Due Diligence is Necessary When You Buy a Website
According to industry statistics, nine out of ten people who begin the search to buy a website never complete a transaction. While there are many reasons for this dismal figure, a lot has to do with the inability of people to "pull the trigger". This gun-shy reaction is due to uncertainty: if you have not gathered the right information or failed to investigate the website thoroughly you will not be 100% certain of what to do.
Due diligence is probably the most critical stage in the website buying process. Many prospective buyers incorrectly identify this period as strictly a financial review. However, an effective due diligence goes far beyond the numbers. Due diligence is the complete investigation and review of a website.
One of the keys to buying a good website comes from your ability to learn the intimate details of it. It is imperative that you identify the strengths, weaknesses, growth opportunities and areas of concern with each website. If you don't do a flawless job of gathering information, you will not be able to pull the trigger and complete the transaction since you'll be uncertain about too many components of the website.
The investigation process must begin the moment a website becomes of interest. Your goal is to be certain that you uncover everything about any website before you buy it. You don't have to communicate with the seller for your research to begin. The Internet is an incredible tool that will allow you to investigate the website, the industry, the competition, the marketing, the suppliers, and on and on.
The importance of beginning your investigation early cannot be emphasized strongly enough. This way, you'll position yourself to ask the seller the right questions. Once you progress to the stage of an accepted offer, you will commence the financial due diligence. This period usually lasts 10-30 days. This is the time when you'll have access to all of the website’s books and records.
Once you begin looking at a particular website, you'll find a thousand things crossing your mind regarding the acquisition. Keep a notepad handy at all times and log your thoughts. Don't trust your memory; these little things are the ones that can and will come back to haunt you down the road. Begin to put together your checklist of what you need to investigate and how you're going to do it along with the materials you require from the seller to accomplish it.
A couple of things to keep in mind:
Prepare properly:
Since you'll have time restrictions, you'll only have x number of days per the contract, provide the website seller with a list of all of the materials required for you and or your CPA to complete this exercise. No matter what you're told, do not begin the process until they have everything ready for you.
Allow yourself enough time:
Many sellers will press for a very short inspection period; sometimes just days. Don't get bullied into this – you need ample time to complete this part of the process.
What about surprises:
You'll probably find some surprises, don't panic, it's normal. Work through them. Get clarification. Build your case. Don't run to the seller every time you find an inconsistency between what you've seen versus what you were told. No website is perfect. The golden rule in this case is: do not treat any incidents as catastrophes, and don’t treat any catastrophes as incidents. If you find a major problem, get your facts in order and then decide the appropriate action to be taken with the website seller (i.e. renegotiation, walking from the deal, etc..)
Remember, if you have not gathered the right information or failed to investigate the website thoroughly you will not be 100% certain of what to do when it is time to make key decisions. And so, you may do nothing. Conversely, if you do a flawless job of investigating the website, and everything else adds up right, then making the final decision is simply one more step in the process!