Acquisitions Anonymous - #1 for business buying, selling and operating - Is this $3.5 million mortgage loan lead-generation business worth it? - Acquisitions Anonymous episode 126

Episode Date: September 23, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) Bill D’Alessandro (@BillDA) and Mills Snell (@thegeneralmills) talk about a top-rated lead generation portfolio of sites for the mortgage loan industry in Missouri, Columbia.We’ll see if this is a good or a bad deal. Together we will dissect the website and see if this is safe and worth trying.-----Thanks to our sponsor!Live Oak Bank - Whether you’re looking to build, buy or expand your business, let the team at Live Oak Bank be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside you. We provide small business loans tailored to your goals.Fuel the growth of small businesses across the country; bank with Live Oak Bank.You can contact Heather Endresen, Director & Founder at [e-mail]. Mention this podcast in the subject line and ask her about office hours to get in touch.*Live Oak Bank is the #1 SBA 7(A) Lender. The data supplied by the SBA reflects 7(a) highest dollar volume during FY 2021.-----Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.Do you enjoy our content? Rate our show!Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:(0:00) - Introduction(0:35) - Our Sponsor is Liveoakbank.com(1:55) - Deal & financials: A Mortgage loan lead generator site (2:25) - What’s the story of this deal?(5:09) - How does this deal work and what’s the value they’re selling?(7:43) - Why is this deal unbelievable?(9:42) - How does this business generate leads?(10:41) - What stands out in this listing? Girdley’s expert take.(13:18) - Why does this deal deserve a shot?(14:34) - What are this deal’s competitive advantage and target market?(19:55) - Is there a reason to believe this is not defensible? (23:55) - What’s interesting about website properties? (25:23) - What is debt collection?-----Additional episodes you might enjoy:#125 Should we buy a CBD shop?#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, Michael here. Welcome back to Acquisitions and Audubis. We have a cool deal for you today. Me, Bill, and Mills went through a set of websites that are lead generation websites for the mortgage loan industry that is asking a ton of money, all with the thesis that the assets are under monetized. So I think you'll enjoy where we went with this one. Super interesting deal and super fun. Also, before we get started on the episode, shout out for our sponsor today, Live Oak Bank. You can find them at Live Oak Bank.com. Awesome people. love Heather and the whole team there, so super thankful to them. And without further ado, here is our episode. This episode is sponsored by Live Oak Bank, the number one SBA lender in the country by dollar amount. But they're more than the top SBA lender. They also provide USDA and conventional financing, tailoring each loan to their customers' unique needs.

Whether you're looking to buy or expand a business, let Live Oak be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take a the journey alongside of you. Live Oaks M&A financing experts lend across many industries nationwide. They also have over 30 industry-specific teams whose lenders are experts in industry-specific small business loans. Some of these include health care, seniors housing, and service contractors as well. With their dedication to efficiency, collaboration, and in-depth knowledge of M&A financing, they'll take you where you need to go. Visit liveoakbank.com slash AA and make sure that's a lowercase a and another lowercase A to connect with a lender today.

So again, that's LiveOakbank.com slash AA with two lowercase A's to find out more about LiveOak and to connect with the lender there and tell them that the acquisitions anonymous folks sent you along. Thanks a bunch. All right, man. Banger deals today. We got the gangs all here. We got everything.

I got my new lights. I'm so proud of everything I got going on. So if you're on YouTube, you can see this gridly. I've got new lights that I spent several hundred dollars of instead of. putting in my kids college fund. So I'm doing it. I'm doing it for the people. So Bill, we got a banger deal today. And it's brought to us by a listener. So I'm excited about this. I love listener deal. So thank you to the listener that sent us. This is a cool one. This is from my boys over at website properties, the brokerage firm who I bought my first business from.

So it is a top rated lead generation portfolio of sites for the mortgage loan industry. So this is super, super interesting. It's all lead gen. They don't actually physically sell anything. Okay, so this business services a 50 state U.S. market base, marketing a full suite of mortgage loan products to prospective clients. So covering all 50 states lets an interested lead generation company quickly start distributing leads to lead buyers, banks, loan officers, or parties interested in any market with any licensing. The portfolio of sites generates over 90% organic lead traffic based on its referral sources, current rankings, and then 10% from paid advertising spending with Google. While the company has experienced year-over-year growth under its current model with recurring revenues for managing and leasing the sites to a bank, it offers a huge opportunity by converting to a lead generation sales model. So we'll impact this year in a minute. Selling existing leads would generate over $3 million per year.

For a large bank, that could manage the volume of leads to close hundreds of loans per month, it would generate tens of millions of dollars per year. This is a remarkable opportunity to capitalize on a well-established foundation to expand this business to its full business. potential. So it's the key benefits is there are 90,000 leads, which they believe could be, I assume this is per year, which could be sold for $9 million at $100 per lead, if you would do that. It sounds like there's a lot of performing going on here. There's seven years of branding. It is apparently it's an agency making about half a million dollars a year, which is due to, at a massive discount due to a 23-year relationship with the agency. So they have hired an agency, they're paying the agency half a million dollars a year and seem to be implying that they

should be paying the agency a lot more but are not because they have a 23-year relationship with that agency, which, of course, you buyer would not have. So we can come back to that. It says it is generating $4.8 million a year currently by selling all the leads to a bank. And they've got $40 to $45 billion in loan requests or leads. And it says there's a big upside to a banker broker who better service this volume of leads. So their financial forecast say that the gross revenue is $490,000 and the cash flow is $450,000. So that is pretty good margins, let's just say.

And that lead volume through August 2022 is 2,607 leads, which is 107 leads over the average projection. I assume that's per month, right? So they're generating 2,600 leads a month. So let's unpack this a little bit. This is a business that has a portfolio of websites that basically rank for things like best mortgage rate or I want a mortgage or refinance, home refinance, or anything like that. If you Google these things, right, this portfolio of sites is going to show up and they're not

going to actually loan you the money, but they're going to get you to put in your name and your contact information and then they're going to sell that lease. to people who will call you. And that's the general business model. But it seems as though this series of sites, rather than doing that, they simply have leased the sites or all of the leads generated by the sites to a single bank, it seems, or a single consumer of leads. And it seems as though the pitch here is that you, the buyer, would stop doing that and that

you would instead kind of sell off all the leads one by one. And they say it's valued at $100 to $150 per lead. And that leads into their valuation for the business, which they say they're going to value it based on a pro forma as though you were doing all of that. And it says that if you start selling the leads individually, rather than as a bundle and selling them to one bank, you should sell them out to a bunch of banks.

And you, by the way, can oftentimes sell these leads more than once, which is why if you put all your information into one of these websites, you got like 10 calls from 10 different mortgage originator. So basically says a new lead gen company would plug and play and immediately make five times the money, but they can't do it because they have a deal, I guess, with this bank. So they're asking $3.5 million for this business that is currently on track to cash flow $450,000 for the year 2022. So that is a geez what is that like a lot

that's that's 7.7 times so so that now that being said right it seems as those pretty hands off 10 times trailing 12 month it's 10 times TTM so between 8 and 10 times 10 times depending how you look at it it's so it's hands off though right they don't have to worry about selling all these different leads they've just got they all one buyer for everything the margins are redonculus. It seems that they have no cost, which probably means they've got almost no employees. And the thing that is freaking awesome about it is that is 90% organic traffic, which is pretty rare to find. So maybe a dumb and stupid obvious question from a guy who's not an affiliate marketer like myself. If this is so easy, why don't these guys go and monetize this

stuff? Like, it seems pretty easy to like, I don't know, hire a salesperson and start trying to sell these leads to other people? Why don't they do that? So that's the thing I can't figure out, because you're actually spot on, Michael, is it is decently easy because there are all these mortgage originators are in the business of buying leads. Like there's just a guy you can call and be like, hey, I got these leads. And they'll just be like, okay, $100 a lead and boom, you're doing it. So that's a puzzler to me. It's funny. The guy that sent me this deal said, I wanted to send you this. Number one, because I think it's hilarious. So the guy who's in this affiliate space said it to be and thought it was hilarious.

So I'm glad we're not like, this seems like a great deal. So at least we agree with kind of what he's saying. But the second thing he said was, man, this multiple is so crazy. I'm sending it to my business broker right now and telling him this is what he needs to go get for my deal too. So I thought that was great. I mean, it's just pro forma like crazy, right? I think something like this could trade for this amount if it wasn't pro forma. Right? I mean, the delta here is they made $338,000 last year. And they're saying they can make probably $3 million.

So that's the delta. That's the chasm that has to be crossed here. And Michael, we could have ended the episode when you when you asked the question, why don't they just do it? Like that's basically, I think. how you poke a hole in anybody's exit thesis and their valuation thesis is we have been growing at X. We think we're going to grow at two to three times X. If it's that easy, why don't you just do it? If margins are going to, you know, consistently improve over the next 10 years like you think they are, why don't you just do it? Do it for a couple of years and then I'll buy it at that, you know, at that real value. So that, I mean, let's just unpack a little bit of math here, right? So they say they're doing 2,607 leads in August. So that's per month. So let's just kind of annualize that, right? That is roughly 31,000 leads a year. If in fact, let's take the low end of the range

at $100 per lead, that means that this business, if you were selling all the leads on $100 and that you were making in August and August was representative and run rate, this business is grossing $3.1 million a year under that economic model, right? So I think that's what they're that they're only asking $3.5 million only, right, for this business, that if you could successfully execute this pivot, you've paid one times for this. And if you sell them for a buck, $150 a lead, it's grossing $4.7 million a year. And there's very, very little cost in it. So I think that's kind of their pitch here.

But what it just doesn't explain is why can't they do this? This is actually not hard. Yeah. Well, I think there's something else going on this listing to me that's, super telling, and I think you only see it if you look at a lot of listings, which is, I think as the 100-something deals we've looked at, this is probably the first one that the first thing that they lead with is, here's the buyer information process. You have to tell us who you are and fill out a form to disclose yourself before we'll even tell you what these sites are.

You know, that's usually, that's backwards, right? So typically you go look at a deal. You sign an NDA. They make sure you're not some, you know, Russian hacker or whatever. And then they send you over like the data and you get to take a look at it. And the broker may do some screening, but generally they're going to work with you if they think you're legit. This is doing it backwards. This is saying we're only going to talk to buyers who qualify themselves to us. And then we'll show you the deal, which to me screams something very important here. And you can kind of see it later in the listing, which is this makes, they want to sell this to a bank or something that's an established consumer of leads who has decided strategically,

they want to get in that business themselves in order to have a competitive advantage. And it is priced that way as well. So to me, I look at this immediately. I see those two things happening in this listing and I'm like, oh, these guys do not want to sell based on economics. They want to sell based on a strategic rationale by somebody else. And it's pretty clear what's going on.

So to me, it's like, okay, well, as a value buyer, it's like, where's the delete key? Pretty straightforward. Yeah, well, there's also something cloaked in here under the valuation. So they say, you know, you have to identify yourself as a buyer and we have to approve it, which I agree is a good signal, right, in terms of quality and eliminating the tire kickers. But under valuation, the next to the last sentence, they kind of cloak the fact that all the revenue is stopping. So they say a new owner will not

have this recurring revenue, which is the recurring revenue that comes from the seller's relationship with the bank. It is, I think, a little bit of an aggressive play to, you know, say, hey, look at this shiny object over here. We're going to, you know, five times or seven times the revenue of the business. In reality, the recurring revenue, every dollar the business is made up until this point is going to turn off at the day of sale. And then it's your job to, you know, convert at $100 a lead. But there's no, it's literally a standing start, you know, that this business is going to have, which makes to me the purchase price. and, you know, they're asked that much more egregious.

Yeah. I mean, okay, though. So let me actually defend them here. Wait, have more stuff that I hate about this. All right. All right. Well, let me defend this one like just a little bit here because the business, like you said, it comes to a standing start.

But the leads are still coming in, right? There's still people going to these websites, filling out the form and your inbox is filling up with people who want mortgages, like every single day. The problem, though, is you don't have the demand side. you don't have the other side where you're selling them off for $100 a lead. So there is, I mean, it's important to note that this specific industry, mortgage lead generation is huge. Like huge.

These are some of the most expensive clicks on the internet are mortgage clicks, right? Which is what's interesting about this business is that it's all organic. So they're getting all that free traffic. I mean, you can spend like no joke $100 a click on Google AdWords for mortgage related keywords because the conversions can be so valuable. So I don't think it would be that hard to turn back on the revenue, right, to go out and broker these all out. But I think obviously there's risk there. Right. And, you know, if you want a mortgage, by the way, like you need someone to call you in the next couple hours. Like you can't let these leads build up for two weeks and then sell them. They go stale.

Right. So there, I mean, the buyer, like we said strategic, it doesn't have to be a bank. I think think a killer buyer for this is basically any of their competitors. Anyone that is already selling leads to mortgage originators that could just immediately, the mortgage originators wouldn't have to know, just suddenly there's twice as many leads, right? And they've got pearly pricing in place, you know, et cetera. So like that is hands down. Like if you're one of those people, this actually could be a freaking amazing deal. Yeah. That begs the question, though, do you want to compete with like Lendingtree.com, you know, who is bigger and arguably better at this than you are. Like, you would want to understand the quality of the traffic, you know, and what is the funnel

that they've built? And is there some competitive advantage over the 800 pound gorillas out there? Well, the competitive advantage could be the like the seasoned domains, the organic SEO rank, right? Like, that could be the moat here. So like, you know who'd be a, it's too small for them, but like Red Ventures would be a killer buyer for this, right? Like they do this already in the mortgage space, you know, and just plug it into their pipeline, optimize these sites a little bit more, spend $3 million,

the thing's going to be thrown, they're going to have zero costs. They can be thrown off $4.5 million a year overnight. This is absolute slam dunk. So two interesting anecdotes. So my buddy was trying to get a car shipped and went through some sites like this for car shipping. And literally he got phone calls.

calls for weeks. They must have sold that lead to everybody. So for sure, for sure, that happens, not just in this, but other stuff. I think the second thing is I bet you dollars to donuts when you double click on their financials, they are peaking or have peaked in terms of their performance. Like there is a big macro thing going on here, which is everybody and their mom was trying to get a loan, often stretching their finances over the past couple of years, refinancing like crazy. and with interest rates going back up, you are going to be not seeing the same kind of upside on this business, I think, as they saw for the past couple years.

I'd be very curious when somebody double clicks on this to understand what the macro kind of trend of going on is. Yeah, I mean, that's a huge. I would be really interested in this case how many of the leads were refinanced leads, right? Because the refinance stuff, right, markets or the rates have been going down. So refinance volume has been through the roof.

Rising rate environment? Yep. Nobody's refying. Nobody, right? Like, why would you refy? The rates are definitely to be higher. So I would be really, I would try to value this based only on how much of it is ranking for new mortgage origination terms versus refi and assume the refi leads go to zero.

I love that part of their growth is we have 90,000 emails in our database that could basically be reached back out to. I mean, you would probably convert something, right? When you send 90,000 people in email, something comes of a. it, but it would be very minuscule. I would want to poke holes in that really fast. The monetization level of what they're doing is, so here, they're getting 40 to 45 billion in loan requests per year when they are converting that into a grant total of $5 million a year

in loans. That's like 0.0001%. How did you get that? Is that in there? Five million a year loans? Yeah, yeah, it's down here in key benefits. 4.8 million a year generated currently. Yeah, so basically they're turning all of these websites into like, how many houses is that?

12? Well, hang on. I think that might be like fee income or something from the bank. I mean, there is no way. That's not loan value. That's not loan value. They're not going from 40 billion in loan value to $5 million in loan value. No way.

Oh, man. Because they wouldn't make half a million dollars in net on that would be 10% of the loan value. Like that just doesn't cancel. Yeah. So there's some funny stuff in this thing as well, if you're a close reader. So here's a funny thing. The business was started in 2016, which means 2022 minus 2016 means it's six years old. A key benefit and feature of the company here is they list and they have seven plus years

benefit of branding. They've been branding themselves for longer. They claim that the branding of what they've been doing is lasting longer than the company exists. So that is a benefit for this deal, which is like, oh, you guys are not really paying much attention to the details, which is what this affiliate business is all just optimizations, like figuring out how to just squeeze out a few more cents out of your SEO. And like, it doesn't make sense. Something that supports your thought that they peaked, too, is if they're doing

31,000 leads, you know, this year on a run rate, they have 90,000, what seems like lifetime leads, you know, I don't, I read that as 90,000 leads at a cost of nine million dollars, if you assume $100. I think they have 90,000 historical leads, but a third of them have happened this year. Yeah, that would be about 34 months worth at the current run rate. Oh, you know where this is? It says here it's in Columbia, Missouri. I bet this is Brent Beshors side hustle. This is Brent's side hustle, of course.

It's Columbia, Missouri. Oh, man. Moon, Missouri. That's a great side hustle. hilarious. So, I mean, I don't, so like, the other thing that it is worth mentioning here is, and this ties into affiliate marketing generally, right? Like you mentioned, Michael, that they want to vet you before they tell you.

And you said part of that is probably because they hope you're a strategic buyer. Another big part of this, and this happens in affiliate market, it happens in e-commerce, this happens a ton in Amazon businesses, but other businesses as well. This is a giant waving flag that this business is not defensible, right? This is they don't want the names of their sites. Because what you can do for me, like as an affiliate marketer, you give me a site. I can immediately plug it into my tools and figure out exactly what keywords they're ranking for and make an estimate of exactly how much traffic they're getting from those

keywords. And then I can say, oh, I never thought about that keyword. I'm going to start optimizing my site for that keyword and try to outrank them. I didn't realize that there was red meat on that SERP, right, as an affiliate marketer. So that's why a lot of times you will see these affiliates. business is or these Amazon FBI businesses and they want to keep a lid on who gets the SIM because they don't just want it everywhere because tire kickers have the potential to actually

cannibalize and kill your business. So that always gives me a huge red flag. Is the mode on this business so small that, you know, just knowing it exists is a threat to it. Beautiful. Love it. Sign me up. So, uh, okay. So who's preparing the L-O-I? You guys got your checkbooks ready? I do. This broker is intriguing to me because I don't think we've looked at much from them. Bill, you said you have history with them. Just really quick before you tell that story. In the sidebar, there's testimonials because I'm not a premium buyer. And the companies that pop up are CorvetteTrader online.com, which sounds amazing and gumballs.com. Both of those seem like they would be fantastic businesses to talk about. Let's keep looking at listings from that.

these guys. So we should, Tom Moore is a friend of mine, the gumballs.com guy. And that is, he is a, he also owns chocolate.com, some other interesting things.

Just a phenomenal guy, great human being, has been in e-commerce around the block a number of times. Great dude. And that is a separate story for separate episode. Can I ask you a question?

I just pulled up gumballs.com. And like, it's got misspellings all over it. Is that intentional? Don't blame. He doesn't own it anymore. I'll sold it. I don't know.

But the guys at website properties were actually one of like the original e-com brokers. Like back, I did my first e-commerce acquisition in 2013 and I bought it from website properties, a business called Nurture My Body. This was back when I didn't know what I didn't know about e-com. And if you are ever having a beer with me, ask me about my experience buying that business flying out to Yelm, Washington, where that business is based, where the broker also was based, and going out to dinner with the sellers and the broker. It includes things I can't share on this podcast, but it's a good story. Those on-site visits universally end up with like some of the

craziest stuff. Like, we're talking to a company in Germany right now, and it's like the funniest thing because they're like super duper German. Like they want to have a call about having a call. So it's an adorable thing. Really good, really good people. Then you, like, one time I went and visited the company and like everybody got quiet, like around 2 o'clock in the afternoon. And I was like, why is the office so quiet? And I asked somebody in there like, the office dog is taking a nap.

They didn't want to interrupt his nap. I was like, oh, this is not. Yeah, I'm going to go back to my hotel room now. The on-site visits are the best. I will say, the reason I really like website properties, and still do to this day. This is not a dig. Hopefully it helps their business.

They often have businesses that are pretty good, and they kind of suck at marketing. So like, you know, versus like every quiet light deal has been shopped all to hell. Like everyone has seen it. And website properties, I don't get the sense that they're quite such horrors about it,

which, you know, if you're a seller, like what you want is the broadest reach. And like, that's fine. Like I'm not knocking quiet light. at all. But I have seen some really good deals on website properties that didn't seem as widely shopped, which of course is probably going to change. Now I open my mouth. But they're a good

place to look. Their listings are interesting. There's another lead generation for real estate professionals that's a $3 million asking price. Digital marketing agency with affiliate style lead generation for $8.5 million. The lead gen business, y'all, we should get somebody on talk about lead, and the thing is none of them will come because it's all, it's so freaking lucrative. It is redonculus. I mean, just so much money, and it's pure profit

because it's just, you're selling information, right? You just rank or you're running Google ads. I mean, I know people making tens of millions of dollars a year in EBITDA just on leads. It is ridiculous. I mean, the margins are 90 plus percent, EBITDA margins. It's just so silly. But brutally competitive. Another one I want to do is is debt collection. If you guys ever looked into that?

Do you know what the world, do you know what the world capital of debt collection is? You'll never guess. Utah. Uh-uh. Buffalo. Buffalo is the Silicon Valley of debt collection. Yeah. Like all the firms are there. It's just like it's just a clustering. Like firms got started in there and they're nothing else to do in Buffalo. And the next thing you know, the place is filled with debt collectors. There's, and part of it is there's this clustering because the debt collectors actually, like, they cooperate and there's a lot of like cross-pollination that happens where it's like, okay, well, like this is my subset of leads that didn't work. So I'm going to broker these to you.

And a lot of that is done around personal relationships. So it pays for everybody to be in the same place. And it's Buffalo. So we should do that in the future one. All right, I think we're going to wrap this one up. You guys good? Anything else to say about this? Who's preparing an LOI? I do want to find somebody who will, you know, absolutely, uh, take us to school on these lead generation businesses because we're all outsiders, Bill, you know a little bit more about this, but I feel like they could look at the raw data and say, this is what you pay up for. This is what, you know, you heavily discount. And just like you could absolutely dress down an e-commerce seller, you know, it would be really interesting.

to hear somebody. I think Twitter's number one curmudgeon, Ariozic, would be the right person to have with this. So we could get him to dig into some of these in the future. But man, what a crazy business. Like some rando out in Columbia, probably next Brett Besor's neighbors just here printing money and nobody has any idea. Awesome.

All right. We'll catch you guys next week.