What is a hosting and colocation provider worth?

A hosting or colocation provider can be seen as a business that owns servers, or as customers who have agreed to keep their systems in one place plus a facility and network that make that promise possible. The second view raises the question of how safe the promise is. A provider with strong revenue but a facility lease near its end, a single upstream carrier or halls full of ageing hardware raises questions that profit alone does not answer, since a buyer would take on the repair bill. Any multiple quoted for this kind of business is illustrative general industry discussion, never an appraisal of a particular company, so this page explains mechanisms rather than numbers.

What to test first

Start with recurring revenue and the terms behind it. A buyer can ask whether customers are on multi-year agreements or month-to-month arrangements, how long customers have stayed, how renewals were priced and whether one account is large enough to change the picture if it left. A second thing to test is the uptime record: advertised availability is a claim, while logged incidents, service credits actually issued and customers lost after an outage are evidence. BDC says buyers want a solid track record and will ask to look at historic and interim financial statements, projections, tax returns and other records.

The facility is part of what is being sold

Whether the provider owns its building or rents space affects what is on offer: an owner sells property as well as a business, while a tenant sells a lease, so the remaining term and any right to renew matter. A buyer who pays for a long run of earnings but can be asked to leave soon may be buying a shorter business than the seller describes. Power and cooling capacity belong in the same conversation, because they limit how many more customers the site can take. A hall that is nearly full cannot grow, and spare capacity is only useful if the power and cooling needed to use it are secured.

How the earnings get recast

Profit can be restated before it is valued, and hardware is one adjustment to consider. A provider that has put off refreshing servers, switches and power equipment may show flattering profit today and leave a catch-up bill, so a buyer can ask what bringing the estate to a current standard would cost (the glossary entry on equipment obsolescence explains the logic). The Canada Revenue Agency places computer hardware and data network infrastructure equipment in their own classes of depreciable property, so tax depreciation follows tax rules rather than the equipment’s remaining working life. Other adjustments to consider are owner pay, one-off migrations, service credits issued but not booked properly, and prepaid annual contracts booked as revenue in one year while the service is still owed. Those add-backs and deductions produce the figure any multiple is applied to.

Why two similar-looking providers price differently

• Carrier diversity. A provider relying on one upstream carrier can lose every customer’s connectivity at once, so ask whether a second route exists.
• Facility term. Equal earnings can carry different risk when one site has a secure long term and the other a lease near its end with no right to renew.
• Hardware age. A funded refresh plan and documented equipment ages can make a different purchase from kit that has outlived its useful life.
• Customer mix. BDC says a seller will not get full value if there is a customer concentration risk, so ask how much revenue sits with a few accounts and on what terms.
• Data location. Customers may have been told their data stays in one province or country; if servers or backups sit elsewhere, that is a gap the buyer would need to resolve.

Privacy promises are part of the price

A hosting provider holds other businesses’ data, so a buyer can reasonably ask about its privacy and security record. Where PIPEDA applies, an organization that hands personal information to a third party for processing remains responsible for it, and the Privacy Commissioner’s guidance treats that organization as still in control of the information if a breach happens at the processor, while noting that control is assessed case by case. A customer in that position may therefore ask a provider about safeguards and past incidents, and a buyer can ask the same. Quebec adds a layer: its privacy regulator says an organization must carry out a privacy impact assessment before communicating personal information outside Quebec, so a Quebec customer’s assessment may rest on what the provider said about where its servers are.

Who might buy

Possible buyers range from a larger hosting or data-centre operator that could move the customers into its own halls, through an infrastructure-focused investor, to an individual buyer taking the business as it stands, refresh bill included. A seller can ask a broker or advisor who works in technology infrastructure which type of buyer is most likely to value their particular strengths, and it helps to have the facility position, hardware plan and customer contracts documented before due diligence begins.