This article is part of our Internet Business Due Diligence series, in which we provide you with information on what makes a particular business model unique when it comes to due diligence. For more in-depth reading on due diligence, see our posts on Due Diligence of an Internet Business and Advanced Due Diligence.
Lead generation websites are excellent way to earn passive income with little more than some writing skills, SEO knowledge and a strategic partnership. That said, it does require some upkeep, and there are definitely factors that can affect the value of a lead gen site.
Owners of lead generation businesses make money by collecting leads – e.g., names, phone numbers, email addresses, etc. – and selling them to a partner company. They typically do this by publishing content related to the company’s product, which attracts leads that are qualified, because visitors are already seeking out information on the product.
For example, if you’re collecting leads for a life insurance partner, you might feature content related to retirement and financial planning. If you’re working with a clothing retailer, you’d post content about fashion, and so on.
The hardest part about owning a lead gen site is getting it started, which is why buying an established business is often the best way to go. But before you do, you must do your due diligence. Here’s what you need to know:
Lead Generation Partner
A lead gen site isn’t worth much without a viable partner, so be sure to thoroughly evaluate the quality of this relationship.
Here are some key questions to consider:
How long has the business owner been working with their partner?
Is the partner still getting value from the leads, and are they likely to continue utilizing the lead generation service?
Have there been any mentions of the partner discontinuing use of the service?
When does the partner pay?
What is the “scrub” rate of leads? How many leads does the partner not pay for because they are not adequately qualified?
What agreement is in place with the lead generation partner? Is it on paper? What are the payment and renewal terms?
Has the seller approached or been approached by any other lead gen partners? Who?
There’s a certain amount of risk involved in buying a lead gen business, because there’s always the chance that a partner will change their terms of agreement once the business has been acquired.
For example, if the site you’re considering has had a long-standing relationship with their partner, they’ve probably negotiated better terms along the way. This could mean more money per lead, or getting paid biweekly rather than monthly, for instance. In the event of a sale, it’s possible that the partner will change these terms.
During the due diligence period, the seller will tell their lead gen partner about the impending sale (if they haven’t already done so) and try to secure the current terms of agreement for the potential new owner. In some cases, a buyer may structure their offer to include a certain amount up front, and the remainder after X amount time to ensure that favorable terms are kept. This can incentivize the seller into locking in terms with the partner, and may stem a buyer’s losses later on, in the unlikely event that terms change.
Lead gen sites are fueled by traffic, because more visitors usually mean more leads. As such, you should know where the site’s traffic is coming from, how sustainable it is and how diversified it is.
The source of traffic is important because it lets you know which channels are most profitable, whether a site is attracting leads through organic, social, paid, referrals or a combination. Buyers will want to look at the top three sources of traffic as they usually account for 80 percent or more of the site’s traffic.
Organic search is likely to be the main contender, in which case it is necessary to examine the quality of this traffic. Buyers should be looking for a high number of ranking keywords, a good traffic split among these keywords and consistency in keyword rankings. If the site has a stable rank, it means there’s a good foundation in place.
Lead generation sites tend to rely on organic traffic, so any threat to SEO could mean lower profit. Sites can be penalized by Google for low quality or duplicate content, but there are really a number of things that could get a site knocked down a peg in rankings. For instance, if the site has a poor backlink profile, such as links from a private blog network, the risk profile of the business increases (more on this below).
We’ve made it easy for buyers and sellers to check whether a website has been penalized in the past, with our Website Penalty Indicator. The tool is updated every time Google changes its algorithm, so it’s a handy page to keep bookmarked on your browser, particularly if you already own a business.
No business is fueled by traffic and impressions alone, so you’re going to need to know the percentage of visitors who submit verified contact information – in other words, the conversion rate.
What constitutes a healthy conversion rate can vary by industry, so you should look at the history of the business and whether conversions have increased, decreased or stayed steady. If conversions have gone up, it’s a sign that the owner has put a fair amount of resources into marketing the site and targeting an effective audience. This means less work for the new owner.
Conversely, if conversions have gone down or remained stagnant, whoever takes over the business will need to put in work to bring them up. For some buyers, this can present an attractive opportunity for growth if conversion rate optimization is a core competency.
Equally important is a website’s cost per conversion, also known as cost of customer acquisition. This is the amount of money spent on each lead, and it’s calculated by dividing the sum of marketing costs by the number of leads obtained within a given time period. The CAC can always be improved upon, and is a useful metric for assessing the viability of paid marketing on the site.
As with any business, you don’t want to have all your eggs in one basket. For lead gen sites, it’s important that one page isn’t dominating in terms of traffic and conversions. This presents a risk because if the product or content on that page becomes outdated, then conversions will drop or cease, leaving the business compromised in terms of income.
Buyers should check to see which pages are making the most money. In an ideal situation, one page should not be making more than 20 percent of the total revenue, so check the business’ Google Analytics account to identify its most popular pages.
Any business that relies on organic search needs to have a strong backlink profile. Looking at a backlink profile can tell you which sites are linking to a business, the quality of sites linking to a business and backlink growth or decline over time, among other metrics.
The traffic to most lead generation sites is about 70% organic, so it is necessary to examine how the backlinks have been built. This is because some low-quality websites will attempt to build their backlink profile using a private blog network, commonly known as a PBN.
A PBN is a network of sites or domains owned by an individual for the purpose of driving links to a primary site. Using a PBN to boost site rankings is against Google’s terms of service, and could get a site removed from the search engine’s index.
A good tool for analyzing a website’s profile and link growth over time is Ahrefs. Buyers should be evaluating at least the top 20 backlinks of the site, the quality of content and engagement on page.
When evaluating a link profile, be sure to ask:
Are the referring websites legitimate?
Are referrers in a relevant niche?
Do links appear natural?
Does the seller own referring websites?
Are links diverse in terms of anchor text and destination URLs?
The answer to all of these should be yes, though bear in mind that even high-quality sites will occasionally attract low-quality referrals. Be sure to look at the whole picture, and question anything that looks suspicious.
Given that they’re relatively easy to set up, lead generation sites are prone to focusing on trendy niches. This isn’t necessarily a bad thing, as long as there is growth potential within the niche.
It’s always a good idea to check Google Trends for a site’s key terms and products to see search trends over time. Here’s what the chart looks like:
A sudden spike after a long period of flat-lining could indicate an imminent nosedive in popularity, while a slow and steady rise in search volume is a sign that a niche, while technically trendy, has lasting power. In the example above, one could assume that “insurance” is a search term with traction.
When looking to buy a lead generation site, it’s very important to determine how strong the partnership is between the company to which it’s selling leads, as that would be your main customer once you take over. A solid business with a niche that won’t go out of style is a great sign, you still need to inspect the terms of agreement and talk to the current owner about the history of the relationship.
SEO and business metrics help to ensure that the website has been set up and maintained properly, which will make your job easier post acquisition. Here’s a downloadable checklist so you don’t miss a thing: