You are about to buy a new digital asset? Great. This due diligence checklist will provide you with guidance on what to look out for.
As we mostly focus on buying websites, this guide is geared towards the specifics of a website. Reach out to us, if you want our guides on buying an App, Domain or any other digital asset.
Due Diligence Checklist for buying a website
I have split this due diligence process into three parts:
- An initial assessment (with a rather quick, first analysis)
- First contact & gathering info
- Deeper analysis before making an offer
This article describes the first step in the process. At the end of the article you will find the link to the next step. If you need help at any point or have questions, reach out to me.
Does the niche fit to you – you personally?
Can you imagine to write articles about this, speak to potential business partners, brief outsourcers? You will spend time on this project. So better choose a niche that is dear to your heart. I mean it or you will regret it later.
I have separated this analysis into a few sub-elements. They can be followed in that order, but don’t have to. However, start with reading the listing carefully yet as you might stumble into weird issues that do not make sense.
Read the listing
Sounds stupid. But do it, and do it carefully. Read it once, twice, and look for the small things.
I looked at one listing recently were the headline claimed a certain business age (e.g. “4 years old with guaranteed passive income”) while a bit further down the official business age was listed with only 2 years. Checking within Ahrefs that traffic only started 2 years ago. So here you already have your clear signal that the seller tries to manipulate. Proceed with caution!
👍 Positive signals:
- The seller writes clearly and shows a clear motivation of why he is selling.
- The information seems complete and is consistent (facts line up).
- The seller provides good ideas on how to grow the business.
🚩 Red flags:
- Does the seller use overly salesy language (e.g. auto-pilot, passive income)?
- Are there obvious mistakes as listed in my anecdote above?
- Is the text sloppy, comes across as inconsistent?
Read the comment section
If the listing is popular and already has quite a few parties interested, read the comment section. What do people ask for? What do they find? Very shady listings are usually identified quite quickly. So don’t miss this crucial section.
Analyze the seller
Who is the person (or business) selling the website? If you use a marketplace (such as Flippa), does the person have previous website sales on the marketplace? Do you find social profiles (e.g. LinkedIn) and can at least establish a bit of credibility?
Is the valuation realistic? We have written an article here about how to value a website. When we buy a business we aim to buy for valuations <30x monthly net revenue. In other words, we aim to recoup our initial investment within 30 months (assuming everything stays the same).
If the valuation is within your defined range, proceed. If the price is already way too high and you don’t spot any easy wins to increase revenue drastically, move on.
When you should pay more?
Can you leverage synergies with either your personal knowledge or other business you already own? If so, you might be able to pay more.
Do you see obvious quick-wins other people can not see?
Does your personal knowledge enable you to quickly increase revenue or reduce costs substantially? But in a way that is not obvious to other parties as well?
Is the website you are aiming to acquire in a stable or even growing niche that is not too competitive?
A great starting point is related search behavior in that respective niche. Use tools such as Ahrefs.com to assess the overall search volume and keyword difficulty.
How fierce is the competition? How easy would it be to grow organically? Paid marketing is alway possible, but usually costly. So I recommend to start with this brief analysis of the search environment of this niche.
Business model assessment
Is the business model interesting? Does it have overly complex (offline) operations? Do you need to speak
- You need to involve multiple external parties to keep the website up and running.
- Support or required headcount is high.
- Processes are not automated.
- Sales required outbound calls.
- You get the idea..
- Low overhead (e.g. personell)
- Operations are mostly online.
- Key processes are automated.
- The working capital is positive (money is earned before it’s spend)
Do you have a positive feeling after reviewing all of those elements and feel like moving into the next phase? Great, but do not get in a rush.
Take your time and be aware that good investors are good at waiting – until the very best opportunity comes along.
It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.Charlie Munger, Warren Buffett’s right-hand
However, if you feel good, move on and move on quickly.
I am are currently preparing a deeper guide on what to do next in your journey. If you are interested, contact me and I am happy to send you a draft.