The first session I attended at Search Engine Strategies New York was How to Build Investment Interest in Your SEO/SEM, featuring Patricia Hall with Hallmark Capital. Hall’s firm is an independent investment company with expertise in preparing SEM agencies for merger or acquisition. She outlined what Wall Street looks at when valuing an SEM agency, starting with the client list (contracts are particularly critical in this regard). Secondarily, the nature of revenues, helps determine valuation: the greater percentage of recurring revenue, the better. The technology strategy can be important, especially in terms of owning unique IP, if not utilizing best-of-breed vendors. Scalability is also important, in that the larger you can scale, the more attractive you may be to some investors. The management team is also a factor in assessing the value of an SEM firm. Most acquirers consider the executive team’s knowledge, experience and talents when determining overall fit (i.e. leadership, credibility, operational savvy). Hall outlined three specific factors in maximizing valuation include: sustainable revenue generation (regardless of type), visionary leadership and competitive positioning. Hall recommends the following tips to enhancing your company’s attractiveness: build your reputation (do what you do well), innovate (stay ahead of the curve), revenue diversification (to reduce risk) and tailor business to strategic acquirer. The four challenges facing the SEM industry today (that impact valuation) include: commoditization, saturation, sustainable technology edge and communication with ultimate buyers. Most importantly, Hall recommends taking the advice of Seth Godin and tell your unique story well. She concluded her slides by mentioning current valuation ranges, which are 6x to 10x pre-tax earnings or 2x top line revenues. Hall then went on to discuss the three primary exit strategies: selling to another company (all or part), to employees (earn out), direct public offering (not IPO necessarily) or reverse merger with a public company shell (to increase valuation roughly 5x). In one case, a $2M company raised $1.5M to buy a corporate shell, then raised another $4.5M for 30 percent of the company. Hall also outlined another option: recapitalization, where you infuse cash into the company through partial liquidity as collateral loan or equity. Recapitalization has added benefits, including bringing in strategic financial partners and increasing valuation for your business. Despite the inherent challenges in the SEM industry, it’s still a great business to be in if you intend to sell someday.
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