For many business buyers, the most difficult part of the process is getting started. With so many options, unanswered questions, and unknowns, how do you know you’re making the right decision about a purchase?
There are, of course, no guarantees for any business when it comes to predicting future performance, but there are ways to maximize your chance of acquiring a successful asset that will provide you with consistent income well into the future.
In this article, we’ll go over how to think about due diligence for online businesses and look at some specific areas to focus on depending on the business model.
We recommend using this article as a guide to supplement your due diligence process, to maximize your chance of acquiring a business that’s right for you.
First, let’s look at why should you consider buying your first or next online business.
Why Buy an Online Business?
Buying vs Building an Online Business
A question that commonly arises here is whether it’s better to buy or build an online business. The answer largely comes down to two key factors: time and validation.
Time: Online businesses on our marketplace typically sell when they are between 2 and 10 years old. When acquiring an online business, you’re potentially saving yourself years of having to build something to a similar level of income.
Validation: Some business owners can spend years building something that ultimately does not reach product-market fit. Most businesses fail for this reason. An online business that is in a position to sell and shows a history of successful operations has reached product-market fit.
Your Unique Advantages Can Drive Growth
Online businesses are attractive assets due to their ability to scale. Many online businesses, while validated by the market, are not fully optimized. This provides clear opportunities for business buyers with particular skill sets, capital or time to significantly grow a business.
An Alternative to Traditional Investments
Compared to traditional investments, online businesses can offer greater cash flow, provide an ability to grow based on owner influence, and can be sold more quickly.
For these reasons, online businesses can serve as replacements for traditional investments or be part of a diversified portfolio.
However, while they are considered scalable assets with potential for quick and significant gains, online businesses can also be considered as volatile and risky assets. This is where due diligence plays a crucial role.
The first step in maximizing your chance of acquiring and growing a successful online business is knowing how to properly analyze online businesses for sale and how to purchase the ones most likely to perform to your expectations.
For a downloadable version of our free buyer’s due diligence checklist, which you can use while analyzing businesses on our online business marketplace, click on the image above. You can also use this guide when speaking with a sales advisor about specific businesses for sale that interest you.
Below is a more detailed explanation of the due diligence checklist points.
The Due Diligence Overview
The specific actions undertaken when performing due diligence can take many forms, depending on the specific business you’re reviewing. In general, however, due diligence for online businesses involves the following:
1. Assessing overall risk: When looking at any business and determining its suitability as an investment, you first want to ask yourself whether you think this business is likely to continue operating at the same level after you acquire it. There are several factors that can affect a business’s future performance, such as its dependence on specific traffic or revenue sources and its vulnerability to algorithm updates, competitors or global events.
2. Evaluating traffic: Recurring monthly income requires a steady stream of site traffic. It will be important to understand some key traffic characteristics of each business, such as the number of traffic sources, a business’s dependence on organic vs. paid traffic, and seasonality.
3. Reviewing the financial details: A business’s profit and loss statement can communicate much more than just those two things. When reviewing a business you will want to pay attention to specific line items and look for any discrepancies in income or expenses. Pay particular attention to spikes or drops in monthly revenue or costs, as these can tell stories about specific events in a business’s life.
4. Determining longevity: Businesses that have operated for a longer period of time and have seen stable monthly traffic and income tend to be trusted to continue operating well into the future. This is more difficult to determine with newer businesses that see sudden growth—they could be a fad that dies out as quickly as it came into being.
5. Identifying growth opportunities: After performing your due diligence to determine that a business is likely to continue operating at its current level, the next step is to think about how you could add value to increase the business’s performance.
While the five steps above provide a holistic overview of the due diligence process, the following sections explore methods of performing due diligence according to each business model.
Content sites are websites that generate income primarily through affiliate commission or display advertising earnings. Performing due diligence on content sites entails reviewing website traffic, site content, and link structure to determine if the business is likely to continue to rank and perform well after it has been acquired.
Before purchasing a content site, you should review the seller’s analytics account, whether that’s Google Analytics, Clicky or another analytics service.
Specifically, you will want to look at the following:
The average amount of time visitors are spending on the site: How much time is the majority of the traffic spending on the site? If there is a significant portion of site traffic spending less than three seconds on the site, this could be an indication that a portion of the traffic comes from bots.
The primary countries clicks are coming from: Is traffic coming primarily from countries you’d expect them to? For example, if the website is about cross-country traveling throughout the US, you’d expect to see a majority of site traffic coming from the US. Conversely, if you’re seeing significant portions of traffic from one specific location, this could imply that this traffic is coming from a traffic-generation service.
The primary drivers of traffic: Where is traffic coming from and how is it distributed across channels? For example, what percentage of total site traffic is organic, and what percentage comes from advertising or social? Does a majority of site traffic come from a few pages or does it come from several pages? This can give you an idea of how reliant a site is on one particular channel or page, and therefore how impacted the business would be in the event that a traffic source or page was affected.
Any significant spikes or drops in traffic: Significant drops in site traffic typically occur in response to browser algorithm updates. It can also be helpful to know when prior Google algorithm updates took place to determine if a website you’re analyzing remained resilient despite these updates. Sites that are unaffected or possibly even benefit from algorithm updates are usually ones built on a solid foundation and could be less likely to drop when future algorithm updates occur.
It’s also important to note that sites can see natural fluctuations in traffic over the year due to seasonality—for example, a website that focuses on summer activities may get more traffic in the lead-up to or during the warmer months.
Understanding the seller’s SEO strategy: Is the seller currently using a private blog network (PBN) or gray hat SEO tactics to drive traffic? If so, the site could be at higher risk of future violations or algorithm updates that can negatively impact site performance.
Measure Earnings Per Click (EPC)
If a business generates income from display advertising clicks, does the earnings per click (EPC) amount make sense or does revenue seem inflated?
Investigate the Backlinks
Using a tool such as Ahrefs, you can look through a site’s backlinks to determine if the seller’s SEO strategy is aligned with your own. For example, a site that sees a sudden jump in backlinks is likely sourcing the backlinks. It is important to discuss the details of any spikes with a seller to determine how risky you believe the growth methods to be.
Review the Content
Is the content relevant and of high quality? If so, this is an indication that the site is receiving traffic from legitimate sources and that the source is providing real value to its audience.
Growth opportunity: A site that is receiving high levels of traffic with relevant but subpar content is a potential growth opportunity for certain buyers to optimize conversion rates and traffic levels by improving existing content.
The quality of content is seen as a key factor in the success of many high-level websites, including this site that sold for 7 figures.
Does the Website Run Ads?
Is the seller monetizing the business purely through affiliate partnerships, such as with Amazon Associates or private affiliate partners, or are they also running display advertisements?
A website that drives high volumes of traffic and isn’t currently running display ads can potentially be monetized through this channel.
Additionally, sites that are already running display ads could receive higher earnings by working with a different display ad network.
These are just a few examples of multiple website growth opportunities you can use to maximize site revenue.
Ecommerce businesses include Amazon FBA, dropshipping, and traditional direct-to-consumer ecommerce. Since ecommerce businesses generate their income through physical product sales, a crucial component of due diligence is inventory management and operations. Below are some of the specific areas to focus on.
Discuss Inventory and SKUs
How much does the seller currently have in inventory?
When buying an e-commerce business you are also purchasing its inventory. This is not usually included in the initial price of the business, so it will be important to budget for it.
When reviewing a business, determine how many months of inventory are currently on hand for each SKU, how much it will cost to purchase this inventory, and how much time there is before you would need to place the next order.
Where are the suppliers located and what is the shipping process?
Most businesses work with international manufacturers in order to reduce costs and increase their profit margin. This can increase the complexity of shipping logistics, which sometimes involve a sourcing agent, inspection company, and specific instructions for shipping inventory to your marketplace.
When reviewing a business with international manufacturers, understand how inventory is shipped to its destination.
How is inventory fulfilled?
In addition to understanding how inventory is shipped, it’s equally important to understand how inventory is fulfilled (sent to customers).
Is all inventory being stored at Amazon fulfillment centers, for example? Does the seller use a third-party logistics (3PL) company to ship inventory? Does the seller fulfill inventory themselves?
Does the business sell through a single sales channel or multiple channels?
If your business sells through a single sales channel, such as Amazon FBA or Shopify, an account suspension or termination would mean cutting off 100% of your business’s income. Selling through multiple sales channels makes you less vulnerable to a scenario like this.
Does the business sell within one marketplace, such as the US, or does the business also sell internationally?
Some e-commerce businesses sell specifically in the US or North American market. Some buyers see this as an untapped opportunity to expand into international markets and grow the business.
What percentage of sales are generated from paid traffic and what percentage comes from organic traffic?
Certain businesses might generate sales through organic (unpaid) traffic, whereas other businesses rely heavily on advertising-generated traffic to drive sales.
When reviewing a business, determine how much of the business is reliant on traffic from advertising to generate sales. A business that relies heavily on advertising is susceptible to increased ad costs, which can lead to a decrease in profit margin per sale.
If a business does rely on advertising, what ad channels are used? Are specialized skills required to manage the ad campaigns, or are the ad campaigns automated or outsourced?
Economies of Scale
Are there clear opportunities to scale the business?
Ecommerce businesses tend to be highly capital intensive, and the speed of growth is usually limited by the amount of inventory that can be purchased.
If you acquired an existing ecommerce business, would the business grow simply by injecting more capital into purchasing larger quantities of inventory? Or would the business benefit from investment in a more aggressive advertising campaign?
SaaS and Recurring Revenue Models
SaaS businesses and subscription-type businesses can be attractive investments, as typically a majority of the cost is invested up front to build the infrastructure, and the business can continue to operate and generate income at a much lower cost.
This is one of the reasons to buy a SaaS business rather than building one. However, SaaS and subscription-type businesses can still require or benefit from technical knowledge for their ongoing operations and any growth initiatives. That said, the focus of due diligence for a SaaS business involves inspecting the technical side of the business as well as some common SaaS performance metrics. Here are some specific areas of focus.
SaaS and subscription-type businesses are usually custom-built or require a certain amount of technical expertise. When performing due diligence, you will want to ensure you or someone on your team is able to analyze code for inefficiencies and opportunities for improvement.
This metric measures the rate at which customers cancel their subscriptions. A low churn rate implies high customer satisfaction and product-market fit. It also provides an indication as to how aggressive your efforts will need to be to replenish subscribers.
How is the business currently growing and do opportunities exist to optimize current growth campaigns? What opportunities exist to implement new growth strategies?
Technical talent becomes particularly relevant if you are not a technical business owner. Are the developers coming with the business? If so, what does the team look like and what are the ongoing costs? To learn more about this, feel free to read about acquiring a SaaS business without technical knowledge.
Knowledge (and a Checklist) is Power for Acquisitions
The more you practice this the more confident you become at identifying great businesses that fit what you’re looking for in an investment.
If you’d like some help with this, you can speak with a sales advisor and discuss what you’re looking for specifically.
Otherwise, if you want to start performing due diligence, feel free to review our marketplace of businesses, which you can filter according to certain characteristics such as business model and price. Just be sure to use our free buyer due diligence PDF as a guide.
With a bit of practice, you might soon find yourself among the ranks of more advanced online business investors and be on your way to building out a life-changing business portfolio.