This article is part of our Internet Business Due Diligence series, in which we provide you with information on what makes each particular internet business model unique when it comes to due diligence for an acquisition. For more in-depth reading on due diligence, see our posts on Due Diligence of an Internet Business and Advanced Due Diligence.
Your offer on a website that’s monetized with advertising has been accepted, and now it’s time to go through the due diligence process to evaluate the business in more detail.
However, examining the metrics and operations behind a site that earns revenue through display ads, like AdSense, or direct advertising entails some unique areas of focus when compared to due diligence for other business models. It’s worth taking the time to understand what these are so you can make a sensible and educated decision about the business.
Here is what you need to know about due diligence on a site that earns its revenue through advertising.
Traffic Sources
Where is the traffic coming from? It’s important to gain an understanding of not just what countries visitors are coming from (traffic from certain countries will be considered low-value compared to U.S. traffic), but also what sources it’s coming from – social, organic search, email, referral, paid or direct. You should check to ensure that the site’s traffic portfolio is well-diversified.
It should be noted, however, that advertising businesses are typically dependent on organic traffic, so it is not uncommon to see a site that does not have diverse traffic sources. (For instance, 60 to 80 percent organic traffic is common for many websites FE International sells.) It is therefore necessary to take a look at the quality of the traffic and evaluate keyword rankings and concentration.
Investors should be auditing:
- Whether the site has a high number of ranking keywords
- A good traffic split among the keywords
- Consistency in keyword rankings
If the site has a history of maintaining good rankings, there is likely to be a good foundation in place.
Click-Through Rate
A low click-through rate can be advantageous since there is room for improvement, and that means you can begin to maximize revenues by eliminating the site’s weaknesses. Problems that are easy to fix – such as improving CTR – should be looked at as opportunities for growth.
What constitutes a “low” CTR may vary from site to site, and also depends on what traffic source you’re looking at. For instance, you’re likely to see a lower CTR from organic search results than direct traffic, because the latter has more intent (i.e. they’re specifically looking for you, and not for naught).
Top-Performing Content and Keyword Diversity
A site ranking for many different terms and driving traffic to a diverse set of pages is preferable to a site that has one landing page that’s attracting all of the traffic, as this can be a risk.
Google Analytics lists your content in order from most to least popular. Here’s where you can find it:
From this page, you’ll be able to clearly see a list of which content gets the most traffic, as well as other metrics like average time on page, bounce rate and goal completions. Don’t expect metrics to be the same for each page, but in general it can be a red flag if one page is accounting for a disproportionate amount of traffic.
For instance, if one page is accountable for 20%+ of the revenue, is there a good reason for this? Is it the homepage where most of the traffic goes? Did that particular post go viral and pick up lots of links? These are some questions you should ask the seller.
You’ll also want to look at the site’s keyword diversity, which you can find using Google Webmaster Tools. Here’s a screenshot of where you can find a list of ranking keywords:
The best part of Webmaster Tools is that you can export a list of ranking keywords into an Excel file for easy SWOT analysis. Again, keep in mind that opportunities for improvement equal opportunities for growth, so don’t dismiss a site just because it isn’t ranking for all of its target keywords.
Bounce Rate and Time On Site
Are the visitors engaging with the content on the site? Are they actually interested in it, or are they bouncing to find other sites that better serve the intent of their search? It’s good to keep in mind that the average bounce rate on any website is about 60 to 80 percent. If it’s any higher, there is usually room for improvement.
An extremely high bounce rate (over 80 percent) could indicate that the seller has purchased low-quality traffic to boost other metrics. But an extremely low bounce rate (less than 40 percent) might mean that Google Analytics was installed on the site twice and is causing errors.
Time-on-site is arguably more important, but it’s often related to bounce rate: Sites with higher bounce rates tend to have shorter time on site, and vice versa. Generally, the more time a user spends on a page, the more engaged they are. So a high time-on-site is typically a positive metric. However, it’s also dependent on business model. For instance, a site that makes revenue through advertising doesn’t necessitate user engagement. As long as visitors are clicking on the ads, it doesn’t really matter how much time they spend reading the content.
Trends in The Niche
Determine whether or not you’re buying into a topic that has declining search trends. There is the chance that it will become revitalized, but if it’s on a downward curve, there is obviously the risk that the site itself could decline in line with industry trends. Check Google Trends to gauge the popularity of your key terms and whether they’re likely to remain popular for years to come.
For example, if the site you’re looking at hosts recipes for vegetarian food, search your key terms to see the search volume trends over time. You can even adjust your time frame, region, and look at related terms to get a high-level view of your niche’s popularity.
Direct Advertising
If the business has any direct advertising, you need to take a look at how long advertisers have been using the service, and if they are getting enough value to want to continue. You need to examine whether there have been any mentions of discontinuing the service, as this puts you at greater risk of losing valuable revenue.
Find out when advertisers pay. It’s possible that an advertiser has paid upfront for a 12-month ad slot. If the seller has received $20,000 for the ad, as an example, and they want to sell their site next month, then you won’t be getting revenue from that advertiser for another 11 months. In a situation like that, you would need to look into whether you will receive a pro-rated payment from the seller.
Another important variable is how much time is going into fostering relationships with advertisers. Direct advertising always takes more time and effort than passive advertising, which means there is a certain amount of effort that must be allocated for business development.
Find out what agreements are in place with advertisers, and whether they are written down. Also determine what the payment and renewal terms are.
Finally, determine whether the seller has approached or has been approached by other advertisers and, if so, who. These could be worthwhile opportunities for you to track down and pursue.
Final Thoughts
These are just a handful of considerations you should take when doing due diligence on an advertising business. An experienced broker can help you navigate the waters and ensure that all areas have been thoroughly investigated.
Keep in mind that weaknesses can be improved upon, and may not necessarily be pointing to deal-breakers. Potential risks should nevertheless be evaluated with a level-headedness, as you could easily lose revenue with a site that’s too heavily dependent on one traffic source or one advertiser. Look for a site that you can build on, but not one that doesn’t have a few contingency plans in place.
Get our download for a complete list of items to check off during due diligence on an advertising business: