12/21 Update: It was announced yesterday (12/20) that Yelp walked away from the $550 million dollar deal with Google.

Yesterday evening, Michael Arrington from TechCrunch reported that Google was in advanced talks to acquire Yelp for at least $500 million dollars. It seems like a big business move, even for Google, so let’s try to break it down. Why does this potential purchase matter?

For Google, the benefit of the acquisition would be ad revenue. If this deal is confirmed, Google will inherit Yelp’s extensive network of local ad-buying businesses. They’ll also be able to take Yelp’s 8 million+ user reviews and integrate them into Google’s Place Pages – which will give Google even more opportunity for ad revenue with keyword searches.

For Yelp, a buyout from Google means that direct links to Yelp listings will show up in Google’s search results. These are not just links to Yelp’s search results page, but links taking you directly to the Yelp page for say, Bi-Rite Creamery. Oh, and of course, there’s the money. Yelp is reporting $30 million in revenue this year, but rumor has it that Google will purchase the company for half a billion dollars.

For local businesses, the acquisition is important because with Google’s backing, Yelp reviews will have the potential to reach much larger audiences. If your business isn’t already on Yelp, what are you waiting for? You can use your Yelp listing to serve as the landing page for your company if you don’t have the budget to build your own personal website. Customer reviews have always been a popular social activity on the Internet, and Yelp has fostered an intimate community of reviewers who could be spreading the news about your business for you.

For social media users, the acquisition ties together the two popular trends of location-based social networking and mobile devices. Consumers could use their mobile phones to locate information through Google about nearby businesses on Yelp. Now armed with a large arsenal of local content, Google could push for more advanced mobile apps that allow users to instantly connect with others in local spaces – much like Foursquare.

With this move, Google is illustrating their play for acquiring community-based websites, and trying to magnify their presence in social networking. It’ll be interesting to see if this deal pulls through. I’ll definitely be on the lookout for confirmation.