There are a lot of mistakes you can make when buying an asset of any kind, so knowing what to look for is important. Having looked at thousands of sites from viewers and fans in DMs on Instagram and Twitter, I’ve seen a lot of red flags.
In my experience, there are 4 main mistakes in the due diligence process that many first time users make when looking to purchase a site on Flippa.
Once you know what to look for, it is incredibly easy to avoid falling into one of these pitfalls and you’ll undoubtedly find some great websites for sale on the Flippa marketplace.
Confirm Organic Traffic
I’ve mentioned in the past that I don’t look at deals unless the business is getting over 60% organic traffic monthly. The 60% rule was learned after failing at multiple businesses purchased either through Flippa or directly from entrepreneurs over the years. Making sure the business you’re buying has a steady stream of organic traffic lowers the risk dramatically given the unique ways you can monetize web traffic.Making sure the business that you’re buying has a steady stream of organic traffic will dramatically lower your risk. Click To Tweet
With that said there are dozens of ways that online businesses can throttle fake traffic. This is a dark side to buying websites that many investors don’t talk about.
There are services that sell “organic traffic” and multiple other types of low quality traffic to boost stats. A common business model of traffic sellers is to set up a subscription so the traffic looks really consistent. In previous posts, I’ve mention 3rd party tools like SEMrush will be your best friend when going through the due diligence of buying a business. Fortunately, Flippa has partnered with SEMrush to provide high quality reports so you can avoid low quality traffic like this.
SEMrush will flush out these types of propped up business stats through backlinks and traffic value, so its worth subscribing to their platform if you’re a serious buyer, or if nothing else, spending the $10 on a full report through Flippa for any asset that you are seriously considering.
Verify Social Capital
Another heavily overlooked metric when buying a business is the social capital a business has built over time. Looking through an online business’s social profiles gives customers, partners, users, and investors a look into the business’s approach to its community. If the profiles aren’t active and the business isn’t communicating with its community on social media, there are a couple approaches that you can consider.Community matters. Before acquiring an online business, examine their social profiles to see how they are nurturing their community. Click To Tweet
One of the most under-represented tactics in buying online businesses is using a follower verification service or platform. These simple services allow you to put in a social media profile to check how many active followers, bots, and in-active followers are following an account.
Using one of these services will give you a good gauge on how you can leverage the community on social media to grow the business moving forward.
The problem many run into is fake followers, bots, and inactive followings. A large following for an online business is going to be crucial over the next 20 years, so it’s important to make sure the business that you are pursuing is actively nurturing their social media presence in order to to maintain a healthy community.
One of the important changes that Flippa made early on with the questionnaire that all sellers fill out when listing their business to the marketplace is “Why are you selling your business?”
To many new buyers, this may not seem like an important question, but the reality is that its one of the most important questions to drill down into.
These are 5 of the most common replies you’ll get:
- I don’t have the time to run this business properly.
- I need money to invest into larger ventures.
- I need money to invest in real estate or other offline investments.
- I retained a full-time job that takes all my bandwidth.
- I manage too many sites and this is my smallest.
In my experience drilling down further into the replies to this question have really benefitted me with buying web properties.
There are plenty of very valid reasons to sell a profitable business. People do it every day both in the digital world and within traditional, brick & mortar industries. But if you’re going to take this business on for yourself, its good to know why they are willing to give up monthly revenue for a lump sum.
It’s vital for beginners to check which assets the seller is including in the sale of a business.
I saved this one for last given its easily the most important. You want to make sure you get what you pay for.
Depending on the stage of the business, and the niche of the business, you will need to look for different types of assets that are going to be transferred.When negotiating a deal for a digital business, be sure to list out all of the assets that will be transferred upon closing. Click To Tweet
First, you of course need to make sure the seller provides all the source code for the online business. Having a developer you trust on retainer to help with the transfer is vital for this due diligence. I’ve been involved in deals where developers that were doing the transfer raised red flags about old or broken code in online businesses being sold that I never would have noticed. Always have a developer do a quality check of the source code when doing the transfer.
Depending on the type of business, make sure the customer database is included and confirm what data is collected from customers.
Customer databases are the backbone of a business in any industry and need to be treated extremely carefully. With GDPR regulations you will need to check with your local laws around notifying users there is a new owner of the business. In some cases, you will need to send out an email to all users registered on the website that there is a new owner. Customer databases are incredibly important to the long-term success of any web property you’re buying.
After you’ve confirmed the seller will be transferring all inventory, source code, domains, and content, you will need to confirm they don’t operate a business in the same niche.
Flippa started having sellers write this in the seller notes of a listing and I’m a firm believer in asking the seller if they have a business in the same niche before closing. In my experience, I’ve heard from many buyers that bought a business and afterwards found out that the seller was their number one competitor.
This can be avoided with a simple message asking if they have any businesses in the same space, to timestamp their response, and request a non-compete be signed that covers an agreed upon period of time.
Lastly, if you are buying an eCommerce business, be sure to understand if inventory is included in the sale or not. I’ve actually talked to many entrepreneurs that use inventory as a negotiation tactic. Asking for less inventory to be included in the deal will help you move the price down.
BONUS: Seller Financing
A bonus for new buyers is that the benefit of an open marketplace like Flippa is you can use seller financing on deals. If you’re new to seller financing, effectively you pay less upfront and pay them profits from the business until a full principle amount is reached over time.
Many sellers that are confident in their business will be comfortable with seller financing, also known as “earn outs”, and I highly recommend asking. A simple term for an earn out would be 60-70% upfront and 50% of net profit every month until the overall offer amount is reached.