Lead Gen Website Valuation
The lead gen website model has become very popular recently, especially targeting local small businesses. With many small businesses lacking sufficient internet marketing skills and knowledge, the opportunity has opened up for savvy content and SEO specialists to drive highly targeted leads through organic Google rankings, or paid ads, and then sell those leads off to small businesses.
While the lead gen businesses can differ from niche to niche, the primary business model remains the same: selling qualified leads to businesses, big or small, in exchange for either a per-lead or commission-based fee.
Most lead gen websites sell for approx. 1.5x-2.5x earnings, or SDE. However, we do see a handful of lead gen businesses that sell closer to 3x earnings from time to time.
5 Most Important Lead Gen Valuation Factors
- Partner / revenue sources
- Niche and geographic focus
- Lead acquisition and trends
- SEO and content quality
- Age and owner involvement
1. Partner / revenue sources
While some lead gen sites operate similar to affiliate sites, using platforms like CommissionJunction, the majority of lead gen websites sell their leads through direct channels.
Additionally, a lot of these business also only sell leads to one “partner” or client. Here are some factors to consider when analyzing a lead gen businesses partnership agreements:
- How long have you been working together?
- How likely is it that the partner remains in business for the long-term?
- What are payment terms and how frequently do leads get voided or scrubbed?
- Is there a paper agreement in place?
Partner relationships can vary drastically. What’s most important is that you have a paper agreement in place that will continue beyond the time frame of the transaction.
If we think about general things that are positive for valuation, here are a number of things that come to mind: multiple partners with good relationship history, written agreements in place, larger / more stable partners, long list of potential partners, etc.
2. Niche and geographical focus
Many lead gen websites focus on hyper-local niche’s. For example: pool builders in Dever, Colorado.
However, there are also hundreds of broader opportunities from car insurance to college applications to even online business brokers.
The niche you are targeting and the number of potential leads you can generate have a material impact on valuation. For my Denver pool builders example, the demand for pools in Denver is rather limited, and you can’t build a pool there 6 months out of the year. There are a lot less potential leads for you to get compared to say a car insurance lead gen site where the target market is 100 million people.
Niche niche’s can be awesome since there is likely less competition for organic traffic, but it can limit your valuation if it’s so niche that there is no growth potential.
3. Lead acquisition and trends
The two primary lead drivers are: organic traffic and paid ads. As with all online business models, paid ads are less attractive and riskier. Generating leads through organic traffic is the holy grail for lead gen websites. Outside of any SEO services, organic traffic is free, so the price you sell the lead for is almost pure profit.
Paid advertising is risky because there are a ton of factors that can decrease its effectiveness. If a competitor moves into the space, ad costs can drive upwards, decreasing profitability. Additionally, it’s easy to saturate your client base if you are using a hyper-local strategy.
Overall, websites that generate strong leads from organic traffic will earn higher multiples.
Secondly, lead gen sites grow by getting more leads. While traffic can be a good precursor for this, increasing traffic only matters if it’s driving more qualified leads. Increasing traffic is a good trend, but buyers will also want to see the number of qualified leads increasing over time.
4. SEO and content quality
Since organic traffic is key for lead gen websites, SEO and content quality become relevant analysis factors for a potential buyer.
In a bid to get to the top page of results, website owners can sometime use poor SEO strategies to climb the rankings faster, which puts the site at an increased risk of penalties.
Websites that use PBN’s or other grey/black hat strategies are at an increased risk of penality, and that risk will be factored into the valuation. For the highest multiples, buyers want to see strong organic backlink and SEO profiles.
5. Age and owner involvement
The age of a lead gen business is important because it allows a potential buyer to view more data around lead quality, seasonality, traffic trends, etc. More historical data is always helpful in predicting future performance and providing buyers with comfort that the business isn’t going to fall off a cliff right when they take over.
Secondly, since most lead gen sites are content focused, the amount of owner involvement required for generating new content, qualifying leads, etc. is important. Generally speaking, buyers look for websites that require less than 10 hours per week of work, with 5 hours or less being ideal for the highest valuation multiples.