Q&A: Ben Robinson, Director, RB Capital
Published 3rd May 2017
NPDs, FTDs, EBITDA or KPIs; no acronym can explain or shed light on the complexities of selling a business. With more and more affiliates looking to cash in by selling their companies to groups such as Catena or GIG, iGB Affiliate speaks to Ben Robinson, co-founder of corporate and M&A advisory specialist RB Capital, to hear about the key drivers behind the current M&A wave and how affiliates can best prepare their business for a sell.
What is the current state of play when it comes to M&A in the affiliate space?
The recent upward trend in M&A activity has mainly focused on the larger affiliate groups attracting investment for the purpose of stimulating growth through non-organic means. There are several reasons for this but our top three are as follows:
- First, the profitability of affiliates using link-building and content-based SEO is usually high, with many small affiliates achieving margins of between 60% and 90%, this compares with operators whose EBITDA margins range from 10% to 30%. Thus the interest in this category of affiliates, specifically if they can be easily integrated into the acquirer’s business and their platform.
- Second, operators such as Cherry and GIG are recognising the importance of having their own traffic source – this is symptomatic of larger affiliates charging such high rates for traffic, effectively extracting all the value from the player and leaving very small margins for operators.
- Finally, affiliates themselves are fuelling the activity, looking to cash in on their many years of hard work.
On average how much business structure or advice does an advisor provide to affiliates looking to exit?
Operators such as Cherry and GIG are recognising the importance of having their own traffic source – this is symptomatic of larger affiliates charging such high rates for traffic
When we are engaged by affiliates, it is usually after they’ve been approached by one or more interested parties. Evaluating and selling your business can be a daunting process, although many affiliates are enticed by the allure of a quick process and (potentially) large amounts of money in the bank.
They jump in head first without properly assessing the business, leaving themselves open to a problematic due diligence process.
Affiliates are multi-taskers who are primarily digital marketers, but also web developers, graphic designers, managers and accountants… many of the acquirers we deal with have specialist M&A teams who will place all aspects of the business under a microscope in order to identify possible risks, many of which the affiliate is likely to have missed.
Our job is to identify all the underlying mechanicals that power a business as well as the possible risks/pitfalls before entering the process. The aim here is to either ‘rightsize’, or at least have an explanation as to why and how the business is addressing the issue. Our analysis covers financials, traffic, IT & infrastructure, geographic and market breakdown.
This analysis also reveals the unique selling points of the business and helps us determine which acquirer is likely to be most interested, based on our extensive network and understanding of their businesses.
While potential buyers carry out due diligence (DD) to identify risks, they are also doing so to drive the value of the affiliate business down, so it’s vital that a proper analysis is applied before handing over financials and traffic data to the inquiring party.
What are the key issues/sticking points you encounter during the whole process, whether valuation, DD or key performance indicators?
I’ll break this question up into two parts: pre- and post buyer engagement.
Pre-buyer engagement is the analysis phase where most of the issues will surface and are ironed out. The majority of these stem from financials (revenue and costs) which will determine the earnings before interest, tax, depreciation and amortisation (EBITDA). This is the most important metric to establish as it will be used to calculate the Enterprise Valuation (EV). NDPs (new depositing players) or FTDs (first time deposits) are an indicator of player value - with the recent demise and prior misinformation of StatsRemote (until recently the most commonly used program to monitor revenues and players), there are many affiliates who are relatively blind as to the real player numbers their sites are generating.
Misaligned expectations can cause issues further down the line if not picked up early, so managing expectations, on both sides, is important. Therefore it is necessary to create a process that imparts fair market value to the business, and often this involves managing owner’s expectations around reasonable EV bandings (and the respective earn-out period), but importantly ensure would-be buyers also recognise the value of the assets to be acquired. Thus we spend a significant amount of our time managing expectations on both sides.
Turning to post-buyer engagement, there are so many acquisitive buyers in the market it is pragmatic to engage numerous parties. This can create complexities and is certainly time consuming, although it is invariably countered by an increased valuation through simple supply/demand economic forces.
Managing and properly gating potential buyers ensures a smooth and expeditious process. Considering the buyer is responsible for preparing the sales purchase agreement (SPA), the final stages can be unpredictable – having applied our own due diligence on many likely acquirers, we are well positioned to help guide the affiliate in selecting the right buyer and not necessarily the one with the most money on offer.
If we’ve done our job properly, this phase is usually smooth sailing but it’s crucial that a proper structure is adhered to, ensuring that we are in control, not the acquirer.
What is the outlook for M&A in the affiliate space?
M&A cycles tend to consolidate sectors to a small number of large players and a handful of medium-sized players.
This is certainly the case with travel and financial price comparison industries.
However, considering the fragmentation of the affiliate space, we believe it is likely to take a slightly different path, where large affiliate businesses are controlling hundreds of small to medium-sized brands. This is likely to be the case due to the diversity in the industry in terms of verticals i.e. casino, sports, bingo etc. and myriad sub-categories within each, not to mention the segmentation of player types they attract.
Currently we have a sellers’ market, however based on recent transactions we are privy to, we believe that the true value of affiliates is yet to be realised and with the correct preparation and positioning combined with the increased buy-side demand we’ll see multiples increase over the next 12 months.