If you’re thinking of buying an existing website or eCommerce store, then you need to know exactly what you’re getting for your money. Thankfully, you can do this by conducting due diligence. By carrying out due diligence checks, you’ll be able to verify the ownership of the site you’re looking to buy, confirm its revenue, and accurately assess how you can run your potential new venture.
To help you work out whether the website you’re looking to buy is a good investment, we’ve put together a due diligence checklist for buying a website. Follow all the steps we’ve laid out and you’ll be able to accurately assess whether the investment is right for you.
But, before we reveal our due diligence checklist, let’s first look at the importance of carrying out due diligence and the steps you need to take.
The importance of due diligence
You should think of due diligence as an audit of the website you’re looking to purchase. By carrying out due diligence on the website you’re looking to buy, you can make sure that you’re making a sound investment. In many ways, due diligence is just a series of checks. After all, if you were buying a house, then you’d get surveys done and if you were buying a used car, you’d ask a mechanic to check it over. The way you carry out due diligence on a business is different, but the principal is the same. You’re checking everything is as you expected and making sure there are no hidden surprises.
By carrying out a thorough period of due diligence, you can confirm that all the information the seller has told you about the site is correct. Without carrying out a proper period of due diligence, you cannot confirm any of the information you know about the site and you may find that the investment you’ve made isn’t the right one for you.
The steps you need to take
Due diligence is a lengthy process, but it can be split into four steps:
- Basic due diligence
- Financial due diligence
- Quantitative due diligence
- Operational due diligence
By carrying out all four due diligence steps, you’ll learn everything you need to know about the business, its traffic, its profit and how it functions. Here’s what all the different steps will show you:
- Basic due diligence: This is the first step and will help you answer basic questions about the website you’re looking to buy, such as the type of website it is, the business model it uses and whether it appears to be legitimate. During this step, you should also verify that the seller is who they’re saying they are.
- Financial due diligence: This will tell you everything you need to know about the business’ revenue and debt.
- Quantitative due diligence: This will show you whether the non-financial numbers also make sense and correlate to the financial data.
- Operational due diligence: This will teach you more about how the website works and how you can run it.
Once you have conducted all four due diligence steps, you’ll be able to make an informed decision about whether the website you’re looking to buy is legitimate, profitable and right for your investment portfolio. To see how all these steps work practically and the things you should be looking for during each stage, download our due diligence checklist for buying a website below.
Our due diligence checklist
Now you know the basics about due diligence and how it can help you, download our checklist to see how you can carry out all of these stages.
We’ve broken down each stage of the process. In doing so, we’ve highlighted key questions you should look to answer at each stage and provided a written explanation of exactly what you should be looking for.
Please note that this checklist is not and should not be considered legal advice.
Basic due diligence
Questions to answer
- Does the website function correctly?
- How old is the website?
- Is the domain valuable?
- How does it compare with competitors?
- Who are you dealing with and can you trust them?
While carrying out basic due diligence, there are a number of simple checks you can make. You should start by visiting the website you’re looking to buy and analyzing how it functions. If the website has been built correctly, all the links should work, the pages should load quickly and you should be able to navigate the website easily. While you’re looking at the prospective website, you should also consider how much the domain name is worth (and whether it could increase value) and whether the website has been monetized correctly (or whether you have the opportunity to improve this).
Following this, you should check the age of the domain using a tool like the Wayback Machine. This will show you whether the domain has ever been owned by another business or used for a different purpose. If it has, then you may encounter problems with old links and incorrect citations.
At this point, if you’re happy that the website looks legitimate and meets the criteria, then you should compare it to the websites of its competitors. This way, you’ll be able to assess where the website sits in the market and whether it’s possible for you to catch and outrank competitors.
As the final step in this process, you should also verify the owner of the business you’re looking to buy. You need to know that they have legal ownership of the domain they’re looking to sell and that they are who they say they are. Although you’re unlikely to physically meet the seller during the sales process, you should be able to build an easy rapport with them and they should honestly answer all questions and supply relevant information in a timely manner. If you’re in any doubt about their legitimacy or whether they have any outstanding lawsuits against them, you can check relevant databases. On a basic level, you can also check their social media activity.
If your basic due diligence has been successful and you’re happy to proceed, you can then perform financial due diligence.
Financial due diligence
Questions to answer
- Are the revenue sources legitimate?
- What are the sources of revenue?
- Which are the popular products and categories?
- Is debt associated with the business?
During financial due diligence checks, you’re trying to work out whether the website is generating the revenue the seller is claiming. To work this out, you’ll need to look at the historical and financial position of the business. For this reason, it’s vital that the website owner has maintained accurate and detailed financial records.
The first thing you should do is take a detailed look at dashboards and reports to ascertain whether the revenue you’ve been told the website generates is accurate. At this point, you should also ask for copies of bank statements, affiliate statements and merchant processor statements. To help verify this information, many buyers and sellers use a live screen share. As well as looking at online banking portals to verify financial information, this technology can also be used to show the seller accessing the back end of the website.
If the website you’re looking to buy sells products, you should look into which are the most popular. Remember that when you’re analyzing this, you’re also analyzing risk. This is because if the site primarily sells one product or mainly sells items from one category, then the site may become far less profitable if one or two pages of the site lose authority or rankings. For this reason, most buyers consider websites with a range of successful products to be less risky.
Finally, you should also trace any historic, current or likely future debts and liabilities associated with the business (credit rating checks are a good place to start). By carrying out these checks, you can accurately assess whether the business is in a healthy or unhealthy financial state and see whether the business has any debts that may pass to you.
Quantitative due diligence
Questions to answer
- How much traffic does the website receive?
- What are the top pages?
- Where does the traffic come from?
- Does the site offer strong organic search performance?
If the numbers add up, then it’s time to look at all the metrics that aren’t financial and see whether they tie in with everything else you’ve learned so far. Ideally, the findings from your financial analysis should be verified by your quantitative analysis because the two forms of due diligence are similar.
However, it can be really easy to get bogged down with quantitative information and try to analyze every piece of data available to you. Keep in mind though that this isn’t necessary. Instead, you need to focus on answering the above questions. No website is perfect and you need to use your due diligence checks to analyze risk.
So, start by looking at how much traffic the website actually receives. You should ask the seller for access to their Google Analytics account (or whichever analytics tool they’re using) and look at the trends in overall traffic. Then, check the traffic for each channel on a daily, monthly and annual basis. Ideally, you’ll see slow and steady growth over time. However, if there’s a drop in traffic at one point or a channel suddenly diminishes in importance, then this may correlate to something the owner did, so you should speak to them about this before you decide whether there’s an issue.
During your traffic analysis, you should also look at the site’s top pages in terms of page views and sessions. If your financial analysis shows that one or two key products outperform others, then you’d expect the top pages to correspond. You should also assess how long people spend on the site and the number of pages they visit. If people stay on the site for a lengthy amount of time and visit multiple pages, it’s likely that the site offers a good user experience.
Following this, you need to assess the sources of the traffic. For example, if you know the current site owner spends a lot on advertising, then you’d expect to see a lot of advertising traffic. Alternatively, if it’s an affiliate site, then a lot of the traffic will come directly from Google. On top of this, you should also consider where the traffic is physically coming from and when. Generally, seasonality isn’t important as long as the traffic comes when you expect it to. For example, if the site sells garden furniture, you’d expect the majority of its traffic to come in spring and summer. Similarly, the traffic should come from the geographical location you’re expecting. So, if the website is based in the US and doesn’t ship products internationally, you’d expect the majority of traffic to come from the US as well. If the site does ship internationally, buyers prefer to buy eCommerce sites where a high percentage of the traffic comes from North America, Europe, the UK and Australia because these are considered high-revenue areas.
At this stage of the due diligence process, you should also consider the site’s performance in terms of search engine optimization (SEO). Although not all websites rely on traffic from Google, you need to know how well the website ranks and how easy it is for competitors to outrank you.
You can use tools like Ahrefs and Moz to see how the website performs against its competitors and check how many backlinks the site has (these will help improve the site’s domain authority and will help it grow naturally). Ideally, the site will have a link profile that has increased gradually over time. The links should look like they haven’t been paid for and the links should be natural. If links have been paid for, this should have been declared.
In addition, you should use tools like SEMrush to look at how the site ranks for the keywords it’s targeting. Overall, if the site ranks for a high number of keywords, receives traffic from across the keyword spectrum and is ranking consistently, then it has a solid foundation.
Your final check at this stage should revolve around penalties. If the website has ever been placed in a penalty, traffic will have dropped considerably and the site may no longer be ranking for terms it did previously. If you have reason to believe the site has been penalized, ask the owner whether this was the case and the steps they took to rectify the issue.
Operational due diligence
Questions to answer
- How is the website hosted?
- What platform, themes and plugins does it use?
- Are standard operating procedures available?
- How long will the handover period be?
- How often is the website updated?
- Does the site use writers and researchers and will they stay on?
Although websites can provide a degree of passive income for their owners, many are difficult to maintain and grow. Remember, in order for your website to perform well, you’ll need to keep it up to date and stay ahead of the competition in an ever-changing market. To help you gain an understanding of how hands-on you’ll need to be and how much time it will take you to update the website, you should ask the seller to break down their tasks and responsibilities on a daily and weekly basis. You may also need similar information from developers, depending how much hands-on work you’re going to take on.
On top of this, you’ll need to know information about how the website is built, hosted and operated. Start by asking about how the website is hosted. If it’s on a generic host then everything can be transferred into your name easily and quickly. However, if it’s on a private server, you may need to pay for it to be migrated and this could cost you several hundred dollars.
Similarly, ask which platform the current website owner uses and also discuss what themes and plugins are required (and whether they’re paid for and licensed). Ideally, a generic platform like WordPress is preferable. If not, you may need to learn how to use the new platform. Ideally though, the business will have well-documented standard operating procedures that will teach you everything you need to know. If not, you can ask the seller about how long the handover period is. 30 days is considered standard, but you can try to negotiate a longer period if you feel like you’ll need more support.
Finally, you’ll need to know how often content is updated or published and the team responsible for this. Ideally, the team of writers and researchers that the current owner uses will be willing to stay on. If so, you’ll need to know how much they currently pay for content. Of course, if they’re not staying, then you can get your own content written, but it’s convenient to inherit a team of people who all know what they’re doing.
In summary, conducting detailed due diligence before you buy a website is critical. By carrying out due diligence checks and answering all of the questions we’ve outlined above, you can identify any risks that might be associated with the purchase and you can put your mind at ease. If you’re considering buying an online business, then take a look at our listings today to find the perfect opportunity.