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Interview with Patrick Gavin – Web Business Valuation and Brand Signals

Todd: 1.     How is SEO important to an online business?

Patrick GavinPatrick: I think it’s paramount for an online business.  I personally believe paid search is a very tough strategy for most small and mid sized businesses leaving organic search traffic as a huge part of the marketing mix for online businesses.  Paid media is a very efficient marketplace where very little margin remains so I think having a strong organic traffic stream needs to be top of mind for most online businesses.

Do you tend to use PPC as a paid metric for the value of organic traffic?  What else would you use to gauge the “potential” in organic traffic for a new business?  Where do you think SEO should fall in the marketing mix?

I still do use Google Adwords data to help identify/analyze potential opportunities.  This is a related article which is a great idea: http://blogs.wsj.com/accelerators/2012/12/03/sell-it-before-you-build-it/ in short you take it to the next step and actually buy some traffic and you can also test user behavior before actually having a product to sell.  I am biased toward SEO so obviously think it should be at the top of the marketing mix :)

2.     What’s the best way to build a brand?

This is a tough one.  I think it comes down to putting consistent resources against a common property over an extended time.  This means a consistent voice for your blog, having an active blog, participating in your community via social, commenting on other like minded blogs, networking with like minded site owners, etc.

3.     What factors would you consider for valuation of a web based business?

The easiest way to value a web based business is off free cash flow.  Many times the web properties you will see for sale on say a Flippa.com are largely one person operations that will be based on organic traffic and you will expect to pay a multiple of the revenue the site is bringing in (assuming it doesn’t have paid traffic, ie is organic traffic only).  Outside of a multiple off revenue, you need to look at how sustainable the asset is.  That is, if it is an organic search based business, how is the quality of the backlink profile?  How sustainable is the strategy that has gotten the site where it is today?  This has gotten much more difficult to evaluate over the last 18 months as I think most SEO’s would agree there has been more change in the last 18 months than the previous 10 years combined.

Great information, and I would absolutely agree.  The last 18 months has made it difficult to put terms to the value of organic traffic.  The “sustainability” aspect of organic traffic seems to be called into question much more, as well as the “health” of backlink profiles. I’ve always heard 2-3 X “owner’s discretionary income” as a good metric.  Do you think anyone should ever pay more or less, and why?

There are definitely strong reasons to pay more or less, let’s talk about the “more”….  If you have relationships in place today that allow you to make more money from the same traffic stream, this can lead you to “paying up”.  Maybe the current site owner is running their traffic through Adwords or via an aggregator and you have a direct relationship with the same advertisers so you can make more money from the same traffic.  Similarly, maybe you have knowledge of better ad placement to convert more of the same traffic streams.

4.     What advice would you suggest to young entrepreneurs?

If you can start small and get profitable fast and reinvest that cash flow into scaling, expanding your idea, that is ideal.  I am big believer in modeling your business after currently successful models.  This increases your chances of success as you know if you can execute on the business idea, you have a good shot at success versus executing on a new business idea where even if you execute, it might not mean there is a viable business model on the other end.  A good place to start for such ideas would be the Inc 500 list http://www.inc.com/inc5000/list/2012  In addition to the Inc 500 list, keeping a close eye on what businesses are getting bought/sold/funding is good directionally for finding models that seem to be getting traction.  Great sources on that front in the digital world would be: www.techcrunch.comwww.paidcontent.org, and I am a big fan of Dan Primack’s Term Sheet newsletter.

5.     What are some brand “signals”?

When talking about online properties, I think the best signal to see if a site has built a “brand” is: is the #1 search referral query to the site, the site’s name?  If so, I would say they have built the beginnings of a brand online and its a lot better position to be in versus a site that whose top queries are all commercial keywords!  In addition you could add a strong social presence, be it Twitter, G+, FB, etc.

What makes it more difficult to build a brand on a word or phrase with generic commercial intent?

I think the challenge here is that keyword driven or “exact match domains” scream of commercial intent versus a non commercial brandable domain which I believe is easier to market to audiences, easier to attract links, etc.  That said it all comes down to creating a great product and/or great content.  If you do that you can have success.

Thanks Patrick!

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