If you have been searching for an online business for sale and found one that meets your desired acquisition criteria, its usually the right time to conduct some initial due diligence to dig a little deeper and see if is worth pursuing. Regardless of how appealing a website looks on the surface, a thorough analysis of the business and the environment in which it operates should help to determine whether or not it is worth pursuing.
Seasoned investors often have a structured process that they follow, starting with a reconnaissance run of the business followed by a detailed review of all the available data and trends to understand the crux of the business as well as its current and historic performance.
There are various different ways of completing a preliminary audit and it can be a brief or time-consuming exercise depending on the size and nature of the business. To structure the task, there are five key areas any investor should explore before arranging a call with the broker/seller:
Choosing a Niche When Evaluating a Website
The niche in which the business sits is important for a whole host of reasons. Naturally, most buyers prefer to invest in a niche that they can relate to or have experience in, which forms part of the motivation for potential acquisition. Even if a site operates in a niche in which the investor is passionate, it is critical to maintain a level of objectivity throughout.
Asking some of the questions below can help to maintain an objective viewpoint, free of bias. To help, tools such as Google Trends, KeywordEye and Keyword Tool can be used to look at patterns within a niche, over time. Take a look at our list of 105 Free SEO Tools.
Understanding the above is important – investing in a highly competitive niche experiencing a downward market trend means that the business is likely to occupy a small market share that is set to shrink further over time.
Observing Traffic when Evaluating Websites
A very important aspect of any online business, traffic is to online business what location is to a high-street shop. If a website is listed with an established broker, it is likely to have Google Analytics installed. Advanced analysis techniques involve a deep dive into traffic data in order to develop independent strategies for user experience, CRO and SEO. At this stage however, it is worth understanding and evaluating some of the headline metrics outlined below.
If well-versed in SEO, buyers may look at negative responses to the above in a positive light, weaknesses in some of the areas outlined could be interpreted as lucrative opportunities. That said, if SEO is not a forte, a buyer may not have the experience or resource required to turn around some of the issues being faced by the business.
Website Evaluation – Looking out for Penalties
This goes hand in hand with reviewing traffic trends. Google rolls out algorithm updates on a frequent basis – in 2013 alone it was reported that Google made over 890 improvements. ‘Panda’ and ‘Penguin’ updates are carried out routinely with the aim to downgrade websites with low-quality content (thin, duplicate etc.) and those that seek to deceive users (and upgrade others).
In 2015 Google also began rolling out a mobile-friendly update, which positively impacts sites that are optimized for mobile access. A check should always be carried out on a website to validate whether it has been affected by an update in the past. This can easily be done using FEI’s website penalty indicator tool. There are also plenty of other resources available that describe how best to tell whether a website has been hit by a penalty or update.
Being ‘hit’ by a Google update or manual penalty indicates that a site is under performing in certain areas. A loss in ranking power as a result is likely to equate to less traffic and impact financials. Unless the site owner has made necessary amendments to the site (which can be explained and verified) and traffic has normalized, buyers should proceed with caution.
Looking at Financials When Evaluating Websites
Validating the accuracy of the income statement is set aside for the due diligence period. At this point in proceedings, buyers should instead look to unpick the income statement, pinpointing any specific trends (e.g. seasonality). A well-diversified set of revenue streams is encouraging, but if the main source is dropping, there could still be a fundamental issue with the business.
As well as revenue, it is important to focus on and question the business’ cost/expense base. If there are costs that seem to have been excluded, they should be noted down. Seller Discretionary Earnings (SDE) is often used as a foundation for online business valuation and it is an important concept to understand in order to interpret potential earnings following acquisition. SDE will vary depending on the buyer and will impact the multiple that one is prepared to pay for the business. Below are some of the questions that should be explored when reviewing the financials:
Traffic and financial analysis should be conducted in parallel with the income statement, telling the story of the business. If traffic trends are on the increase, but financials are decreasing or stable, it could be that there are issues with conversion that need addressing, at a cost to the new owner. Generally speaking, buyers should look to acquire sites with a history of stable income and should remember to price their time into an offer on the business where the financials are on an SDE basis.
The Operations When Evaluating a Website
Even if all of the above look healthy and in good order, once the business has been acquired it will still need to be operated. Consequently, buyers should ensure that the business fits with their existing skill-set and that the time required to manage the business successfully is actually achievable in practice. The information pack provided on the business should contain all of the details relating to the platform, tasks completed, skills required and level of owner time required. Below are some of the key considerations that should be explored:
Without employees and infrastructure to manage, the owner time commitment on a well-established online business can be very low. Using the transaction data, FE International compiled an estimate of the average owner time commitments for the most common online business models:
Being attracted to an online business for sale that is in the right niche, trending upwards and has a good grounding is tempting. Nevertheless, if a buyer cannot run the site successfully and/or is not well-positioned to take ownership, then this should be noted early in the process. Making a sound investment decision is as much about understanding one’s internal capabilities as it is about spotting the right business to acquire.
Final Thoughts on Website Evaluation
Looking to buy an online business for sale is an iterative process, requiring plenty of back and forth between buyer and seller. Having completed some initial due diligence, learnt more about the business and put together an initial set of questions, buyers should be sure to speak to either the broker responsible for the deal (if broker represented) or the seller directly. In the case of the former, buyers should take advantage of a broker’s ability to source any additional data that requires assessment.
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