Checklist For “Business Buyers” by Website Properties
Due diligence for any business – brick-and-mortar or online – can be a complicated process, one that’s further amplified by the costs that even the smallest oversight can represent. Often coming after a ‘letter or intent’, it can feel like a tedious series of hurdles keeping you from the business you want to acquire, but with the finish line in sight, it’s essential to maintain focus in order to protect yourself and your hard-earned dollars from disaster.
So to prevent being caught ‘holding the bag’, here’s a fundamental breakdown of what needs to be considered when preparing to close on the purchase of a business deal.
The key elements that any prospective business buyer should examine fall under these categories:
- Traffic
- Financial
- Owner
- Technical
- Operational
- Legal
Now it should be noted that the above list is not a ranking. Depending on the nature of the business and the terms of the deal, some elements on this list might take priority over others. This is simply an accounting of the elements that make up effective due diligence.
Traffic:
The most important thing when it comes to traffic is not only looking at the numbers on the whole, but also being able to assess their origins, their legitimacy, and any costs associated with producing them. Important things to consider include:
Sources: Where is the traffic coming from: search, social media, referral? Does one channel produce the bulk of the traffic and if so, is it consistent and stable? Is the traffic high quality, producing time on site and/or conversions?
Time on Site: This is the canary in the coal mine when it comes to online businesses since all the traffic in the world doesn’t matter if people are bouncing off the site in a matter of seconds. Combined with the number of page views, you can come to understand whether the issue is the business itself, or maybe just some easily fixable UX/UI.
Traffic vs. Financials: How much does each visitor represent in terms of sales? Do these numbers seem to correlate, or does a small subset represent a large portion of sales?
Tools:
Google Analytics or Host Server: One of the best ways to get a comprehensive look at traffic over time. The more information you can get, the better, but as a rule of thumb at least 12 months of data is preferable to account for any potential seasonality in the business. Pay careful attention to stats such as Acquisition Overview, Behavior Flow, Page Views, Conversions and Bounce Rate.
Ahrefs, SEM Rush or Moz: Great tools to identify backlinks and keyword rankings, and a worthwhile way to assess if the company is over reliant on paid links or ‘spam’ SEO tactics designed to game the system.
Financial:
Often going hand-in-hand with traffic, a business financials gives you an essential portrait of exactly what you are buying, and can give you essential insight into the future of your prospective business. Fundamental elements to request are (at least) 12 months of affiliate/advertising reports (where applicable), merchant processor statements and bank statements. All these elements should be considered in tandem to ensure that they both correlate and add up.
Tools:
Physical Documents: Requesting monthly affiliate statements and/or merchant processor statements, checked against bank statements provided by the seller is a good place to start. Any discrepancies our outlying concerns at this initial stage would prove to be a red flag.
Team Viewer: Probably one of the most straightforward – and uncorruptible – methods for assessing financials is using a screen share service. After assessing physical documents provided, it’s worthwhile to proceed to a second level of verification. This way the current owner can walk you through documents such as bank statements, merchant credit card statements, tax returns and third-party payments (Adsense, Amazon, etc). If a company trades in a product, it’s important to also see inventory numbers (volume and value) and supplier invoices (to ensure they’re in good standing and also to verify the wholesale cost of goods).
Ownership:
Even though the owner will be stepping away from the business, it’s important to do a quick search of them to ensure that their reputation doesn’t precede them. Doing some quick due diligence on the owner can save painful hours/days/weeks/months trying to separate their reputation from a business you now own. Contacting current and past vendors is a good way to assess whether the current owner is in good standing, or has a problematic reputation.
Tools:
Google: Sometimes nothing beats a google search, particularly when it includes the word ‘scam’ at the end.
Social (Facebook, Instagram, LinkedIn): A quick run-through of the owner’s social profiles can reveal a great deal about them.
Flippa: It’s always good to look into the history of a site to assess its ownership history on sites like Flippa.
WHOis: Making sure the domain is registered and properly maintained is essential. It’s also important to assess whether the current owner maintains any similar ‘lookalike’ URL’s that you might want to roll into the terms of the deal.
Technical:
This might be one of the most important – and under-assessed – aspects of a business. It’s essential to assess not only the stability of the overall platforms a business is built on, but also how reliant it might be on second or third-party software (and the running costs of such software) to make sure you are not inheriting time-consuming and costly future fixes. Another aspect is a close inspection of any potential proprietary elements to ensure that they are stable, effective and that any issues with them can be addressed in a timely and cost-effective nature.
Tools:
Built With: This tool will give you an overall picture of the technologies that have been used to create the business: everything from hosting to analytics, shopping carts, exit monitors and more. It’s also important to consider auditing the plug-ins in use to ensure they have been properly licensed and paid for. But beyond just assessing the potential acquisition in a vacuum, the program can also allow you to run comparisons between it and other online businesses in the same market, an invaluable tool when it comes to assessing whether they’re an industry leader, or an industry laggard.
Operational:
Whether the business ‘runs itself’ or requires a staff, it’s important to talk with the owner to assess both the long-term and day-to-day operational requirements of a business. This is particularly important if you already own other businesses that consume your attention. There’s nothing worse than purchasing a business and realizing that you have neither the time nor funds to operate it. Much like a car, letting a business run idle because of a lack of funds or resources can often mean costly restart expenses when it comes to getting the business back into profit-making mode.
In the case of a business that requires staff, it’s important to verify the company payroll, payroll tax, and overall expenses tied to staff.
Legal:
Online businesses can often be like the wild west, where the rules are unclear and opportunities for profit take precedence over finicky ‘laws’, so it’s essential to understand exactly how the business is operating to ensure that you are not exposing yourself to future legal issues. Even the biggest and seemingly stable businesses are not immune from illegal activity.
Having a lawyer specializing in e-commerce businesses can be a pricey, but invaluable asset when it comes to identifying potential issues. Though many might balk at the cost of this level of due diligence, it’s surely less expensive than acquiring a business on shaky legal standing or unknowingly inheriting a lawsuit or two.
Trademark Search: This is essential on two fronts. One, to make sure any trademarks and copyrights you might be buying do indeed belong to the seller, and two, to ensure there aren’t any existing filings that might affect the business now, or even into the future.
Plagarism: Particularly important on content-based sites, a service like Copy Scape will allow you to quickly check the originality or a site’s copy.
After a successful initial due diligence like the one outlined above, typically a binding purchase agreement is made. This reveals a secondary level of highly sensitive information to the buyer, such as: vendor lists, vendor contracts, email subscriber lists, and other elements that are essential for the success of the business. It’s important to note that any binding purchase agreement will stipulate that upon anomalies or issues with any of this data, the deal would be terminated, so the buyer remains protected should the new data reveal major concerns or issues with the company.