How To Assess The Liquidity Of Web Host Service Businesses

Wednesday, 25 November 2009

In this article, we'll look at the flexibility and liquidity of various types of web host service businesses.  Liquidity affects the ease with which you can sell on a business, and the type of buyer that business will attract, and hence will affect the valuation of the business as a whole.

Liquidity of web hosting business

The most liquid business model, and one that can be sold on within 48 hours once due diligence has been satisfied, is the single owner, co-located web host service, with no employees, data center or design service to complicate the issue.  These types of service are very attractive to cash buyers.

The least liquid business model is the exact opposite - a web hosting company with a vast range of back office services, such as design and data centers.

Although superficially it would appear that a design studio would add value to the company, this isn't necessarily the case.  The revenue generated by one-off design jobs is rarely equivalent to recurring revenue from pure hosting fees.  Secondly, a design studio can actually be a risky proposition for a potential buyer, who has to worry about whether key designers will leave with a change of ownership, affecting relationships with clients, as well as all the risks and costs associated with staff and offices.  It's been estimated that there are 90% fewer buyers for web-host and design companies than for pure web hosts.  Fewer people buying means it's a buyer's market, so it can also mean lower valuations.

Similary, an Internet Data Center is more of a long-term investment than a short-term cash generator.  Owning your own IDC inevitably reduces liquidity, as it's essentially dead weight until it's being used to it's full capacity - this is why most start up web hosts co-locate to begin with.  As a long-term strategy, however, it can add significantly to the value of the company, as you can sell that capacity on to other companies.  Again, this affects the type of buyer you can hope to attract, and hence the valuation of your company.  

Generally speaking, more flexible and more lightweight companies attract cash buyers, and you can expect a quick sale and hence a quick return.  Companies that have acquired assets will attract cash-and-asset buyers, who are fewer and further between.  They may have more money to play with, but they're in a stronger position to dictate terms.  It's just important to remember that when it comes to valuing your business, you need to be realistic about the amount of liquidity it has.