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Selling Your Hosting Company

Companies that are beginning to think about selling their business often ask us how the sale process typically works.  While it is not possible to summarize all of the possible ways to sell your business, we can give a brief outline of one way a small hoster might do it. We caution that every situation is different and the outline below may be inappropriate for your company and you should consult your financial and legal advisers before undertaking any sale.  We also want to emphasize that there are many other ways to sell your business that may be as good if not better.

Here are the basic steps the owner of a small hosting company might sell their business.

1. Get ready
2. Find prospective buyers
3. Mutual confidentiality agreement
4. Provide high level information
5. Negotiate and agree on a summary of terms
6. Complete detailed due diligence
7. Negotiate and sign the purchase agreement(s)
8. Transfer/migrate the business to the purchaser

We'll go through each of these steps below;

1. Get ready.  It is a good idea to prepare the basic information buyers will need to evaluate your business in advance of starting the process.  That way, you don't risk losing momentum by stopping things partway along while you prepare a key piece of financial or technical information. You also won't risk losing sight of your own business if you have to try and fulfill a lot of data requests.  The information to prepare in advance can vary a bit depending on your business, size and the nature of the prospective buyers.  You would be in very good shape if you could pull together (a) a written summary of your business, its ownership, its products, etc. (we have a questionnaire that we use to help sellers put this together); (b) recent financial statements for the last 12 to 18 months, quarterly if possible; (c) the number of customers and amount of revenue broken down by product line; and (d) a summary of the customer accounts added and lost for the last year.

If you don't have any of the above, it doesn't mean you can't sell, it just means you have to use other things to get the buyer what they need.  Try to keep the goal in mind - you need to help buyers understand how much cash your company will produce for them and the risks to that cash flow.  The more confidence they have in your business and its cash flow production, the more likely you can get full value for it.

2. Find prospective buyers.  Once you've got your information package ready, you need to find prospective buyers.  This isn't an issue if you work with someone like us as we already know, and have relationships with, a very large number of prospective buyers.  If you're doing it on your own, try to think of what we call the "logical" or "natural" buyers. If you lease servers or resell services of another company, they may be willing to buy you or refer you to their other customers.  They have an incentive to find someone for you so you don't get purchased and moved to another provider.  Likewise, it may make sense to talk with providers in your own geographic area or data center. Generally the goal is to talk with several prospective buyers to keep everyone competitive.

3. Mutual confidentiality agreement.  A mutual confidentiality agreement (sometimes called a non-disclosure agreement or NDA) is an agreement between you and a prospective buyer that restricts each party's use of the confidential information of the other party. Since you're going to be disclosing key information about your company, it is generally a wise idea to have and NDA signed with each prospective buyer before giving them your information package.  We strongly recommend getting a lawyer's help in putting one together (or reviewing one that you get from the internet or other sources.)

4. Provide high level information. Once you find a prospective buyer and have an NDA signed you can send over your package of material.  Oftentimes a conference call to go over technical issues and for both sides to ask questions is a good idea after the information package has been reviewed.  What is key at this step is that you want to give enough information for the prospective buyer to prepare an offer but not more.  So for example, a revenue summary of customers by product makes sense to disclose at this point but a list of customer names does not.  Also remember that you're trying to find out if they'd be a good buyer and need to find out as quickly as possible if they would be trustworthy, have the money, are a solid business, etc.

5. Negotiate and agree on a summary of terms.  Once you have answered the high level questions, you want to have the prospective buyer provide an outline of what they would pay for your company and the key terms of the transaction including an expected time-line until closing.  If the proposal is not acceptable as-is, the parties try and negotiate a mutually acceptable deal.  Oftentimes once the outline of a transaction is agreed to, a non-binding letter is signed that sets out the key terms.  Again, we strongly recommend having a lawyer advise you during this stage and help prepare or review any letter or agreement before you sign anything.
6. Complete detailed due diligence.  Once you've agreed to a proposal, the buyer generally begins a more detailed due diligence of your business.  They will look to confirm all the information you provided to them, see if there are any risks or liabilities that they missed and generally ensure that they have a detailed understanding of your business.  Remember, they are trying to understand/confirm the amount of cash your business is likely to produce for them and the risks to that cash flow.  You will also be looking closely at the buyer to confirm that they can fulfill their obligations and that they are trustworthy to do business with.  We believe it is in your interest to ensure the buyer knows fully what he is getting.  Surprises after closing are generally not good for either party.

7. Negotiate and sign the purchase agreement(s).  Sometimes simultaneously with the due diligence, the buyer prepares the purchase agreement(s) that is then negotiated.  Once you've reached agreement on the documents, both parties provide the information required within them and sign. We strongly recommend (yes again) having a lawyer help you with this. 

8. Transfer/migrate the business to the purchaser.  Once the purchase agreement(s) have been signed, there is sometimes a period where the buyer helps transfer the customers/assets/business to the seller.  This transfer period may also be tied to the payment of the purchase price.  For example, a certain part of the purchase price may only be paid once all of the customers are migrated onto the buyer's infrastructure.  Buyer's want provisions like this when the seller's help/expertise is critical to the migration/transfer process.

Those are the major steps for how a smaller hoster might go about selling their business.  Firms like ours help businesses navigate this process and hopefully make it go easier and faster while improving the chances for success.

As mentioned above, every business is different and this may or may not be the right method for you.  As always, we strongly urge you to consult your business, financial and legal advisers before undertaking any significant transaction.

Please feel free to let us know if you have any questions.

Cheval Capital, Inc.
March 2010

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed.  Please be sure to consult your financial advisers when valuing your company, considering the sale of your business or making other financial decisions.