Due Diligence Checklist For Buying a Website
One of the biggest mistakes when it comes to purchasing any business is failing to look past the reason why a great investment opportunity is offered to you on a silver platter. You must be vigilant and see why they want to let go of a business with huge potential.
Is it because they have a promising plan for the future of their company, or is it because the business is starting to lose steam and is on its way down the drain?
You need to be smart and strategic with your investments. It’s not enough to see the potential on the surface level. You also need to dig deep and understand its structure and operations.
If you want to succeed in securing and improving a new investment opportunity, you must execute due diligence before you proceed with the acquisition.
Table of contents
What is due diligence?
In general terms, due diligence is all about performing an audit or a comprehensive investigation of a potential investment before finalizing a financial transaction. The seller performs this to see if a buyer has enough resources to complete the purchase.
Meanwhile, potential buyers also perform this thorough research about a company before they finalize their purchase of shares or even the business as a whole.
Depending on the business or shares you’re going to purchase, there are different steps when it comes to performing due diligence. If you want a holistic understanding of a business, it’s necessary to do both hard diligence and soft diligence.
When it comes to the world of mergers and acquisitions, people always separate hard due diligence with soft due diligence. If you’re planning on acquiring a share in a business or the whole business, you should know the difference between the two:
Hard due diligence
Hard due diligence is all about studying business structures, costs, benefits, assets, and liabilities to gauge the strengths and weaknesses of a business. In general, hard diligence is a study driven by hard data like mathematics, statistics, and legalities.
More often than not, the best numbers are going to be highlighted by the business willing to sell. The reason is to make their company look more attractive to potential investors.
Soft due diligence
Soft due diligence is the study of a company’s non-tangible factors like culture, management, interpersonal relationships, and other human elements. Numbers in hard due diligence can be manipulated, overemphasized, and tampered.
But soft diligence is something that you would be able to observe with your own eyes. It is vital to perform soft due diligence as it gives you an idea of how your future employees relate and work with each other.
Although people tend to focus on hard due diligence, it would be wise for investors to also look into the culture of the people working within the business machinery. By doing so, you’ll have a more holistic and well-rounded view of the company that you are planning to buy.
Why is due diligence essential when buying a website?
As mentioned, you shouldn’t just enter into a business blind. You have to do the necessary research to make sure that you are making a smart investment. Just like traditional businesses, the same logic works when you’re dealing with online businesses, blogs, and websites.
In this digital age, being able to acquire an online business with great potential can propel you to greater heights. However, with the number of companies willing to sell their online assets, it can be difficult to pinpoint exactly which business to prioritize.
Online assets are easy to fake and manipulate, so you have to be careful when dealing with a business that you are not extremely familiar with.
Thankfully, there are ways to gauge and measure the legitimacy of online business or site. Since most of the online footprints people leave behind are measurable, underhanded manipulations and fake data are quite easy to dig up. All you need to do is focus on the correct rubrics and metrics.
Due diligence checklist
In this article, we will explore 10 online metrics that you can use when performing due diligence online. As a potential investor, you must learn how to accurately interpret these to have a good grasp of the online business you are trying to purchase.
Here are some of the factors that you should include in your due diligence checklist for online businesses and websites:
1. Owner and organization of the company
In traditional businesses, it is practically a given that you should meet with the owner of the business you’re dealing with if you are serious about planning to purchase the company.
You may think that doing this is a given at all times; however, you’ll be surprised to know that not all online buyers verify the identity of the online business owner before they go forward with a deal. It could pose a problem in the future, especially when you encounter issues with the online business, and you cannot hold anyone liable anymore.
In online businesses, it’s technically not required for you to meet with the owner of the online business before you go forward with a deal. But you should at least know that their identity is verifiable. At the very minimum, you should be able to see them on social media sites like Facebook, Twitter, and LinkedIn.
By doing so, there’s less likelihood for you to be dealing with a scam. Plus, you can trace back accountability when something amiss happens in the online business.
2. Financial Information
One of the most critical pieces of information, you should have this before you go ahead with any online business or website purchase. As a smart investor, you should be aware of the previous and current financial situation of the business you’re buying.
At the same time, make sure that the online business follows all legal measures when it comes to tax returns and affiliate statements.
You should also require a live screen share with the seller when it comes to accessing the back end of the website. Online banking portals should be checked as well to verify the financial information provided and prove the legitimacy of ownership.
Before signing on the dotted lines, it would also be useful to trace all liabilities, debts, and loans associated with the online website or business you’re purchasing.
You can never be too careful when reviewing financials. Your goal is to earn from that online business or website. As such, acquiring a company that’s already on its way down is not something that you should do.
Assess the financial situation of the business you’re planning to reach out to before you sign anything remotely related to the company you want to purchase.
As mentioned, you should make sure that the business you’re acquiring has been vigilant in paying the appropriate taxes for their online business or website. The last thing you want is a long-winded legal battle about back-paying proper taxes that were previously left unpaid before.
Otherwise, you could end up losing more than the tax required. Just imagine seeking the assistance of legal representatives who won’t be able to defend you fully because of your lack of due diligence.
Every legal business transaction will leave footprints, especially when it comes to online businesses and websites. With simple mining of data, people will be able to tell if your taxes do not match the necessary amount needed relative to your income.
As a potential business owner, having access to this data is vital if you want to have an efficient and effective online business or website for the years to come.
4. Employee or contractors’ information
Any company wouldn’t be able to function well without the work rendered by its employees or contractors. That is exactly how it works with online businesses and websites as well.
Since practically everything is digital nowadays, people tend to forget that behind every function is a real person performing his or her job well.
As a potential online business owner, you need to familiarize yourself with the employee structure and the use of contractors within the company you’re looking to purchase.
Are there any gaps when it comes to the division of work? Perhaps there are irregularities with the service provided by your online business relative to the work produced by the contractor?
It would be useful to know exactly what happens behind the digital façade of the company. Allow yourself to have a full grasp of the culture and structure of the human elements in your future business.
5. Legal verification
It’s one thing to purchase an online business with a sure ticket to success. It’s another thing to make sure that the online business itself is working within the regulations that bind the laws of the land.
If you’re buying an online business from someone, you must make sure that they operated their business legally, and that you will continue to operate it under the rule of law.
Some of the biggest issues when it comes to online businesses, apart from problems in direct transactions, are trademark infringement and image licensing. It would be useful to study these terms.
Learn how the previous business owner managed the business legally, and apply that to your future business operations. By doing so, you can ensure the high possibility of continuity and growth within your company.
Avoid legal issues in your future online business now by performing diligent legal verification. As soon as you spot irregularities, raise it to your legal adviser or the business owner and see if they can resolve them easily.
6. Technology and intellectual property
When you acquire an online business, you often receive everything that comes with it, including intellectual property. This matter should be dealt with seriously, as IPs deal with licensing and ownership of a certain material.
If you are planning to purchase an online business, you should inspect their intellectual properties and see how you can enforce it properly.
One of the first things you should do when exercising due diligence in intellectual property is confirming the rights of the business owner on the IP. Once you confirm that their claim is valid, you must make sure that the contract includes active and direct reinforcement against third-party companies.
It would be helpful also to identify possible issues. Some of these issues are the IP’s lack of teeth in enforcement and the exploitation of existing technology to block the operation of your intellectual property.
The digital world is so vast that it’s hard to pinpoint exactly where to focus when discussing due diligence. But in a field where you have to stand out to succeed, having unique concepts protected by IP will definitely help you along the way.
7. Website traffic information
One way to gauge the success of an online platform is to see the traffic report of visits, clicks, and conversions in an online business. The more traffic the online business attracts, the more potential clients and consumers will be incentivized to purchase the items you offer.
If the company you’re looking at has good traffic, you should research it and see the reason behind good traffic and if it's legitimate.
Nowadays, there are many ways to manipulate online traffic or make it seem like you’re getting an overwhelming number of online visitors in a short time. An example of that would be buying spam and bot accounts for automatic traffic.
However, you can link up your pages and generate traffic by using legal methods like boosting, displaying ads, and using other online marketing methods.
When performing due diligence on website traffic information, you need to check the following:
- Average time spent on the page
- Number of pages visited by visitors
- Traffic versus conversions
- Analysis of where online traffic is coming from
8. Operational process
Before purchasing the business, you must make sure that you know how to operate the business independently. That means that from the number of responsibilities to the smallest of tasks, the new potential owner should understand the operational process of the online business.
Essentially, you need to understand your business to inspire growth. Learn the inner workings of the company, absorb the most critical issues faced by the business owner, and study the way the original business owner handled the issues on their own.
The task ahead, which is helping the company develop, should be no problem at all when you understand the size of the task at hand.
9. Products and services offered
As an online business, probably one of the key aspects of your company are the products and services you offer. At the end of the day, people will only visit your online business if they see potential in your business or if they’ve already experienced your excellent services beforehand.
If the business you’re eyeing is product-centric, you should look at the supply chain and seek to improve the processing and delivery of the items. If your business is more on the service-provision side of things, then you must provide the best customer experience in order to inspire patronage.
10. Customer information
Study and analyze the existing customer information from the previous management. See the behavior of the customers and check whether they’re strictly following the community guidelines within the webpage of the business you are trying to buy.
If you are not confident in pulling this off alone, there are software programs available online that can help you do the following:
- Consolidate customer information from all sources
- Screen violators and recommend sanctions
- Automate beneficial owner verification
- Real-time screening from your CRM
- Storing due diligence documents
- Harnessing existing relationship networks
These are just some of the principal aspects you should look into when it comes to establishing online businesses. To have a smooth and hassle-free turnover, having a checklist like this will help you tremendously.
Due diligence questionnaire
Apart from doing your research on the factors affecting due diligence, asking the business owner a few questions will practically help you understand the business more.
Here are some queries that potential buyers like you should ask online business owners:
Why are you selling the business?
You should ask the business owner why they’re selling the business in the first place. If the business model is strong and the sales are good, what would they gain from selling the company?
Knowing the answer to this question will help you find the path forward when it comes to developing your own goals for the company you want to buy.
Have you attempted to sell before?
Ask the business owner if they’ve attempted to sell the business before. If yes, why did the deal fall through? Understanding why deals reach completion and when they fall apart is crucial because it helps you understand the business, its merits, and issues.
How complex is the business model?
Some business models are pretty straightforward, but there are particular businesses that are harder to understand and handle from the get-go. If you are a novice business owner, it might be helpful for you to do your research on the business model of the company you want to buy.
Make sure that you can handle the complexity of the business, and try to have as much fun as possible along the way.
Who are your current competitors?
In the market as it stands, who are the biggest competitors of the business you want to acquire? Answering that question is vital, as it gives you a point of reference when it comes to performance levels and competition in the market.
Learn who your competitors are, and find out what plan of action you should do to encourage patrons of competitor businesses to visit yours instead.
How easy is it to enter the same market for someone else?
If you are not an expert in the field, it would be difficult to enter the market and expect to be good at doing your job correctly.
However, if you have prior experience in this type of work, you’ll have no problem adjusting at all. The key to being able to adjust in an unfamiliar setting is patience and research.
Ask the existing business owner: what are the barriers to entry in this field? What should be done to make this more accessible?
By understanding these things, you’ll know where you should focus when it comes to improving yourself for your next online business.
Will you sign a non-compete agreement?
Of course, you have to ask the business owner— will you be developing a company with the same business model anytime soon? The answer to this question should be a resounding “no”.
What good will the purchase of an online business be if you’re going to end up competing with the same person who knows your business inside-out?
There’ll be less room for growth when you allow the previous owners to go back and claim the concept they’ve already sold to you. A word to the wise: it’s better to deal with a clean company that recognizes the necessity of non-compete agreements.
Don't skip due diligence
Are you looking to purchase online businesses and websites around the area? If you want to have the opportunity to rebuild a business and develop it to its fullest potential, performing due diligence is the first thing you should do.
Due diligence is all about understanding all aspects of a business, from hard data to interpersonal relationships among customers, employees, contractors, and other workers.
When you perform due diligence on businesses online, you are making sure that the business structure and overall development of the business are sound and stable which, in turn, will make it a good investment.
- Updated on September 9, 2020