Affiliate Due Diligence: How to Evaluate an Affiliate Business

This article is part of our Internet Business Due Diligence series, in which we provide you with information on what makes a particular business model unique when it comes to due diligence. For more in-depth reading on due diligence, see our posts on Due Diligence of an Internet Business and Advanced Due Diligence.

Buying an existing affiliate website is an effective way to make money online, especially if the owner has done a good job setting it up to earn passive income, and the niche has everlasting appeal.

An affiliate website is one that monetizes on the sale of third-party products by collecting a commission fee when they’re sold through the site. For example, Amazon and Alibaba are affiliate sites. However, you don’t need to be a household name to make money from the business model, particularly if you choose a high-demand, low-competition niche.

But before writing your letter of intent, you need to do your due diligence. Here are some factors that are particularly pertinent to affiliate websites.

Content is Key

Affiliate sites tend to be content-driven, so they’re similar to advertising business models in that they are highly reliant on organic search traffic. As such, content creation and search engine optimization are major components of running a successful affiliate business. This can pose certain risks, as search engines are constantly updating their algorithms, so maintaining SEO is not a set-it-and-forget-it task. Not to mention that creating the content itself can cost time and money.

You’ll want to ask site owners:

• How content is being created? Do they use freelance writers and designers, an agency or do they have a staff?
• Who maintains SEO? If it’s the owner, how much time do they spend?
• Have there been any anomalies in site traffic? What caused them?

For a full list of everything you need to look into when doing your due diligence for an FBA business, click below:

You’ll also want to look at the site’s analytics. An affiliate site with many traffic sources and a diversified set of keywords is likely to be more stable than sites ranking for fewer terms, especially if the terms do not have long-term value. Because affiliate sites tend to rely on keywords with high buyer intent (i.e. ones with high competition), this factor presents risk.

You can see which keywords a site is ranking for by looking at its Webmaster Tools; just click on Search Analytics then Search Traffic:
From there, you can look at keyword metrics over specific periods of time, and see which pages are ranking highly. You can also export keywords and their metrics for quick and easy analysis in Excel.

Another component of content that needs to be evaluated is how much promotional content is on the site in relation to how much informational content there is. A site should have a good mix of the two, and there should be a clear distinction between them. Tutorials, how-to guides and other educational content are great complements to product descriptions and reviews.

Conversions: Are People Buying?

With an affiliate business, you should look closely at conversion rates, or the percentage of visitors that click-through onto the affiliate site and subsequently make a purchase. High traffic without conversions isn’t worth much for an affiliate site.

Don’t just look at current conversion trends, look at them over time. Is the CTR up, down or stable? Why? Does this present an opportunity or a risk for the business?

A high conversation rate isn’t always a good sign, since the product could be trendy now, but less attractive to consumers in the future. A loss of traffic could also result in lower sales. Conversely, a low conversion rate isn’t always a bad sign, especially if the site is driving a lot of traffic. There may be an opportunity to optimize conversions. It’s important to look at the potential upsides and downsides of current metrics.

Room for Expansion

You’ll want to look at sites that aren’t too narrow in their niche. Generally, businesses that can easily add offerings are more agile and have more long-term potential than those that focus on a trendy niche. Consider whether there’s opportunity to add products or services to the site in the future, and if there is room for the business to expand and attract a larger market share in the same category.

Buyers should carefully consider whether there are opportunities for growth, as this means less risk.

Affiliate Terms of Agreement

Affiliate sites should have written terms of agreement with all of their merchants, so you’ll want to ensure that these A) exist; and B) will be easily transferrable. Read through what the seller and its merchants have agreed to, and consider having legal counsel review it as well – particularly if there’s anything questionable regarding payouts or obligations.

Buyers will want to ensure that the business is legally and logistically transferable and gain a clear understanding of how and when commissions are paid.

Conclusion

Affiliate websites can be a great way to earn income without spending a lot of time on fulfillment and maintaining inventory. If you want to make sure the affiliate site you’re eyeing is worth the investment, be sure it gets good traffic, has quality content and there are opportunities for growth – both in terms of the niche itself and the agreement the seller has signed with their merchants.