Buying A Digital Product Business Could End In Disaster If You Miss This
Updated on August 13, 2025
Transcript
Digital product businesses are some of the most attractive acquisitions in today's market, but they're also where I see many buyers get a bit burnt. So, unlike an e-commerce store where you can touch and feel the inventory, or a SaaS where you can log into a dashboard, digital products tend to live in this weird, nebulous space that requires somewhat of a different approach to due diligence.
If you're looking to acquire a digital product or an info product—or, you know, of course, whatever you want to call it—I’ve helped buyers acquire over 2,000 businesses. Again, digital product deals have some of the highest margins out there, so the potential here is amazing. On the flip side, there’s also the potential for a higher failure rate post-acquisition if you don't understand the digital product business a bit better than your average Joe.
So, in this video, we’re going to dive into how you, as a business buyer, can actually do some real due diligence when it comes to acquiring a digital product business.
Alright, where do we start with due diligence? Well, just like any other business, we want to start due diligence with the profit and loss statement—the financial statements of this business. Those Stripe and PayPal reports, these are your bible when you're looking at buying one of these kinds of businesses. You want to download the raw transaction data, whatever the seller is showing you in the actual P&L, to make sure it's true.
Now, here's something you need to know if you've been looking at, say, e-commerce businesses and you want to look at acquiring digital products: the refund rates are going to be pretty different. It is not uncommon for refund rates to be much higher with a digital product business than what you'd see in, say, e-commerce. If you're looking at a high-ticket coaching program or a course, seeing 8 to 15% refunds isn't exactly a deal killer. It's not a red flag—I want to say that's normal per se either. Preferably, we have no refunds, right? But people buy on emotion, and sometimes after the credit card hits, reality starts feeling a lot, lot different than whatever aspirations they had before they bought the course.
Now here's something that is—I wouldn't say a myth, but it is a common thought that a lot of people have—where some buyers might mess up (and not you, because you're watching this video): they assume a digital product costs nothing to produce. This is completely wrong. There's hosting, there's email platforms, there's your payment processing, there's your customer support, and, often, ongoing content updates. So, a course platform like Teachable, Circle, or another membership platform might cost you easily hundreds of dollars per month, depending on what kind of feature sets you need.
Another thing you want to look for, especially in the course world of the digital product world, is the monthly recurring revenue. A lot of courses will have maybe a membership site or a continuity program where their students are paying every single month—maybe it's like a weekly workshop or something along these lines, right? And this is fantastic: MRR keeps people engaged, keeps you in the course, and actually helps them finish the core course that they bought because they feel like they're part of a community.
All is well and good. The issue you need to find out is if they do have MRR—that monthly recurring revenue—whether that revenue is transferable to another payment processor. Otherwise, it means you'll need to get all of those customers who are paying every single month to sign back up for the recurring payments once you take over the business. So, you either need to negotiate with the seller to take over their existing processor account or ensure there's a seamless migration plan, ideally with the payment processor rep that they're using and the payment processor you're using, to make sure that migration is smooth.
Alright, let's talk about marketing and traffic. Digital product businesses live and die by the lead generation—that is, it's the most crucial part of the whole business in my view. Most successful digital product businesses have four core traffic sources: paid media, organic content, email marketing, and affiliates.
Let's start with the content strategy. The first thing you want to ask when you're doing your due diligence is: Is there a content strategy—an SEO-based strategy, or is it a social media-based strategy? These are going to be two very different things. Content-driven digital product businesses are golden because that traffic compounds over time. But if their organic reach is declining, that means you're buying a depreciating asset. Ideally, we don't want to do that.
Of course, sometimes that content, even if it's very successful, is a double-edged sword. If the business is heavily personality-led—something we'll talk about shortly—that can make their whole content strategy much, much harder for you to replicate. In the case of a podcast or a YouTube channel, is it them in those videos? Is it them on the podcast? That makes it much harder to transition.
First, let's talk about email lists. You want to look not just at the size. Let's say they have a 50,000-person list that hasn't been mailed in six months—this is worthless. Those 50,000 people have no clue who this person is. People forget what they signed up for literally 20 minutes later, and you should price that into your deal structure. You should not be paying for an untested list.
Some stuff you want to check with email lists are open rates, click rates, and most importantly, their email automation sequences. A well-built email funnel that is automated can turn a $10 Facebook ad spend into $5,500 of revenue for you, which is amazing—and this is exactly what you want.
Now, let's talk about affiliates. The top affiliate might be driving 40% of the revenue of the entire business, and they have zero obligation to keep promoting your product. They can stop anytime they want, right? So, this is unreliable traffic. Well, all traffic is somewhat unreliable, but this is specifically unreliable when they're making up 40% of your revenue. That's pretty scary. Ask me how I know: I run a referral program for Empire Flippers—which, by the way, you can sign up for. I just paid a referral partner $80,000 for referring one deal, and that could be you! So hey, sign up and don't be like most affiliates, and I'll pay you out. You could sign up with the link below in the description.
Back to the affiliates: in your due diligence, the vast majority of affiliates will likely produce nothing, as I said, which means you need to focus on the top producers among these affiliates. The reason why you want to look at these is because sometimes these top affiliates can make incredible future bolt-on acquisitions down the road. Now, if you're not familiar with a bolt-on acquisition, it just basically means you're often buying a smaller business, combining it with your business, and by doing that, they both explode and it's very happy days, right? So that's a bolt-on, and top affiliates can make incredible bolt-ons for your business.
Now, let's talk about paid advertising. This is where digital products get a lot more interesting, at least in my view. So, unlike e-commerce, where you need at least a 3-to-1 return on ad spend to be profitable, with digital products you don't need to be that crazy to print money. You can be at 1.5 ROAS or 1.6 ROAS because digital products have amazing margins. A $97 course that costs less than $1 to deliver can afford much lower returns on the actual ad spend.
With paid media, you really have the golden goose for a solid digital product. You can scale paid media almost like nothing else to truly life-changing money with a digital product business, because there's nothing that's bottlenecking you in delivering more products. So, if paid ads are not working for a digital product business, what it usually comes down to is two things: terrible front-end conversion/front-end offer, and the back-end economics of the marketing funnel.
If you're using paid media and want to be successful, you need an average order value of $90 to $150 to make paid media work. Because if they're trying to scale, say, a $27 product on the front end with no upsells, well, good luck making Facebook happy. It's unlikely to work because it may work great right out of the gate, but anytime you scale any paid media campaign, you can expect your overall conversions to go down as you get to more progressively colder audiences.
So, the first thing you need to focus on when it comes to paid media is getting the front-end conversions right, but also getting the back-end right, to where there's more things you can sell them—where there is a potential for someone to come in and spend really, really big money that makes the entire thing worthwhile.
Alright, let's talk a little bit about operations—the invisible infrastructure—when it comes to doing due diligence on a digital product business. First, we want to verify how the product actually gets delivered. Is it an instant download? Is it a membership area? Is it drip-fed through email, like a premium newsletter? Each delivery method has a bit of a different technical requirement and potential failure points. So, you want to know: how does a customer actually get a hold of these products?
Then you want to check their support setup. There are times where people will forget their passwords—very, very often. They can't figure out the downloads; they want a refund; something goes wrong in your automation tech stack—this stuff happens all the time. So, you want to know: how do they handle this and how do they keep visibility on top of it, right? Do they have someone on their team that is checking a support inbox of some sort? Are they using Zendesk? Are they using Freshdesk? All this type of stuff. If the support is handled through a random email address that no one's checking, you're inheriting a mess.
Now it's time for us to talk about some tedious stuff. When you buy a digital product, you need to do a few things to make sure you do not get burned. First, you need to verify ownership of every piece of content: the design elements, the templates, any kind of system that they designed, that they've trademarked, that they've named. Did they create all the course videos themselves, or did they license the content that they're selling (which is a thing that happens sometimes)? Are they using stock photos they actually have rights to, or something they just downloaded from the Internet?
There's nothing wrong with buying a course where the seller is taking heavy inspiration not only from their own experiences but also their research. There's nothing wrong with that, but we want to make sure it's in their own words, that they're not copying something. Luckily, if you use Empire Flippers, we vet this type of stuff, so you're going to be all right. Still, you should check it, though, because vetting and due diligence are two different things.
Another thing you want to pay attention to in terms of the content of a course that you're buying is whether the content is evergreen or is it time-sensitive. This depends on who you are as a buyer; this might be important, or it may not be important. A course on how to build a log cabin, for example, will probably be good for the next decade, right? Whereas a course on Facebook ads in 2024 will be outdated by 2025, which, you know, is when this video is coming out. But, of course, that doesn't mean rapid change in industries are bad buys—it’s just knowing what you want up front.
Once you look at all this content, whether it's evergreen or time-sensitive, you want to map out all the bundled assets—workbooks, templates, any software licenses, any bonus materials they're using. And here's a pro tip: when you're mapping out all of these assets, sometimes you'll see the free bonuses that they give away with, say, the main course—the $497 course. That might be perfect to, instead of giving it away for free when they buy the main course, turn it into a premium lead magnet that you charge, say, $19 for. And now you might have found your foot-in-the-door offer when it comes to paid media—that first thing, that impulse buy—and then you upsell them into the course.
Now, if you want to look at buying a digital product business and you don't know where to begin, well, let me help you out. The best thing you can do is go to empireflippers.com marketplace. If you haven't signed up, you can get a free account with us. We get digital product businesses—both info, like educational course content, but also we get like more traditional (or I shouldn't say more traditional, because info products are more traditional) but we also get other digital products that are not course content that you can look at too.
And we're very newbie-friendly. So, if you’ve never bought a business, do not worry, my friend. We've helped buyers just like you acquire over 2,400 businesses over the years, and I look forward to helping you acquire yours.
