When investing in any business, it’s crucial to first investigate it thoroughly. It’s easier to fall prey to a bad investment, especially when it comes to online businesses.
If you’re buying an online business, this website investing due diligence checklist will help you tackle some of the most important issues.
A due diligence process will help you answer all the important questions.
- Why is someone selling their business?
- Is the website losing money?
- What are the liabilities?
- Does it even have the potential to return your investment?
It goes without saying that any investment, big or small, needs to be strategic. With a website, it’s both easy and difficult to conduct due diligence.
It’s comparatively easy as the business is digital, so there’s not much running around.
On the other hand, it is difficult because the information may be limited or even deceiving.
What is Due Diligence?
In the world of business, due diligence is the process of investigating an investment opportunity. It could be anything from a company to a property or even copyrights to something.
In the context of websites, due diligence is basically ensuring that the website you’re purchasing is legit and has potential.
Due diligence is not one-way, as sellers can also look into a buyer to ensure that they have the means to buy their business.
In simple words, a website due diligence is similar to an audit before the investment is finalized and the deal is done.
Website Investing Due Diligence Checklist
This checklist will cover general due diligence for covering a website. Most of the steps of due diligence have tangible results.
In other words, the outcome is hard data that you can study to make the final call.
Due diligence shouldn’t just focus on numbers. It should also look into ideas, procedures, employees, vendors, and culture behind that website. You see, a website is a company, so you have to investigate it like one.
Here’s what you need to put on the list for due diligence:
1. Website Owner
First thing’s first, you need to look up the owner of the website and talk to them directly. Normally, in a traditional business transaction, no investor would go ahead without a face-to-face meeting with the owner of the business.
The same is the case when buying an online business like a website.
Regardless of the nature of the website, it’s important to ascertain the identity of the person behind that business. With digital communication tools like Skype or Zoom, it’s possible to chat face-to-face on live calls, even from a different country or continent.
Using those tools, you should set up a meeting with the owner and have them answer any questions you have (more on that ahead).
While it’s not required to personally meet the owner or the organization behind the website, the very least you can do is confirm their identity. Look them up on social media, especially LinkedIn, to confirm they are legit.
This will give you only an idea that person is perhaps legit, although it’s not too hard to create a fake account these days.
2. Finances
This is the most crucial step, which is why it’s on top of the checklist. As a potential investor, you have the right to view the finances of the website you’re about to purchase.
Those finances will help give you a direction with your decision, whether the website is worth investing in or not.
You can request financial documents pertaining to the website or its owner to see how well the website is performing. Transaction statements and tax returns can be used to get the picture of how much revenue the website has been and is currently generating.
You can also ask them to show you the backend of the website where all of this is happening.
Similarly, find out if there are any debts, loans, or other financial liabilities currently on the website or the company behind it.
If you want to be extra cautious, hire an expert to review these finances, and help you make sense of the business.
3. Taxes
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.
4. Verification
When buying a website from someone or some company, you need to make sure that they fulfilled their legal obligations and conducted business as per the laws and regulations.
- Is their business registered in the country they are operating in?
- If not, are they operating as a sole trader?
- Do they have trademark licenses, if any?
- Do they have appropriate image and content licensing for the content on the website?
You can tackle these questions directly with the owner and also find out the information on your own. Of course, it will vary based on the nature of the website.
5. Website Traffic
One of the most crucial steps for due diligence for investing in a website is looking at the website traffic for the past year or perhaps years. The number of visits, clicks, and conversions will help you evaluate the success of the business.
The traffic should commensurate to the revenues you looked at earlier. If there are discrepancies, you may need to investigate further.
The traffic report should be quite detailed, so you can make the distinction between real traffic and fake traffic created with bots.
Here’s what you should look into:
- Average time per visit
- Clicks to conversion ratio
- Number of pages visited
- Source of traffic (search engine, social media, affiliate links, etc.)
6. Intellectual Property
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.
7. Products and Services
The website you’re interested in likely offering a product or service. The whole thing revolves around the product or service at the end of the day.
So does it have potential? Do you believe it? These are some of the most important questions to ask.
While the other steps in this due diligence checklist cover verification and investigative parts of the process, this one measures its potential. If the product or service doesn’t have a lot of potential, it may not be worth investing in the website.
You should also be asking questions like whether the product or service could use improvements. And if they could, whether those improvements will increase revenue.
8. Employees
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.
You should understand the employee structure of the business and get to know those employees beforehand. They might be working for you once you’ve purchased the website, so you should know their roles in running the day-to-day business.
This will also give you a chance to learn about the culture of the company. Even if it’s just two employees or remote employees, you should know how they’ve been working all this while, especially if the website is quite successful.
You would want to continue that process to ensure the traffic and sales grow or at least remain steady.
9. Operations
Similar to employees, you should also 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 uses a vendor, and find out how it all works.
If you have a valuable skill set that can extract value in the operations, this is your moment to find areas to improve the business.
10. Customer Profile
The customer of the website will soon be your customer. But who is the customer? Believe it or not, studying visitors to the website is just as important as investigating the website. It’s an important but often overlooked part of website due diligence.
You should catalog the consumer persona to see what kind of customers are visiting the website. Also, look into their interaction with the website. Demographics are also vital to understanding the profile.
More importantly, make sure you receive all the customer information the website has collected since its operation. Organic data like that is crucial from the point of marketing and engagement. This is all the more important for online businesses that rely on loyal customers.
Wrap Up
This website investing due diligence checklist covers all the essential steps to investigate a website thoroughly before investing in it. It will give you a wholesome picture of the business and confirm its legality.
You can conduct most of these verifications on your own, but to be more cautious, you can use a business consultant. If the owner or company isn’t transparent about any of the information outlined above, then it’s probably not a good idea to invest in it.
