Purchasing a hosting company

I'm a web designer and host by trade. I have a business friend who also does hosting. He currently has 28 paying customers, all paying quarterly. Several of the customers he's had for 3+ years, and several are recent signups. He also has about 6 non-paying (nonprofits) which he would expect to transfer as well. He would sign a non-compete agreement.

He has moved to another project, and is wanting to sell his hosting company off. By that I mean simply his client list and his main domain name.

How do I value this in terms of purchasing it from him? I'd like to make the deal fair for both of us, but honestly neither of us know what it's worth.

Will

 

Look at what they would pay you for one year. And how long it would take you to make up for the amount you are expecting to pay.

For example, we purchased a few hosting clients. The owner wanted XXX amount. After reviewing what the customers paid, etc it would be nine months before we turned a profit.

Basically - how long will you go before you are willing to be out of the hole?

 

I think that's good advice. You might also consider valuing each customer invidually. He is motivated to sell and you are doing him a favour, in some respects, by taking care of his obligations for him. If the clients are in long term contracts, you're fine, but otherwise you've no guarantee they will not all leave you. I would suggest offering one quarter per client, so you only need to wait for one more payment from each to break even on your investment. The maximum might be someting like 9 months.

 

Most online businesses are worth 8 - 12 months revenue. Just an idea for you.

 

This is what the average hosting company sells for.

 

Wow, everyone, thanks for the words of wisdom. And jdv you're right, I have no idea how many of these clients will even stay with me when we do 'the move'.

I'm going to offer him 9 months/revenue and see what happens.

 

If You Dont Take It I Might Be Interested Care To Share Who The Hosting Company Is?

 

If you help everyone in the transition, things will go smoothly for you. In fact, we only lost one customer which did not bother us since he was only paying $2 a month (yes the hosting company's plan were pretty low).

We have actually had two of the customers refer more over to us because of the service we provided them. One of them did not get the email until the night before but all he had to do was change the DNS. We had moved everything else over.

Give them time and more importantly, give yourself time to move everyone. Don't try to do too much all at once otherwise it will come back to haunt you

 

Let me ask you this. He's not interested in dissolving his entire company, but is willing to give up that domain name. Would it be wise to keep the companies separate, or maybe rather put something on the site about it becoming part of my company, etc. I have no idea what his PR is, but I'd like to take advantage of it if it's not too bad...

And no, I'm not going to share the company, adsneblrd

 

I would move everything over to your company - because chances are, your merchant account is in your name and this will help keep everything in order for you hopefully.

 

I would like to argue against buying any web-hosting business were you are responsible for the actual server hardware. I took over a hosting business last year, and I just got out of it last week, and I'm thrilled to be done with it.

Here are some of the problems I experienced:

SPAM - Spam is real pain. If one of your users starts sending out mass emails or if you have a relay port open your entire server can quickly get blacklisted. Then all of your users start calling because they can't send email.

Upgrades - We used a popular product called cpanel which was setup to auto-update. After almost everyupdate, I had problems.

Hard drive Failures - Hardware fails it happens. We used Raid drives, but I still had to order drives and be prepared to drive to the data center at night to swap them out.

Webhosting is a commodity - Webhosting is so cheap now. I'm paying like $2.20 per month with my reseller account from icdsoft.com.

This is just from my experience.

 

Thanks for the comments, newurbanmedia.com. In this case, he is only offering his client list for sale. The hardware he is able to use on another project. Since I'm already a web host, we'll simply have to move the accounts.

$2.20 a month for reseller hosting? Is that your average price per client? Or just a mis-type?

Will

 

Actually I'm paying $2.50 per month for webhosting via icdsoft.com. I just double-checked the price.

 

Here is a common way to purchase a hosting company:

Annual revenue: $100000
Purchase price: $100000

First payment: $20000
Then 50% of the revenue from the customer list until the purchase price is paid in full (might take a few years).

Note: The second payment will not happen until 50% of the revenue covers the first $20K payment.

This technique is a great way for companies to buy others using the extra revenue.

 

Not sure I like that idea, chrisd. Paying a years revenue would mean I'm assuming that every customer of his would transfer to me. If they don't, I'm paying more than what it's worth.

 

You'll find that most sales of hosting companies, especially the smaller ones, almost always go for 10-12 months revenue. Customers that have been with him 3 years, there's a very good chance they'll stay with you unless you give them reason to leave.