Episode 156: Due Diligence Framework

Justin Cooke Justin Cooke May 26, 2016

If you’re looking to buy a website or online business, one of the most critical pieces is performing due diligence.

Understanding Due Diligence Allows You to See Opportunities

Being able to spot deals and opportunities is a great skillset to have, but you really need to take a critical, skeptical deep-dive before you actually make the purchase.

It’s interesting, because these skillsets are often not aligned. On the one hand, you want to be able to find future opportunity, but you still need to clearly spot the weaknesses.

In this episode, we’re actually replaying one of the better episodes to come out of Season 2 of the Web Equity Show about due diligence. Our goal is to help you put together a framework you can use to help you weed out the bad apples and really focus in on the quality deals you’ve found.

This episode’s pretty meaty – if you’re in the market and looking at a purchase this is definitely the show for you.

Check Out This Week’s Episode:

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Topics Discussed This Week:

  • Content Sites
  1. Check Visitor-To-Customer Flow
  2. Sustainability/Scalability
  • Earnings
  1. Are The Claimed Earnings ONLY Coming From Site For Sale?
  2. Compare Stated Earnings To Bank Account Deposits
  3. Brig In A Professional (Larger Purchase)
  • The Website / Niche
  1. Is The Content Quality?
  2. Will The Niche Last?
  3. What’s The Site History
  4. What’s The Reputation / Backlinks Situation?
  • The Seller
  1. Are They Real?
  2. Who Have They Done Business With?
  • Not-So-Common Scams
  1. Fake Leads Being Sent To Affiliate Partner
  2. Seller Is ALSO The Affiliate Partner or Supplier
  3. Seller Is Claiming Earnings From Multiple Sites As Only One Site

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“Don’t go into deals with a cloud of mystery as to why it’s making money.” – Ace – Tweet This!

Did you dig this episode? Make sure to check out the rest of Season 2 from the Web Equity Show – I bet you’ll dig it.

 

Justin:                                   Welcome to the Empire podcast, Episode 156.

                                                If you love deep diving on websites and online businesses to purchase, today’s episode is for you. We’re going to provide a strategic framework for that purchase, and we’re going to dig into details in this episode. If you’re in the market for a buy right now, this is not one you’re going to miss.

                                                You can find the show notes and all links discussed in this episode at EmpireFlippers.com/DD. All right. Let’s do this.

Announcer:                        Sick of listening to entrepreneurial advice from guys with day jobs? Want to hear about the real successes and failures that come with building an online empire? You are not alone. From San Diego to Tokyo, New York to Bangkok, join thousands of entrepreneurs and investors who are prioritizing wealth and personal freedom over the oppression of an office cubicle. Check out the Empire podcast.

                                                Now your hosts, Justin and Joe.

Justin:                                   Joe, some of our listeners may not know this, but I’m actually cheating on you a bit as my podcast cohost, man. Just want to let you know.

Joe:                                        Oh, boy.

Justin:                                   Yeah, cat is out the bag. For anyone that’s listening to this and doesn’t know, I actually cohost another show called the Web Equity Show, and we do that with our buddy Ace Chapman. We’ve done quite a bit of business together with Ace Chapman as Empire Flippers, and we talk quite a bit. He’s been a guest on this show several times now, and we had a lot of fun doing those episodes.

                                                I was like, “Look, man, you should do a podcast. You’ve done a bunch of podcast interviews. Why don’t we start one?” So we actually started one. We’re just wrapping up Season Two, which basically walks a potential website buyer, online business buyer, from the very beginning when they’re considering purchasing a site or business, all the way through due diligence, and all the way through transferring the site, and growing the business out afterwards. I think it’s an absolutely great piece for our space and our industry, and I’m really excited to share that.

                                                We’ve got Season Two finished. I’m going to put a link to that in the show notes for anyone that wants to check it out. This episode, the episode we’re doing today, is actually one episode from the Web Equity Show. It’s on due diligence. We’re calling this one the Due Diligence Framework, and I really hope you appreciate it.

Joe:                                        What makes me jealous is not that you’re cheating on me in doing another podcast, but it makes me jealous that you’re already up to Season Two, and we’re still on Season One. It’s 156 episodes, but it’s still technically Season One.

Justin:                                   Yeah, I guess, man. That’s an interesting point. I’d say this is kind of the season that never ends, man. We never really did the season thing.

                                                Here’s the thing, too, Joe. Think about it. I did this with Ace, because I thought it’d be fun. That’s literally … Both of us were like, “This would be fun. We love talking about this stuff.” It would be a chance for us to connect regularly. But we’re like, “Let’s break it up into seasons.” We have businesses to run and things to do. If we just break it up, we give ourselves a couple months’ break, and then we get back at it, seems to be a little safer than trying to knock out a weekly episode.

Joe:                                        Does anyone else do that? That’s an interesting approach to podcasting that I’ve never heard of, and definitely like.

Justin:                                   Yeah. I like it, because Season Two … It’s a piece on its own. It speaks to website buyers, online business buyers, and I can use that as a resource and hand that off. It’s a really in-depth piece for them. Season Three will be for sellers, all the way through the process, from creating your business all the way through the sales process. Twelve months out, six months out, three months out. I think that’ll be really helpful for listeners that are in the space. It doesn’t have the global appeal that may appeal to entrepreneurs, but for people that are in the space or looking to get into it, I think it’s a really helpful resource.

                                                Anyway, this episode we’re sharing is one of our best, and I think probably the most important episodes on due diligence. It’s really just a framework. The truth is, we could talk for a hundred hours on due diligence. It’s really easy to understand due diligence, and really hard to master. This is really going to be born through experience. Our listeners that are going through due diligence or have done it a few times are going to be nodding their heads at a few points, and hopefully learning some tips along the way.

Joe:                                        Yeah. You and I, Justin, have gotten burned on buying businesses that we didn’t properly vet and check all the information. It’s interesting to hear some of your tips and tricks for those people out there.

Justin:                                   Yeah. What’s interesting, too, Joe, is that there’s some problems with third-party due diligence companies or people that are offering that as as service. Because most of the time, a huge percent of the time, the people that can really do due diligence aren’t offering it as a service, aren’t offering that as one of the services they provide. They’re out there doing it themselves because it’s so valuable. Such a great skill. That’s why it’s really tough to find someone to help you do due diligence. We get requests quite often, but we’re busy building our business and doing our vetting process, and everything, so it’s not really something we offer. Most people I know in the space don’t offer it either.

Joe:                                        Yeah. I think it is going to be hard to do. Obviously, there are some services out there that do that, but there are drawbacks to that. I think the best way to do due diligence is on your own, and learn by doing small deals at first that you can afford to lose out on, and then go for the bigger deals.

Justin:                                   Ace and I cover a whole bunch of things in this. We look at how to verify traffic and earnings. We talk about what to look for in the seller, in the industry or niche, and then how to take a skeptical approach. I think that last piece is really important.

                                                You don’t want to look at reasons to purchase, you want to look for reasons that you can back out of the deal. This is a de-selection process, not a selection process. If you’re looking for reasons to buy, you’re going to have plenty. Go through due diligence with a skeptical eye in mind. When you come out the other side, sure, then you can start building the business out in your head. But when you’re looking for this, you’re looking for reasons for this business to not qualify for a purchase.

Joe:                                        Yeah. There are a lot of reasons. I was just talking to someone today that was thinking about buying a business that earns in Australian dollars. One of the concerns they had was the US dollar getting weaker, and therefore their returns getting smaller, just because of currency exchange. Currency fluctuation. I think that that’s an interesting aspect of the business that I didn’t even think of. You definitely have to look at everything when you buy businesses online.

Justin:                                   Cool, man. All right. We got a show to do here, but before we do that, let’s do the featured listing of the week. What you got for us, buddy?

Joe:                                        We’re talking about Listing 40511. This is a business in … We have it listed as the Legal and Consulting niche. But, really, it provides services to those in a legal or consulting niche. It does both B2B and B2C services. It’s been around since December 2014. It’s making just shy of $23,000 a month in net profit, and we have it listed at $618,000.

                                                I really like this as one of those service-based businesses. If you’re looking to get into that, it’s definitely a business that has a lot of growth potential. But, at the time right now, all of the actual work is outsourced to a small team here in the Philippines.

Justin:                                   Yeah. I see that the list price is based on the last six months of earnings, and we’re looking at a listing price multiple of 27x. Joe, we’re got … Average monthly revenue is right around $44,600, monthly expenses of $21,600. What are the expenses for?

Joe:                                        Obviously, you’ve got a large number of consultants that work on this business. I’ll leave it at that. If you do want more information, you’re going to have to place a deposit, and the sellers would definitely like to speak with you before revealing more information. Most of the work is outsourced. There is a paid traffic aspect to it as well, so, obviously, that has some of the expenses going on.

Justin:                                   Cool, man. If anyone’s interested in that, we’ll put a link in the show notes to Listing 40511.

                                                All right. Let’s dig into the heart of this week’s episode.

Announcer:                        Now for the heart of this week’s episode.

Justin:                                   We are talking about due diligence. As you said at the top of the show, due diligence is very website or business specific, and just the truth is that there’s way we could cover every single scenario in a one-hour, in a three-hour, in a ten-hour podcast. It’s just not possible. Our idea here is to really wrap this into a framework that can help our listeners develop their own rules in terms of their due diligence process.

Ace Chapman:                   Yeah. It takes a lot of experience to get really good at this, so you want to tread lightly. There’s nothing worse than getting phone calls from people who jumped into this space. They spent their life savings because they were really excited about getting their first deal, and $300,000 disappear from their future retirement because they got into a deal. I’m like, “Okay, tell me what kind of due diligence you did on it.” They’re like, “I just went with my gut.” It’s like, “That is a bad idea.”

Justin:                                   Yeah, man. The last preparatory thing I’ll say about this is that it’s hard to talk about every business scenario. If we’re talking about an Amazon affiliate site, that’s going to be different than an Amazon FBA business, which doesn’t have a website attached, and doesn’t have analytics, and all these things. Some of these are going to apply more to others as we go through them, but I think a lot of them apply to most business, so hopefully it’ll help you.

                                                All right. Enough about that. Let’s get right into it, man. First thing we want to talk about is traffic and customer flow. We have a few different bullet points we’re going to talk about here. The first is … At Empire Flippers, we require, for analytics on a website, either Google Analytics or Clicky. The reason for that is that there are a lot of server-based traffic measurements, stat counter, and things like this that can be manipulated, can easily be faked. These third parties are not as easy to fake. I’m not going to say it’s impossible, but it’s very, very difficult, so you know you have a much, much better chance at looking at the actual, real traffic that’s going to the site. It’s really easy to parse and use once you’ve done it a few times.

                                                If you’re looking at sites with all different types of traffic platforms, you don’t know which ones are real. You don’t know which ones are legit. You don’t know how to read them. It makes due diligence take a lot longer. Our idea is, look, if you’ve got Google Analytics or Clicky, some people are scared of Google, our buyers get used to reading traffic on those platforms and it makes it easier for them.

Ace Chapman:                   Yes. When you get used to digging into these, it actually can become fun, or maybe I’m just a nerd at this point when it comes to this stuff.

Justin:                                   Yeah, you nerded out there, dude, for sure. Fun? Looking at analytics? All right.

Ace Chapman:                   Yeah. You get into Google Analytics, and Google Analytics I love. I prefer it over Clicky. But you can do so much with it when you’re comparing the traffic, and you can have graphics, and see what’s going on, and dig in. “What’s happening with this source?” “What’s happening with that source?” Sometimes a site can be growing in traffic, but you notice that their SEO traffic, or their Google traffic, is going down. Maybe their direct traffic is going up, or their social media. It tells you the story of what’s going on with that website, and really dictates the questions that you need to ask.

                                                One of the questions that you should always be asking yourself is, does what I’m looking at make sense? Does it jive with what they’re telling me? They’re telling you what’s going on, and where they’re getting traffic, and all that stuff. If you look into analytics and something isn’t matching, that should be the red flag.

Justin:                                   Yeah. You’re looking for lies. If they lied in the listing, if they lied in the interview, when you talk to them, if they lied at any different point … It may have been a mistake. If it was an esoteric point or something, then maybe they’re like, “I wasn’t very clear on this,” then you can ask for clarity. But you’re looking for discrepancies to see if they are lying.

                                                You want them to lie. When I say you want them, you want to catch them lying or where the information’s wrong, because it’s an easy answer. You’re looking for an easy answer. You’re looking for an easy no. This sounds really negative and skeptical, but when you’re doing due diligence, you need to be negative and skeptical. That’s the point. You’re looking for a reason to deny this and move on to the next one so you’re not wasting your time on a loser anymore.

                                                Okay. The first thing with Google Analytics or Clicky you’re looking at, are these real visitors? This is most important if you’re using an AdSense type site, if you’re using a lead gen type site. Anytime you’re getting paid per click, you definitely don’t want bots. You don’t want all this spider traffic. You don’t want fake … They have robots out there that go through and click on ads. They’re clicking on ads and getting them paid that way. That is not conducive with the AdSense terms of service, and that site is going to be at serious risk. They may look like they’re making a bunch of money in their AdSense account, but it’s all going to be fake, and it’s going to come raining down in a house of cards.

                                                When you’re looking for real visitors, what we look for are, are large portions of the traffic coming from a small range of site on time? Let’s say, for example, that 70% of the traffic, or huge gobs of traffic are coming, they’re spending less than 10 seconds on the site. Most traffic’ll come, they’ll spend 3 minutes. Some of them will spend 20 seconds. But if a huge percentage of the traffic is coming and spending less than 3 seconds on the site, that’s a problem. It’s very likely that it’s bots. It may not be their doing, but they’ve definitely got some kind of bot or spider traffic.

                                                I also look for … Sometimes what these bots, they’re getting sophisticated, what they’ll do is if you’re looking across the US, it’ll come from different states. When you start narrowing down to cities, though, you’ll see a huge hub of cities that aren’t necessarily major hubs of people. If I see way more traffic coming out of Sacramento than Los Angeles, for example, in California, that’s weird, unless it’s a site particularly tailored to Sacramento for whatever reason. If it’s worldwide, if it’s countrywide, and a lot of the traffic is coming from these weird little hubs that aren’t necessarily hubs of people, that could be a bad sign.

                                                Also from countries that aren’t relevant. If I’m looking at the traffic in … It’s a site about, I don’t know, lampshades that people buy in the US, different types of lampshades, or whatever, and there’s a whole bunch of traffic coming from Pakistan, I have to look at that critically. Why is that traffic coming from Pakistan? I’ll look at the traffic from Pakistan specifically and try to drill down on what the problem is, and why it’s that way.

                                                A lot of times when you see that, you’ll see that traffic from Pakistan, it’s maybe 60% of the traffic. You’re like, “That’s weird.” You drill down, you realize, “They’re spending less than five seconds on the site. They’re clicking and trying to get paid. I get it now.”

Ace Chapman:                   Yep. Like you said, Justin, it’s basically we’re building this funnel, deals are coming down, and at every step in the funnel, you’re changing what you’re looking at.

                                                At the very beginning, you’re going to get screenshots, and that’s really valuable at that point. It gives you a picture of whether it’s worth spending time on this deal or not. After that, you may talk to the seller. You may get a video, like, “Here’s what’s going on with the site. Here’s the back end.” But either one of those can be faked. It’s really tough. You got to give them A for effort if they do the video and they’ve faked that, because that’s a huge pain, but it can be faked.

                                                At some point before closing, you want to try to get access … I really just don’t do deals without access at this point. But if there’s some reason that you can’t, or whatever, at least get them on a live video, have them walk you through everything, and make sure that it’s live. Talk to them. Have them stop. Have them go back. That can be an alternative to getting access.

Justin:                                   Yeah, Ace, you’re totally right. Screenshots can be faked. It’s so crazy. You normally see it in the smaller deals. For the larger deals, I guess people don’t bother. But anyway, you see this on the smaller deals. Faked screenshots. Sometimes you can spot them, but I wouldn’t bother. You always want to get access. There’s no harm in giving you Clicky or Google Analytics access. Get it. Then once you get it, you can make your own reports.

                                                For whatever reason, say they’re really skeptical and they won’t let you in, a video, again, can be faked. In fact, a live walkthrough can be faked. I’m not terribly technical. Someone listening to this podcast is going to know exactly what I’m talking about. But basically, they can set up a local copy of Google Analytics on their machine to where it looks like you’re on the website but you’re not. If they’re just walking through the steps, and following a process to show you what it looks like, they can have it all faked to look like you’re on the site.

                                                If you ask them to change date ranges, or start changing things that they weren’t planning on doing, it can throw them off and ruin their façade. If you’re doing a live screen share, have them change certain aspects of it to where you can get a better picture. That’s the best way. The best way is access, the second best way is to throw them off a little bit.

                                                The only other thing I’ll mention about Google Analytics of Clicky is you want to look at the conversion rates and the revenue per user. Is it an eCommerce site? Are they converting 25% of the traffic to buy the products? That’s odd. 1%, 2% makes sense, maybe even 4% if they’re crushing it at conversions. But 25%, 30% would be really odd. For an AdSense site, if they’re making a buck 50 per visitor, not per click, but per visitor, that’d be really weird. That means if 1 in 10 is clicking, they’re getting $15 clicks. I would take a much closer look at that in terms of the traffic.

                                                If it’s in the range of reasonability, that’s fine. The only way to know that is to work with it over time. 5 cents per visitor on an AdSense site is fine. Even 50 cents, 70 cents on a visitor for an eCommerce site might be fine. You’ll learn this stuff over time, but you want to keep a record of all the earnings per visitor you get at all the sites you’re doing due diligence on, and you can start to build a profile. Anything in the box is great, outside the box needs to be checked even closer.

                                                Second thing around traffic and customer flow I want to talk about is the visitor to customer flow. This comes about because Joe and I at one point were looking at an eCommerce site, I think we were doing bedding, and you get down to it, and you go through the process, and you can’t actually purchase … There’s a problem with their cart. You couldn’t actually purchase the eCommerce products that were for sale. If the customers are having trouble even purchasing the products, how are the customers getting through? There’s a serious problem there. That’s kind of interesting.

                                                If you’re looking to buy this business, go through, buy the product. Tell the seller afterwards. “You want to refund that,” or whatever. “I was just testing it out because I want to buy your site,” or whatever, no problem. But go through the process as a customer. See what the customer experiences, and make sure that it actually works.

Ace Chapman:                   Yes. That’s something that … You would be amazed at the number of people who just buy things. Like, “Have you bought the product?” Even if you are buying a $200,000 site, it can be really valuable just to know what the product is. As we get into these FBA deals, and dropship deals, and manufacturing, it could be something … We’ll talk about some of the issues that people pull where the manufacturing quality is quickly going down. The seller of that has no control. They realize. They’re starting to get a few more complaints, and they end up with products that aren’t … They buy the business, and the products aren’t really the products that helped that business grow.

                                                You want to buy it. You want to go through the process for this reason, but it also makes sense to own the product that you’re going to be selling.

Justin:                                   For sure. When we’re talking about visitor/customer flow, I think this is also important for info products. If they’re selling an info product, eBook, or whatever, some kind of course, it’s worth going through, making sure you actually received the course. Is the course of quality? Is it interesting? As a customer, are there any followups?

                                                What happens if you didn’t get the course? Where did the email go? If you abandoned the cart, do they have an abandoned cart followup? I think that works for eCommerce as well. Not so much to where if they aren’t following up on their abandoned carts, that the site’s no good or the business isn’t good, but it’s definitely a point of opportunity for you. That’s something you can mark down and say, “They don’t have an abandoned cart procedure. I think we can do a really good job.”

                                                Actually, we got a great guest post on Empire Flippers about abandoned cart followups, and I’ll put a link to that in the show notes. It’s fantastic. It’s a really good read. But yeah, I think-

Ace Chapman:                   I would agree. We call it, basically, due diligence, and then there’s opportunistic due diligence. Where you’re doing due diligence to see, “Is this a good buy or bad buy?” But then you’re doing the due diligence that, “What are all the opportunities for growth?” Not just, “I think this product may sell,” or that kind of thing, but when you’re looking at, “If we upsold, downsold, on the back end, or had abandoned cart followup,” these are things that we know, whether it’s a .5% increase or a 20% increase, those things are going to have a impact on the bottom line. It’s not to say that that’s a part of making the business a bad deal. That’s what makes it a really great deal.

Justin:                                   Again, we mention the looking for upside. I’d say that’s 20% of your due diligence. Your due diligence should really be focused on reasons to say no to the business. The reason I say that is because, a lot of people, their due diligence process is selling themselves. They’re going through, they’re like, “This is why I should buy it. Oh, my God, I could totally crush it with this.” They miss the critical piece.

                                                I think the critical piece should be up front and center, and keep notes on the things where you can add value later, because you’re going to come across them as you’re digging through the business.

                                                I think we’ve covered the visitor to customer flow pretty well. The only other thing I’d say is for lead gen sites, if someone goes through, let’s say it’s a medical education niche, you put your phone number, you put your email, your name, and stuff, do that. Go through, fill out your phone number, fill out your name, whatever. See if you get sold to. See who calls you on the lead. See who’s trying to get in contact with you, if it seems legitimate. If no one’s contacting you, then what’s going on? How are they getting paid for these leads, and no one’s following up on them? One time it’s possible it could happen, but if you’ve done it several times and you’re not getting any followup at all, there’s something interesting there you need to dig deeper into.

                                                All right, man. Third point under traffic and customer flow, I’d say, is sustainability and scalability. Sometimes you’ll see this in a business for sale, that it’s getting a ton of traffic. It’s getting a ton of attention. It’s because it’s gone viral in some way. It made the first page of Reddit, it’s getting a ton of traction on Hacker News. People are going crazy on Pinterest, or whatever. That’s great, but you might not be able to count on that going viral all the time.

                                                I remember not that long ago there was the glitter site, “Send glitter to your enemies”, where you send it to them, they open it up, it’s a mess. They had a ton of orders coming in. But that’s not going to be a long term, sustainable business, I don’t think. We’ll see in a year, two years. I bet no one’s going to be crushing it in that niche two, three years from now.

                                                What you want to look for is you want to make sure there’s a repeatable and sustainable process for traffic. Will that traffic continue? Are those traffic channels solid? I think that’s an important thing. Again, you want to think like a skeptic. When you’re looking at traffic overall, visitors, what are the weak points? What could cause the traffic to go away? What would it look like and what I would I do after I purchased it if that catastrophic things happened? If the biggest weak point in the business happens, what would be my next step, how would the business continue, and what would I do to continue it?

Ace Chapman:                   If you look at these deals, the most important thing is longevity. If you look at a deal, and there’s a huge pop, or there’s a certain event, or … We call it the situational profit opportunities, where there’s just this specific situation and they made a lot of money. We walk away from those. You want to make sure that there’s longevity. You’ve got sustainability on one end of that.

                                                Then the other thing is, are there specific things that you can tweak in the business to help it grow? Because when that catastrophic event happens, and you realize, “Oh, no, we got hit by Google, and this thing is going to go down,” and there’s some deals where that’s just the case, and you don’t have any levers or pulleys and things that you can go up to that business and do to get it back to that sustainable level, that may be a deal that’s not right for you just because you don’t know what to do.

                                                Don’t go into deals with cloud of mystery as to why it’s making money.

Justin:                                   Yes. Oh, my God, yes. If you’re going into it going, “This is magical. I’m going to ride this magical unicorn home,” that’s not going to be good for you. You’re missing something, for sure.

Ace Chapman:                   We laugh, Justin, but it happens.

Justin:                                   If you look around the room and you’re looking for the sucker, and you can’t find him, it’s you. I think that’s the issue. I know. It totally does happen. It happens to everybody, and it’s scary.

                                                The last thing I think we’d say to balance sustainability or scalability is that … If you’re more analytical, I think this’ll help. This helps me. Is, I’ll do the Ben Franklin. On one hand, I’ll put the absolute best-case scenarios that could happen with this business. What would I do that would absolutely crush it? On the right side, I’ll put the absolute worst-case scenarios. I’ll try to assign a percentage. Maybe 10% chance this happening, 15% chance of this bad thing happening, 30% chance of this good thing happening. Then I’ll try to weigh them out. I’ll look for positive opportunities.

                                                Let’s say there’s one great case and one worst case. The worst case isn’t quite as bad as the upside on the good case. In that case, it’s okay. Everything else, all other things being considered, I’d say that’s a better site than others in terms of targeting.

                                                All right, man, I think we’ve said everything we’re going to say for now about traffic and customer flow. Let’s talk about earnings.

Ace Chapman:                   The money.

Justin:                                   Yeah. The money.

                                                The first thing I have, I’m not sure this is the most important but it’s the first thing I put down here, is you have to look to make sure that, whether it’s in the listing, or it’s in the Amazon account, or wherever, the claimed earnings are only coming from that site for sale.

                                                The reason for this is you can use the same Amazon code, the code that gets you paid, on multiple sites. I could have the same Amazon code on 50 different sites, and try to pass it off as if that code were only from the site that I’m selling. You can actually, and we’re going to mention this later, but there’s a bunch of different ways you can reverse look up the person, look at other sites they own. A lot of times it’s just worth asking. “Is this just on this site? Is there any other sites?” And that kind of thing. Most people are going to be pretty straightforward. But it’s also worth digging into, again, because you’re being skeptical.

                                                Have you seen this before?

Ace Chapman:                   Absolutely. It happened a lot more years ago. It’s just one of those very easy things to do. What’s a little more scary with this is that, literally, sometimes the person doesn’t remember. If you’re dealing with a site that was built, maybe, three years ago, and they just didn’t take the time to create a couple of codes, and they realize, “I’m making a bunch of money with this code,” when people have a portfolio of deals, it can be tough to just keep up with everything. They forget. “Yeah, I did throw up these couple of other sites that are getting a little bit of traffic, and I just use that same code because I didn’t feel like going back, and it was easier.”

                                                But one of the keys to this is what we talked about earlier, trying to make sure that everything makes sense. The more deals you look at, the more time you spend doing due diligence, you’ll be able to look at it and start to get a feel for, “This is really weird.” Normal conversion rates when sending folks to Amazon should be this. “They’re getting this amount of traffic. That looks completely out of whack,” and you can at least question them like you said, Justin.

Justin:                                   The second thing with earnings, one of the things you should do, is compare their stated earnings to the bank account deposits. If they’re saying on their profit and loss that they’re making this, that they’re depositing this much in their bank account, is that actually what’s coming up? Get their bank records to see that they’re depositing somewhat close.

                                                Sometimes it’s going to be a little off. It may be over the quarter they deposited $32,000. You look at that particular quarter, and it was $31,000 because they made up for it in April, in the first month of Q2, or whatever. It might be a little off, but it has to be pretty close. If it’s not being deposited in their bank account, where is it going? They’re taking cash deposit? How is this working exactly? Because you follow the money, and it’s got to be there. If it’s not there, there’s a problem.

Ace Chapman:                   Yes. Always follow the money. That’s just doing due diligence on anything.

Justin:                                   Yeah. You can look at this yourself. I don’t think you necessarily need an account, especially on the smaller deals, but you can ask for those accounts to make sure that money is being deposited. You can review their PayPal and make sure the money is actually being deposited. If it’s plus or minus 20%, as a rule, I think, is relatively fair. If it’s more or less than that, then you need to dig a little further and find out what’s missing.

                                                The third point in earnings, and this is definitely true for larger purchases, you can bring in a professional. If you are regularly shopping deals, larger deals, let’s say $100,000 plus, having an accountant that you work with that … Have them put together a service. Have them work with you on the deals, and start to help you with your due diligence can be very, very helpful.

                                                Here’s what I’m thinking, is that … Here’s why I think it’s helpful. A lot of times someone new is going to look at a lot of deals. They’re going to keep digging through. They may spend a ton of time, and not actually get any deals done. That’s bad. You don’t want to be just a shopper all day long, you want to actually find something good. By paying a professional, an accountant, to come in and actually run the numbers, number one, you’re going to make sure that you’re not sending them junk deals. Your filter at the top is going to get better. You’re not going to send them junk deals because you’re paying them 500 bucks, or 1000 bucks, or whatever. You’re not going to want to send them a bunch of junk deals and spend 1000 bucks every time.

                                                The other thing is, is that they’re going to be … Every time you pay them and you don’t do the deal, it’s costing you money. If I’m looking to buy a $200,000 deal, it might be worth it for me to have them look at five or six deals. If they’re looking at 30 deals, that might not be so good for me. It’s going to force you to, for lack of a better word, shit or get off the pot. You’re going to have to start making some moves. You can’t be shopping all day, because it’s costing you money.

Ace Chapman:                   Yes. When you are dealing with these folks, it does force you, before you send them anything, to make sure that you’re not throwing away money.

                                                The other thing that it does do is … They’re going to come in with the most skeptic eye ever. You have to understand and you be able to balance out the real from just lack of understanding and knowledge about the space. Just like we were talking about earlier on the podcast, when it comes to financial institutions, they’re very leery of the space just because they don’t understand it. As we’re going through these things and giving you guys understanding of the due diligence, these are the things that they don’t really understand. They end up being these deal killers when it comes to this stuff, which, there’s a pro and a con.

                                                When you understand that you’re dealing with somebody who is a deal killer, that, at the end of the day, can be empowering because they’re going to give you every possible negative scenario. If you can listen to that and continue, and just make the right decision … It could be that it’s actually a bad deal, or it could be that it’s actually a great deal. But you want to go into these relationships, and working with the attorneys, working with the accountants, and take what they say with a grain of salt while you do understand their advice.

Justin:                                   Yeah. If the accountant is looking at it and they’re like, “Look, these numbers don’t match up,” I’m probably going to lean on the fact that they know that business. “Okay, great.” If they’re telling me, “I’m not sure that this marketing approach is great,” “Okay, great, I’m the decider here.” You know what I mean? “This is my deal to make or not make, and I don’t trust your expertise in that area.”

                                                I don’t know. I’ll just mention this as an aside. If you have a big thing you’re thinking about doing or trying and it’s risky, and you bring that to your family or friends, like, “This really risky thing, but I think I want to do it,” from their perspective, it’s a lot easier for them to wish you well but to tell you, “No, I don’t think you should do it,” if you’re asking for their advice. To tell you, “No, I don’t think you should do it.” The reason is, the situation as it is today is better than the potential risky situation in the future. They don’t want to put you at risk by giving you advice, having you blame them.

                                                Lawyers and accountants are times 10 at this. They don’t want your blame. They don’t want you to come back to them. That’s why we call them deal killers. But I think they do fill a valuable role, especially when they’re digging through finances and looking for things that you might not have noticed.

                                                All right, man, I think we’re through earnings. I think we’ve worked out a bit of a framework there. Let’s talk about the website, the niche, the industry, that space. The first thing I want to look at, and this is with websites, particularly, if there isn’t a website that associates them, not as important, but you’re going to want to look at the quality of the content.

                                                This is pretty subjective, but I like to ask myself a question. Is it true that a reasonable person would get value out of this site? Could a reasonable person go to this site, read the content, and find it valuable? A reasonable person is not always me. It may be a subject matter that I’m like, “This is horrible. I hate this idea,” but it doesn’t have to be me. It has to be a reasonable person, maybe on the other side of my political spectrum, or whatever. Right? There has to be a reasonable person that would [inaudible 00:33:55].

                                                What you could do for this is get a few opinions. Ask friends, ask peers, ask the person standing next to you, to read that and see if they think it’s valuable, or is it junk? Sometimes when you’re in the middle of the deal, it’s easy to say … You skim it, and you’re like, “This seems kind of useful.” You get someone else to read it, and they’re like, “What, did a robot write that? What is this?”

Ace Chapman:                   Yeah. You see a lot of deals where … Sometimes it may be that a robot wrote it. It’s spun content. Other times, it may be that, just, a low-quality outsourcer or VA wrote it. At the end of the day, it’s just not good content. In some cases, and we’ve done this before, where we get a deal, it’s on a subject matter that people are very hungry for information on. Could be something medical, or whatever. When you get into those types of deals, the people will struggle through terribly written content just because they need the info, and they’re very hungry.

                                                When we were talking about the opportunistic due diligence, that can be one of those places, where instead of being kind of suspicious about it, it’s like, “Man, if people are willing to spend average 11 minutes on this site reading this terribly written robot-looking content, if I go through and get somebody and actually pay to get some great content on here, this thing could be a grand slam.”

Justin:                                   Yeah. I think that’s great. I think that’s interesting. You have to remember, too, if you’re going to do this, if you change the content, especially significantly, you change the particular headline, or whatever, you may change in the rankings. If you improve it, we would hope that it would go up, but it may go down, at least in the short term, may go down overall. You may see some changes in the rankings at least temporarily. Know that you’re taking a risk. But, in general, I say better content is a good move.

Ace Chapman:                   Yeah. The other thing to think about with that is just adding additional. You have the old stuff, it’s bringing traffic in, you can actually have links on those pages to the better content. You want to think creatively when you’re doing that.

Justin:                                   The reason why this matters … I’m a business guy. I don’t particularly care. The content is horribly spun and robotic, and it makes me a ton of money, that’s what I care about. But here’s the problem, here’s the issue, is that Google is looking, too. Google algorithms are getting better and better. If you’re basing on organic traffic and the content is really bad, really spun, robotic, whatever, really keyword stuffed, they’re getting better and better at determining that and pushing those down in the rankings. They want quality content up in the rankings. There are problems with Google algorithm people are manipulating on a regular basis, but it’s getting better and better. Even if it works today with that kind of crappy content, will it work tomorrow? Will it work next month? Will it work next year? Those are open questions.

                                                The second thing about the website niche or industry is, will the niche or industry last? One of the things to look at here, are there any pending or recent legal issues in the niche? To give an example, Joe and I, my business partner, had a business rebuilding back in 2004, 2005. It was in the gambling niche. It was, “We’re going to build a site called RandomBet.net.” It was basically where friends or non-friends, people across the country, can bet on just random things. You had this bet board, and you could go on there and bet on these things. We thought it’d be fun. We were getting into it.

                                                It was right around the time where they were totally changing the way you’re allowed to bet in the United States, like whether you’re allowed to do that. This is when online gaming was still big. Everyone in the US was playing it. It was a gray area. I ended up bailing out of it. Joe went down to Panama to set up the business and the bank accounts. We were still targeting US customers. That was an interesting niche. I think we could’ve possibly made it work. If they’d’ve made it legal, it could’ve paid off hugely. But you have to know that you’re going into a potential risky area.

                                                I think if you’re looking for niches today that have that thing hanging over their heads, it’d be the e-cigs or the vape niche. There’s some pending litigation that could shut that down badly, or at least harm the industry, or the industry in a particular area, pretty badly.

                                                There’s a flip side on that too. If it goes the other way, and things go well for them, or a bunch of other competitors go out of business, it could be particularly good for you. It’s just a higher risk/reward scenario.

                                                Same thing goes with hover boards. You know those little two-wheeled things people were riding around that irritate the shit out of the rest of us? Those things? Amazon just recently stopped selling them. There’s a question as to how long those are going to last, whether they’re a fad. That’s something to look into. If you’re buying in that industry, it could be boom or bust, depending. Know that it’s at more risk.

Ace Chapman:                   Yeah. You want to make sure that it’s not a fad product. But, it could also just be a temporary pop in certain search terms. Anything right now, because it’s election time, having to do with politics is hot. We’re seeing on the market a few Facebook type of based fan pages and blogs that are really hot politically, and you can see that they’ve really gone up and things are really hot right now. They’re generating a ton of income. But we all know that, at the end of the election, that’s going to go away. A lot of these, they try to make the case that, “Okay, we’re going to sell this at a discount, and we know it’s going to go down,” but it’s not going to go down to zero, and you’ll still be able to make money. But is that a risk that you want to take?

                                                Other things that are hot are guns. Guns are hot right now.

Justin:                                   With the election going on, Second Amendment stuff, yeah. Guns are pretty hot. We have a site around that space. I know other people that do. They’re doing quite well, actually. It is an election year. I think that’s hot because of that, for sure. But the question is, will it stick after? It’s an open question. We don’t know. Depending on who gets in and what happens, it may go up, depending. Honestly, that’s a weird niche, because when bad things happen, gun sales go up, which is really strange. From a business perspective, you’re rooting for bad things, as horrible as that is.

Ace Chapman:                   Yes.

Justin:                                   You’re on the side of gun manufacturers, it just feels icky. It feels like you’re rooting for bad things. That’s horrible. But, it’s an interesting niche.

                                                Another thing is, let’s say that someone famous mentioned it. Like Oprah is talking about that. She gets hot on the topic for a month, and she’s talking abut it. She’s just got a gazillion buyers. She’s leading a horde of buyers behind her. Says, “Let’s go check this out,” and you’ll get swamped by buyers. That may be temporary, and if you’re buying in that niche, after something massive happened like that, just know that it may go back to pre-Oprah levels.

Ace Chapman:                   Yeah. That’s what you want to compare it to. You want to look at that event, that situation, and see what the business was doing before that, and what the price is compared to that pre-event income.

Justin:                                   Also, what is the site’s history? A lot of times … You can use something, and we’ll put a link to this in the show notes, but you can use the Wayback Machine to see what previous versions of that exact domain or that exact site look like. Sometimes people are building sites on old domains. The domain’s been around forever. It was a site six years ago, and they’re building a site on top of it now. The domain’s been sitting there the whole time. They try and say, “The site’s six years old,” or, “seven years old,” or whatever. Totally not true. If you use the Wayback Machine, you can actually see previous versions and see if it’s actually the same thing.

                                                They’re telling you, “Site’s been the same. I’ve owned it for six years,” and you see it was … You’ll see this sometimes. It’s an old campaign site. Someone was running for sheriff of whatever, and it has [JoeAttabroomba.net 00:42:13], or something. You look back, and you’re like, “What? This is some crazy campaign, and now they’re trying to sell vacuum cleaners. What’s going on here?” Obviously, if they’re lying to you about that, you caught them. Good. Let’s move on to the next one with our due diligence.

                                                I think it’s important, too, because if you’re looking at a site, and you’re looking at the history, you want to know that it was in the same niche. If it was in the same niche, a lot of those back links are going to be more valid. If it had old back links to that site in the same industry, they’re going to be more valid than if you’ve now changed industries. It used to be a vacuum cleaner site, now it’s a whatever, the links aren’t going to be as powerful or as valid for your niche or industry and getting the site ranked.

Ace Chapman:                   Yeah. One of the things you want to watch out for is just that some of the traffic that may be coming at that point … Depends how you’re making money, but some of that traffic may be starting to go away because it was a vacuum site, there aren’t vacuums there. Those are some of these you want to take into consideration.

Justin:                                   Yeah. We’re getting lost in the weeds here, but this is something you’ll see. Another thing you want to know is, did this person … You can ask them upfront. Is the seller … Did they create the site? If they didn’t create the site, who did create the site? if you can, reach out to that person and see what their thoughts were when they created the site. They might be like, “Who are you and why are you calling me?” But just a few questions to them may give you a bit more background on how the site was created, why the site was created, and give you a bit more history, and help you with your due diligence.

                                                The last thing we can talk to you about the website or niche is, what’s the reputation of the business? Then, what are the back links situation? One of the things we always look for, and we do this in just vetting sites, it’s an early step, is, was the site previously listed, or was the site previously sold? What happened there? We’ll do a search. We can do site:Flippa.com “and then the domain name”. What that’ll do is it’ll search all of Flippa, searching the site Flippa, and searching to see whether that site was ever listed or mentioned on Flippa. Since Flippa’s been around for a long time, they’ll give you a good idea.

                                                You can also search the other search terms, “website for sale”, and then the domain name, things like that, and see if it was listed anywhere else. What’s interesting about this is that … Let’s say that I found that this side was listed on Flippa three years ago, listed for $30,000. I start looking through the comments, and I see, “I found this or that.” Some of the comments are ridiculous and outrageous, but some of them are legit and thoughtful. It can guide you in places in your due diligence you might not have thought to go.

                                                It also gives you an idea on trajectory. If it was for sale two years ago and they said it was making $2000 a month, and in the listing it says when they bought it it was making $5000 a month, that’s sketchy. Doesn’t make a lot of sense. You found them BS-ing their way through the sale. That is a good reason to turn around and say no.

                                                You want to look for these things. Again, you’re skeptically looking at reasons not to do the deal.

Ace Chapman:                   Another thing that I love to do on these … The thing you just mentioned, I see that a lot more on Flippa type deals, and all that. But when you’re using SEMrush or Moz.com, you’re looking at their back link profile. When I’m looking at a deal that is a PBN, I think the thing to be careful of is, for a little while after the most recent update from Google, PBNs became this, “Don’t do a deal with a PBN.” I have a lot of deals that are still doing great with PBN, so I don’t know. But the truth is, you have to do that work. You have to do the research, and see what their strategy was.

                                                It wasn’t like Google said, “Okay, we hate PBNs,” what we want to focus on is, “Are there good sites in the PBN? Is it total spammy?” Everybody who was using that strategy, and they were doing all this spammy stuff, and they were popping up really quickly, they got hit. They started saying, “it’s the end of PBNs.”

                                                In a lot of this stuff, the thing to keep in mind when we talk about improving the content, and all that, you want to get into the mind of Google, if that’s where your traffic is coming from. If you have a FBA deal, you want to get into the mind of Amazon. We just had a guy who joined our program who was a part of the original team that created FBA. He just talked about some of the pivoting that they did, and how, when they first started, they were getting people sending old, used lawnmowers in, and just crazy stuff. It’s interesting. You want to get into the minds of that. We got a guy that’s in the program that works with Google. All those things, you want to make sure you understand what they’re trying to do.

                                                When it comes to the PBN, or any of these things, it’s not these overarching rules. A lot of times you got to understand what their purpose is behind it so that you’re taking advantage of great opportunities, and not missing out on them because you don’t understand the reason behind their actions, and what’s really going on.

Justin:                                   I’m going to back up real quick, and I’m going to say that, for anyone that’s listening to this and not sure what a PBN is, it’s a private blog network. When he says “PBN”, he means “private blog network”. What this is is people will set up their own little spider, little network of websites. These may be older domains, they may be older authority sites that no longer make any money. They’ll have a bunch of them, and they’ll point links from those sites to their money sites. This links have juice. They have SEO juice, and they have power. Sometimes they’ll link them to other sites that then link to their money sites, but there’s a whole industry around these PBNs.

                                                People at one time, yeah, it was like a year ago, or something, who got really skeptical because some PBNs, private blog networks, got shut down. Google was going through and taking away the value of them, and whatever. The truth is, a lot of people still use PBNs. They’re still valuable, but they are risky. Google, with that, they said, “Look, we’re going after PBNs if we find them,” and they don’t always find them, because they’re private, some of them. If they’re public, and people are selling links on these PBNs, we’re going to go after them. We may shut that down. If that happens, you may lose value. That’s the whole deal with PBNs.

                                                You mentioned some tools. SEMrush and Moz.com, they have a thing called Open Site Explorer. These are tools that will give you pretty accurate information on back links, on who’s linking to them, on how powerful those back links are, on the site overall. These are tools we use in due diligence. What you want to look for is, you’re looking for disclosure. Did the seller say they were using a private blog network? It’s fine if they’re using a private blog network if they’re disclosing it. If they’re not disclosing it, again, whatever you think of private blog networks and whether they work or don’t work, or you want to buy a site with them or without them, if they didn’t disclose a PBN and you found one, that’s a problem. Or if you ask them point blank and they say, “No, I never use any links,” or, “I don’t create new links, it’s all organic, natural,” and it’s not, that’s a problem. That’s one of the reasons you’re going to want to look and verify that information.

                                                All right, man. Let’s look at the next section. We want to talk about the seller. Here’s the thing, when I’m looking at a seller, obviously, I look at this. I’m doing business with anybody, whether it’s a seller, whether we’re partnering, whether we’re affiliates, whatever, anything, is I look at, “Are they real?” Are these real people? Do they have a real name? Do they have a real Facebook page? Do they have real friends? Do they have real barbecues with their friends on the weekends, and they comment on their pictures? Or is it a fake picture, and their friends have a stock image photo, and they say, “Hey, what’s up?” It’s just totally fake, and you can see that.

                                                I have just a rule, Ace. I don’t do business in any fashion with someone I can’t verify online. I need to be able to verify you some way, somehow, online. If you’re not real … Because I’ve been down those rabbit holes, man, a bunch of times. Dozens and dozens of times. It always accounts to nothing. It’s crap. When you’re looking at the seller, you want to make sure they’re a real person, they have a real online presence. You want to be able to follow their breadcrumbs. Everyone leaves a trail. Everyone has a history on the internet. If you can’t find that, there’s something wrong, generally.

Ace Chapman:                   Yeah. I don’t even worry about if there’s something wrong or not. I just don’t deal with them, because it’s too easy to deal with people that I can verify, I can connect with on LinkedIn, on Facebook, actually be able to have a conversation. That is just valuable on the front end to know that they’re real, the deal is real, that kind of thing, and it’s valuable when doing due diligence. But it’s valuable long term to be able to reach out to them for help, or advice, or thoughts, and build relationships. At the end of the day, this is a relationship business, and the stronger your relationships are, the better deals you’re going to get, more money you’re going to make.

Justin:                                   Yeah. I’m glad you have that same rule, Ace. I won’t do business with you if I can’t verify you. If your name is [RandyHogden69@hotmail.com 00:51:32], I don’t know. Who knows. You made that up. If I can’t verify your identity and you’re not so forthright in sharing your real identity with me, or LinkedIn, whatever, we’re just not doing business. I think that’s a great way, it’s a quick way to determine whether you can do business with someone. As you said, there’s lots of deals with people that are real that can verify their information. Why mess with these jokers?

                                                The next thing is, and for every one deal I would miss because there’s someone who’s super secret, and they’re, whatever, they’re scared of … I don’t know. Someone finding them, Google, or the government, or whatever, I don’t care. I miss out on it. I save myself 50 ridiculously not-going-to-happen deals. Fine. I missed that deal, I don’t care. Doesn’t bother me. I’m happy about it. Right?

                                                The second thing you want to look at with a seller is, who have they done business with? If they’re in business, they’ve probably done business in the past. Can you contact their customers? Can you contact current or ex-partners? Can you get a feel as to what it will be like to do business with them? You can take the referrals. They give you a referral. They say, “Reach out to this person.” That’s even better, though, because if they give you a referral, you can dig a little further and find people that aren’t a referral. Those are the ones you really want to talk to.

                                                I’ll talk to a referral just to see … Because it’s easy to just give you a bullshit name and not be real, so talk to a referral. But, especially if it’s a bigger deal, or a deal where I have to work with this person a little closer, I want to know what they’re like to do business with from someone who didn’t promise them to give a glowing review. Do a little bit of digging, do a little bit of Google-fu, and find someone else that’s done business.

Ace Chapman:                   Yeah. That’s one thing that folks listening to this can take note of, is it’s really powerful to have a profile online, and connections, and recommendations, and all of that, regardless of what business you’re in, just because it helps get deals done. I love doing deals with people that have some kind … Not to say high profile, but that have some kind of profile online.

Justin:                                   Something.

Ace Chapman:                   So when we connect, it’s like, “Okay, great. I can go back. I can see your history. I can see different businesses you’ve been involved in, almost your resume. Other folks that give you recommendations.” It’s a powerful thing.

Justin:                                   Yeah. Full disclosure, I’ve never actually done this next thing. I know other people that have, though, so I’ll mention it. Some people do background checks. They’ll actually order a background check on the seller. I’ve had sellers order background checks on buyers. That’s not something that we generally do, or I’ve actually never done it for customers or partners we work with. But I think it’s an interesting idea. Even if you don’t do a background check, if you’ve got some Google-fu, you can use it and do some research. Again, I think this depends on the size of the deal. If you’re buying a $30,000 Amazon site, I don’t know about a background check. If you’re buying a $600,000 eCommerce business, maybe. Maybe it’s worth that.

Ace Chapman:                   Yeah. I’ve never done that.

Justin:                                   I figured. You don’t seem like the background kind of check guy. Some people, they’re like, “I want to see what the deal is with this guy.”

                                                I think that gives us a good framework. We talked about traffic, we talked about earnings, we talked about the niche or industry, we’ve talked about things you can do to verify the seller. Let’s look at some not-so-common scams.

Ace Chapman:                   Yeah.

Justin:                                   These are some things that we found doing vetting or doing due diligence that I think maybe our listeners will get some value out of. Just put it in the memory bank, and if you run across this or think you’re running across this, recall this back to the top of mind, and hopefully it’ll save you some hassle.

                                                First thing is fake leads being sent to affiliate partner. I’ll give you an example. A lot of times you use … I forget the name. It’s called QuinStreet. They do the medical education leads. They’ll pay you for leads, people looking to go to tech schools, or whatever. Sometimes you’ll have sellers that are maybe new with them, or whatever, or they just started. You’ve seen a big increase in earnings recently. What they’re doing is they’re having random people go and fill in their first name, their last name, their email, and their phone number, and getting paid for leads that are not real.

                                                It’s not easy to see, because the traffic looks legitimate. One thing you can do is if you’ve seen a big increase in earnings and you haven’t seen the equivalent increase in traffic, like you’ve seen a little extra traffic and they’re making a lot more money, that’s something to look into. It’s the potential that they’ve been faking the leads. But what happens is, they’re selling those leads to a partner. It may take a couple of months, two, three, four months before the partner actually catches on that these leads are fake, and then they’ll cancel the deal, they’ll cancel the account, and penalize you. But that might be your business by the time that happens.

                                                One of the things you can do to fight this, these fake leads being sent over, look very closely when it’s only the last couple of months you’ve seen the big uptick. Then what you want to do is get permission to speak with the affiliate partner about the site or business. In most cases, that shouldn’t be a problem. There’s very few cases I can think of where that wouldn’t be acceptable, where they have some kind of deal that they wouldn’t work. But most of the time you can talk to the affiliate about it. I think that’s the way to fix that.

Ace Chapman:                   Yeah. That’s just something to look out for whenever you’re doing the leads deals.

                                                The next one is when you’re dealing with a seller who is either owns the affiliate network … We’ve seen that before, where they’re making affiliate money. Then you realize they’re one of the partners, and you start to dig deep, they’re one of the partners in the affiliate network that’s paying out those commissions. You think they may have a sweetheart deal that maybe you’re not going to be able to get. That could be a possibility.

                                                The other thing is when they are the supplier. They are either the manufacturer of the product, or they’re the sole provider. They’ve got an exclusive deal to supply the product from the manufacturer. Those are things that you want to be a little concerned about. We continue to see those deals.

                                                On the front end, we always want them to be 100% transparent and upfront about that. As soon as we get into one of those, and, “By the way, yeah, that is my exclusive contract, so you’re going to have to still get this product from me,” and that’s something that we had to dig and find out, and they didn’t tell us …

Justin:                                   That’s bad.

Ace Chapman:                   That’s probably going to be a no-go.

Justin:                                   Yeah. You’re totally right, being affiliate and being a partner of the affiliate overall, or the provider. That can be a red flag. Let’s say that you’re buying a shoe eCommerce company. They sell a couple different types of shoes, and it’s just an eCommerce business. They have a supplier, whatever. Turns out, that same eCommerce vendor is also the manufacturer. They’re selling the shoes themselves at 10 bucks, they’re retailing them at 80 bucks. You buy the business, they’re going to raise that wholesale cost from 10 bucks to 40. Now you’re not making nearly the margins. Your paid traffic isn’t working, and you’re like, “What the hell happened?” What happened is, it was them running the manufacturer, or their sister, or their brother, or their cousin, or their friend, or whatever. They’re somehow related.

                                                One of the ways to get around this … A lot of times, they’ll give you the contact information for the manufacturer, or whatever. You want to find it independently. Don’t take the name and phone number they give you. It could be their cousin, could be them disguising their voice, or whatever. You want to find that manufacturer, you want to find that supplier, you want to find that affiliate network directly.

                                                Another way around this completely is to only buy businesses that work with larger, well-known partners. If it’s Amazon, they don’t own Amazon, trust me. If it’s ClickBank, if it’s Commission Junction, any of these big players, they are not also the manufacturer there. They are also not the affiliate network. They are not them. If you’re using ABC Lead Company, whoever they are, maybe. It could be some small lead company that’s also them or their sister.

                                                I will say this. I’ll add this caveat that it’s not always a scam. I’ve had this question, and I think it’s actually a really smart and interesting way to do business. Where I’m a manufacturer, I want to build my affiliates. I want to build my retail side. I create eCommerce stores, maybe give them different names, and start selling my product. Then I’m very honest about it. “Look, I am the manufacturer. I’m selling the eCommerce side of my business. Here’s how it works.” They’re transparent and straight up about it from the front, I think it’s actually a creative and interesting way to do business. They’re driving their own eCommerce businesses and then selling them off so they can create more, and create more. I think that’s really interesting.

                                                What you want to do is you want to make sure the deal is big enough to where if you contractually obligate them to deliver products at a particular price that they’re going to be able to do that, and you’re willing to fall through if they don’t.

Ace Chapman:                   Yes. That is a crucial aspect to doing a deal like that. Otherwise you’re at tremendous risk. But you’re right. On their side, from the seller point of view, what a neat way to build a business.

Justin:                                   Yeah, right?

                                                The other one is … Sometimes you’ll see this. We mentioned this earlier. The seller is claiming earnings from multiple sites as only coming from one site. Let’s say, for example … We mentioned an Amazon code being on 50 different sites and pretending it all comes from one site.

                                                I’ll give you another example. It’s an info product site. I’m selling an eBook or course for, let’s say, $49. It’s about gardening. I’ve got another one that’s about knitting that sells, an info product, for, you guessed it, $49. I’ve got all these $49 payments coming into my PayPal account. I show you my PayPal. You’re like, “It’s great. It’s very clear that you’re making $5000 a month with this site.” Turns out, that site only makes $800. That $5000 is coming from the 30 sites that you own that are selling info products at $49. That would be a problem for you. As a buyer, the earnings are way overstated.

                                                The answer to this, one thing you can do, is use a site like SpyOnWeb.com. I’ll put a link to the show notes. Basically it allows you to reverse search by domain. You can search by analytics code. You can search by AdSense account. You can search by Amazon account. You can find out other sites that this seller owns.

                                                They can be hidden. Sometimes they don’t show up here. They could be in their sister’s name, their brother’s name, their cousin’s name. You might not find those this way, but this’ll give you a good idea. If I do a reverse search, and I find other products that are the exact same price point, I now have to question whether all those $49 different products are actually coming in for just the site I’m selling. It puts a big question in my mind, and the seller’s going to have some explaining to do. Right?

Ace Chapman:                   Yeah. With all of these things, you don’t want to go in accusing the seller of trying to scam you. The most important thing to each of these is really just asking them questions, and digging deeper. Sometimes there can be a legitimate reason.

Justin:                                   Ace, thank you so much for mentioning that. The way we’ve been talking about this, and being very skeptical, and very anti-deal, I know by saying this I’m going to get one of our buyers come in and go, “You’re scamming people, you seller.” I’m like, “Why?” They’re like, “You’re off by $40 a month on your bank statements and your earnings. You’re a scam.” I’d be like, “Oh, my God.” “I listened to Justin’s podcast on due diligence.” That’d be horrible.

Ace Chapman:                   I totally got that vision as you were talking of, “Let me stop right here and just remind folks.”

Justin:                                   That’s a good idea. No, yeah, as you said earlier, this business is, really, relationships. There are times, say, “Look. I’m uncomfortable. I found this problem, and there’s no way in my mind I could resolve it.” I think that’s a fair thing to say. “Look, I think there may be this problem, and I can’t figure out a way to resolve it.” That’s a fair thing to say to the seller, it’s a fair thing to say to the broker. If they can come up … Because, me, as a broker, I want to find a fair way to resolve that, honestly. Not like, “Trust me. No, trust me, it’s good.”

Ace Chapman:                   Absolutely.

Justin:                                   I’m like, “Okay, shit. How can I actually prove this to be the case?” Because it’s a good question. I’m going to have this from other buyers on this deal, too. How can I show that this is the case? It’s interesting. You’re challenging me to come up with a good way to prove it to you.

                                                If the seller’s a jerk about it, and you’re very polite and you’re very straightforward about it, that’s an even better reason to walk away. If they continue to be a jerk, say, “Really appreciate your time. Unfortunately this isn’t going to be a deal we’re able to go with.”

                                                All right, man. We’ve covered a ton of things. Let’s do a quick wrap up for everyone listening. Again, just to mention, we can’t cover everything in this podcast. No matter how long we talked about due diligence, we’re not going to be able to cover everything. We hope this helps you build a framework for the deals that you’re looking at. Again, we’re talking about traffic. Make sure it’s real. Make sure the conversions and dollars per visit are in an acceptable range. Start building a bank of those so you know what that acceptable range is so you can build it over time.

                                                Make sure that following the path from being a visitor or customer actually works and gets someone paid. The earnings side, makes sure the earnings are only coming from the business that you’re purchasing. Compare to their bank accounts to make sure they’re reasonable, and then don’t be afraid to bring in professionals. An attorney. Bring in an accountant, especially for the larger deals. It has the added bonus of making sure you keep your funnel tight, so you’re not looking at a bunch of crap deals.

                                                For the niche or industry, make sure you’re looking for quality content and niches that will last. Make sure the seller is a real person. Don’t do business with non-real people. Find others who’ve done business with them either through their referral or through your own Google-fu. Find other people you can do business with.

                                                Then, as we said, we’re going to put links to everything we’ve mentioned in the show notes. Over time, as we add new things or we think of things after this, we’re going to put them there, too, so you have a great bank of due diligence tools, due diligence items, due diligence content, so you can dig further as you build our your formula for due diligence and success.

Announcer:                        You’ve been listening to the Empire podcast. Now some news and updates.

Justin:                                   All right, Joe, let’s talk some news and updates.

                                                First off, I wanted to share with our listeners that we’re working on a series of posts that explains the different monetization methods and business models, particularly from a buyer and seller perspective. We’re publishing these every Wednesday. We’ve already done the AdSense business model, we’ve already done the Amazon affiliate model, and we’ve done the lead generation model. We’re going to be doing a bunch of these every week for the next eight weeks or so.

                                                This specifically looks at it from the buyer and seller perspective. It discusses the monetization method, how it works, the basics about it, but then also looks at things to look for specifically, whether you’re buying or looking to sell one of these businesses. I think it would be really interesting.

Joe:                                        Yeah. I love all the new content that we’re putting on the blog, but this series especially appeals to me, because I definitely get questions from buyers asking about the differences between monetization methods. When I can point to content that already exists out there, it makes it a lot easier.

Justin:                                   Another bit of news, buddy, I’ve got some good news for you. We just broke 30,000 email subscribers, man.

Joe:                                        That’s cool. I think, if I remember right, you curated that list and went through a lot, and deleted some out. Is that correct?

Justin:                                   Yeah, that was a couple of years ago. I’ll tell you, I haven’t done much to that lately. I’ve seen our open rate over time drop, and click-through rates drop, and stuff, because I’m not curating. But I was thinking about it. We’re not this affiliate thing. I don’t need to curate the list. If people are on the list and are not opening emails that much, or just goes to a folder they check someday later, I don’t care about that. So what? Let them do that. I don’t need to prove open rates or click-through rates are really high. Might as well leave them on the list. I think actually curating … I took a few thousand off a couple years ago. I think it probably wasn’t the best move, honestly.

Joe:                                        That’s interesting. That’s good to know.

Justin:                                   Think about this, Joe. If I need to prove to people that, by sending out, “If you sell my product, here are the open rates I got with this headline,” or, “Here are the number of sales I got with this email, you can do it too as an affiliate.” Then it makes sense for me to have a super tight list of only buyers for my $17.95 eBook, or whatever, it makes sense. But with our list … There are people, too, that buy once a year, every other year, or something. If they’re not checking, they’re just not in the market, that’s fine. They still get it. When they’re ready to come back on board, they can check it out.

Joe:                                        Yeah. The only thing I would say is, wouldn’t it make testing the list a little bit harder, because you’d always be able to make the argument that, “Because some of the contacts on the list are stale”?

Justin:                                   It totally does. I was just telling [Mike 01:08:28] about this, Mike [Swagunski 01:08:29], who is our sales marketing liaison. We’re talking about split testing headlines, and stuff. It does make that a bit challenging, because you have to have a statistically significant difference when you’re doing split testing. When you’ve got a ton of people, let’s say you have more people than usual are not opening that email, or whatever, then you’re going to have much, much smaller percentages across the board. The change or difference is more minimal.

                                                Yeah, that does make it a little challenging, but I don’t care. I think it’s worth it. Plus, I’m not sure I totally trust any of these email providers in terms of them saying whether it’s opened or not. I don’t know, man. I’m skeptical.

Joe:                                        You don’t trust the little pixel that they’re putting in those emails? I get it.

Justin:                                   I don’t. Let’s say we took off 8,000 people from our list that are generally non-openers. We may be taking off 500, 600 people that are interested in doing business with us that were actively looking for sites to buy next. Complaining, like, “Why’d you take me off your list?” They get hurt, or they don’t see something. That would suck, right?

Joe:                                        Especially with a high ticket value item like we have, if they buy a $100,000 site five years from now, it was absolutely worth keeping them on the list.

Justin:                                   Yeah. Exactly.

                                                Another bit of weird news … You’re gone. You’re in Manila right now. I’m in Saigon, Vietnam. We just had Obama come to visit Ho Chi Minh City, or Saigon, as it used to be called. It has been crazy, dude. The streets are jam packed with people just lining up, hoping they get a glimpse of the beast as it cruises by with all the Secret Service agents, and stuff.

                                                I was walking around a little bit yesterday afternoon, and I swear there was probably more than 100,000 people standing in the streets. The city has just been Obama season, Obama flurry, here in Saigon. It’s pretty wild.

Joe:                                        Yeah. I heard he spoke at Dreamplex, as well. Is that correct?

Justin:                                   Yeah. For anyone listening, Dreamplex is that coworking space in Saigon that us and some friends sometimes work at. Yeah, all of them had their office closed down for the day while Obama came to speak to like 20 totally pre-selected entrepreneurs in Dreamplex. Everyone else, the people that were running businesses from there and stuff, were all kicked out. There’s a big #ThanksObama thing going around on Facebook because of it.

Joe:                                        Interesting. He was here in Manila, and if the traffic wasn’t bad enough already, the town was just totally shut down when he came through a few months ago.

Justin:                                   I believe it.

Joe:                                        I don’t envy the traffic gods, as so they say.

Justin:                                   For anyone listening to the show right now, if you would like to ask the question that we can get to on a future podcast episode, we’d love to play you on the show. We’ll answer your question in depth and go into some detail. You can go to EmpireFlippers.com/DD, and there’ll be a link there to SpeakPipe. You can actually just record a message to us, and we’ll actually put you on the show and answer your question. Feel free.

                                                Let’s do some listener shouts, also known as the indulgent ego boosting, social proof segment. First up, I’ve got [Lord Tyler Ward 01:11:18] on Twitter. He sent a message, says, “What’s the benefit of selling via Empire Flippers versus Flippa?” I thought that was an interesting question. I don’t know why he tagged both of us. I think he was looking for a cage match or something.

                                                It depends on what type of site or business you have. If your site or business has been around for less than six months, or it’s not earning, or, as the startups like to say, pre-revenue … I love that. Pre-revenue. You wouldn’t be a good fit on Empire Flippers. We just simply don’t have a way to provide a valuation for you. A lot of those businesses ultimately aren’t worth it. They hate to hear that. I get people mad at me when they come with their pre-revenue, or their not-yet-monetized website. They’re like, “No, I put $100,000 in development of this thing.” It seems like a real waste, because it’s not making any money. If you want it to be worth something, it’s got to be earning.

                                                I say that with the understanding that there are the unicorns. There’s this actual company that has real tech behind it that’s really crazy valuable. Twitter not being profitable, or YouTube not being profitable, sure, they have values. But that’s not you. If you’re listening to this podcast, that’s not you. You’re not that guy.

Joe:                                        Yeah. I would say that that’s a good point, Justin. The other thing would be is if you have a factory that’s turning out turnkey websites, and you don’t know what they’re really valued at, then you could put those on Flippa and run the auctions, and get what you can out of them. There’s a lot of guys based all over the world doing that kind of business. Again, that’s not something we sell at Empire Flippers, because we only sell profitable websites.

                                                I imagine, too, if somebody had a very big audience and didn’t know how to price their site, or wanted to do some sort of crazy auction on a business, they might be able to place them on Flippa and then run a lot of traffic to the auction to see what they could bid it up to. I’m not sure that would be great for buyers, but it might do well for sellers. For just about everybody else, I think that we’re better.

Justin:                                   Yeah. I think if you’ve got over 12 months of earnings, if you’ve got relatively stable earnings and it’s more than a couple hundred bucks a month, we’re probably a good fit. If it’s in eCommerce, you probably want to be making $1000 in net profit or more per month to sell with us. Lower than that, a lot of our buyers just aren’t interested. It’s not really worth the hassle for us or the sellers, generally. If you’re in that box, if you’re over that bare minium, I think we’re probably the better bet.

                                                The other thing is, too, is that you’re going to get wildly varying multiples on Flippa. You’ll see some websites are selling for six times net monthly profit. The reason they sell for so low is because they’re right next to other ones that are just illegitimate. They’re not legitimate listings. You’re right next to these other guys going for six to eight times monthly net profit, so you should probably go there too. You have others that just get hugely popular, and end up selling for about the multiple you’ll get with us. Maybe slightly higher than you’ll get with Empire Flippers, anyway. It’s a huge variance, and it tends toward the low side.

Joe:                                        Yeah, definitely. It’s easy to get mixed in with all those listings. That’s one of the biggest problems. You’re definitely not going to have the hands-on process that you have at Empire Flippers, where somebody’s going to walk you through the process, help create the listing page for you. You’re going to need to do everything yourself. If you’re not the kind of person that has the time to deal with not only creating the listing but dealing with bidders and their questions, then a marketplace like ours is going to be a better choice.

Justin:                                   That was a good sales pitch, Joe. You going to ask for the order, now, or what? You just leave me hanging?

Joe:                                        I’ve done that a couple of times on the phone.

Justin:                                   That’s it for Episode 156 of the Empire podcast. Thanks for sticking with us. We’ll be back next week with another show. You can find the show notes for this episode and more at EmpireFlippers.com/DD, and make sure to follow us at Twitter @EmpireFlippers. See you next week.

Joe:                                        Bye-bye, everybody.

Announcer:                        Hope you enjoyed this episode of the Empire podcast with Justin and Joe. Hit up EmpireFlippers.com for more. That’s EmpireFlippers.com. Thanks for listening.

 

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