Success in Selling Your Hosting Company

There are a number of reasons to sell a Web hosting company. Most people have their wealth tied up in the business. As a result, people sell their companies or even divisions when they want to move on with life, want to focus on another venture, or they believe the market value is high for what they have. 

When selling a hosting firm, it is important to remember that businesses are not liquid.  A share of Exxon stock can be sold in five seconds, while many businesses are not even sellable.  Any interest expressed by a company in acquisition mode is worth listening to.  The only time business owners are 100 percent ready to sell is when the business is in decline; and rest assured, they don’t like the valuation when it occurs.  I know too many people who regret not selling when they had the opportunity and actually wanted to, but were too tough on price.  

Effective Communication

Companies seeking growth through acquisitions will almost always find something to buy.  Whether it’s your company they acquire or not, it’s sometimes actually up to you.  Sellers will often run buyers off without even realizing it. Buyers will acquire a company they believe is a good strategic fit; it is impossible to control this aspect. However, with organized, timely, honest and decisive communication, sellers can create a much more appealing deal for themselves. Sellers need to consider several important points, particularly in relation to communication:

• It’s okay to tell someone that you are interested in entertaining offers for your company. This simply implies that it would be a good use of their time and money to explore your company further. It is not a sign of desperation.
• Playing “hard to get” usually informs the buyer of the opposite. 
• Be realistic with yourself regarding price.  Potential buyers can be lost forever to unrealistic expectations of “home run” offers. 
• Bottom line … buyers will not beg you to sell your company.  There are simply too many other companies out there that are for sale.

Effective Organization

Organize yourself, and make use of business plans and business sales books. There should not be a significant difference between a business plan used for internal management, raising money and planning, and a business sales book used to sell a business.  Both of these documents should be 90 percent complete at all times, as they give a wonderful first impression to a potential buyer.  Never forget the buyer is the one with the cash, is the person taking most of the risk, and is looking for any reason at all to walk away from the deal.  Being organized and having the ability to give the buyer information in a timely manner is the most important and easiest thing you can do to increase the chance of selling your company for the highest price.  Ideally, every time the buyer asks for information, it should be delivered in a timely manner, in electronic form, accurate and up to date.  Try to refrain from providing 1990s dreamy type pro-formas, as they are no longer in vogue. 

One final point: buyers do realize that the last piece of due diligence information received is usually what the seller doesn’t want anyone to focus on. 

When preparing your company for sale, run your business like you plan to keep it for the long term. When sellers attempt to prepare their company for sale, many times they avoid making needed investments in the company.  If you invest cash into a project that has yet to pay off, get credit for it in the valuation. 

Other key points to consider:

• Would you be willing to sell parts of the company, or just the whole?
• Do you want to stay on with the buyer or leave after closing? Why? Remember that it is more attractive to buyers if there is someone at your company who can run the show upon your post closing departure.
• Stock vs. cash for consideration: There are many variables regarding stock to be covered here.  However, keep in mind that you may prefer $900,000 in cash and $300,000 in stock, as opposed to just $1,000,000 in cash.  If treated correctly, stock deals can be beneficial in many ways.

 The Process

In the first or second communication with the buyer, the seller should determine who the buyer is, what they are looking for, and how they basically value it.  Don’t pin the buyer down for exact valuations initially, because he doesn’t know what you have.  Every business is a little different.  There is no harm in telling a prospective buyer what you have in regards to number of sites, domain names, servers, employees, etc … after all it’s not your customer list.  Inquire about their business and don’t forget many times the small fish eats the big fish. 

You will also need to select an attorney. Find an attorney with industry specific experience in mergers and acquisitions and understands the appropriate tax implications.  Ask them how many deals they have done in the industry, how much they charge, etc.  Please, don’t use your brother in law who is a great divorce attorney.  Deals get stalled and even cancelled because an inexperienced attorney delays the process.  There is a fine line between being thorough, and taking so much time with documents the buyer walks from your deal and seeks another company to acquire. 

The Documents

The letter of intent should be short and sweet. The purpose is not to map out every single issue, rather to come to a gentlemen’s agreement on the very basic aspects of the proposed deal - without spending too much time or money.  The basics which should be covered are stock vs. asset purchase/merger, valuation, consideration, assets included or not, timelines, etc.  If everyone agrees to the letter of intent then each party, at their own expense, should start working on the purchase and sale and other closing items.  If both parties cannot agree on a one to three page letter of intent within a week, they typically will never make it through the entire process. 

The purchase and sale agreement will spell out every aspect of the deal.  If both parties agree on the letter of intent, then they should work on the purchase and sale while all of the other aspects of the due diligence process and pre-closing issues are being handled.  Most of these events can and should occur simultaneously.  Don’t forget, some variables are more important to the seller, while others are more important to the buyer.

Every once in a while there is a real “tough guy” on one side of the table or the other.  This guy just has to have every variable to go his way or there’s “no deal!”.  These guys kill mutually beneficial deals all the time and rarely accomplish anything.  Hire “tough guys” for the collections department.

And finally, always be honest and fair.  This world is becoming smaller every day.