We have been fortunate to help buyers and sellers complete over 250 hosting, ISP and related transactions in all shapes and sizes. Over the course of these transactions, we have seen a few common themes emerge among the more successful buyers/sellers. What follows is a summary of some of those.
Please keep in mind that our comments here are not in any way a complete list or a “How-To” guide for acquisitions or sales. Acquisitions and sales of businesses are complex transactions and you should consult your legal and financial advisors before attempting them on your own. Please also be sure to see our disclaimers below.
- Experience – Acquisitions and sales are unique business transactions and different from what most business owners normally encounter. We recommend companies consider a “starter” transaction that is smaller and easier to accomplish to help gain experience before tackling more challenging or higher priced purchases.
- Know what you are buying – It is not unusual for a buyer to endup with something different than what they thought they were getting. Most of the time, these differences are not meaningful but at times can impact the economics of the transaction (e.g. getting a significant percentage of lower margin domain revenues when expecting 100% higher margin hosting revenues.) Successful buyers perform detailed due diligence on what is most important for the transaction’s success.
- Make sure you can migrate & operate the business – Transactions get into trouble when the buyer has difficulty migrating or operating the purchased business. Successful buyers plan in detail how they’re going to migrate and operate the business in advance and use the due diligence period to ensure those plans are reasonable.
- Make sure you are getting what you need to run the business – Make sure the purchase agreement lists the assets you want to acquire and confirm that those assets are sufficient for you to run the business (e.g. buying a hosting business with old hardware may mean you need to buy new hardware almost immediately.)
- Know who you are buying from – The risk you take on will vary with the nature of the seller and their business. Ensuring that your transaction structure and agreements reflect these risks are key (e.g. if you are concerned about the reliability of the seller, you may wish to have a larger holdback to provide them an incentive.)
- You want the buyer to succeed – You are more likely to have a successful transaction if the buyer has a successful transaction.
- Disclose early – Buyers are generally more accepting of issues disclosed early and versus issues discovered later on.
- Know who you are selling to – The risk you take on will vary with who the buyer is (e.g. Do they have the money; Have they made acquisitions before; Do they have they ability to operate/migrate the business, etc.)
- Keep your business going – Transactions take time and can distract you from running your business. There may also be the temptation to stop spending money on marketing or other items that benefit the purchaser. Keep in mind that if the business loses sales momentum or if there are negative changes in customer attrition or expenses, buyers may back away from the transaction or seek a lower purchase price.
- Spell out what you are selling – Be clear in the purchase agreements about what exactly you are selling and what services you may or may not be performing for the buyer (e.g. the amount and terms of migration support the seller is to provide.)
Buyers & Sellers
- Hire a knowledgeable transaction attorney – We can’t emphasize enough how important it is to be represented by a transaction attorney in a transaction. One of their biggest value-adds is ensuring you have a solid purchase agreement that spells out what happens if things don’t go according plan.
- Read all of the agreements (repeatedly) – If you are not used to reading legal agreements the first time through can be a pain but it gets easier the more you do it. Don’t agree to anything you don’t understand.
Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including NTT/Verio, The Endurance International Group and Web.Com among many others. She has helped complete over 250 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.
DISCLAIMER: This summary is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell companies or a comprehensive discussion of the risks involved in buying or selling a company. Please be sure to consult your legal and financial advisors when considering the purchase or sale of a business or completing other financial transactions. Cheval Capital assumes no responsibility or liability for any of the information contained herein.