Written by Blair Quane
If you're looking at a website or online business to buy, then there are a number of things you should do at the beginning of your due diligence process. These checks are not meant to be full and final, but simply a few initial questions to ask to then decide whether to proceed with a deeper dive into the purchase.
Are you working with a Business Broker? If so, then ask them how many other people are currently looking at the business you are considering purchasing. This will give you a fell for the demand/popularity of the offer as well as help you plan your timeline for deeper investigation of the business. For example, if the broker confirms that the business is being looked at by a number of potential buyers then you may need to complete your due diligence quickly to ensure you don’t miss out by someone else getting in before you and making the purchase.
Another item to check with the broker is how long the website has been for sale and if this is the first time it has been listed for sale. If its been for sale for over 30 days and/or has been put up for sale before, then these may be red flags for you to question the broker on. There maybe things in the background which is putting off other buyers, so dig in deep and seek answers.
One key initial question to really delve into is; why is the owner selling the business. I see so many sellers commenting “I’m selling because I am launching a new venture and don’t have the time with this site any longer”. This may be true, but you should question this further because if the website you are looking to buy is so good and requires so little owners time per week then it makes the sellers reasoning look a bit flimsy. I always go in with the approach that there must be something wrong with the business and it’s my mission to find out what it is. This may sound like a negative approach but you need to consider that there are many websites for sale out there which are simply not what they're being sold as. You job, as an educated buyer, is to uncover any issues before you buy. Don’t get me wrong, the issues with a website may not be a show stopper and it still maybe a good purchase to proceed with, but you need to know everything about it before you commit.
Question the seller to how long they've owned the business — if its a short time, like 6 months, then this would be a flag for me to question further why they are selling it so quickly after starting or buying it in the first place.
One way of protecting all of the above issues is to see if the seller is willing to vendor finance the sale. This means that they effectively keep a portion of the sale price in the business and you pay this out to them over a set period. So for example, if a website is selling for $200,000 and you have them leave $50,000 in vendor financing, then this means you pay them $150,000 and then pay the remaining $50,000 to them over 6 months, or whatever period you agree on. If there is an issue that the seller is not disclosing, then they will be very unwilling to opt into vendor financing because the hidden issue is likely to become obvious to you over that 6 month period of you operating the business. Bear in mind that the seller not accepting to do vendor financing isn't always an indicator of something being wrong, so use good judgement here.
Ensure to do some research about the seller. Google them, their company and any other details they provide to verify what they are presenting to you. Look for troubles in the past or any discrepancies with what they've told you. Social media searching is also a great way to see beyond just their name.
If you’re happy with the seller and their reasoning for selling then the last initial check I do is to check the financials. Normally you are presented with the last 12 months of financials and you need to verify that these are correct and valid…. so having a brokers verified financials is ok or even better, access to the sellers financial accounts to verify the information. Simply relying on a Excel spreadsheet is putting yourself at risk that the information has been changed.
Look into the valuation of the business. Is the asking price realistic? Normally businesses are valued as a multiplier of net profit and sometimes these can be heavily debatable. There are a lot of factors which get taken into account when determining the multiplier. See this article by FE International (business brokers) for in depth information on business valuations.
They also offer a professional valuation service which can be very useful as a cross check to the sellers valuation.
At the end of the day the value of a website business is the middle ground between what the seller will accept to receive and what a purchaser will accept to pay. Don’t be fooled in thinking the listed price is what the business will sell for. Always be prepared to negotiate the sellers price down to what you are comfortable with. In any negotiation situation, a business broker or your lawyer can be very useful as a third party negotiator, but remember that the broker will always bee leaning towards the party who they are ultimately representing.
The above information is intended as a brief outline of the main areas I look at when considering a website purchase. I need to satisfy the above points before I then delve deeper into due diligence and look at a SWOT analysis, competitors, industry trends, product supply etc etc.
Never proceed with a website purchase off the above points only. There are many more steps to cover before you can conclusively state that you have done a full due diligence on a business.
If you found the above information useful, then visit our free resource website at www.emilyandblair.com (launching April 2021) for a vast library of likeminded guides, checklists and content devoted to online businesses.
See you in the next article…