6 Reasons Why Sellers Are Selling Their Hosting Business
When brokering the purchase of a hosting business, we are often asked why the host is selling in the first place – especially if the business is particularly profitable. There are a variety of reasons that sellers sell. In this post we will cover some common scenarios and what you need to know as a buyer.
Hosting Insights: What the Seller Is Thinking and What You Need to Know
1. The seller is retiring
In some cases, it is simply a matter of the company owner reaching the end of their working career. They are ready to move on from the business and are looking to sell. This is particularly true in hosting because it can be very demanding on one’s time.
What you need to know in this scenario:
- This type of seller is often a one-person shop with some outsourced support during off periods.
- Often this seller will know each of their customers personally and so it will be important to understand if this relationship is critical to the customers staying on through a transition to a new buyer.
- Signing a non-compete and non-solicit is usually no issue here.
2. The seller is selling off a portion of their customer base
In this scenario, the seller is only selling a specific part of their business such as selling all of their dedicated customers or all of their Windows customers, for example.
What you need to know in this scenario:
- Oftentimes this is because they want to grow one aspect of their business and it might not make sense to renew certain contracts to support a specific customer base. For example, the host might need to hire or rehire someone with Windows server experience, secure control panel licenses or sign contracts with a 3rd party data center to deliver some of their services. In these cases, some hosts will opt for selling off the customer base rather than having to make such investments.
- This scenario can sometimes be deadline driven – i.e. they need to sell the customers and move them out prior to having to recommit to some sort of a contract.
- This situation leads to questions around who will get the brand. Unless these customers are under their own brand, the buyer won’t likely get the brand and this has implications for renewal rates (churn) as well as considerations for how well the pricing structure these customers are used to works with your existing brand. For example, if the seller’s customers are used to paying $20/month and you are charging $5 for similar services, you will see a lot of cannibalization of these customers. Getting clear on a non-solicit and non-compete for whatever services are being sold is also going to be essential in these cases.
- Obviously in these cases you won’t get a non-compete, at least for hosting services, but you should definitely get a non-solicit unless there is any overlap in customers.
3. The seller wants to change industries
Sometimes the seller is just bored and wants to pursue a new opportunity.
What you need to know in this scenario:
- Usually this makes for a clean sale, however the seller may not be able to provide much in the way of seller financing if they require the funds for a new venture.
- Signing a non-compete and non-solicit is usually no issue here although sometimes the seller may stay in the hosting industry, just not providing the same services. For example, they may choose to become an ISV with a control panel.
4. The seller wants to sell to a new owner and ideally wants a job working for a new owner who has more capital and resources behind them
Sometimes the seller is tired of working for him or herself and no longer wants to deal with managing the business.
What you need to know in this scenario:
- This can be good for a buyer because the seller (and all of their knowledge and possibly relationships) comes with the purchase for no additional charge, assuming that the buyer would need to hire someone anyway. This can solve the buyer’s problem of finding trained employees and gives both the buyer and seller security and familiarity with the business.
- Rapport between the buyer and seller will be key here.
- It will be important to discuss roles and ideally the seller is bringing something to the relationship that the buyer is lacking. It could be that one party is technical and the other isn’t or one has a large network of customers and vendors to leverage for future business etc.
5. The seller’s wife (or husband) is going to divorce the owner if he/she doesn’t spend more time with him/her and/or their kids
Typically, this means that the seller is tired. This scenario is similar to #3 above but can in some cases lead to the seller getting back into the industry if they haven’t fully identified what their next gig will be.
What you need to know in this scenario:
- This situation can support seller financing if the business is of sufficient size whereby an initial payment will cover the seller’s personal requirements for income for a time before subsequent payments are received. This may not be the case, however, if the seller’s business is relatively small.
- A non-compete and non-solicit will also be very important here because, unless the buyer has identified their future plans (and even if they have), it’s quite possible they will go back to what they know or some variation of it.
6. The seller is interested in selling into a larger company and being a partner in a larger organization
This is a variation of #4 above but instead the seller becomes a minority shareholder in an existing business or a newly created entity.
What you need to know in this scenario:
- In this case, having a fair and agreed upon valuation of both businesses will be the difficult but required piece.
- The other points under #4 above will also apply here.
The above reasons for selling reflect some of the most common scenarios that we come across when brokering sales of web hosting companies and internet businesses. While every sale is unique, these general considerations, which can apply across different situations, are important for buyers to understand when starting on the M&A journey.
If you are interested in selling your business, please contact us for a free evaluation.
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