Positioning Your Business For Acquisition

So, you operate a managed hosting business and you've heard about those Internet entrepreneurs whom have made millions. Some operators have thought that there is not much genius in building an online shop and selling goods - there were free shopping cart scripts back in the mid 90s - what's all the fuss about today. Compared to a managed hosting provider whom needs to master the technical side of networking, operating systems, applications, security, and hardware, one could argue that the level of technological sophistication in a managed hosting provider's operation far exceeds that of an online portal. But whether this view is right or wrong should not be your concern Miss entrepreneur.

There are several ways for you to enter the league of Internet success stories. The managed hosting business is largely a recurring revenue business model. Steady recurring revenue is preferred by VCs as compared to lumpy cashflow or large one-off projects.

In recent times - managed hosting companies that have been able to exit in million dollar deals in Australia include Planet Domains and SmartyHost. These companies were seen as attractive to their purchases due to the large SME customer base they serviced. Essentially - the new parents see these child companies as vehicles to capture market share of the SME market - but not just for managed hosting services - they can onsell a variety of other services to these same companies as well. These companies are essentially seen as a distribution network to small business - and she who controls distribution controls the world.

Exiting a successful business can be highly rewarding for its founders. Some valuation models use a recurring revenue multiple - anywhere from .5x to 2.5x. Different investors will place weight on different aspects of the business enterprise. For example, software license fees from hosting would not be valued as high as server management fees which have a higher margin. Colocation is often seen as a loss-leader and may not be valued highly by a potential managed hosting purchaser either. Also beware of large hardware leasing liabilities which can bite back.

Playing with numbers, you may have 1200 customers spending $600 annually. In a basic model, that's a valuation of $720,000 and an easy path to retirement.

So - look at acquisitions that take place in the managed hosting world and position your business accordingly. Don't forget it's the recurring revenue stream and diversified customer base that will make your business an attractive investment. Everyday keep striving to build that customer base. Good luck and do let us know about your success story.