So, you have decided to get into investing in online businesses; then it only makes sense to have a solid due diligence process in place and utilize professionals who can assist you in verifying the key metrics of an acquisition. The following seven steps listed below are the basic checks needed in order to make sure you have purchased a quality web business with a good financial history. All of these steps are usually performed by a website broker when first taking on a listing, but you should always conduct your independent review or hire a 3rd party due diligence service to assist you.
- Finding the Right Website – There are hundreds, perhaps thousands of websites for sale on any particular day across the internet. Many of them have owners who just want to get rid of a poorly performing business or may have simply lost interest in running it; while a large percentage of sites are, quite bluntly, scams! If your only just beginning your search a website broker will find a list of potential on-line businesses based on the information you provide (monetization, age, authority, etc.) within your range of prices and can assist you in determining the correct business for your skill level.
- A New or Old business – If the website you are looking to buy has been active for only a few months, then this should be accurately reflected in the price. Too often, sellers want to “sell the opportunity” rather than present the facts on very new websites. You will find many of these sites when browsing Flippa so be wary if something seems to good to be true. Some of the sellers are very skilled in copywriting and they will be very persuasive in making you take actions based on emotion instead of facts. Let facts and data points be your guide to finding an opportunity that is genuine and authentic.
- Background Information – A website broker will conduct an initial review of every business you are interested in purchasing that matches your criteria. If the current owner is already trying to sell, a broker can gather information such as customer traffic, click conversion, marketing campaigns, current EBITDA value and other needed information. With this data, a broker can then project future business growth and estimate future earnings, which is usually the metric website businesses are valued on.
- Current Income – Is there a current income being generated? If the website is already making money, then it’s a good sign. A broker will get at least a years worth of revenue history for you and verify the source of the revenue is derived from the online business you are buying. If the seller can't accurately tie the revenue to the website you are considering for purchase, then be wary of moving forward.
- Advertising Costs – What are the current ad and marketing costs? Your broker should compile a detailed P&L report that will include all the business expenses, including advertising costs. Utilizing a 3rd party service like SEMrush you or your broker can verify the numbers seem accurate and that there aren't additional sources of paid traffic not being reported.
- Purchase Price – Websites can be bought for approximately 1.5 times to about 2 times their Trailing Twelve Month (TTM) profit. Valuations can go as high as 3x if the website is generating high margins, has a solid growth trend, multiple traffic sources, and a high barrier to entry.
- After Sale Support – Make sure you establish upfront and in writing what you expect from the seller for support. To avoid misunderstandings after the sale be as specific as possible and make sure to clarify 1) How the support will be provided (usually via Skype or email). 2)The maximum amount of time the seller is responsible for support. 3) If additional support can be purchased at a “consulting rate” after the included support has expired.
For many of the sales we complete here at TSS, the seller will provide 30 – 60 days of ongoing support with unlimited email support durning that time and also a set number of “live training” sessions via Skype.
If these seven points can be accomplished satisfactorily you may have found a solid website. Also, if at some point in the future you decide to sell your on-line business, you’ll need to be able to answer these same questions in order to get the best possible price wether you sell though a broker or an online marketplace.