them?
Is this going to be an asset or stock deal? i.e. are you selling the clients and or equipment only or the entire registered company?
If you are selling assets only, what domains and assets would be included – i.e. servers, equipment, all .coms, .nets, etc.
Technology considerations: Are you on contract for any technology services supplied by a third party vendor and do you have the resources to help a buyer with the transition?
Are you in any leases on contracts with data centers, outsourced support, office space, office equipment? If so, how easily can these be gotten out of?
Be prepared to provide bank statements and/or access to billing software closer to the final stages of the due diligence process.
HOSTSEARCH: And I suppose if you are selling a Web hosting business, you have to be ready to stay out of the business for a while, otherwise you could just set up and compete with the person who is buying your company?
HARTLAND ROSS: Yes, it is important that you give thought to your future prospects since it is true that most buyers will want you to sign a non compete for 2 to 5 years or at the very least there will be a non solicit clause. You should be prepared to answer this question.
HOSTSEARCH: I am sure this is a science, and when there is an economic downturn it could become an art, but how do you value a company, and more importantly, how do you avoid being taken advantage off?
HARTLAND ROSS: Well, there are a number of ways to value a company from multiples of EBITDA to discounted cash flows using Beta values among others however the hosting industry (at least for smaller deals) is generally done based on a valuation of approximately 1 times (1X) the annual revenues for a pure play hoster. This value will change somewhat depending on the type of company (dedicated vs shared vs managed etc) and on the specifics of the company such as technologies used, geographic location, the reason for the sale, profitability, other sources of revenues, etc.
HOSTSEARCH: I have spoken to some people who say when you are selling a Web hosting business you have to establish a level that you emotionally feel is the right value for your company and stick to your guns and not go below that amount. Can people afford the luxury of that type of approach these days?
HARTLAND ROSS: I would caution against this approach in general regardless of any external economic conditions. Firstly sellers should disassociate emotionally from the sale – this can’t be an emotional decision – it must be a rationale decision taking all factors into consideration. Secondly, as with selling anything, it is the market that will decide what it’s willing to pay and you may decide that you want $1 million for your $200K business but in this case, you are really wasting your time, as well as that of your broker and any interested buyer. Having said this, it is a good idea to have a value in mind and what sort of deal structure you are willing to entertain however this should be based on the values that others in the market are receiving. In other words it is important for the seller to have reasonable expectations prior to entertaining offers.
HOSTSEARCH: Final words of advice to those selling a company? What would you say to them?
HARTLAND ROSS: I would remind them of the work and time involved in preparing the necessary documentation, addressing questions from the buyer and ultimately following through with the work involved in the transition. This is not like selling a car – most sellers (and buyers for that matter) don’t realize how much work is involved. As a result, a common scenario is that the seller can’t focus on the required tasks and follow through with requests made by buyers in a timely fashion, and this results in two things happening. Firstly, the buyer loses confidence in the seller – both in their ability to complete a successful sale and perhaps in the accuracy of the information being provided. This then leads to the second issue which is that either the buyer will lose interest and move on to another deal or their offer will be lower to compensate for the hassle and uncertainty associated with the process. Obviously this is not a desirable outcome and the tragic part about it is that in many cases this type of outcome is totally preventable.
Posted January 1, 2009