How to Build Investment Interest in Your SEO/SEM

Mar 17, 2008 - 1:38 pm 0 by

Presentation by Pat Hall of Hallmark Capital

Hallmark is an independant investment firm, meaning the discussion today is unbiased.

Going to cover in today's presentation: 1. how the SEOs/SEMs are evaluated? 2. 3 Factors investors look at specifically 3. how to make your company more attractive 4. challenges within the industry

Why do we care, even if you're not intending to sell? Its an investment. When you know what your company is worth, you can then make intelligent decisions. Decisions may involve financing/company growth type decisions.

How are SEOs/SEMs evaluated?

1. Who is your client list? This is the single most important factor. It shows how you as a company are perceived in the market place. The type of client also plays a role in telling a great deal about a company, both in terms of size of clients and industries targeted. THis obviously means keeping existing clients happy and profitable. Stable client bases are also positively viewed.

2. Nature of revenues. Are they one time projects, or recurring revenues? The lower the risk of cash flows, the better.

3. Technology Strategy. Have you developed software to help your company excel or keep costs low. This can make a company more attractive than one that has none. Software development isn't crucial ... you may take a best of breed approach, and employ the best software available in the marketplace.

4. Scalability. How able is your firm to grow by 10x for example. THe more scalable a company is, the more its worth. This very difficult to achieve.

5. Management/Owner Leadership. Who's running the company? How broad and talented in the leadership base. Different vendors will view different structures differently. Eg. Ad agencies may like more distributed power and teamwork.

At the end of the day, its the interplay of these factors that ultimately determines value, and to some extent the value is still in the eye of the beholder.

Specifics - 3 Key Factors That Investors Look for: If these 3 elements are all in place, then your company will likely be an attractive target.

1. Is Revenue Generation Sustainable? Can you continue to generate acceptable revenue levels over time. How great is the risk your firm cannot sustain its revenues over time, and from year to year.

2. Is There Visionary Leadership in your Firm? Do you know what you're doing, where the firm is going, and exactly how to get there? Odds are the purchasing company doesn't have this knowledge, and needs this type of insight and guidance. You must however be able to articulate it to the investors.

3. What is your Firms Competitive Positioning? There are alot of companies in the space. How do you differentiate your firm? How capable are you at explaining this to potential investors?

How Can You Make Your Company ore Attractive? 4 things you can do:

1. Reputation - how are you viewed in the industry, by competitors? by clients? This goes along way to show how well positioned you are in the market. Do whatever you can to build reputation with clients, competitors, and others.

2. Innovate - Stay ahead of the curve! Companies need to be viewed as long term players, and this requires constant adaptation. Search is ultra competitive. So, what is your company doing to innovate and stay ahead of the masses of competitors. Ensure that its something tangible and that you can articulate, and that makes sense to potential outsiders.

3. Diversify Revenues and Business Risks - this doesn't necessarily mean you have to provide a whole slew of different services, but perhaps rather serve clients in different industries, in different geographic regions, and do not have too much revenue with a small group of clients. It is difficult though. Firms do need to ensure they do not overdiversify at the same time, and try to take on too much.

4. Identify Possible Acquirers or Investors, and Appeal To Their Needs - eg. align target markets.

Challenges to The Industry: 4 particular challenges:

1. Commoditization - company's viewed as such have low margins, and are not particularly attractive in such a competitive space. Fight commoditization by measurement, accountability, and relevancy tactics. The jewelry industry is a great industry case in point. Many companies have found ways to differentiate themselves online.

2. Saturation - lots of SEOs and SEMs out there now. Clients get confused as a result, as they typically don't understand points of differentiation. SEOs/SEMs must find ways to differentiate themselves in their pitches.

3. Sustainable Technology Edge - to stay ahead of the masses of competitors, companies need an edge. Technology often permits this, and helps to ensure you remain at the forefront of your niche.

4. Communication with Ultimate Buyers - figure out ways to connect with utlimate buyers for forging closer ties with them ie. who's buying your client's products, and can you influence them?

Summary: Its not just ad agencies and other marketing companies that are looking to buy. It may be client companies. The universe of potential purchasers is very large. Most companies want to be part of a growing industry. Consequently, with the influx of larger more organized firms, many existing companies will go bankrupt!!!

So, find ways to differentiate yourself.

General Multiple Principles: a. multiple of 6-12x pretax earnings b. multiple of 2x revenue Though all the factors above will affect those multiples. THey are just a general guideline

4 Paths to Liquidity: Companies need to be liquid (ie. ready for sale), and there are 4 paths:

1. selling to outside entities. Can sell outright, majority, or minority ownership. Lots of possibilities. Sometimes outright sale isn't ideal.

2. public offerings. There are more opportunities than just IPos such as a. direct offering (where you create the buzz yourself ... done on a state by state basis). Can raise large capital in exchange for shares of the firm b. reverse merger ... buy a public company shell. The company might not be doing business, but exists and is registered. Can buy it for $50k to $700k, and then you become a public firm. WHat is the opportunity here? If your private company is worth x ... then as a public company it will typically be worth 5x. What a great way to increase the value of your company. Its not for everyone, but given the right circumstances, it offers incredible returns.

3. Sell Company to Insiders. Meaning ESOPS (employee owned entity) or management buyout. 2 typical situations for this: a. can't find enough buyers b. real concern and care for employees

4. Recapitalization - have your cake and eat it too. Keep your company but gain liquidity. Firms will lend you money, and you do have to pay it back, but have the use of the money in the interim. Good from the sense you still maintain ownership, and can afford better people/partners in the short term. Valuations are typically very good with recapitalization. Not as good as with going public, but still good.

Jeff Quipp is President of Search Engine People Inc., a Toronto Canada based SEO, SEM, SMM.


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