If you are starting an online business with a website, you can either start your own brand new business or buy an existing online business with an established website. When you are buying any business, including an online business, you have to investigate the business very well.
You have to ask the seller a lot of questions, look at documents, and search on the internet to get all the information you need. This process is called due diligence.
Always remember that when you buy an online business, the online business’ website is part of the whole deal. The website’s traffic analysis can tell you a lot about the success or not of the online business.
In this article, we will discuss most of the important aspects you have to attend to in your due diligence process and provide you with a website due diligence checklist.
When looking into a business’ viability to buy, you will often come across the term “due diligence.” The term means “to take reasonable care.” It became common in business with the United States Securities Act of 1933, where the process to ensure that a business you want to purchase is legit, was called “reasonable investigation” in Section 11b3 of the Act.
There was also a reference to “due diligence defense.” This defense could be used by brokers when accused by investors of inadequate disclosure of relevant information.
In the Business Milieu
In the business milieu nowadays, the process of investigating an investment opportunity is called due diligence. For an online business with a website, due diligence is the process to ensure that the website you’re purchasing has potential and is legit.
A good tip is that if you either find something really suspicious when you are busy with the due diligence process and you cannot get enough information to satisfy you that you’ve been wrong, or you discover that the online business is not what you have in mind, call off the deal. There will be other online businesses and websites up for sale.
As a potential buyer, you must remember that the seller might also research you. The seller’s due diligence normally centers around your financial situation, as the seller wants to ensure that you have the means to buy the business.
Website and Online Businesses Due Diligence
Most of the research or steps of due diligence into an online business and website result in tangible outcomes. This means that you get data and documents that you can study.
But don’t fall into the trap of only looking at hard data. Remember, a website forms part of an online business and you must look at it like you would at any other business model. You also have to look into the existing business and website’s procedures, successes, etc.
Price and Goals
Although there are many aspects you will look at to determine the viability of purchasing the website, one of the most difficult parts will be to value the website and put a price on it.
Something you must keep in mind is that even if an online business or website is real and legit and is making money, it doesn’t necessarily mean the business is right for you and your business goals. The due diligence process also assists you to determine whether or not the business is right for you.
With the due diligence process, you’ll not only evaluate the financial and other risks in purchasing the online business and website, but you will also determine whether or not the online business is a fit for both your skillset and your lifestyle.
As a buyer, remain skeptical during the whole process. Look for reasons not to buy the business. This might seem counterintuitive, but by doing it you will not miss negative details you would have missed if you’ve only looked at the positive aspects of the online business. You will have your own risk threshold. Understanding the risks involved and why you shouldn’t buy a business will allow you to measure it up against the potential rewards.
Website Due Diligence Process
Let’s look at aspects you have to attend to in the due diligence process. We’re not discussing it as steps following each other, but more as a list of aspects you have to attend to before finalizing anything. However, these aspects will help you draw up a customized checklist suited for the type of business you foresee purchasing.
In your final checklist, try to organize all the things you want to look at and have questions about, in a logical order. This will prevent unnecessary questions and spare you the time to work through documents more than once.
If you know what you are looking for in specific documents, search for all the information as you go through the documentation. A well-organized checklist will save you lots of valuable time.
Meet the Website Owner Face-to-Face
For you as the buyer, it is necessary to speak face to face with the seller of the online business. Traditionally, the seller and buyer would have met personally somewhere for discussions and to confirm each other's identity.
Nowadays, face-to-face meetings can be done via Skype, Zoom, or another digital and online method. With the current Covid-19 pandemic’s travel restrictions, online contact is actually the only way to see each other face to face.
It is always a good idea to talk to the seller face-to-face early in your deliberation process. You can then ask questions about the current “health” of the online business and website.
Ask the seller about the reasons why the business is for sale. The owner’s answers, and even his attitude, will give your further due diligence process direction. You can follow up on some of the answers and research the aspects you want to verify.
When you’ve completed the whole process and you’ve decided to make an offer, a one-on-one online meeting should also be arranged to discuss the finalizing processes.
You just have to ensure that the person you are talking to online is the person you are supposed to talk to. Before you arrange an online video call, it would be a good idea if you could find other photos and information of the person on social media, especially LinkedIn.
Verify Financial Aspects
This is probably the most crucial aspect of the due diligence process. As a potential buyer, you have the right, and the obligation to yourself, to view the finances of the website and online business you’re about to purchase.
Request up-to-date financial documents of the website and online business for at least the last 12 months. To determine how much revenue the website has generated over time, transaction statements and tax returns can help.
Find out if there are any financial liabilities like debts, loan agreements, and bank overdrafts currently on the website or the online company. If you see something suspicious, hire an expert to review the finances and advise you.
If it is a very small online business and is not in business for long, there is the possibility that the owner has not opened a separate bank account for the online business. Then you can ask the owner for personal financial statements with a clear indication of the income and expenditure related to the website.
Taxes are important because if taxes are outstanding or there are some discrepancies in past tax payments, you might, as the new owner, be held responsible for paying the arrears.
Verify Ownership of the Online Business
Before you purchase a website and online business, one important step of website due diligence is to ascertain that the seller has legal ownership of the domain name. You can verify the ownership of a domain with a “Who Is?” tool, like http://whois.domaintools.com/. Sometimes the owner has to provide you with other information as well, as the contact information on the domain might be the details of the web designers hired to build the original website.
You must also verify that the current owner of the website and online business you’re interested in has fulfilled all the legal obligations and conducted business according to the applicable laws and regulations.
Some of the things you have to verify include:
- Is the business registered in the country/countries where it is operating?
- Is a trademark license necessary, and if so, is there a currently valid one?
- Does the owner have the appropriate image and content licensing for the content on the website?
Verify Ownership Of Intellectual Property
There are serious legal implications for stealing someone’s intellectual property. When purchasing a website, make sure that the seller is the owner of the intellectual property, if applicable.
If so, put it in your purchase agreement that you are also purchasing any intellectual property associated with the website. Stipulate that it will be your sole property when the purchase agreement has been signed.
The same arrangement must be made for any proprietary technology linked with the website. If the website uses a unique tool, ensure that you’ll become the owner of that technology with the purchase of the website.
Evaluate Website Traffic and Ease of Using
As an online business is normally linked to a website, you have to look at the website’s current traffic, including the traffic source. This is the one aspect where it is good to get help from persons or companies who understand and can evaluate website statistics if it is not your specialized field.
It is worth spending money on expert advice. Your online business will to a great extent depend on website traffic – organic traffic and otherwise.
Get access to the seller’s analytics website account and information. Here are two important aspects to investigate:
- How much time are people spending on the website? If it is only for a few seconds, the chances are good that the visitors are not interested in what is offered on the site.
- Are the clicks coming from the demographical areas that are relevant to the products or services the online business is selling? The records can show a lot of traffic but the majority of the traffic might be from places that you cannot service.
You have to visit the website yourself. Determine whether it is a user-friendly site or not. Follow the flow of the site and see if you can click through easily. Ask yourself the question of whether it is easy to navigate from the home page to the products or services offered. Click on a product/service and see if you get the information you need.
Sometimes the “problems” you encounter when on the site can be rectified later, but some problems might be design problems. This is also one aspect where it can be a good idea to get a website designer’s opinion.
Watch Out for Website Traffic Scams
If the seller has a problem in giving you online access to the website analytics or produce printed copies, red lights must start to flicker. Even if the seller offers to provide you with a video walkthrough, be aware that only sections might be shown to you. The seller can manipulate the video. Ask the seller to adjust the date ranges or segment reports. If it is an honest video walkthrough, the seller should be able to do the changes immediately.
Faked clicks are not so easy to spot. A fake click is when someone is paying random people just to click on the website. One way to try and detect this is to check on the analytics report if you have it at your disposal. Check how many visits to the site have been for not more than 2 seconds.
What is a diligence checklist?
In the business milieu, the process of investigating an investment opportunity, like buying a business, is called due diligence. For an online business with a website, due diligence is the process to ensure that the website you’re purchasing has potential and is legit. The due diligence checklist is a list of all the aspects you want to look at, and all the questions you want to ask to enable you to decide whether you want to proceed with the purchasing of the website and online business.
What should I ask for during due diligence?
What you should ask for will differ from business to business, but there is some information to base your final decision on that will always be part of due diligence. If, to begin with, you ask for the following documentation, you will have material to work on and to formulate further questions you want to ask:
- Financial statements like bank statements to verify any profit, receipts, tax documents
- Ownership proof, including intellectual property
- If applicable, licenses and authorities’ approvals
- Website analytics
How long is a typical due diligence period?
A buyer has a fixed period of time following a letter of intent to perform due diligence. The period is specified in this letter. The period is normally negotiable. A starting point is 60-90 days. The period should be long enough to allow the buyer to review documentation, inspect assets, and hire professional appraisers to value the ongoing business.
Website due diligence is vital for anyone who wants to purchase a website and online business. There are similarities in all due diligence processes, but every type of business asks for a customized procedure.
Before you start “investigating” the online business you want to purchase, make a website due diligence checklist of what you want to look at and what questions you want to ask the seller and other people. The time spent on a good process can spare you a lot of trouble later. For some key ‘extra' due diligence things to consider, check out our article on Empire Flippers: Detailed Due Diligence Hacks You Need to be Doing.
If there are aspects in your checklist you are not sure whether you would be able to retrieve and analyze yourself, get an expert to help you and be sure to check out our pre-done due diligence checklist right here for you to use.
And always remember you can at any time during the process decide that you are not interested anymore.