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June 3, 2008

Creating Value In Your SEM Business

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It’s time for our first session in the brand-new Business Track. Moderating this next one is Chris Elwell, President of Third Door Media, Inc. Sean McMahon, President, EngineWorks; Matt Naeger, Executive Vice President, Operations, Impaqt; and our very own Bruce Clay, Bruce Clay, Inc. are speaking.

Before officially beginning, Bruce takes a straw poll of the audience. He wants to know who owns their own business, who’s been around for more than three years, who’s got more than 10 employees. It’s all the same six or so people. Then he asks who’s making more than $2 million revenue a year. It drops to like 2. I guess he wants to know who he’s speaking to.

Sean McMahon kicks off the presentations. He says that he hopes to give the audience value by seeing what he’s done to be successful.

What is value? “Value is that which one acts to gain and/or keep.” -Ayn Rand. He says this means value requires actions. He’ll be giving us insight on the actions he took to build value in his companies.

At his former SEM company, TrafficLeader, the challenge was getting clients’ indexed. They decided to go to the search engines and pitch the creation of paid inclusion listings. They met with Inktomi, who was obviously skeptical. Sean proposed to them that paid inclusion could monetize their business. TrafficLeader became the first paid inclusion partner with a search engine, and they followed through with a number of other search engines. By building value for the search engine, they brought value back to their client.

Several years ago, Sean patented a product he invented. It was a water bottle with an attachment for fitness machines. He first went to fitness centers and told them that they could give out the bottles to new customers, and could say, “By the way, the bottles only fit in our machines.” This would keep customers coming back to their gym. This was valuable to the fitness businesses.

A client of his current SEM company, Lisa Kline, came to him for search marketing services. They found that the original keyword focus was a little off. Instead of Hollywood fashion, it should have been celebrity fashion. With this change there was a 59 percent increase in search revenue through a 12-month organic campaign. This new model of marketing is now driving all channels of Lisa Kline’s marketing mix.

Focus everyday on building value in your client engagements and the value in the marketplace will take care of itself. You can’t make someone buy you, but you can position yourself as highly valuable so that someone will want to buy you.

Bruce Clay is up next. Go Bruce! Bruce is going to use the history of BCI to help illustrate the valuation timeline. He started in ’96 as a one man show. At 5 people, he had people do things for you. At 10, he had to delegate. At 20, he was able to specialize. At 50, an employer is federally regulated. Over the last five years there has been 40 to 70 percent growth in revenue.

The high-value assets are staff, tools, and training. The philosophy of the company is knowledge transfer. Clients are required to undergo training because an educated client won’t fight recommendations and the project goes faster and smoother. The result of high-quality service is consistent growth, a solid reputation, and clients come to us.

If you’re looking to set a value for your company, consider what analysts walk in and ask for:

  • Client list and a phone number
  • Procedure documentation
  • Accounting Info (audited 3 years)
  • Employee audit with HR interviews, especially top executives and key rmployees
  • Business plan
  • Sarbanes-Oxley
  • Retention / renewal / satisfaction is key

Valuation is commonly 4.3 x Revenue or 11.3 times EBITDA
The value to Bruce: Priceless (awww!)

As the final speaker, Matt Naeger says he’s going to follow the earlier speakers by answering the question “What does it all mean?” and by highlighting some of the mistakes he made along the way to building value.

Ask yourself:

  • Who do you want to be as an agency? Enterprise, SMB or boutique?
  • What are you comfortable managing? Only take on clients that fit the size of your company. Keep your reputation in mind. If you take on the big client that walks in the door, your inability to service them could ruin your agency.
  • Don’t be afraid to share your knowledge, both with clients and the industry. Post on blogs. Write articles that give real opinions. Tell your clients what you know, even if it isn’t related to the project. A whole new line of services could come out of your communication.

In 1999, when Impaqt first began, the client target was anyone that willing to talk about search. The business grew by educating clients in the sales process, not by saying we’re the right company for you. As the industry grew, they built their brand through industry events and networking with analysts. He echoes the fact that the people in the company are one of the greatest assets and they have a 90 percent employee retention rate. Along the way, the major challenges were growth for growth’s sake and too many clients in too little time. The challenges were the worst and the best thing to happen for the company.

Q&A
You all mentioned the value of employees. How do you keep staff?

Bruce says that early on in the company, they sometimes discovered newly hired SEOs were spammers. Instead, they started bringing in young people, recently out of school, and put them in mentoring environments. What was created was a community of friends that support each other. It also helps that they don’t have a vertical, so a variety of projects keeps things interesting.

Sean says that employee skill set is the number one advantage when getting a new company off the ground. Salary isn’t going to be the key enticement. Instead, they carved out ownership for employee stock incentives.

Bruce, can you shed some light on the methodology of valuation?

He’s seen consistent numbers, like 11.3, in newsletters and articles. He’s seen the number go as high as 20. It’s going to matter if it’s been consistent and how long it’s been going on, as well as other factors, but that’s the average.

When your name is on the door, how do you address the issue to a potential buyer that you are the star?

Bruce says he’s been trying hard to make it less of a one-star organization. Through delegation, he says that the company will be ready to be acquired if he can be out of the office for two weeks every month and still see things running smoothly.

What percent of your time do you spend thinking about valuation in the company?

Bruce says that he does not spend a lot of time thinking about that. Matt’s in the same place, saying that he’s not looking to get out of the business and so doesn’t spend a lot of time thinking about valuation. Instead, it’s determining whether they can afford to continue being the company they want to be. He says he thinks about value rather than valuation. And Sean agrees, saying that he spends 90 percent of his time thinking about the value of the company.

Is the demand for SEM reaching a plateau?

All the speakers agree that at least 60 to 70 percent of the potential clients haven’t thought about SEM or aren’t doing it right. Upcoming growth may be seen in local and mobile.

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One response to “Creating Value In Your SEM Business”

  1. SEO Pune writes:

    Interesting article…but it may not be true that SEM has reached a plateau. With the rise in e-commerce and online trading, i think it’s popularity will only increase.



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