Display Advertising Business Valuation
This article is part of our Internet Business Valuation series, in which we provide you with information on what makes your particular business model unique when it comes to valuation. For more in-depth reading on valuation, see our post How to Value a Website or Internet Business.
If you’ve been running a business that makes its revenue from display advertising, you already know that this business model has certain qualities that make it different from other businesses. Unsurprisingly then, display advertising business valuations also take some special consideration.
The value of your display advertising business depends on several factors. Let’s look at what is unique when it comes to valuing display advertising websites.
Valuation Matrix
To arrive at an accurate valuation of a display advertising business, you need to look at the business’ financial picture, consider other attributes that contribute to its valuation and then determine the appropriate multiple. For most display advertising businesses, the Seller’s Discretionary Earnings (SDE) method is used to determine earnings or “net revenue.” In the internet business world, investors have increasingly gravitated towards the multiple-based methodology because of its simplicity and robustness in the face of scant financial or comparable data.
The multiple-led method stipulates the buyer should arrive at a valuation by multiplying the seller’s discretionary earnings (SDE) by a multiple that is appropriate for the business. Naturally the “appropriate” multiple is where all parties seek to formulate their own opinion and hopefully (read: eventually) arrive at a consensus before consummating the deal.
While the general valuation drivers are a key consideration, it is important to note that every business is unique and there are several factors that impact the multiple along that range.
Depending on the strength of the above drivers will determine where an affiliate business’ multiple falls within the expected range of 3.0x-5.0x:
Valuation Factors
We’ve advised in the sale of display advertising businesses across various niches and income levels, so we’ve learned quite a bit about the factors that contribute most significantly to a high valuation. Here’s some factors to consider:
Passive vs. Direct Display Advertising
We deal primarily with two different types of display advertising businesses: passive and direct. Some businesses utilize a mix of both models.
An example of passive display advertising is Google AdSense. The only things needed to make money are a website with traffic and an AdSense ad. Once those two things are in place, the rest of the process is fairly passive. Aside from testing different ad layouts to find the best performing ads, the only other thing you’ll be doing is monitoring your account and analytics. AdSense is primarily a set-it-and-forget-it model of generating revenue.
Direct display advertising takes more work on the site owner’s part. It entails building strategic partnerships with other businesses through outreach (from cold calls to in-person meetings), negotiating rates and ad maintenance. Building a network of advertisers alone can be a bigger time commitment than many buyers would be interested in taking on.
Another factor to consider with direct display advertising is concentration risk. For example, if your site earns $50,000 per year in revenue and 100 percent of that comes from a single direct advertiser, then there is a high degree of concentration risk for a potential buyer. This is because that advertiser could choose to pull their ad at any time, leaving you without revenue. Even to a lesser degree, they may want to renegotiate the price based on the results they are or aren’t getting. To reduce your concentration risk, you may wish to diversify by having more than one direct advertiser.
The bottom line is this: The more passive the business model is, the higher the valuation is likely to be. Additionally, if your revenue sources aren’t diversified, your business will be worth less because there is greater risk for the prospective buyer.
CPMs
Another important factor in your display advertising business valuation is CPMs.
CPM stands for cost per mille, which is the price a webmaster pays to run an ad on Google, or the revenue that a site owner can earn per 1,000 clicks from a passive ad on their site. The average CPM is getting harder to calculate because of the multitude of ways content and ads are now served and consumed – email, mobile devices, videos and so on. Nevertheless, it is important to know your average CPM for benchmarking.
CPM rates will vary depending on the quality or perceived value of your traffic (i.e. what percentage of your visitors convert into customers). One of the biggest factors is the niche that you are operating in. In lucrative niches, such as insurance and education, each lead is worth more to the advertiser, which means they are willing to pay a higher amount on a per lead basis. This means that you will see a higher CPM on a site that talks about different insurance companies, compared to video game fan sites, which have notoriously low CPMs.
A website with a high CPM will need far fewer visitors to make the same amount of money than a site with a large amount of traffic. Let’s look at a quick example of two different sites, one with a high CPM and one with a low CPM.
Site #1:
- $50 CPM
- 10,000 unique visitors per month
- This site makes $500 per month
Site #2:
- $5 CPM
- 10,000 unique visitors per month
- This site makes $50 per month
These two sites get the same amount of traffic, but since the CPM varies between the two, there is a large difference in monthly earnings. It’s safe to say that sites that benefit from high-value CPMs are likely to be worth more than others. The same can certainly be said for high-quality traffic, but it will only play into your valuation in extreme cases, such as when you have extremely low-quality traffic, or really high-quality traffic.
Organic Search Traffic
Display advertising sites are typically reliant on organic search traffic, which means there are certain factors that you should look at to determine the health of this traffic.
Things such as the site authority, backlink profile and how your site is positioned in search results will factor into your valuation. If you have an aged domain with plenty of strong links pointing to it, a high number of your pages and posts are ranking well for your keywords, it’s fair to say that you have a more valuable website with less potential risk.
The more sustainable (good site authority and a strong backlink profile) and diverse (many pages contributing to traffic and keyword rankings) the higher your site will be valued.
Quite simply, a site with 100 percent passive display advertising revenue and a strong backlink profile is going to be valued more highly than a direct display advertising site with a weaker backlink profile.
Mobile optimization could also play a part in your valuation, as buyers will be looking for sites that are easy to use on smartphones and tablets. In a recent study by comScore, there are now more mobile internet users than desktop users.
Due to this, now is the time to start optimizing your site for mobile users. This will pay off in both the valuation and increasing the overall engagement on your site.
Ad Networks
Many investors are now focusing on acquiring display advertising websites that are monetized through Google’s AdSense or Newor Media’s program and switching them to higher-paying programs elsewhere (or switching to affiliate models).
Another focus has been to adopt more direct display advertising agreements. While these do rely on business owners to build relationships and concentrate on service and ultimately returns, the rewards can be worthwhile as the CPM rates achieved are far higher, as the traffic is likely to be more targeted to the advertiser in question. Therefore, display advertising websites with a very clear focus, audience and community following (i.e. email lists) can often yield higher valuation multiples if it can be proven that there is a history of converting these elements into higher-paying direct display advertising relationships that have stood the test of time.
While AdSense doesn’t always offer the best CPM, it’s a safe bet. You can depend on reliable payout and performance, plus it caters to a number of niches to serve relevant ads to your site, a big plus for user experience.
These partnerships are not just limited to online businesses; many have been observed partnering with offline businesses seeking a greater direct access to end-users. This is an area of particular focus for investors, many of which come from traditional backgrounds and may have existing relationships to leverage.
Content Quality
The display advertising business model is largely based on content production and the number of views or clicks that come in from your audience. The most important factors for a display advertising business are the age of the site, the SEO/link profile and the partners that are involved. The sourcing of traffic from social media is key in an advertising business, although this tends to be harder and more expensive to sustain than organic traffic, it is important that you have a diverse range of traffic sources coming in.
High-quality, long-form content is the most effective way to rank for relevant search terms and for turning readers into buyers, both of which are very important to the success of a display advertising website. Generally speaking, the more indexed pages a site has, the more likely a site is to receive a good stream of traffic. But traffic alone won’t determine the quality of the content. The audience will also need to be engaged with the posts or product reviews.
One of the best ways to determine the quality of the content is to see if people are engaged with posts or product reviews.
You’ll want to assess the quality of your site’s content by your own subjective measures, but you may also hire an editor or freelance SEO consultant for a second opinion. If you’ve been outsourcing your content creation, you should consider using a tool such as Copyscape to confirm that there aren’t any duplicate content issues.
It is also worth considering how you are currently producing content for your site and how easy it will be to transfer this process to a new owner. If you are working with a copywriter, or agency, then the reliability of this service will factor into the site’s value. If it seems unlikely that a new owner will be able to keep content flowing long-term, or will have to pay for copy at a higher rate, this could present a problem.
How to Sell a Display Advertising Business
If you’re looking to sell your display advertising business you have four main options available to you:
- Marketplace – list the business for sale on a classified business-for-sale network like BizBuySell or BizQuest
- Auction – sell through an auction platform
- M&A advisor – hire a professional broker to sell the business on your behalf
- Direct – cold approach potential buyers and sell the business yourself
There are advantages and disadvantages to each of these approaches, which we cover briefly below.
Marketplace
Selling your display advertising business on a marketplace means preparing information on your business and posting a listing to generate interest from buyers that peruse the listings. A popular marketplace is BizBuySell.
Pros:
- Low cost – a listing fee with added features is only a few hundred dollars.
- Large distribution – if you list on a large, reputable business-for-sale network then it is likely your ad has the potential to be seen by a lot of visitors.
Cons:
- Low demand – marketplaces serve a high volume of listings daily and standing out from the crowd is often a problem. Most buyers perusing the listings look for listings with brokers (who use them as well) as they know the listings are likely pre-vetted. At FE International, our average listing gets only 18 inquiries from third-party platforms, and from our own network it’s 500+.
- Process – you personally must take care of the process of vetting qualified buyers, sending out non-disclosure agreements, answering questions about the business, negotiating offers, running due diligence, preparing a contract for sale and facilitating the transfer of funds/assets. If you don’t have experience in a business sale process, you could come stuck in several places. It will also take your time and attention away from running your business.
A marketplace listing can work if you have a lot of experience selling businesses and you have the time to run a sale. Otherwise, it can be a long, high effort way of finding a buyer. A marketplace sale on average takes about 6-9 months.
Auction
Selling your display advertising business on an auction platform is like a marketplace listing in that you’ll prepare similar information and run the process yourself. The difference with an auction scenario is that there will be a fixed period for the business to sell, which creates more competitive tension amongst buyers.
For online businesses, Flippa is the most common auction platform. In general, it is most suitable for businesses less than $5,000 in value and is most used for domain sales.
Pros:
- Large distribution – if you list on a large network then it’s likely your ad has the potential to be seen by thousands of visitors.
- Set timeframe – if you list for 7, 14 or 28 days, you have some certainty over the length of time to find a buyer, assuming a suitable one is found.
Cons:
- Buyer qualification – many buyers on auction platforms are not seasoned business purchasers and a lot are looking for their first purchase. This means many are looking for smaller business sales (<$5,000) and are inexperienced in the sale process, which can cause difficulties during due diligence and closing.
- Value – most buyers on auction platforms are looking for cheap business sales, and the typical multiple for sale is 0.5x – 1.5x. This is likely substantially lower than what you would want to get for your business.
- Process – as above you are responsible for running the process end-to-end. This is likely going to take up quite a lot of your time.
- Fees – auction platforms such as Flippa charge a fixed listing fee and a success fee of 10% upon closing, so they are substantially more expensive than a marketplace and similar to an M&A advisor but relies on you to do everything.
An auction platform works well if you’re looking to sell a small business very quickly and for a cheap valuation.
M&A Advisory Firm
Selling your display advertising business with an M&A advisor is likely the best option to consider if you have a large business for sale ($20,000+), you don’t have a lot of experience selling a business and/or you want to maximize the sale value.
An M&A advisor will take care of the entire process end-to-end, from creating marketing materials to contacting buyers, negotiating offers, coordinating due diligence, drafting the contract for sale and facilitating the transfer of assets/funds through Escrow. They will also help advise on your valuation (more on that below) and the best deal terms for your legal protection and economic benefit.
Pros:
- Large distribution – if you list with a well-established, reputable M&A advisor you’ll gain access to their network of qualified and experienced business buyers so you’ll be in front of a large, highly targeted investor audience. Their buyers will be able to execute and close a deal in a timely manner.
- Full process – a good M&A advisor will take care of the process end-to-end, once you’ve provided enough information for the initial marketing materials. You won’t have to self-support negotiation, due diligence or contracts etc. This frees up time to continue running your business or doing your day-to-day tasks.
- Maximum value – an experienced M&A advisor will know how to value your business based off market insight and previous transactions. They will aim to court several offers and negotiate the highest one with the best overall terms.
Cons:
- Upfront requirements – to work with an M&A advisor you’ll need to be organized and have information on your business ready. Their buyers are highly motivated, organized and willing to execute for the right business, but need the documentation ready to do so.
- Fees – an M&A advisor will typically charge up to 15% of the sale value of the business upon successful closing. That being said, if you hire the right advisor, in almost every case the net proceeds to the seller (sale value minus broker fees) are higher than those from a marketplace, auction or direct sale. Here’s a good example of Tim Seidler who sold his business with FE International for $100K more than he thought his business was worth.
An M&A advisor is a good option if you don’t have a great deal of experience valuing or selling businesses, don’t have the time to spare and want maximum proceeds from the sale of your business. A brokered sale usually takes between 4-8 weeks depending on the size of the business (larger businesses can take longer). You can learn more about the process here.
Direct
The final option is to directly approach potential buyers (cold email or call) and persuade them to buy the business. The most efficient way to do this is target other business owners in the same or a complementary niche.
Pros:
- No fees – if you find a buyer yourself and close successfully it’s going to cost you a lot less than the other options. It’s likely you’ll only incur fees for legal advice.
Cons:
- Finding the buyer – you’ll be required to do the research and outreach work necessary to find a buyer and may end up divulging sensitive information to competitors. Typically cold outreach has a low success rate – most business brokers avoid this route when selling a business.
- Process– similar to marketplace and auction, you are responsible for running the process end-to-end.
Direct works if you’ve been approached yourself (though you should still consider an M&A advisor to run a competitive process for value maximization) or if you don’t mind trying with a low chance of success. A direct sale can take 3-24 months depending on whether you’ve had inbound interest or you’re starting from scratch.
Understanding Financing Options
For most sellers of a display advertising business, the most desirable outcome of an exit would be a one-time all-cash payment. For many buyers, this is not an option they are willing or able to consider. Buyers typically seek to secure the best possible deal according to their available funds and risk profile. Often, to align the expectations of the buyer and seller, creative financing methods are employed. Here are the four most common financing methods used in the acquisition of an e-commerce business:
1. Cash
Cash typically forms the most substantial portion of total consideration in acquisitions of e-commerce businesses. Buyers may limit their search to online businesses they can purchase with liquid assets, such as the money in their bank accounts. This can lead to buyers limiting themselves in their ability to make an offer on an otherwise desirable business. In this instance, many buyers turn to more creative and sometimes unconventional methods of raising cash. Some of these methods include:
- Cashing out retirement funds;
- Borrowing against a 401k account or taking regular IRA payouts;
- Revoking a Roth Contribution;
- Small Business Administration (SBA) Loans;
- Asset or collateral-based lending;
- Bringing aboard a partner with cash and/or experience; and
- Peer-to-peer lending platforms like Prosper and Lending Tree.
2. Seller Financing
One of the most deployed methods of financing in online business acquisitions is seller financing. Seller financing allows the buyer to bridge the gap between their available cash and the purchase price of the business by using the cash flow of the business to pay the outstanding balance over a fixed period post-closing. A seller’s willingness to agree to this type of financing has the additional benefit of showing the buyer that the seller has confidence that the business will not decline going forward.
Seller financing is popular in online business acquisitions because it eliminates the red tape involved with the buyer borrowing from a bank or other lender. However, it is critical to keep in mind that seller financing bears risks for both parties. Buyers must be realistic about future cash flow, as a missed payment may prove costly and, depending on the agreement, can even result in the seller repossessing the business without having to pay back any cash consideration thus far received. Sellers should retain some collateral in the business until the buyer pays off the financing in full.
3. Earn-Out
In an earn-out agreement, the buyer agrees to pay the seller a percentage of either profit or revenue over a fixed amount of time. Earn-out agreements are typically seen in acquisitions involving younger businesses, sites with inconsistent cash flows, or with companies facing an uncertain future. With an earn-out, the buyer attempts to leverage the seller’s knowledge and resources in an effort to grow the business immediately after the sale is complete.
In order to structure an earn-out, the buyer will need to forecast future cash flows based on historical data, as well as micro and macro industry trends. For an earn-out arrangement to work for both parties, it is vital that the buyer and seller agree on what the site is expected to earn over the term of the agreement.
Given that earn-outs agreements are based solely on projected revenue or profits, they carry a high degree of risk, particularly for the seller. The seller must be confident that the buyer is capable of operating the business successfully and that they will not default on payments. Due to the additional risk, it is not uncommon for the seller to demand an extended earn-out period beyond the somewhat standard 12 months.
Because earn-outs carry a high degree of risk, sellers are advised only to consider such an agreement when the buyer has a track record of growing and operating businesses successfully. With inexperienced buyers, the risk that the business will not perform as forecast is likely too great to make an earn-out satisfactory to the seller.
4. Holdback
In a holdback agreement, the buyer retains a portion of the total consideration payable under the APA until certain mutually agreed milestones or obligations are met. Examples of such milestones include:
- The seller meeting mutually agreed upon commitments subsequent to the sale;
- Employees continuing to work for the firm for an agreed period of time;
- Long-term service agreements being honored and fulfilled;
- Agreed upon targets being met, for example, maintaining monthly gross revenue averages; and
- Verification of agreed-upon revenues and costs that are difficult to evaluate thoroughly prior to sale. Examples of this could include refund rates and chargebacks.
Holdbacks carry risk for both the buyer and seller as either party may under or overestimate the value of post-sale obligations.
Determining When to Sell Your Display Advertising Business
If you are looking to shift your focus to a new venture, are interested in a lump sum payment, or you want to free up your time, divesting might be the right choice for you and your business. An important factor once you have made your decision to exit, is when. Timing is critical when it comes to resulting in the most optimal outcome for you and your business. You should plan to sell your business when it is most attractive to potential buyers.
Find Out What Your Display Advertising Business is Worth
Now you know all about valuation, exit strategy and sale options for your display advertising business, the best way to get a good sense on how much your business is worth is to speak an M&A advisor. They will be able to calculate your profit (SDE) accurately and advise on the multiple applicable based on their assessment of the business and previous transactions.
A good M&A advisor will give you the best advice on exit strategy and timing, irrespective of whether this is in their short-term interest. The best advice might not be to sell right now, but instead to do three things to lift the valuation and come back in 3-6 months with a more valuable business for sale. That’s a win for everybody.
If you run a display advertising business and you’re considering a sale at some point, get in touch with us to see how we can help maximize the value of your business and find you the right buyer.
How Does the Exit Process Work at FE International?
FE International will walk you through the exit process from start to finish. It does not matter if you have never divested of a business before or are a seasoned pro, we are here to help. Our process has been built with one thing in mind: minimizing your time commitment while maximizing the final sales price of your business.
Assessment and Valuation
We have discussed valuations at length earlier in this article. This stage is important since it is when we get to know more about you, your business and your goals for a sale. We will ask questions about your business to determine an accurate valuation and the best time to sell. Valuation is a complex topic and is not as simple as “annual profit x 3”. Our valuations are not based on theory, they are based on data from real sales we have completed over the past decade. We will let you know what your business is worth and how long we expect it will take to sell.
If you decide to work with us, we get a Representation Agreement signed which outlines our role, fee and exclusivity period. In most cases, we do not charge any upfront listing fees and only get paid when the deal is completed. Our fee covers:
- Valuation and pre-listing due diligence, managed through a secure and audit-ready deal room;
- Preparing sales materials;
- A dedicated M&A advisor to communicate with and a whole M&A deal team dedicated to your sale;
- All advertising costs related to the sale/finding buyers;
- All negotiations directly with the buyer(s) and their representatives;
- In-house legal including drafting the Letter of Intent (the formal offer from a vetted buyer), purchase agreements and other documents required to complete an acquisition;
- Escrow (Escrow.com or attorney escrow) facilitation;
- Handover documentation formation; and
- Management of post-sale contractual obligations.
Acquisition Preparation
Our sales materials are the very best in the industry. We prepare a detailed Prospectus for buyers that covers everything they need to know to make an informed offer on your business. This is usually 25-35 pages depending on the size and complexity of the business.
When preparing for the sale, we may ask for the following to be uploaded into the deal room:
- A detailed monthly profit and loss/income statement for at least the last 12 months;
- Detailed answers to a custom questionnaire about your business;
- Google Analytics access;
- Access to any third-party metrics platforms you may use; and
- Supporting documentation for business and financial claims.
Our upfront preparation is incredibly detailed and ensures your business is best positioned for a successful sale.
Marketing Your Business for Sale
At this stage our Onboarding and M&A teams work together to identify and speak to suitable buyers for your display advertising business. We have tens of thousands of vetted buyers looking for businesses to buy every day. On top of the buyers already in our database, we invest heavily into marketing your business (while retaining privacy) elsewhere.
Our advisors will deal directly with buyers on your behalf, answering questions, making calls and starting offer negotiations. At this stage, there may also be more questions for you to answer facilitated by our M&A advisors to make the process as hands-off for you as possible.
Acquisition Negotiations
Once we have discussed the business with all potential buyers, we will begin to narrow down to the most serious of prospects and work on getting offers from multiple parties. At this stage, you may be required to join conference calls with the buyer and your FE International lead advisor to discuss the sale.
We do all negotiation on your behalf and will advise on appropriate offer structures, but buyers often like to speak to the business owners directly to feel comfortable with the acquisition. Again, this is hosted through your dedicated advisor.
Once an offer (or multiple offers) is negotiated and the best buyer(s) selected, a formal Letter of Intent (LOI) will be prepared by our in-house legal team. This outlines the terms of the offer and sets the timeline for due diligence and closing.
Due Diligence
Due diligence is an essential part of every business sale and ensures the buyer is comfortable with the business and claims made during the marketing and negotiations. It can sound like an arduous process, but its purpose is actually very simple, especially with an experienced M&A advisor on your side.
This process will vary depending on the buyer’s requirements (outlined in the LOI) and the complexity of the business but usually covers these six areas:
- Traffic
- Financial
- Ownership
- Operational
- Technical
- Legal
The due diligence process will be overseen by FE International through our secure deal room – we are always on hand to advise what is reasonable to expect in the process. Having verified much of the due diligence items ahead of listing, we have a 94.1% sale success rate.
Simultaneously, we will also start drafting the Asset Purchase Agreement (APA). To learn more about what buyers may look for, check out our article on advanced due diligence.
Closing
At this stage in the process, the buyer has been identified, the offer structure has been agreed upon and due diligence has been completed. In most cases, FE International’s in-house legal team will draft the APA on your behalf which forms the legal basis of the deal, but we also advise having your own attorney/lawyer review the agreement, too.
Once the contract and terms are agreed with the buyer and seller, contract is signed by both parties (facilitated by FE International) the deal moves into escrow ahead of the transfer. We use either Escrow.com (more about their process here) or attorney escrow depending on the size of the acquisition. Both options keep all parties safe and secure.
Throughout the transfer process, we will manage the process to ensure a seamless handover of assets. Once everything has been transferred (per the APA), funds will be released to you (this is when we get paid) and the acquisition is complete.
The Right Exit Strategy
As you can see, there are a few different components that are likely to have an impact on your display advertising business site’s valuation. FE International has extensive experience advising Advertising business owners on valuations and throughout the exit process.
From a big-picture perspective, you’ll want to evaluate and analyze the advantages and disadvantages of passive and direct display advertising, what your average CPM is, the quality of traffic coming to your site, the authority and backlink profile of your domain, and mobile optimization. These are the factors you can weigh when considering an exit, but once you become serious about selling your site, you should get a valuation from a professional advisor.