Huge Growth + Talent Shortage = Increased M & A Activity

by Jennifer Osborne May 12th, 2008 

Last week I wrote about how the SEO industry is growing up. Tremendous growth and low barriers to entry are / will attract many new entrants to the market.

But with formal SEO training not yet available on mass (i.e. taught in colleges), this growth is going to leave us with a talent shortage.

Essentially, large companies who want to get into this business are going to be forced to buy their way in.

In order to prepare your shop to possibly benefit from this increased M&A activity, it is helpful to have a sense of what factors will make you attractive to a perspective purchaser.

But one size does not fit all.

The evaluation of a one man shop is entirely different from that of a large Agency .

THE ONE MAN SHOP
There are many one man shops that are hugely successful. In fact many of our most authoritative industry experts are sole proprietors.

Like it or not, YOU ARE the business. Your business has little value unless you come with it.

Potential buyers – Your potential buyers are likely those looking to “buy talent” and/or credibility. A new entrant to the SEO Industry can say that they’ve been "doing SEO" for as long as you have.

What makes a one man shop desirable?

1) Reputation / Brand - To be attractive to a potential buyer in this scenario, you MUST have a well known name in the industry. Ideally, you will have case studies from recognizable brands. Further, active participation in the industry increases your credibility as an authority.

2) Re-occurring Revenue Stream – A re-occurring revenue stream will also be important to your valuation as it is likely that your price will be a multiple of your revenue. Moreover, your established business (re-occurrent revenue) should be sufficient to pay for your future salary.

3) Top Line Revenues – An EBITDA (earnings before interest, taxes, depreciation and amortization) calculation doesn't make a lot of sense to a one man firm as sole proprietors typically realize their profits as they are earned vs reinvesting.

In this case, a calculation should be made based on a multiple of top line revenues.

SMALL TO MID SIZED SEO FIRM (2 – 30 people*)
If a new entrant is looking to fast track it's success by"buying the talent" that it requires then considerations around the size and strength of your team will be important.

1) Team Attributes – How many years of experience does your team have? Do you have high turnover? Do you have senior people filling key roles in your business?

2 Process – Process is also an important consideration. A new entrant doesn't want to just buy talent, they want to buy the secret recipe……

  • How do you sell SEO?
  • How do you manage the work flow process?
  • Who is accountable for what aspects of the process?
  • Do you have checks and balances in place?
  • What does your reporting look like?
  • And to what degree is it automated?

3) Cash Flow – Cash flow will be an important consideration (nobody wants to buy a sinking ship) however if you're having trouble collecting on your receivables, many companies will assume that once they take over, they can do a better job than you are (rightly or wrongfully so).

LARGE SEO AGENCY (30+ *)
For a large SEO Agency, factors that make you attractive to acquisition focus much more on hard calculations than the softer considerations of small to mid sized firms.

*Note: There are lots of web design firms who claim to be in this category when in fact only a handful of their 30 person shop actually do SEO. This article differentiates between firms with an SEO component versus a dedicated shop of 30+ people who only do SEO.

1) Scalability – The strong team you were proud of as a small to mid sized SEO firm is expected of in a large firm. For a large SEO agency to be attractive for acquisition, organizational structure is critical.

Can the structure be replicated easily for growth? Are there established training programs in place?

2) Cross Sell Opportunity – New entrants will be looking for "fit" with their existing markets.

  • Is there an opportunity to cross sell between the acquiring company's existing clients and your products?
  • Is there an opportunity to sell between your clients and the acquiring company's products?
  • What about clients? Do you predominately service mom and pop shops while your perspective buyer mainly targets enterprise sized clients? Your firm will be less attractive if the purchaser is discounting too large a proportion of your business due to "lack of fit".

3) Technology – Have you invested in proprietary technology that would benefit the buyer either by providing them with a competitive advantage or reducing costs?

Not only does an investment in technology give you an edge against the competition but it also shows long term strategic thinking.

The actual calculation
Keep in mind that there is a difference between book value and market value. A traditional "by the book" valuation will typically end up being a multiple of your EBITDA. Six times EBITDA on the low end and twelve times EBITDA at the higher end.

But EBITDA isn't always the most fair way to measure value. When companies are growing really quickly, profits tend to be lower or non-existent. This does not mean that your company's value is non-existent.

This is why in a pressurized environment like SEO, a calculation based on a multiple of your top line revenue may be the more appropriate measure even for large SEO Shops.

At the end of the day, what you're worth really boils down to how much you're willing to sell for. And with the industry booming, algorithms changing, new markets emerging – it's still very much the wild west out there.

so…

…how do you put a price on fun?

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16 Responses to “Huge Growth + Talent Shortage = Increased M & A Activity”

  1. Nick James says:

    Thought provoking stuff, Jenn. I like the wild west analogy at the end.

    I was wondering what your thoughts were as to why the big corporations haven't yet dipped their toes in any measurable scale into the SEO pool.

    Over here, SEO is still very much a cottage industry and with the sort of money that can be made on what can be sold as another branch of marketing, why do you think that the snouts have kept away from the trough for so long?
    Is it just a case, as you say, that they can wait until SEO reaches an unprecedented level then just buy their way into the feeding line; or has the likes of personalised search, social media, people talking of 'the demise of SEO', left them questioning the long-term stability of search engine optimisation?

    Thanks for another great post :)

  2. Dev Basu says:

    Fun is priceless. The dynamic nature of this market is what makes it so alluring, both to those just entering the market, and its veterans. Great post Jenn!

  3. This is a very nice post, thanks for posting about the M& A Activity.

  4. Catfish says:

    Great article Jen. One of the challenges that exists within a large agency is developing a scalable, repeatable process and that develop training materials around that process. The upside is that it really makes you define what you do and why.

  5. Kyle James says:

    Great well thought out post, but I have to wonder… are we taking ourselves too seriously? I mean yes SEO and Online Marketing in general is booming, but is it really going to get to the point where it's going to be outrageously priced? Supply will always quickly find a way to catchup to meet demand.

  6. Thank you Nick, that's a great question! I think that traditional agencies have stayed out so far because SEO is very different from traditional marketing.

    Traditional marketing is a decision made by the marketing department and is measured using impressions. SEO is a decision affecting Marketing, IT,etc; and is measured using the site's analytics sometimes getting right down to ROI.

    Plus how much have TV, Radio, Print changed over the past 40 years? How many Google Dances can you name from the past 5 years? They are just so different – I think it's a comfort level thing.

  7. @ Dev – fun is priceless – I totally agree :)

    @ Critical Bride – thank you!

    @ Catfish – I think that developing a scalable model is a challenge for any growing SEO, even the small ones. What makes it even more challenging is that a 5 person shop will have very different processes than a 30 person shop. As you grow, that scalable model is forced to change. Great comment – thank you!

  8. @ Kyle – that's a good point. I do think that supply will find a way to catch up. You are starting to see more SEO's selling training video's, etc.

    But the shops that aren't thinking about how to attract and retain talent, how to train people new to the industry, and how to scale what they do best will find the transition somewhat uncomfortable.

  9. Dev Basu says:

    I think the only problem with most of the training material out there is that the techniques taught are always getting outdated. For example, many guides teach the value of free directory submissions, but we know that just isn't as effective anymore. That's one of the core problems in writing a book about SEO – by the time you finish it, SEO will have already evolved into its next iteration.

  10. Utah SEO says:

    The shortage of talent is ridiculous. There's way too many SEOs who also have a poor sense of marketing or absolutely no tech background which makes for another problem.

  11. Mike Munz says:

    A standard (in search) will soon emerge from the train wreck. Accountabilty, seems to be the biggest problem from where i sit. I see enough business owners who don't understand SEM, let alone the internet. Therefore, they don't know how to judge a good result from a bad one.
    I think a better informed advertiser will be a natural segway to a higher quality product as better qualified SEM. Eventually the "squeaky wheel" will be oiled!

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  13. Hmm… topical for me because I have been shopping myself… most M&A want the one man shop guy to conform to their vision which is generally to pitch the stuff the acquisitor do which is to still be pitching the crap that stopped really being effective a year or two ago. ;-)

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