Written by Blair Quane
Before reading this article, be sure to firstly read the article I wrote on the initial steps you should consider when looking at a business to buy — read it here. This article follows on from that article and provides a second tier, more detailed analysis of the business so only do these steps below if you have covered the initial ones first.
The key thing in detailed due diligence is to question everything. Question the figures, question the seller, question the broker, question everything. Remember that you are looking to spend your money on this business and so you need to be ruthless in investigating every detail to ensure you’re not buying a dud.
I normally look at the business model as a whole to begin with. I prepare a SWOT analysis, being Strengths, Weaknesses, Opportunities and Threats. Strengths are looking at what the business is strong and doing well at. How can you capitalize and take advantage of these strengths to dominate the competition and grow the business? Weaknesses are what the business is doing poorly at. How can you improve these and consider if they are actually a deal breaker for you. Opportunities are where you identify areas of growth or improvement which you can implement once you own the business, to improve its offering or revenues etc. Threats is really important. Its looking at the competition, their impact and market share. How can they affect the business? Is the business still viable if the competition starts to gain more traction?
You should compile a detailed SWOT document and then draw conclusions from the findings and decide whether to proceed from there or not.
After SWOT, I then move onto the financials remembering that we’ve already addressed the basic financials prior to now. At this step I look to involve my accountant and have them do a review of the profit and loss, sales figures, supply invoices etc. They need to verify that everything lines up and is as per what the seller has claimed. You will need to get real proof of earnings, so what I mean by this is actually seeing the sellers dashboard in real life — this can normally be done via a shared screen zoom call. Don’t accept screenshots or scans of earnings as total proof — you need to verify them in the flesh.
From here you need to look at the metrics. Now each website is different but you may want to include traffic trend — where is the traffic coming from and how is it trending over the last 12 months. Look at profitability and see if this has changed — are the business profits being squeezed by the competition? Examine Google Analytics and Google Search Console for other metrics that could show any issues (decline in performance). Make a list of all of these as questions to address with the seller.
Question how reliant the business is on the seller. Are they working 80 hours per week on the business and if so, are you willing to match their input? This is really important to have a firm understanding on because the business is likely to be heavily affected if you cannot match the time the current owner is putting into the business. Also, look at the owners skill set — do they have skills that you don’t because if so, you may need to either learn those skills or outsource them. An example of this is that if the current owner is skilled in photoshop and does all of the marketing and website graphics for the business then this will need to be done by you or outsourced at your cost, so make allowances for these extra costs or time to upskill.
Have an external company do a website audit to see if there are any technical seo issues going on with the site that aren't obvious. You need to be looking at the site speed, keyword trend, backlinks etc. Ensure that the backlinks don’t contain many toxic ones as this isn't good or will need resolving before you buy the website. We normally use Human Proof Designs audit service as they offer a wide ranging audit at a competitive price — you can enquire about this audit here.
Next item is to have a look at the product the website is selling. Whether digital or physical you need to get very familiar with the product and look for flaws or issues with it which may be problematic in the future. Also, consider is it one product or many? One product can be an issue if supply or demand changes. Is the product trendy, seasonal or evergreen. Trendy (Fidget Spinners!) means that it maybe going good now but sales will freefall when the trend runs out. Seasonal is ok but will mean that the rest of the year the sales and your revenue will be quiet so good budgeting will be important to ensure you don’t run low on cash in the quiet times. Evergreen is good because its consistent and long term meaning the website has a viable future selling this product. Check out competing products to see where your sits against them in terms of price, quality etc. Look for opportunities to expand the product offering if you were to buy the business.
If you are working via a business broker, then ask them for the draft Buy Sell Agreement and have your lawyer review this — feedback to the broker any changes you want from the lawyers review.
If you are not using a broker then your lawyer can provide a templated Buy Sell Agreement for you to use with the seller. Always include a non-compete clause in the agreement to cover you.
Inspect the products supply chain. Is the supplier of the product willing to work with you, as the new owner, on the same or better terms than they had with the current owner? Is there just one supplier? If so, then can you find a second supplier in case the current one changes or goes out of business?
Look into the product freight options — are there other ways and providers to freight the product with? Can you find a cheaper freight supplier?
If the product is digital like via an affiliate arrangement, then are there other affiliates out there who can offer the same product should the current affiliate stop their product offer?
Next is to look at staffing — does the business use contractors or freelancers? If so, are they willing to continue with you as the new owner and under the same terms and payment rates? Do they have contracts? If so, have your lawyer review these as now is the time to renegotiate and terms you are not happy with.
Review the businesses systems, data, policies and procedures — have these been all documented for you to easily use? Remember that most sellers will provide a hand-over period of 1–6 months and then they are gone, so its important that you ensure the documentation is there and easy to use so it doesn't walk away in the sellers head when they leave.
The above points should provide you with a list to review with the seller. Be prepared to run through this type of process a couple of times to really drill down into the level of detail you need to make your final decision whether to buy the business or not.
Use any negative points found in the due diligence process as bargaining chips for dropping the asking price. Remember that no business is perfect and you will find issues with all businesses, so the key thing is to work out whether you are happy to proceed with those issues and if so what asking price you are willing to pay for them.
Remember in making the final decision to involve a support team who could be any of; your accountant, lawyer, banker, business mentor etc.
Don’t be afraid to walk away from a purchase if the due diligence isn't stacking up like you wanted. More opportunities will come up and you need to understand that it can take doing this process over and over again on multiple businesses before you hit the one right for you.
If you found the above information useful, then visit our free resource website at www.emilyandblair.com (launching May 2021) for a vast library of likeminded guides, checklists and content devoted to online businesses.