Conducting due diligence when acquiring a hosting business is critical to evaluate the financial health, customer base, operational structure, and technical infrastructure of the company. By thoroughly examining these factors, buyers can ensure a sound investment and identify any potential risks. This guide provides a comprehensive approach to due diligence based on detailed questions gathered from typical acquisition assessments.
1. Company overview and financial stability
Understanding the hosting company’s history, revenue, and financial stability forms the basis of the due diligence process.
- Company Age and Brand Value
- How long has the company been in business? What brands are included in the sale?
- Revenue by Service Type
- How is revenue divided among shared hosting, VPS, domain registrations, and add-ons (e.g., SSLs, IPs)?
- Recurring Revenue Breakdown
- What is the breakdown of recurring revenue by service type and subscription term (e.g., monthly, quarterly, annually)?
- Financial Health
- What was the total revenue over the past 12 months, and is hosting the primary revenue source?
- What are the payment processing costs (e.g., PayPal, Stripe), and how much revenue is attributed to each processor?
- Currency and Taxation
- In which currencies are clients billed, and are any taxes applied to these transactions?
- Revenue per Customer
- What is the average monthly revenue per customer, and what are the average cancellation rates per month?
2. Customer base and retention metrics
Customer metrics, including churn rates and demographics, provide insight into customer loyalty, service usage, and retention potential.
- Churn Rate and Cancellations
- What are the monthly and annual cancellation rates, and what are common reasons for customer cancellations?
- Are customers typically canceling due to no longer needing the service, and is there a “churn rate” or specific value loss per customer?
- Customer Demographics
- Where are customers primarily located, by region (e.g., USA, UK, Australia, India)?
- What is the average age or tenure of customer accounts with the company?
- Subscription and Renewal Terms
- What types of subscription terms are most common (monthly, yearly, biennially), and how many services are set to renew within 12, 24, and 36 months?
- How many clients pay through subscriptions or auto-renewal, and are they managed via a specific billing platform?
3. Technical infrastructure and service details
Assessing the technical foundation of a hosting business is essential to understand its scalability, efficiency, and potential maintenance requirements.
- Hosting Services Offered
- Which hosting services are available (e.g., shared hosting, VPS), and what percentage of revenue does each service contribute?
- Server and Data Center Infrastructure
- What data center setup is in place, and how are resources allocated across shared and VPS services (e.g., total vCores, RAM, bandwidth)?
- Are there any customizations (e.g., unique PHP versions or configurations) that would require ongoing maintenance?
- Control Panels and Management Tools
- What control panels (e.g., cPanel, WHMCS) are used, and what are the associated licensing costs?
- Are there any outstanding licensing contracts for control panels or server management software?
- Billing and Payment Processing
- Which billing platform (e.g., WHMCS) is in use, and what are the management fees?
- Will access to existing payment processors be transferred, or will new accounts need to be created?
4. Support and staffing structure
The company’s support framework and staffing are essential to maintain customer satisfaction and operational continuity post-acquisition.
- Support Channels and Languages
- What support channels are available (e.g., email, live chat, phone), and in what languages is support provided?
- Support Costs and Packages
- Are support services bundled with hosting plans, or are there additional support packages?
- What are the total monthly costs for support staff, including outsourced and in-house employees?
- Employee Structure and Daily Responsibilities
- How many employees are on payroll, and what are their daily responsibilities?
- Are there any contractors with active agreements, and if so, what are the terms and monthly costs?
5. Vendor contracts and monthly expenses
Reviewing vendor relationships and operational costs is key to understanding the company’s cost structure and potential liabilities.
- Long-Term Vendor Contracts
- Are there any long-term contracts with hardware or software vendors that would continue post-sale?
- Which vendors are used for critical resources, such as server’s, and what are the monthly costs?
- Vendor Costs Per Service
- What are the costs associated with specific services, like IP addresses, SSL certificates, CDN, and other add-ons?
- How much is allocated monthly for licenses, server leases, and support?
6. Sales and legal Cconsiderations
Examining sales agreements, legal structures, and contractual obligations helps clarify post-sale responsibilities.
- Included Assets and Accesses
- Will the sale include payment processor accounts, such as PayPal and Stripe, to ensure customer billing continuity?
- Are there any intellectual property rights, software, or proprietary systems included in the acquisition?
- Existing Customer and Vendor Contracts
- Are there any active agreements with customers or vendors, such as Service Level Agreements (SLAs) or terms on refunds?
- Are there any unresolved disputes, obligations, or liabilities that might impact operations?
Comprehensive FAQ
Q1: What financial records are required for thorough due diligence?
A: Typically, three years of financial data, including revenue, expenses, and profit margins, is advisable. Detailed monthly breakdowns provide greater insight into revenue consistency and cost trends.
Q2: How is revenue stability assessed in a hosting business?
A: Revenue stability is best assessed by analyzing customer retention rates, churn, and the distribution of subscription terms. Recurring revenue models and long-term customer accounts indicate a stable cash flow.
Q3: How should server and infrastructure quality be evaluated?
A: Review server specs (e.g., vCores, RAM, storage) and data center setup. Ask about redundancy features, such as Scale Computing clusters, which improve reliability by allowing hardware hot-swaps without downtime.
Q4: Why is billing platform compatibility important?
A: Billing platforms like WHMCS are essential for managing subscriptions and renewals. Ensure the platform is compatible with your systems to avoid disruption in billing continuity.
Q5: How do vendor costs impact acquisition decisions?
A: Vendor costs, such as server leasing and software licensing, directly affect profit margins. Detailed vendor cost analysis helps determine the sustainability of current profit margins post-acquisition.
Q6: Should payment processors be transferred in the sale?
A: Yes, transferring payment processors like PayPal or Stripe allows for continuity in customer billing and reduces potential cancellations caused by switching payment methods.
Q7: What customer metrics are most critical to review?
A: Important metrics include churn rate, average customer lifetime, and revenue per customer. These indicate customer satisfaction and the potential for revenue retention.
Q8: How should support structure be evaluated?
A: Check support channels (e.g., email, phone) and staffing levels. Ask about bundled versus separate support services, which impacts customer satisfaction and staffing costs.
Q9: What long-term contracts should be reviewed?
A: Review agreements for servers, software, and support services. Ensure there are no restrictive terms that could affect scalability or incur unexpected expenses.
Q10: How do customer demographics influence acquisition potential?
A: Customer location impacts payment preferences, support hours, and marketing strategy. For instance, if most customers are in North America, support hours should align with peak activity in that region.
Q11: How is the value of custom software or intellectual property assessed?
A: Evaluate any proprietary software for its role in operations, costs, and maintenance requirements. Custom systems that reduce operational costs can increase business value.
