

Ask HN: How to conduct due diligence on a web hosting company - sagacity

I'm not talking about exactly a mom-n-pop operation here. On the other hand, I'm not talking about a hosting company with &#62; 100k  accounts either.<p>I <i>am</i> aware of the fact that web hosting companies have been traditionally acquired by about 2.5/3X of their annual revenue multiples.<p>My question here is (as stated in the title of this
thread), what are the different ways to conduct due diligence on this?<p>They give you X number of accounts, Y revenues and Z costs (and some other things) to look at. Now, how do you <i>independently</i> verify these? (We already know about running a Whois on their primary and secondary DNS servers).<p>I'll highly appreciate any input from HNers with experience in such matters.
======
patrickgzill
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.

------
aussiesilver
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.

------
staunch
Have an accountant dig through their books. Have a technical guy
(sysadmin/programmer type) dig through their network.

~~~
patrickgzill
Succinct, excellent advice.

------
sagacity
Thanks for _all_ replies. Just to let all those who have posted know that it
all helps, thanks again. :-)

