Whether you’re a first-time website buyer or an experienced web entrepreneur, it is always important to perform proper due diligence before placing a bid.
For those unfamiliar with due diligence, it is the process of verifying that an asset is as it is claimed to be. In the case of due diligence on websites, it’s making sure that revenue and traffic claims are accurate and ensuring the online business isn’t fraudulent in any way.
Here at Flippa, we offer a full scale Due Diligence service that provides complete verification and assessment of any asset that you’re looking to acquire. We provide a range of services that report on identification of high-level risks and opportunities with presentation of financial and traffic information based on source documents.
Apart from the Flippa blog which you are probably familiar with, a great source of insight can be found reading the comments on particular listings. Most of the time people ask insightful questions.
By learning the kinds of questions people ask, and the variety of answers given, you start to learn what’s important to most buyers, which is usually something that would be important to you too.
The more listings you read in general, the more you’ll learn. You’ll see the twists people put on their sale pitches, the types of businesses that are for sale and how they’re monetized, and why some businesses seem incredibly popular while others get no real interest.
With the help of our marketplace integrity team, we have pinpointed some of the top questions to ask and areas to focus on when looking at an asset for purchase. In the case that you decide to perform due diligence alone, below is the complete buyer’s due diligence guide and checklist.
One of the first things you should check is to make sure you understand the business model and how it operates. For example, is it an eCommerce site that sells products? Is it a SaaS software that provides services? Does it carry any inventory or not?
If you’re unsure about the business model, make sure the owner clarifies:
- The hourly time commitment, broken down by task
- Any technical expertise required to operate the business (ex: knowledge of WordPress, Amazon Affiliates, etc.)
- Monetization Methods
You can verify the owner by checking the site through a WhoIs lookup.
Personally, we recommend whois.domaintools.com. From there, search for the domain and scroll down to whois history. Click through some whois records to see if the owner has changed recently.
For example, here is Flippa.com’s WhoIs history.
If the domain is under privacy, you can also check the hosting history and see if there have been any IP address, hosting provider and domain registrar changes. This will not tell you with 100% certainty that the owner has changed, but if all three have changed (around the same time, +/- 3 days), it is likely.
Get to Know the Seller
Your due diligence process can be a dream if you establish a good business relationship with the current owner. That doesn’t mean it would be a nightmare if you don’t, but certainly leverage the opportunity to get to know the seller on a personal level if possible.
In online business purchases it remains fairly unusual for the buyer to meet the seller or the seller’s agent in person; after all they may well be located worlds apart.
However, it is good practice to establish the seller’s business profile, history, and reputation. While somewhat subjective, using social media platforms such as LinkedIn provides a valuable means of background checking.
An authentic seller will be confident in the business and will have genuine reasons for wanting to sell the business at the present time. The current owner will have a clear sense of how the business is performing and, just as importantly, trending. Additionally the vendor may well have ideas for the next stage development of the business which would be useful to the purchaser, even if the buyer decides not to follow that particular growth strategy pathway.
Sellers should always be open to detailed questions from a prospective buyer as a result of the due diligence process. It is sound, and increasingly common, practice for the seller or the seller’s agent to agree to a conference call discussion with the buyer, to respond to questions or concerns raised by the due diligence. It also enables alignment of the buyer’s and seller’s expectations of the transfer. No reasonable seller expects a buyer to part with hard-earned money just on the basis of the buyer’s enthusiasm and blind faith.
You should investigate the operations behind and around the website. Who does what when using what?
Most successful businesses today standardize their procedures, which streamlines work and improves revenue. If the website is linked with another company or user a vendor, find out how it all works.
Make sure to get a clear understanding of the owner’s responsibilities, including the time to perform the tasks and the technical experience necessary.
What time and effort commitment is being invested by the current owner and what is the cost value of this? The seller should be open and specific about the details of this investment. Is this within the buyer’s capacity of expertise and time availability to sustain, and if outsourced what will it cost?
While a lot has gone digital, there are still people behind any technology. If you’re purchasing a website/online business with multiple employees, you should also speak to the employees.
Thoroughly understand the employee structure of the business and get to know the employees beforehand. They may be working for you once you’ve purchased the website, so should you know their roles in running the day-to-day business.
You would want to continue that process to ensure the traffic and sales grow or at least remain steady.
As always, if you have any questions, make sure to ask for clarification from the current owner.
Checking for plagiarism isn’t just something college professors do. Verify that the site has original content will help confirm that the website is built using whitehat SEO tactics.
Our personal favorite tool to use is copyscape.com.
This will show if there are other copies of the site out there. If you spot very similar sites, it may mean that the site is either using someone else’s design, the theme is very popular, or the seller has other competing sites.
In case of blogs, it is recommended to check a random sample of 5-10 articles, to verify they are original and not stolen from elsewhere.
To verify if the business has been established for as long as the seller has claimed, go to: archive.org and search for the domain. Always check for more than one screenshot, something from the beginning, middle and end.
Note: If the business is very young (less than 6 months), archive.org might not have that domain archived yet.
One thing to look out for is big gaps in archived pages as this may indicate that the site was down during that time. Below as an example is Flippa.com:
You’ll notice that from 2005 to 2008 there’s almost nothing archived. In this case, you would need to take a look at the last and first screenshot from that gap. In many case this will show that the domain was parked, meaning that most likely it had not been used for the entire time.
In this particular case, it was parked and redirected to seeq.com.
Sometimes archive.org may show something like this:
In this case, click on the link to the robots.txt file. Sometimes the seller has blocked archive.org by mistake and sometimes it is intentional, if they want to hide the true age of the site for example. But in either case, you would need to be cautious.
If you see that robots.txt has disallowed all spiders apart from Google and Bing, it’s not a red flag. But if you see that they have disallowed archive.org specifically, this would raise a red flag.
A non-compete form prevents a seller from competing with the site you just bought from them for a pre-determined amount of time (typically 2-3 years).
If the seller says that they can’t sign it, find out why and if this can be negotiated. For example, in some cases, they don’t want to sign a very broad non-compete, which is understandable, but if it is very specific, most sellers are willing to sign it.
Another example would be that they have another similar site, in which case, ask if they would be willing to include it in the sale for the right price.
Check if there is a trademark for the business name or domain name. If there is a trademark in a similar niche, ask the seller if they own the trademark and will include it with the sale or if they have the right to use that trademark.
Also check that the domain isn’t infringing on any trademarks, for example, iphone7.com or theandroid.com. Note though that trademarks in names are fine if the site is in no way infringing, i.e iphoneyou.com is fine if it is a blog about phone calls, called “I phone you” but not fine if it is an eCommerce site selling iPhones (unless the have permission from Apple to use the name).
For more on trademarks:
Australian trademarks: http://pericles.ipaustralia.gov.au/atmoss/falcon.application_start
European trademarks: https://www.tmdn.org/tmview/welcome
For certain business models, such as eCommerce, it is important to check the refund and chargeback rate of the business. It should never exceed 2%. Anything over and the payment processor may terminate their account. Often this happens without prior warning, but usually a month of high refund rates is not an issue, only if it is a trend.
If the current owner hasn’t already disclosed the refund/chargeback rate, follow up with them to get an idea about the business.
Top-Level Domain Transfer
Check that the domain can be transferred to anyone. Some top level domains have specific registration requirements. Examples:
- .com.au – buyer needs to have Australian presence, either reside in Australia or have a business registered there.
- .com.mt – buyer needs to have presence in Malta
- .ca – buyer needs to have presence in Canada
You can check the requirements by Googling the top level domain. The Wikipedia page for a particular TLD will have the requirements. For example: https://en.wikipedia.org/wiki/.au
Successful online businesses all rest on relatively sophisticated technical operations, with not only base platforms but also plugins and extensions. It is essential to audit these and ensure that every element of the platform has been paid for or licensed, and that these are to be transferred with the business. SaaS and software businesses, as well as eCommerce sites, will be reliant on source codes and it is important to confirm that they are clean and also modifiable for the future.
Other assets which must be transferred include all domain names, subscription lists, customer records, product images and all third-party contract and communication details.
TTM Financial Trends
This one will likely be one of the first things you check, but in case you haven’t already, check that the trailing twelve months’ revenue trend seems reasonable. Both the net profit and gross revenue. If you see a sharp spike or large decrease, ask the current owner what caused it.
Make sure to identify exactly how the site is monetized, and if this monetization method has been changed in the last six months.
Revenue Account Transferability
Make sure that the revenue account can be transferred or that opening a new account is straightforward and easy. Easiest is just to Google for it and look at the terms for that particular payment processor. At the time of writing, PayPal and Stripe for example can’t be transferred, but it is fairly straightforward to open up a new account.
In case of subscriptions, unless the seller is selling the entire business, not just the asset, in most cases the subscriptions can’t be transferred over to a new owner. In this case all the current subscribers would be prompted to re-subscribe, but you would be sure to lose at least a portion of them, thus losing a portion of the revenue.
The only sure way to keep the current revenue levels with a subscription business, would be for the new owner to assume ownership of the entire business, therefore be able to keep the current revenue accounts.
Note: In some cases many payment processors allow transfer of subscriptions, but this is on a case by case basis and is rather the exception than the rule.
Taxes are extremely important because not only do they spell out the money the website has been making, it also assures that the business will not get you into any trouble due to the non-payment of tax.
Of course, no one wants to be embroiled in legal battles regarding tax.
You should also see if the person or company behind the websites have been paying appropriate taxes by declaring the correct amount of money they have made. Any discrepancies can spell disaster later on, as it’s rather easy to detect tax fraud in this day and age with everything going digital.
Google AdSense ToS Compliance
When a business is monetized with AdSense, it is very important to make sure it complies with AdSense terms. AdSense terms can change fairly regularly, so for the most up-to-date terms, visit their help page: https://support.google.com/adsense/answer/48182
One big change that Google did just recently, was to remove max ads per page limit. But instead they now just say: “Advertising and other paid promotional material added to your pages should not exceed your content. “
It’s important that the site complies because even if they have been running for years just fine with AdSense and breaking the terms, it may get a manual review at any point and get banned from AdSense. Usually manual reviews are done within 6 months to a year since implementation.
While Flippa does show Google Analytics stats from the listing itself, we highly recommend getting the full picture by asking for Google Analytics “read-only” access.
With this check you’ll need to go through all the top traffic sources and see if they make sense and are sustainable.
For example, if organic search shows as one of the top traffic sources, click on it to see the traffic graph for that and make sure there aren’t any drastic changes that may indicate a Google penalty, algorithm change or that the traffic is faked.
But if you see a traffic source that you can’t verify, (e.x. the source shows up “ads / 22media”), ask the current owner about this.
Cross-check the financials with the traffic. How much revenue is each unique visitor generating on average? Does this outcome correlate with what the business model predicates?
This is basically the same check as for revenue but instead of the revenue graph you look at the traffic graph for TTM and see if there are any odd spikes and if the revenue is declining or increasing.
Typically, high revenue months will also coincide with high traffic months. This is particularly relevant for content sites that make money via advertisements.
Now that you have access, click through all the traffic sources and see if you spot any that may be bought traffic or from ads. If the seller has not disclosed any expenses for Google AdWords but you spot cpc traffic from Google, ask for explanations.
Also be on the lookout for odd referrals. If you spot anything suspicious that you wouldn’t expect to be sending traffic to that site, check out the URL and if it still doesn’t make any sense, it is most likely paid traffic.
Example: The seller is selling a blog in the pet grooming niche but you spot that 30% of traffic is coming from getfreebitcoinsinstant.org and it’s a random low quality site, with no links to the site, it is almost certainly paid bot traffic.
Be alert to the possibility of any paid traffic or sponsored links driving traffic to the business. That is not inherently bad, of course, but it is an expensive strategy and a significant problem if the expense has not been disclosed by the seller. Over-reliance on unsustainable traffic sources is actually the most common single concern encountered by new owners acquiring online businesses.
If the business is selling subscriptions or products, ask the seller where his customers are from and see if it matches the top traffic countries, if not, try to understand why/ ask the seller and see if makes sense.
Make sure visitor engagement seems natural and sustainable. If engagement is very low, i.e bounce rate is around 99% and returning visits are less than 5% and time on site is only a few seconds, it is highly likely that the traffic is faked. But if the engagement is a bit higher but still on the high side, it means that visitors for some reason do not want to stick around on the site.
And on the flipside, if engagement seems too good to be true, i.e bounce rate is only 10%, it may mean there is a tracking issue. Or in very very rare cases people find the site so appealing that most tend to click through to another page.
Live Revenue Verification
After you’ve done a majority of the heavy lifting, one final thing to do would be to prove that their financials are as claimed.
While screenshots can make for excellent revenue proof, one way to quickly verify all the data is to ask the owner about live revenue verification.
Live revenue verification would involve doing a screenshare through a service like Skype, where the current owner would navigate around the account financials and proving that these claims are accurate. Typically this is verified by looking at the Shopify Analytics, WordPress plugins, or just going through the businesses PayPal account.
Intellectual property has become a valuable commodity over the last century. There are legal implications for stealing someone’s intellectual property.
When purchasing a website, make sure you’re also purchasing any intellectual property associated with it as part of the contract. Websites that may focus on a unique product or service are relying on someone’s intellectual property, perhaps the owner of the website.
Make sure to discuss this with the seller and any legal adviser, and have a clause added to the sale agreement that any intellectual property associated with the website will be your sole property after the execution.
The same goes for any proprietary technology linked with the website. If the website uses a unique tool custom to that website, you’ll become the owner of that technology with the purchase of the website.
If everything checks out and you have no further questions, it’s time to place your bid! The whole process may be exhausting, but it’s necessary to ensure the authenticity of your asset.
If you ever uncover anything suspicious, please use the report feature, which can be found on every listing.
Head to the Flippa Marketplace and check out our Editor’s Choice listings.
Anymore enquiries, reach out to us here.