Web Hosting Interview - Hypoint Company November 2007

DAVID MATTHEWS: Hypoint Company specializes in brokering the sale of Internet and technology companies worldwide.  We primarily focus on hosting and access businesses that generate between $100,000 and $10 million per year in sales.  Our role is like that of a real estate broker; we take exclusive listings to sell a business for our client, then we find a buyer, negotiate a deal and make sure the deal closes.  We are paid a "success fee" when a sale is completed.  We are one of the leading companies in the world in this niche, specializing in Hosting and Internet service companies.  I am the owner of the company and a broker.

DAVID MATTHEWS: I started Hypoint Company in 2000 after I had a conversation with an owner of an ISP in Dallas.  I was interested in what kind of "Internet business" I might be able to get into.  He indicated to me that he had lined up $25 million to buy up ISPs and was aggressively working on making acquisitions.  I have flipped real estate and brokered commercial real estate and businesses since I was 18.  It seemed to me that I could probably make a success out of specializing in brokering the sale of these kinds of businesses.  That strategy has proven to be correct.  

DAVID MATTHEWS: The Internet is the most powerful force on Earth today.  No business can operate without it and every individual must use it, directly or indirectly, as a daily part of life.  The growth of the Internet economy will continue for the next 100 years.  There will be a tremendous amount of evolution and churn in the industry and plenty of opportunity for everyone who is willing to work, innovate and take risks.  The key is to constantly move forward.  Don't be afraid to let go of one business or service and go on to the next.

DAVID MATTHEWS: The only thing an advertisement can do is generate an inquiry.  That is about 5% of the process of selling a business.  For most business owners, selling a business is a "once in a lifetime" thing.  They do not know how to qualify a buyer or to keep confidential information from getting into the hands of unscrupulous types who would do damage the business, intentionally or unintentionally, if given the chance.  They do not have the experience and skill to know what kind of problems may arise from exposing a business to prospects or in how to "close the deal."   As a professional with over 30 years experience, and having closed hundreds of deals, large and small, my knowledge and experience is invaluable.  Real buyers usually prefer to work with a broker, as they know the process will be handled fairly and professionally.  What most business owners don't realize is that buyer's who seek out "for sale by owner" deals are most of the time looking to take advantage of the seller's lack of knowledge and experience.  Sellers often get tied up in some hicky "formula" deal from "good ol' boys" only to end up with a fraction of the money they thought they would get.  It is not uncommon for a inexperienced seller to only get 25% to 50% of what the business is worth just trying to save a success fee.  

DAVID MATTHEWS: Today, there are few sellers and many buyers.  Owners tend to not want to sell, as it seems as if there is nothing but upside and no way to go down.  That is false security, of course, as the market is becoming dominated by predatory giants and new technology that is putting the small operators at a serious disadvantage.  The hosting business is today as the ISP business was around 2001.  In 1999, every ISP thought they had no place to go but "up."  In early 2000, after the bubble burst, it became apparent that stratospheric prices and multiples were a thing of the past.  In 1999, ISP were selling for 2X to 4X gross revenues on the assumption that it was a "blue sky" unlimited growth business.  Today, ISPs are selling for more like .35X to .5X and dying very quickly as big ILECs and others take away business with cheap broadband.  The independents just cannot compete.  Many missed the boat and are just folding.  Small, independent hosting companies are following in that path.

DAVID MATTHEWS: :  When an industry is young, it is possible for newcomers to jump in and pick up business.  Ten years ago, when nobody knew how to run a hosting operation, and it was mostly a sideline for ISPs, it was not too difficult to specialize in the hosting business and pick up customers.  Today, without million dollar ad budgets and huge customer base, it is very difficult to maintain the infrastructure and support that compares to the competition.  Today, it is possible to get an excellent web hosting package for $2.00 per month that is far better than most $29 per month plans available by smaller hosting operators.  Consolidation and "wringing out" is just part of "business as usual."  I call it, "the Walmart effect."  The hosting industry is definitely subject to this effect.

DAVID MATTHEWS: The industry continues to evolve.  Innovators find new and valuable services that serve the customer.   Goggle, Microsoft and other "world domination" oriented "Walmart-like" companies are now investing heavily in "cloud computing."  I expect that webhosting will become just part of the "suite" of cloud computing services and, for all practical purposes, will eliminate the need for "hosting services" altogether.  Big players will absorb many hosting functions as a loss leader or part of a more proprietary service that others cannot offer.  Stand alone hosting, as we know it today, will go by the way of the "dial up" Internet account.

DAVID MATTHEWS: Webhosting operations now sell for between .25X and 2.5X gross sales.  It is impossible to give a reliable "rule of thumb" because the value factors, profitability, growth potential and portability of various types of accounts and services is so wide.  It is not possible to reasonably estimate the value of a hosting business without a comprehensive analysis.  We do provide a free, no obligation preliminary estimate of value to anyone who is considering listing and selling their business.  We also offer comprehensive valuations for a fee, for owners needing an appraisal for other purposes.

DAVID MATTHEWS: The most typical reason is the job of running the business is more than the owner can handle and he/she is not making enough money to justify the time they are spending on it.  The demands are 24/7 and can be very stressful.  It is overwhelming to spend so many hours... to have to go and rebuild a server on Thanksgiving Day or New Years Eve or when your wife is having a baby ... many owners go for years without a vacation or any real time off. For many owners, the upside they thought would be there simply is not materializing, mostly due to the intense competition, which continues to grow more intense every day.  

There are still buyers today, because they realize they simply cannot "grow" the business quickly by advertising and marketing alone.  The only way to get bigger, which is critical to gain any scale and be competitive enough to survive, is to buy customers and consolidate the competition.

DAVID MATTHEWS: The single most important thing to do to maximize the value of the business is to have excellent financial and operational records.  Most buyers discount heavily for poor record keeping and as a hedge against "the bucket of worms" that tend to be present when record keeping is substandard.  The next thing to do is to make sure the accounts can be relocated easily with the least amount of "friction" at the time of the transition.  Buyers are looking for one thing ... and one thing only ...  revenue from customers that will survive the sale and pay the invoice when presented.

DAVID MATTHEWS: The most important thing a service provider can do is provide good service.  So the one "don't" is "Don't give bad service."   When an owner begins to fall behind, the business will deteriorate very rapidly.  The owner probably does not even realize just how quickly this happens.   When the sale occurs, if customers have been unhappy, they will jump ship in droves.  Most deals, if not all, have a "reconciliation date" where the remaining customer count must equal the number of customers the seller based his price on.  When the customer shrinkage occurs, money is deducted directly from the final sale price and that can be a huge chunk of change!

DAVID MATTHEWS: I actually thrive on the stress to some extent ... it is part of the fun and challenge.  No two deals are the same.  Most people just could not do what I do and I am paid well for my successes.  However, I find that rigorous physical activity is the best overall stress reducer.  I run, work out, do triathlons and things like that.  I have done four marathons, including the NY Marathon.  My black lab takes me running and plays "fetch" with me too.