Buying an established online business can be a lot easier than starting a new company from scratch. For one, most of the start-up kinks have likely been ironed out, and an already-existing supply chain means you can hit the ground running. Plus, an established business already has a customer base, and much of the digital marketing like SEO may already be in place.
But what if you’ve overlooked a key factor in how the business operates? Have you done due diligence to ensure you can afford to run the company (and that the company you’re buying is right for you)? Without proper checks, you could be walking into bankruptcy.
Thankfully, there are steps you can take to avoid disaster. Read on to learn about the top five mistakes made when buying an online business and how you can avoid these common pitfalls.
Due Diligence
As the adage goes, if something looks too good to be true, it probably is. Not everything described by a site owner may be as it seems, so the first step that must be taken when buying an online business is to complete due diligence. Without proper checks of the company’s history, revenue, and operations, you won’t know what you could be potentially buying.
Even though you’re excited to get started with your new digital acquisition, there could be a reason why the current owner is selling. While not an exhaustive list, due diligence should at a minimum include:
Background
To help project future growth, collect information like click conversion, customer traffic, marketing campaigns, and the current SDE or EBITDA value.
Profitability
You need to know what potential income (or loss) you’re buying. Ensure revenue breakdown listed on any reports can be tied directly to the business.
Costs
Overheads can quickly eat away at your profit. A detailed P&L statement should include all business expenses including current marketing and advertising costs. Services like SEMrush can be useful to ensure there aren’t any unreported paid traffic sources.
Assets
If the business sells goods and not just services, check what stock you will be inheriting. If possible, physically visit the site where the stock is held or at least request a video of the goods. Pictures can be more easily manipulated (and video shouldn’t be hard to get).
Ensuring you gather as much information as possible before entering into an agreement is the first step in avoiding buying the wrong online business.
Buying the Wrong Website
There are literally thousands of websites for sale at any given time, with many of these being sold by unscrupulous owners trying to offload a bad investment. Completing due diligence will help safeguard against many of these scammers,. However, to further protect your time and money, it’s important to take a careful approach with any new digital acquisition.
To ensure you’re buying the best business for you, ask yourself the following questions:
What is the seller’s motivation?
Are they selling to get away from a financial catastrophe or is the sale genuine? Is the seller getting out because the business has run its course? Look at trends in the market you’re wanting to enter to ensure the business is future-proof.
What is the business’s reputation?
It can be near impossible to improve the reputation of a tainted business. Check the Better Business Bureau for complaints against the site.
How does the business rank on search engines?
Search engine traffic helps drive business to your site. If you buy the business, will you need to employ an SEO expert or does the site rank well enough as is?
Does the business fit your interests and goals?
Establish some criteria to help narrow the scope of your search. Setting profit, maintenance time, and sale price parameters is a great start.
Will the business grow?
There’s no point buying a business if there’s no chance for growth. Setting up a realistic, time-based business plan with achievable goals can help lead you in the right direction.
With careful consideration, you can ensure you’re buying a business that will last the test of time.
Paying Over Market Value
Prices for online businesses vary greatly, from a few hundred or thousands of dollars to many hundreds of thousands of dollars. When buying an online business, many new owners overestimate the value of a business they’re buying and end up paying too much.
To avoid this, it helps to know how online businesses are valued. A general rule of thumb is to multiply the business profits by a factor of two to three. While this is a good guide, a more accurate measure often employed is to work out the Seller’s Discretionary Earnings, or SDE.
Generally used for selling businesses under $1,000,000, SDE is based on the owner’s total cash flow rather than being based solely on profit. The basic formula to work out the SDE is:
Total Profit – Cost of Goods Sold – Expenses + Owners Compensation
While SDE is the main method used to price online businesses, this is only part of the equation. The final sale price will be influenced by a number of additional factors, including:
• Profit
• Brand recognition
• Domain name
• Web traffic
• Social media presence
• Customer database
• Physical assets
Overextending Finances
A common mistake of many new business owners is going into debt. While it can sometimes be hard to avoid, running any business requires capital so you need to know how much you have to work with. If you have a business loan to cover as well as general expenses, will you be able to offset these costs with only the cash flow from the digital acquisition?
One of the easiest ways you can avoid going into debt is to wait until you have sufficient funds to cover the cost of buying the business. Even with low profit, it will be easier to run the business without a monthly loan payment looming over your head.
Another option is to look for investors. Giving up partial ownership of the business may seem drastic, but it can also provide the necessary funds to make the purchase. Investors don’t just provide capital in return for a percentage of the profit; as they’re buying a piece of the business, they also share in any losses, thus mitigating your risk.
Not Using a Broker
One of the easiest ways you can avoid these mistakes is to enlist the services of a reputable broker. As brokers only work with reputable business owners, they can ensure your new digital acquisition isn’t on its last legs.
Brokers can help with due diligence and negotiations and as experts, they can field any questions you might have.
Final Word
Buying an online business for the first time can be a daunting experience. There are so many sites for sale and even more business types to look through, so it’s easy to make mistakes.
To help safeguard your time and money, carry out due diligence and learn as much as you can about the business that you want to buy. Investigate the motivation for sale, and ensure you pay a fair and reasonable price by using the SDE formula. If you are unsure about anything, speak to a professional advisor. They will not only protect you from buying a failing business, but they can lead you through the process and ensure you pay a fair price.
