Posted on December 4th, 2007
This incredibly relevant session featured the generous tutelage of Patricia Hall, Investment Banker, Hallmark Capital. She walked the audience, comprised primarily of search related business owners, through a brilliant real-world overview of how the financial community looks at the SEM industry and evaluates companies for potential investment or sale.
Even if youâ€™re not thinking about selling your company at this time, itâ€™s important to always track it’s value. Knowing what it could fetch on the market helps keep your firm agile should opportunity arise.
The most important attribute in evaluating an SEO/SEM firm for potential investment is the client list. The type of client matters because it verifies why the company is valuable. Future (speculative) client profiles are critical and bankers look to current ones as excellent indicators of future worth.
The second area is the nature of revenues. Are they one-time sales like site optimizations or are there reoccurring revenues? In the SEM industry itâ€™s not necessarily less valuable to provide one-off services because the universe of potential clients is so big that a single client portends thousands of potential clients in any given niche like health care, travel, etcâ€¦
Technology strategies are considered valuable, particularly if tools give your business a competitive edge. Sometimes itâ€™s better to be best of breed by looking out into the market to always stay ahead of the curve with commercial tools. Thereâ€™s no one way thatâ€™s more valuable than another. In search, unlike many industries, either approach works.
The fourth area is scalability. Potential investors will want you to scale, say ten-fold. Therefore purchasers will want to know if your firm has the ability to exponentially multiply key areas where youâ€™re already successful.
Finally, management style, owner, and leadership approach matter a lot. If an advertising agency is looking at you theyâ€™re going to find a team approach attractive. Another type of buyer, who does not know the market very well, may be looking for a singular leader to drive the business and lead into the future.
How all these factors interplay as well as â€œvalue in the eye of the beholderâ€ represent what any particular buyer is willing to pay at any given “transaction” time. What appears to be valuable today could be much more valuable tomorrow but could also be of fleeting worth. In the end, when youâ€™re thinking about raising capital or selling your company, the real thing you want to do is create a transaction at the time of greatest value.
Key Investment Factors
First, sustainable revenue generation is critical whether from high volume one-off jobs or reoccurring work from a group of long term clients. â€œCan you keep this up, year after year?â€ The gap between what you can generate today verses next year is a risk for investors so do what you can to mitigate that risk.
The investor wants to be assured that you have the ability to see into the future and be a visionary leader. This factor is particularly important in the SEO/SEM industry because things change so quickly. Competitive positioning is very important to potential suitors. Know who your competitors are and be ready to paint a picture of what your competitive landscape and know your position.
Enhance your companyâ€™s attractiveness by growing your reputation carefully. What your current and past clients say is very important so deliver on your promises and build your cumulative reputation over time. Your future and speculative value depends on it.
Innovate by staying ahead of the curve. Also diversify your revenue and reciprocally your business risk. Customers are really looking for total solutions so make sure that you either internalize or collaborate with strategic partners. Identify who would be the logical buyers of your business and be aware of whatâ€™s valuable to that space.
Challenges of The SEM Business
There is a tendency towards pigeonholing SEM as a commodity business. Fight this dangerous stereotype by measuring and making your SEO relevant and special. There are many more firms than in the early days which makes for many more boots on the street competing for clients. The antidote is to know your unique selling proposition and remember that the pool of potential customers is incredibly vast.
Technology Investments Could be Scary
With a marketplace evolving so quickly, how does a search marketing agency dare invest in technology? Keeping that sustainable technology edge is a challenge so building knowledge in related fields is the key. Communication with ultimate buyers (web users) is essential. Help keep your clients to embrace what he WEB wants and lead them into the future.
The good news about the industry is that search marketing is a fact of life at this point, more and more accepted as good and essential. Keep this in mind. The bigger companies want a piece of the action and itâ€™s not just advertising agencies. Some of the best potential buyers for your company might be your buyers.
Finally, tough a crude thumbnail, itâ€™s not unreasonable to look at 6-12X pre-tax earnings as the starting point for valuing your SEM business. Even if youâ€™re not looking to sell out at this time, itâ€™s an excellent practice to always be READY because you never know whatâ€™s going to happen in the market. You want to know what your companyâ€™s worth and be ready to sell at any time.