According to the Forrester report 2013, online commerce in the United States will shift the traditional brick-and-mortar within the next 5 years, reaching total annual sales of US $ 370 billion. That is why many entrepreneurs are looking for opportunities to buy online businesses, trying to achieve the benefits of a model that has lower fixed costs and great flexibility for its owners.
Based on industry estimates, there are more than 100,000 online businesses in the United States that generate at least $ 12,000 in annual revenue. When the owners of these businesses decide to sell the business, they follow the same process as traditional companies, e.g. Work with a specialized broker, establish a business valuation and promote the sale of the business.
But on the buyer side, you have to keep in mind that buying an online business has its particular risks. Therefore, when conducting due diligence, it is important to focus on the specifics that determine its value, risks and financial projections.
There are 5 main aspects that need to be investigated before closing a buy-sell transaction for an online business:
Unsustainable Site Traffic
In the online universe, success and site traffic go hand-in-hand. Although online companies advertise through Google Adwords and other mediums, these companies rely heavily on organic search capabilities to achieve sustained site traffic. During due diligence, it’s important to evaluate traffic sources for issues that could threaten search rankings and ultimately reduce the number of users who visit the site.
You don’t have to be a computer programmer to be a successful online business owner, but online companies do require a certain amount of technical know-how. Unless you are extremely adept at the technical aspects of online assets, you should consider hiring a contractor or online due diligence firm to evaluate the site for black hat SEO tactics, tampered traffic totals, plagiarized site content and other issues.
High Maintenance Requirements
Online business owners often play a key role in normal site maintenance routines. Talk with the current owner to estimate how much time you will need to devote to site maintenance on a daily, weekly and monthly basis and to determine whether or not you have the technical chops to maintain the site without assistance. If you require additional help, you’ll need to include the cost of outsourcing or of hiring an additional team member in your budget forecast.
Competition with the Seller
The possibility of competing against the seller post-sale is a serious risk for acquirers of online companies. The ease of launching a new online business and the inability to enforce non-compete clauses overseas (where many acquisitions are based) mean that you will need to go the extra mile to research the background of the seller before you commit to a deal.
Most online businesses don’t audit their financial records. To verify financial disclosures, sellers are often forced to rely on secondary checks using a combination of site metrics and industry benchmarks. If a certain aspect of the site’s financial information doesn’t fit with the larger story being told by site metrics, it could be a sign that the financial information is flawed or fraudulent.