How To Perform A Due Diligence Check Before Buying An Online Business
Last updated on : February 11 2021
Online Businesses Can Be Profitable To Buy
Buying any business is a hugely exciting time.
None is more so than purchasing an online business where there's potential scalability to the earnings that aren't available with many other investments.
You hear the stories about people doubling their monthly net profit in a short space of time and now want a piece of the action. The good news is that those stories are real, and there are more online businesses than ever to choose to buy.
However, buying an online business comes with risks, and you need to prepare for these.
The Need For Due Diligence
While buying an online business presents many opportunities, it also means there are many potential pitfalls. These pitfalls aren't just with scammers but also with entities that aren't the right fit for you.
Dealing with these issues is why you must set up a due diligence process or checklist to verify each online business's legitimacy and suitability before you buy.
Performing due diligence means taking reasonable steps to satisfy yourself that the business is a good fit for you and your expertise.
Once you have a due diligence checklist in place, it will allow you to find online enterprises quicker, more efficiently, and with a greater chance of success—it's that important.
The Difference Between Vetting And Due Diligence
Before we get into due diligence itself, let's first establish the difference between vetting and due diligence.
Vetting is what a broker provides to evaluate a business's suitability for a listing on its marketplace. A broker will perform checks that the claims of ownership, traffic, and earnings, among a few other things, are legitimate by the seller.
Vetting by a broker is an added layer of protection for buyers. It assures buyers that the business they are viewing is legitimate. However, vetting doesn't mean there's a guarantee of future earnings or traffic. No one can guarantee these factors when it comes to online businesses.
In a private sale, without a broker, or sourcing deals from a marketplace where there is no vetting, it is your responsibility to vet the business to ensure everything is as it seems.
Unfortunately, marketplaces like this open the doors to scammers, and so it is better to use a recognized broker when you can.
Establishing A Due Diligence Checklist
Your due diligence checklist will vary depending on the type of online business you're interested in buying.
The due diligence for an e-commerce store will be different from an affiliate website. If you're looking for something to fix up and flip, it will require other criteria than a hands-off style business.
However, be sure that whatever checklist you develop incorporates the following five critical aspects of any online business you wish to buy.
Working with a broker helps ensure you get an added layer of protection. You get this added protection because the broker vets the legitimacy of the business and its earnings.
With this assurance, you can focus on assessing the business's financial performance.
There should be a profit and loss statement that gives a monthly breakdown of the income and expenses over the years leading up to the sale.
These statements should differentiate between revenue and net profit, as well as one-off and recurring expenses.
For an affiliate site, it's necessary to see which affiliate programs are generating the income. And for an e-commerce store, having the units sold by SKU will give you essential information on what products are successful.
Look for any spikes and dips in these metrics and investigate them. Use Google Trends to see if there's evidence of seasonality for products or niches.
Also, understand the sustainability of the finances. Will market conditions allow these numbers to continue and grow. Or have factors like the pandemic fundamentally impacted the business, making it less profitable in the future.
A downward financial trend might not always be negative; perhaps the site hasn't posted any new content in a while. Buyers willing to take more risk may see this as an opportunity, while buyers who want a steady earner can immediately discount this.
Many online businesses leverage content to drive revenue. Before buying, you will want to perform a content audit to analyze the content quality and value.
One of the first things you can do is check for plagiarized content using a tool like Copyscape.
Owners should disclose if the site has received any Google penalties, but you should also do your research. In Google Analytics, you can click on "source/medium" and filter by "Google/organic."
If there are any big dips (or spikes), then compare this with a list of Google algorithm updates, which will tell you if it's likely to be update related.
Once it's passed these tests, you can begin to assess the quality of content. Note that lower-quality content is not necessarily harmful because one of the best conversion rate optimization techniques is improving low-quality content.
3. Traffic - Including Paid v Organic
Bringing in visitors is a vital part of running a successful business, and each traffic channel will have its positives and negatives.
You'll likely have expertise in at least one of them, but there are a few basic questions that you must be able to answer from your analysis.
- Where is the traffic coming from?
- Which pages are driving the most traffic?
- How long do visitors spend on the site?
- What are the opportunities for growth?
It's common for most online businesses to have some analytics platform installed, such as Google Analytics. You will need at least read-only access to these analytics to find the information you need.
You can also analyze the traffic trend in the same way as the financials. Ask yourself why big or small movements in traffic and the proportion of paid v organic traffic.
Also, consider conversion rates for each channel, whether organic converts better than paid, and the implications of these numbers.
Lastly, you will need to understand the return on paid traffic, whether it is profitable or not, and how you might improve the profitability if necessary.
4. Backlink Profile
Google has tried to crack down on people gaming the system with low-quality links. Analyzing where the inbound links come from will help you see if anything black-hat has been done.
A site owner should disclose whether they've used a private blog network (PBN) or link building service and what will happen to it post-sale.
To do your check, you can use Ahrefs to view the sites linked to the one you're interested in buying. If you spot many sites linking to one another, this is usually good evidence that the site uses a PBN.
A PBN is not necessarily a hard no for everyone, but you should consider whether it's right for you. A site that uses a PBN will carry more risk of being negatively affected by a Google penalty or update. And you should factor this risk into the valuation.
A part of your due diligence should be assessing what competition is out there. This research can help you see how well leveraged the site is against the competition and where the opportunities lie.
Buyers often use the analogy of how deep the moat surrounding the business is, in other words, how difficult it is to enter the industry as a competitor.
A deep moat, or a business with high entry barriers, becomes more critical as its price increases. The higher the asking price, the higher the barriers to entry.
Understandably, a newer or smaller business might not have the deepest of moats, but there might be an opportunity to improve this, making it a better buy.
Start Practicing Your Due Diligence
The best way to improve your due diligence skills is to get out into marketplaces and start outlining potential businesses. And an excellent way to find businesses is to register for a free account on the Empire Flippers marketplace.
You can filter and save listings from this most extensive curated marketplace of online businesses in the world.
Empire Flippers also has a free downloadable checklist to help narrow down businesses that fit your criteria. It will give you a good idea of what you need to be analyzing when searching for online business purchases.
Use this as a starting point to create a checklist that meets your particular needs, depending on the business you are considering buying.
Firstly, reduce your purchasing risk by selecting businesses for sale from a pre-vetted broker's list.
Then be sure you understand your hard limits for the critical areas of your target business's finances, content, traffic, backlink profile, and competition when performing your due diligence.
And note that weaknesses in any of these areas can also represent opportunities, especially if you can bring expertise to these areas of weakness.
About The Author
Max Lapit is part of the Marketing Team at Empire Flippers. Before joining the marketing team, he helped create content sites and copywriting. Outside of work, you can find him watching sport or traveling the world to watch it. He's hoping to take in more new places after memorable trips to Budapest and Croatia.
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