Valuing a Lead Generation Business
By Sage Duvall
Aug 06 2019
This is a guest article from Founders Advisors Vice President Brad Johnson. We hope you enjoy it!
In today’s digital economy, the ability to identify a target audience, communicate the right message, and convert prospects to customers is critical to any business. The rate at which advertising dollars are shifting to performance-based marketing models is well published (and increasing); while many factors are driving this trend, improved technologies coupled with an ability to calculate return on advertising spend have given advertisers the confidence (and data) necessary to funnel more of their budgets to the Web.
There are several business models that fall into the online lead generation and performance-based marketing categories. In this post, we’re going to explore the top three valuation drivers for lead generation companies which have perfected the process of targeting, educating, and converting leads into customers. This list is by no means comprehensive, but based on our experience, these are the factors strategic and financial buyers consider first when developing acquisition strategies and building valuations models in the lead generation space.
When it comes to digital customer acquisition, the two primary channels are organic and paid, and each of these channels has unique advantages and disadvantages.
For organic lead generation businesses, “Google risk” is the most significant factor influencing valuation given the number (and sometimes erratic nature) of the search giant’s algorithm changes. A business’s reliance on Google for performance is highly correlated to valuation; however, there are a number of strategies to mitigate any perceived risk in the minds of buyers. Some key factors that our team builds a story around include: the breadth/depth of keyword rankings and the associated traffic/revenue; the link profile and domain authority; optimization efforts; and the relatively high value and conversion rate associated with an organic lead. There have been many companies which have generated impressive results in a short span of time via organic search; however, buyers and investors are more attracted to lead generation businesses that have a history of strong performance (and doing things the right way).
Based on the capital requirement of paid models, the efficiency at which dollars are put to work, coupled with the return on investment, play heavily into the corresponding business valuation. How a company tracks and measures ad campaigns is critical, and there is a premium applied to those paid channel players who consistently generate positive and profitable results via arbitrage. Demonstrating a defined and documented process that is both repeatable and scalable is critical for paid customer acquisition companies to earn a premium valuation. In our experience, paid customer acquisition strategies can drive higher lead volumes for their clients relative to their organic peers, which can earn a better average payout even with lower conversion and lifetime value rates. Additionally, unique and proprietary technology also plays an important role.
The degree to which a company leverages content in the lead generation process is a factor that distinguishes high and low-value customer acquisition companies.
He who educates, wins. This is a common phrase in our office, and one that applies well to the lead generation space. There is a clear valuation gap between customer acquisition businesses that leverage content and those that do not. Companies that use stale landing pages with limited content generally attract much lower valuations, and in most cases, there are very few buyers interested in this model. Premium valuations are earned by websites that fill the top end of the funnel through thoughtful, engaging content that moves prospects through the purchasing process and create a call to action.
In certain markets, lead generation businesses aren’t able to control the ad copy associated with their lead buyers. However, there is still an opportunity to become the expert voice and produce adjacent content that meets prospects at the right time in their digital journey. Buyers also assign value to evergreen content that has developed an impressive link profile and was produced by a true subject matter expert.
The key with any content strategy is to ensure you have clear ownership of unique content. A free and clear title is critical to buyers and investors, so don’t wait to get the appropriate employee/contractor agreements place – this will affect the transaction structure and valuation assigned to your business.
Revenue Structure & Payment Terms
How and when you get paid is a key factor that buyers and investors will consider when valuing a lead generation business.
Do you drive leads to a form and receive payment based on interest, or are you compensated once your end customer has an active, paying client? The latter is generally viewed as more valuable (and secure), but ultimately the quality of leads you’re driving to your customers is most important.
Another component of payment terms considered by buyers and investors is what sort of clawback rights your clients have for low quality leads, individuals who don’t ultimately sign up, or customers who cancel within a certain timeframe. As a CEO, it is critical that you understand both these terms, how your business performs relative to competitors, and how any such terms might impact future cash flow for an acquirer.
While contracted revenue and locked in rates are highly coveted, buyers and investors understand that this is atypical for most lead generation businesses. That said, a CEO’s ability to demonstrate premium relative pricing, maintain direct customer relationships (i.e. skip the middle man – affiliate network), and negotiate quicker payouts will reduce the amount of risk associated with future cash flow.
If you’re considering selling your company, we would love the opportunity to learn more about your business and give you our experience driven guidance on what your lead generation business is worth. Please don’t hesitate to reach out to Zane, Chris, or Brad; we can quickly discuss next steps and the process.
About Founders Investment Banking
Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, SaaS/software, industrials, internet, digital media and industrial technology companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M & A Securities Group, Inc. or Founders M&A Advisory, LLC, both members of member FINRA & SiPC. M&A Securities Group and Founders are unaffiliated entities. Founders M&A Advisory is a wholly-owned subsidiary of Founders.
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