It takes a rare type of entrepreneur to start and successfully build a web hosting business from the ground up. Very few individuals have the unique combination of drive, market knowledge and adaptability to break into, survive and thrive in a market controlled by some big players with global data centers, established systems and brand recognition. But for those who choose to take on the challenge, the payoff can be tremendous.
My name is Sunil Saxena, founder of InMotion Hosting and CEO of Web Ventures, the mergers and acquisitions arm of InMotion Hosting. Fifteen years ago, I found myself in the exact situation mentioned above, and hopefully I can share some insights from the experiences I had growing my own web hosting company as well as facilitating the sale and purchase of multiple third party hosting companies.
If you own a small to midsize web hosting company, chances are you are beginning to encounter some of the challenges of scaling, whether that be server load, data center space, support volume, marketing or a slew of other challenges that face all growing companies, but seem underlined when dealing with the moving technical pieces and margins of the web hosting space. This is often the time that entrepreneurs and founders look to sell or bring in some outside help from a third party who has done this before.
And while selling a company isn’t really a walk in the park, oftentimes there are ways to make the process smoother, or at the very least, less stressful. Nobody wants to labor their way through a negotiation process that ends in feeling shortchanged, and there are a number of ways to make sure you are accurately conveying the value of your business when looking to sell. Ultimately when you, the business owner, decide that moving on from the company is the best decision for you, there are a couple of things you should consider before embarking on the journey.
The first mistake I often see when someone decides they are ready to sell their business is a lack of preparedness. While you may think an acquisition is as simple as a quote, a conversation and a purchase, the process will certainly require preparation and organization. As the value of your business appreciates, buyers will apply more and more scrutiny to your numbers and business practices to make sure they understand all aspects and nuances of your hosting company. Below is a breakdown of some specific areas you will want to focus on having organized when you are ready to begin the negotiation process.
First things first. If you are selling your business, the initial thing a buyer is going to want to see is almost assuredly your company’s financials. This is often the most involved and time consuming part of the process, especially if managing your financial statements is not something you have experience with or do often.
If you performed the bookkeeping yourself over the last few years and feel confident that your financial statements are in good order, you may not necessarily need to hire an accountant, though I recommend you get one to run information through in a time of need. Keep in mind that there are often tax and employee implications that come with selling your business. Having the expertise of an accountant can help prevent costly issues from arising both during the process and once you ultimately sell your business.
Typically the financial documents that will be requested will include, but are not limited to:
- Income Statements
- Balance Sheets
- Bank Statements
- Tax forms
The more organized you can be with your financials and user and subscription metrics, the better. It will serve for a much more fluid selling process and expedite a lot of the conversations with the seller, making for quicker closes and higher valuations.
In lockstep with getting organized on your financials, you will also want to start organizing the documentation for the legal side of your business. This entails things such as:
- Company formation documents
- Equipment or office contracts and/or lease agreements
- Any loans or liens you may have against your business
- Employee or independent contractor contracts
This typically comes after a review of the financial documents, and while you often won’t have to present these types of documents until later in the negotiation process, it is important to have ready, as failure to produce these documents will almost assuredly lead to a stalled or blocked sale. No investor or buyer will take the risk of purchase without combing through these documents.
Much like an accountant, I highly recommend having a trusted lawyer on standby when you begin the process of selling your business. You will eventually be presented with various legal documents requiring your authorization and signature, and while you may very well be capable of understanding the document, an experienced lawyer will be able to protect you from potential loopholes that could be placed in the language, saving you from future headaches and the potential devaluation of your business.
The final area of your business to focus on before listing your business for sale is your operations. The operations section is the nitty gritty details of how you do business. This includes any internal software insights about customers, subscriptions, product and term blends, revenue breakdown, technologies and equipment utilized, support volume, traffic insights and much more. This will likely be the most tedious part of your organization process, but is necessary to paint the full picture of your business and how it runs.
In addition to having your operational metrics in order, another great thing to have ready is documentation of your day-to-day operations. Oftentimes smaller businesses don’t have documented policies or playbooks that can describe to others how their business works. This is an underrated step in preparing your business for sale, and something that will give the buyer a degree of confidence in your standard operating procedures that could potentially score you more favorable purchase terms. It also lessens your obligation to the buyer after the sale as they will have a much firmer grasp of how to continue operating your business, freeing you up from staying on longer than you want to post-acquisition.
Listing Your Business
Now that you’re organized and ready to present your business on your terms, listing the business is the logical next step, and something that not many people have any experience with. So where do you start? You have several options, depending on the size of your business and what you are most comfortable with. While hosting is a big business globally, there are a limited number of large players, and many of the heads of the bigger companies know each other. This means putting out some simple feelers to contacts you have around the industry to get a word out is a valid starting point.
Another option you have is going through a broker. Brokers have their pros and cons. A broker will likely be able to get you in front of a qualified buyer way quicker than you doing so yourself and generally have familiarity with the whole process, knowing what to expect and how to negotiate. On the flip side, brokers will cost you. Most of the time, brokers want a percentage cut of the total amount your business is sold for. And while the broker is there to represent you, they are also looking to make their money in the deal. It behooves them to close a deal quickly, and they may expedite finding a buyer at the expense of some value at your end.
Selecting a Buyer
Now you are comfortable with the decision of listing your business and looking for the buyer, you will be faced with the most important decision of this process, selecting the correct buyer for your company. Now this doesn’t necessarily mean take the most money and run for the hills. There are other important considerations you will want to make when choosing the appropriate team to sell your company to.
- Align your vision for your company and employees with a buyer who shares that vision. The last thing you want is for your customers to be hit with the tough decision of finding another host if their product or service is disrupted by transition issues or a separate vision for your hosting company.
- Check the buyer’s track record. Have they done a deal like this in the past, and if so to what result? Do they understand the web hosting space? Your initial conversations with the buyer should give you a pretty good indication, but don’t be afraid to ask questions.
- Which deal is the most lucrative or has the best purchase plan for my situation? At the end of the day, it might just come down to a homerun offer. But consider the future when considering deals. While one buyer may be willing to purchase your hosting company for a bit more money in the long term, it may be in installments or come with stipulations based on performance of the company after your exit.
- Do I trust the buyer to be a good steward of my business and brand extending into the future? Have these conversations first. Get a feeling for what they are going to do with your business and make sure you are comfortable with that plan. Then get to talking numbers.
What Web Ventures Offers
I hope this post has helped answer some questions you may have had around selling your web hosting company and has encouraged you to look into next steps if it fits your vision. Web Ventures, the mergers and acquisitions arm of InMotion Hosting, is a great place to start your journey. We closed several similar deals over the last year and a half, and you can expect professionalism, friendliness, and a genuine interest in what’s best for you, the founder. Web Ventures isn’t like any other buyer out there, we make sure you are comfortable with the entire process, outlining plans for your business, your employees, and your customers.
If you are ready to begin the process, please click the link below and give us some general information about yourself and your business and arrange a brief introductory call with us today.