Website Buying Due Diligence: Introduction

Websites are without doubt valuable assets. Many make money predictably and so it is like any other business. I've bought several websites, and it can be fun too – if you know how to improve it. This article looks at matters a prospective buyer should consider when acquiring a website.

Where Do the Users & Revenue Come From?

Assuming the business is like most websites, it sells a product or service and these transactions happen via the website in some way through a payment portal. Alternatively the website may make money through adverts or affiliate links. Another scenario is that the website is un-monetised but has a lot of traffic that is valuable for you the acquirer. In all cases, the question truly is: where are these valuable users coming from?

If you're serious about acquiring a website with a normal vendor there is no question that you will be given access to some reporting analytics letting you see the breakdown of users visiting the website, such as a Google Analytics property. Satisfy yourself of the following questions:

  • Which channels are users coming from – is the site getting most of its users from one channel, eg organic search, paid ads, social media referrals, affiliates?
  • Which channel is most of the site's revenue coming from – this can usually be understood in the same analytics tooling but filtering for conversions of some sort.
  • What country, demographics and devices are these users & purchasers coming from?

Be wary though that some analytics data tooling can be faked / spoofed. It depends on the tooling. There are plenty of websites I've seen for sale on sites like Flippa and EmpireBuilders that fit this suspicious / fake profile. We will return to this point later.

I'lll assume in the example that follows that organic is our main channel followed by PPC (paid search), for both revenue & user acquisition.

Organic Search Traffic Analysis

Organic traffic (SEO) refers to the visitors who arrive at a site through search engine results. High-quality search traffic is often characterized by a high level of engagement and conversion rates, indicating that the site appears in relevant search queries and attracts a target audience interested in its content, products, or services.

How can you tell that organic traffic is real? Well, you can see traffic in Google Search Console and Bing Webmaster Tools; this data is not possible to spoof. Remember though you want access to the property, not screenshots (which can be faked).

Sample Google Search Console property for a website starting out; it looks like the site is about to break out (in a good way)
But if a website looks like this over in Bing Webmaster Tools, you'll need to investigate why. Is search not a main acquisition channel? Is Bing search completely irrelevant to the user base (eg for Gen Z-ers)?

It is possible to build a real search profile with validated data in Google & Bing and yet still deceive the buyer however. How? If you build a website designed to trick the search engine algorithms, sooner or later it is likely that the search engine will catch up and issue a penalty. Telling if websites are likely to be hit by a penalty is a more nuanced exercise but you would want to look at things like:

  • Are the webpages being ranked obviously 'gaming' SEO algorithms? (e.g. mass scale automated pages with little value)
  • Has the website's search profile turned from 0 to 100 in an unrealistic period of time? If so, how did that happen?
  • Who is linking to the website – how healthy is the backlink profile?
  • Have any penalties been applied on the domain in the past?
  • How old is the website? Older is generally better in terms of trust with search engines like Google.

Paid Search Traffic Analysis

When assessing paid traffic the mean thing you want to understand is whether this traffic source is repeatable and whether it is profitable. Repeatability can never be guaranteed but is the cost to acquire a customer trending up, down or is it steady? Is the website conversion tag (if applicable) firing at the right time on the website or has this been falsified (as the business defines the conversion event and value – not the advertiser). This can easily be spoofed.

Onto profitability of search: in many areas PPC is not profitable, especially for small businesses. Check that the acquisition cost in the advertising interface (eg Google Ads) is a sensible amount; usually you'd want it to be a third of the revenue generated by the customer (and so a return on ad spend of 300%). This varies hugely by sector however so I will stop giving figures. If you're new to e-commerce (why are you buying an e-commerce business though?) do not be impressed by figures like 100% RoAS; this simply means you got your money back on acquiring your customer, but now you will lose money on fulfilling the order. While this is not uncommon in e-com (because you can price customers based on lifetime value) this can catch some people out the first time they go into e-commerce.

Social Search Traffic Analysis

Again this can be faked. In terms of traffic, one of the quickest ways to tell is to look at user engagement metrics based on a given channel. If dwell time on page is very low (e.g. 1/2 seconds) and bounce rate very high, this is a junk traffic channel. Having said that, social media traffic is often quite attention-poor and so analysing this requires some more delicate methods. If the claim is that the site is driving revenue from social media traffic, this is easier to verify – again, in your analytics tool view, eg GA4, look for conversions (however defined) by the channel 'social'.

Social media traffic can be very here-today gone tomorrow, especially as many people are incentivised to game the algorithms. Therefore it is worth spending some time as well seeing if the channel looks like it has grown organically or if they have paid for like/follower/click farms to artificially boost the profile.

Click farms are operations where a large number of workers are hired to click on paid advertising links, engage with websites, or manipulate online metrics in other ways. These activities can artificially inflate the perceived popularity or engagement of a website, product, or service. In the context of website due diligence for acquirers, it's important to consider the possibility because they can significantly distort the true value and performance metrics of a website.

This is not such a problem where you are able to verify that the channel is driving revenue – because click farms do not generally drive revenue. But it is possible for more sophisticated ones to supply fake purchases. And so we get to the matter of looking at the company's financials...

General Due Diligence for any Website/Business Acquisition

Financial Assessment

  1. Revenue Streams and Profitability: Evaluate the site's revenue sources (e.g., sales, advertising, affiliate marketing). Examine financial statements, tax returns, and bank statements for at least the past two years to assess profitability and consistency. Linking back to the above; if a click farm was paid $100,000 to purchase $90,000 of goods to inflate a social media channel's performance, you're in trouble.
  2. Expenses Analysis: Scrutinize all operating expenses, including hosting fees, marketing costs, and employee salaries. This helps in understanding the net income and operational efficiency of the website.
  3. Traffic Monetization: Analyze how effectively the website converts its traffic into revenue. Higher traffic does not always equate to higher profitability.

Legal Examination

  1. Intellectual Property: Ensure the website owns or has licenses for all its content, including texts, images, and software. Software copyright, like all copyright, is not verifiable but the termsheet of any deal needs to include a warranty, giving you a remedy in misrepresentation in the event that something turns out to be false.
  2. Compliance with Laws: Verify the website's compliance with relevant laws, including data protection regulations like GDPR, COPA.
  3. Contracts and Agreements: Review all contracts, including with suppliers, customers, and employees. Pay special attention to any long-term obligations or liabilities.

Technical Evaluation

  1. Website Infrastructure & Codebase: Assess the website's technical setup, including hosting, scalability, and security measures. Evaluate the quality of the website code and any third-party integrations.

Operational Review

  1. Business Model and Strategy: Understand the website's business model and future growth potential. Assess how well it aligns with your own business goals and strategies. If you do not know the domain / sector, e.g. affiliate marketing or e-commerce, get someone in who has done it before.
  2. Customer Base and Satisfaction: Evaluate the size and loyalty of the customer base. Review customer feedback and satisfaction levels to gauge the website's reputation.
  3. Management and Staff: If the website comes with a team (although many sold online promise a one-person business which you can run from home / the beach / etc), assess their skills, roles, and importance to the business. Continuity in management can be crucial for a smooth transition.

Best Practices in Due Diligence

  • Hire Professionals: Consider engaging financial advisors, legal experts, and IT specialists to assist in the due diligence process.
  • Request for Full Disclosure: Insist on complete transparency from the seller. Incomplete or misleading information can lead to poor investment decisions.
  • Perform a Comparative Analysis: Compare the target website with its competitors to understand its market position and potential.
  • Plan for Post-Acquisition: Develop a clear plan for integrating and managing the website post-purchase.

Common Pitfalls to Avoid

  • Neglecting Due Diligence: Skipping thorough due diligence can result in unforeseen problems post-purchase.
  • Overestimating Revenue Potential: Be wary of unrealistic revenue projections. Base your expectations on verifiable historical data.
  • Underestimating Operational Costs: Operating a website can entail hidden costs. Ensure you have a realistic understanding of ongoing expenses.

Website Due Diligence: Wrap Up

If you are paying real money for a business (three figures + ) do meticulous due diligence. By thoroughly examining financial, legal, technical, and operational aspects, you can make an informed decision and mitigate risks.

Anecdotally I've noticed a lot of junk websites for sale in previous year on sites such as Flippa which sell for low to mid range two figures ($10k, 25k, $50k). Many seem to have entirely made up traffic profiles and are presumably targeting those who have fallen into easy money somehow. Watch out.

I get it: buying websites is fun. But balance your enthusiasm with research, you want a sound investment. If you need help with assessing the traffic / analytics / technical aspects of a website you're interested in acquiring, get in touch with Self.