Hey All,


Most of the hosting companies nowadays are going for acquisitions, they keep on acquiring clients to grow there business.

Is this an effective way to grow the hosting business?
Is is successful? How many of these deals are really successful?

What are your views on it?

let me know.

Regards,
Nitin Gupta

Yes indeed it is effective, but only if you have done proper homework to clinch the proper deal.

Do you ever had any luck in such a deal?

I simply never tried, but have seen people here getting success, moreover its a general fact, otherwise why big companies are after takeover bids.

i would also like to know some tips and point to remember form the pro's here.

any specific criteria that we should look for?

I simply never tried, but have seen people here getting success, moreover its a general fact, otherwise why big companies are after takeover bids.
I know that it works, but i just want to know whats the success rate like? Coz i have heard about the scams where seller tried to sell fake clients.. i just want some hardcore information about it..

When I had a hosting company I bought two other companies that were great deals, one I integrated the customers and the other I didn't. In my case we lost just one person in the integration and the rest stayed for the next few years until I sold everything.

I think buying other hosting companies is a great deal if you do your research. Much cheaper than advertising in some situations.

One thing you do need to make sure you have down is your processes if you plan to acquire another company.

Migration of clients to your platforms (whether if may seem to be the same) requires lot of research prior.

How your employee's or any employee's you obtain from the sale will communicate to the new customers is also key. Make sure they are fully aware so that they can continue to serve your customers.

We purchased a company little over ayear ago and doubled our client base. It has proved to be very helpful in the growth of our company, and we will be looking to do the same in the future.

It really depends on what you paid for the clients/company and how many of those clients actually stick around after the sale.

Paying 2x revenue (which is insane) means you don't make any money for 2 years and if 50% of those clients cancel at some point during that time, you lose that money (unless of course you can gain the same amount of new clients).

Like bwb mentioned though, it beats throwing money down the drain by trying to get visibility while advertising a hosting company.

Thanks a lot for all this information,

Whats a decent price to takeover any hosting company?

As per sharwood, its 2 Yrs.Revenue but i have gone through some other deals and there it was 10 Months Revenue..

what are your thoughts?

Paying 2x revenue (which is insane) means you don't make any money for 2 years and if 50% of those clients cancel at some point during that time, you lose that money (unless of course you can gain the same amount of new clients).



As per sharwood, its 2 Yrs.Revenue but i have gone through some other deals and there it was 10 Months Revenue..

what are your thoughts?

I think sharwood meant that 2 years revenue is not the right price (sharwood please correct me if I am wrong).

Ok Nitin,

While/if you are in a process of taking over a company, you should see what revenue you will be getting in the coming year, as there may be many clients paying yearly, so when their term is ending, then how much you will be spending on equipment or to make it more specific, what will be your cost to operate that existing client base, there may be other points to that I have missed.

So do a through research, do your homework for individual takeover, then reach for a final decision.

It really depends if your just buying the clients or the company as a whole.

Companies with a lot of equity (ie. servers, buildings, ect.) will probably always go for more then 1 year of revenue.

But most, buy just the clients and migrate to their setup. The industry standard currently is around 8 to 15 months depending on what else is in the bill of sale.

Keep in mind that there's a difference in buying clients and buying a company. Most of the "companies" being sold at WHT aren't companies at all, but merely a guy with a few servers (or less) who's collecting money from people. Those deals are going to be cheaper, since you're only paying for the client base.

--Tina

I think sharwood meant that 2 years revenue is not the right price (sharwood please correct me if I am wrong).

That's correct.

One thing you can try to do to mitigate some of the risk is to ask for a performance earn out.

For example: Pay 50% up front and the other 50% over the following year (or 6 mos, etc). If 10% of the clients leave, you pay 10% less. If 20% leave, etc

Only issue I see in that would be the seller. Honestly if I was selling and was offered that I'd have to refuse. Your baseing your sale on how well the buyer manages there business, support and servers.

To me thats just not a good deal.

True, but to me, if you're the buyer, you'd have to be crazy to pay anything over 10 months revenue without something like that in place.

It's just too easy to change hosting companies and the fact that your customers who have used your long proven service quality are now faced with a new owner, you're fighting an uphill battle as the buyer.

This is also why you want the seller to stay involved for 30-60 days

A lot depends on the competency of the buyer as well.

Yup, most of the companies sold here are merely 1 man company handling everything with few clients and a couple of servers. There's no benefit of adding to the equity as normally the buyers have there own setup (However, in some cases, where the servers are special (Video Streaming or Games Server), it needs to be included).

Buying up clients for a price of 8 - 15 Months revenue seems fine to me, but what iff some of them leaves us in between? Normally, the buyer provides good services to the new clients, but what if they still leaves? Who should be blamed at that point? What about the costing at that time?

Buying up clients for a price of 8 - 15 Months revenue seems fine to me, but what iff some of them leaves us in between? Normally, the buyer provides good services to the new clients, but what if they still leaves? Who should be blamed at that point? What about the costing at that time?

There will always be customer turnover, so it is inevitable that you're going to lose some customers. However, you have to balance that with the benefits you will yield by gaining new customers. Remember, more customers means more word-of-mouth referrals from happy customers and more chances to upsell. You cover the loss by making strides in other areas...just like you do with your existing customer base.

--Tina

Yup, most of the companies sold here are merely 1 man company handling everything with few clients and a couple of servers. There's no benefit of adding to the equity as normally the buyers have there own setup (However, in some cases, where the servers are special (Video Streaming or Games Server), it needs to be included).

Buying up clients for a price of 8 - 15 Months revenue seems fine to me, but what iff some of them leaves us in between? Normally, the buyer provides good services to the new clients, but what if they still leaves? Who should be blamed at that point? What about the costing at that time?

There is no blame - churn is part of a service business. It is a risk you are paying for when you buy the client.

A lot of talk has been said about what your buying and what is reasonable price. Having been through one acquisition I would like to point out that actually getting involved in the hosting companies daily routine for a week or more will help a lot. If you are not going to be the technical side or the person doing the day to day tasks and support then make sure you have a person that will be doing that to take a look at the company.

Have them give you login information to their systems with minimal privileges, cPanel, Modernbill, Kayako, whatever they may be. You might find that after the acquisition and running for a few months that book keeping, support, and servers setup had been done improperly, very poorly, or other dramatic problems that can raise flags for billing, support, or server health down the road.

This is from an experience of only working with the company for 3 days before acquisition. 3 days was not enough to learn everything.

On the plus side, the acquisition was positive and improved cash flow even if just a little bit. Sometimes it can be a breath of fresh air for customers too when they are coming from an organization who had not been doing everything up to par.

One more thing, Should we ever tell customers that the company has been sold? Say, if i buy up a company, should i tell them that i am the new owner or not, have any of you been through this kind of situation?, what you did? and what was the client's reactions like?

How large is this company? Will the user notice a change in the end experience?

If not, then a simpler action like posting a news item on their website, updating the "About Us" section to reflect and mention the change of ownership, posting on their forum if they have one, etc. are all available options.

If the end user was accustomed to a single person always handling support, you need to be a bit more careful to the needs of the customers.

Why?
1) Many will have formed a relation and trust with that person. Pulling them out of the picture and bringing someone else in entirely won't be good.

2) Many customers will email that person directly for support issues and not through the standard support channels like a support ticket helpdesk system.

You need to look at all these factors, plus what others will mention, and make a decision. My points are probably not a comprehensive list of how to deal with it, simply what I feel is most important.

The benefit of acquisition is you can leverage economies of scale (better terms from suppliers) and spread your fixed costs more widely.

Now as for price, will you have better gross and net margins as a combined company than with your current company? If so, factor that into your value calculations.

If the margins are similar, then don't use revenue multiples and instead use EBIT multiples, or to be more accurate do a DCF on 5 year's cashflow based on growth with a terminal value, and discount back at your company's ROIC (or cost of capital, depending on source of funds).

Hey All,


Most of the hosting companies nowadays are going for acquisitions, they keep on acquiring clients to grow there business.

Is this an effective way to grow the hosting business?
Is is successful? How many of these deals are really successful?

What are your views on it?

let me know.

Regards,
Nitin Gupta

Nitin,

Having just completed an acquisition in the beginning of this month, I can tell you that they certainly can be helpful when trying to not only build a larger brand, but also add more stability (and size) to a customer base.

However, I would have to warn against making very large acquisitions - it is much better to work slowly, adding a few new customers at a time (in this manner) than to make one large purchase. It is so easy to mess up a larger acquisition and lose a large number of customers; if a smaller move gets messed up, at least less users are impacted, and the damage to the brand is likely to be small.

Nitin,

Having just completed an acquisition in the beginning of this month, I can tell you that they certainly can be helpful when trying to not only build a larger brand, but also add more stability (and size) to a customer base.

However, I would have to warn against making very large acquisitions - it is much better to work slowly, adding a few new customers at a time (in this manner) than to make one large purchase. It is so easy to mess up a larger acquisition and lose a large number of customers; if a smaller move gets messed up, at least less users are impacted, and the damage to the brand is likely to be small.

Thanks :-)

We are in phase of a similar acquisition and this is really going to help us a lot.

Nitin,

Having just completed an acquisition in the beginning of this month, I can tell you that they certainly can be helpful when trying to not only build a larger brand, but also add more stability (and size) to a customer base.

However, I would have to warn against making very large acquisitions - it is much better to work slowly, adding a few new customers at a time (in this manner) than to make one large purchase. It is so easy to mess up a larger acquisition and lose a large number of customers; if a smaller move gets messed up, at least less users are impacted, and the damage to the brand is likely to be small.

There is plenty of research to show that in general (i.e. not the hosting industry specifically), that large acquisitions rarely see all the planned cost-savings and synergies work out. Think of DaimlerChryser and Compaq-HP as examples.

However, the benefit of larger acquisitions over smaller acquisitions is transactions costs for customer acquisition. Think of how much time and effort is spent to acquire a single customer. Look at sales cycle, accounting/credit risks, etc. That can help to come up with a better value to the benefit of an acquisition.