As the distribution of the COVID-19 vaccine increases, governments are lifting pandemic-related restrictions and the world is finding a new footing. Consumers are eager to convert pent-up demand into real spending while maintaining technology-led behaviors that kept them connected and engaged during lockdowns.
Political and economic factors are also beginning to change the way business owners budget and plan for the future. Governments are starting to roll out measures for tackling the increased burden of debt incurred in 2020 and the first half of 2021 and businesses are a prominent (and often voter-friendly) candidate to cover shortfalls in public funding.
In the US, President Biden’s proposed increase in the capital gains tax top rate to 39.6% (plus the additional 3.8% surtax on investment income) would raise federal tax rates for wealthy investors to as high as 43.4%. Additionally, in June the US Federal Reserve announced that it would increase rates in early 2023 to stave off inflationary pressures.
An increase in corporate taxes will also hit the UK in 2023. In the aftermath of COVID-19, the British government is looking to restore public finance and its Finance Minister, Rishi Sunak, has announced that the corporation tax will increase to 25% in April of that year. Further, the government has already decreased Entrepreneurs’ Relief rates in recent years by 90%. Other governments around the world are expected to follow similar patterns to the US and UK.
Rather uniquely, this is not causing an oversupply of businesses in the market, as acquirers who have historically benefited from low-interest rates have been pursuing opportunities at a higher pace, keeping an equilibrium between supply and demand. It is unclear if and how the expected increase in capital gains in the US will be distributed between business owners and acquirers at the time of acquisition (i.e. acquirers will be paying slightly higher multiples to help offset the expected increase).
Higher valuation multiples for technology businesses, combined with the current capital gains tax position, provides an ideal opportunity for business owners to exit at optimum levels.
In this report, we will explore how micro- and mid-cap content business acquisition landscape has changed in the past 6-12 months.
We have been reporting for some time that acquisition opportunities for high-quality 7- and 8-figure content businesses are becoming rarer, for a few key reasons: Google algorithm updates and marketplaces offering exit opportunities much earlier in the process (at lower valuation multiples and sizes).
The first half of 2021 saw three key updates from Google: Google Passage Ranking, Google Page Experience and Google Core Update. Passage Ranking (February 2021) indexes not just web pages, but also individual passages from those pages. This update was designed to help users “find that needle-in-a-haystack information” they might be looking for when doing very specific searches. While it is unclear exactly how the update impacted Search Engine Results Pages (SERPs), Google estimated the update would impact 7% of queries.
In May, Google began rolling out their Page Experience update to measure a website’s loading performance, interactivity and visual stability. The update is happening slowly and is expected to be complete by August 2021.
Finally, in June, Google released their broad Core Update, as they do several times per year. As always, such Core Updates have the potential to disrupt website rankings and traffic across the internet and content businesses are not immune from these effects. Businesses that keep up with SEO best practices and employ white hat strategies are less likely to be penalized.
These changes are all designed to increase the end-user experience, a key performance area for Google, especially given the broad increase in search volumes seen over the course of 2020 – heavily linked to increased spend in e-commerce. This, combined with major updates to Facebook’s ad platform, has led many e-commerce brands to enter the market for content businesses to increase market share and reduce long-term customer acquisition costs.
With Google continuing to thin out top-performing sites and well-funded e-commerce brands now entering the picture, multiples have continued to climb.
During the first half of the year, FE notably acted as sole advisor to the 8-figure exit of Domainify, leading a competitive process among several public e-commerce and marketing agencies.
Demand for content businesses is expected to remain high, with acquirers confident in the opportunities in the market given the frequent updates released by Google in a relatively short period of time, providing validation for many of the businesses offered through FE.
The increase in strategic, private equity and e-commerce suitors will also provide ample secondary demand for future disposals. We expect to see more fund activity in the coming quarters given the opportunity to sell to higher ticket acquirers in years to come.
As a result, multiples for content businesses will likely continue to rise from the 3x-4.5x seen today.
Content Deal Value
The percentage of deal values made up of content businesses has been on the rise since the first half of 2020. Early last year, 12.5% of deal values were connected to content deals, compared to 37.3% during the first half of 2021. Due to our more stringent client acceptance policy, the content businesses we have taken on are of significantly higher value.
Learn more about the process of valuing a content business by checking out our post on affiliate website valuation.
FE led the sale of Domainify Group, the world’s largest business name generator, to Game Lounge in February 2021.
With a strong portfolio of businesses – including BizNameWiz, Domainify and BusinessNameGenerator – the Domainify Group had a vast library of thousands of articles and comprehensive lists on business names, domains and logos, amassing approximately 135 million page views and several million in gross revenues over the year prior to listing.
Not surprisingly, the business was well-received by investors in our network, including leading e-commerce platforms, digital marketing agencies and private and public strategic investors in the domain name registration, DIY website builder, web hosting, online marketing, professional website design and SEO services segments. In addition, the opportunity was evaluated by leading financial sponsors in the technology, online business and digital assets sector.
After qualifying interested parties, FE helped the seller navigate through several dozen potential buyers and identified the one that most aligned with the seller’s long-term vision for the business: Game Lounge. Game Lounge is a division of Cherry AB, a European online gaming and digital marketing group and one of the Nordic region’s oldest gaming companies, dating back to 1963.
As the market leader in content business M&A, FE is able to consistently bring top-tier acquisition opportunities to companies like GameLounge, seeking long-term strategic growth through inorganic channels, to the benefit of FE’s valued sell-side clients.
Mark Cambridge, seller of Domainify Group said, “For anyone looking to buy or sell a business, FE International should be at the top of your list. They made the process of selling the business stress-free. Their communication and commitment to completing the deal was flawless and they worked tirelessly to get the best outcome for both the buyer and myself.”