Ask HN: How to conduct due diligence on a web hosting company
4 comments
Webhostingtalk.com will give you plenty of discussions on that.
Depending on the quality, you should be paying from 1x on up; there are many factors.
They should have statistics, copies of bills from their upstream provider, bank statements showing X amount being deposited each month, etc. Try to get access to their ticketing system to get a feel for how much support (expensive) is needed each day/week/month.
Who does their accounting or taxes? If a CPA, they should be able to pull together plenty of verifiable info. No CPA worth his salt is going to lie to you on something he puts on paper.
For smaller operations, often you look at their online billing system (which can be checked out remotely as they are web-enabled) as well.
Involve a lawyer to draft documents concerning the sale, have some hold-back or money placed in escrow which they don't receive until 90 days later.
Depending on the quality, you should be paying from 1x on up; there are many factors.
They should have statistics, copies of bills from their upstream provider, bank statements showing X amount being deposited each month, etc. Try to get access to their ticketing system to get a feel for how much support (expensive) is needed each day/week/month.
Who does their accounting or taxes? If a CPA, they should be able to pull together plenty of verifiable info. No CPA worth his salt is going to lie to you on something he puts on paper.
For smaller operations, often you look at their online billing system (which can be checked out remotely as they are web-enabled) as well.
Involve a lawyer to draft documents concerning the sale, have some hold-back or money placed in escrow which they don't receive until 90 days later.
I would go through the numbers with a fine tooth comb
For the number of accounts find out the number of actual active paying accounts if applicable. Some other numbers if they have them like advertising dollars spent per customer gained would give you an idea of the business viability.
The main thing you will get out of buying this is customers. I would also check though whether you are just getting a reseller account or are you getting rack space along with some servers that the customers are hosted on.
Web hosting companies usually come with some history. Do a search for the company on sites like www.webhostingtalk.com to see what people are saying.
Also I would ask them about their payment gateway and there current standing with their payment processor. Do they have 1000's of charge backs and are in poor standing or do they have measures in place to prevent this and all is rosy with the processor.
From a legal point of view get someone (depending on local laws) to trawl though all there accounts to make sure there is nothing illegal i.e. pornography, file sharing etc as you don't want to be buying into something that could get you into serious trouble. Also make sure they have legit software licenses for any non free software that is in use.
As staunch mentioned getting an accountant to go through their books is a no brainer.
I hope this helps it was a bit of a brain dump. I can go into more info about different topics if need be.
For the number of accounts find out the number of actual active paying accounts if applicable. Some other numbers if they have them like advertising dollars spent per customer gained would give you an idea of the business viability.
The main thing you will get out of buying this is customers. I would also check though whether you are just getting a reseller account or are you getting rack space along with some servers that the customers are hosted on.
Web hosting companies usually come with some history. Do a search for the company on sites like www.webhostingtalk.com to see what people are saying.
Also I would ask them about their payment gateway and there current standing with their payment processor. Do they have 1000's of charge backs and are in poor standing or do they have measures in place to prevent this and all is rosy with the processor.
From a legal point of view get someone (depending on local laws) to trawl though all there accounts to make sure there is nothing illegal i.e. pornography, file sharing etc as you don't want to be buying into something that could get you into serious trouble. Also make sure they have legit software licenses for any non free software that is in use.
As staunch mentioned getting an accountant to go through their books is a no brainer.
I hope this helps it was a bit of a brain dump. I can go into more info about different topics if need be.
Have an accountant dig through their books. Have a technical guy (sysadmin/programmer type) dig through their network.
Succinct, excellent advice.
Thanks for all replies. Just to let all those who have posted know that it all helps, thanks again. :-)
I am aware of the fact that web hosting companies have been traditionally acquired by about 2.5/3X of their annual revenue multiples.
My question here is (as stated in the title of this thread), what are the different ways to conduct due diligence on this?
They give you X number of accounts, Y revenues and Z costs (and some other things) to look at. Now, how do you independently verify these? (We already know about running a Whois on their primary and secondary DNS servers).
I'll highly appreciate any input from HNers with experience in such matters.