This post is part of my series on digital investment. See here for an overview. More articles on investing in digital assets coming out every few days.
If you want to buy a website on some place like Empire Flippers, Flippa, or one of the other online website and digital marketplaces, then you have to know how to do due diligence. Scary, but awesome!
Doing due diligence on a website can range from zero ("looks good... let's buy it at list price") to a massive huge ordeal ("Hello, I am Dana; give me all your numbers so I can create the mother of all models!").
Website due diligence is huge because buying a website isn't like buying some product on Amazon, because no two vendors or websites are the same. It's not even like buying a house, because there are relatively fewer ways in which you can make money buying houses. So when buying a website, there's a lot you have to check to make sure that you're getting exactly what you bargained for.
And to make things more complicated, you're often under time pressure when buying a website online. If the website is of good quality, then there are definitely other bidders circling the prospect. I've seen good-quality websites (in which I've been interested) sell within a day. The year 2020 has been particularly crazy in this industry.
So I'll go over the things you need to cover at a high level here when doing website due diligence.
Later, I'll cover some of these aspects of due diligence for websites in more detail, with screenshots and scary complicated Google Sheets models.
In this guide, I'll cover...
- What website "due diligence" means
- Basic due diligence for a website – making sure it isn't a chimera
- Financial due diligence – making sure the numbers add up
- Quantitative due diligence – checking to make sure the non-financial numbers make sense
- Operational due diligence – understanding things like the hosting/theme situation, contracts, etc.
- Qualitative due diligence – checking on the seller themself
I've ordered the above in rough order of importance, though they're all important (and the position of each element is debatable, especially depending on which broker you're using).
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What is "due diligence" when buying a website?
For the uninitiated, "due diligence" sounds like some term spoken mostly by financial and legal professionals.
Due diligence simply means: check every aspect that matters of whatever you're buying to make sure that it is exactly as advertised and what you're expecting.
The origins are in the legal system. In the olden days, sellers could be held liable if they didn't disclose every material aspect that could affect the value of a business (there are still reduced versions of this law in practise today, of course). But because that was overall impractical, and so legal systems recognise that "due" diligence means uncovering every bit of information that the seller has available. Not stuff they don't know (or would only be guessing).
Due diligence when buying a business is just like going over an inspection checklist when buying a car or motorcycle. You know you have to check the chain, tyres, charging system, registration, liens, mileage and so on... and so you check them one by one. You can't tell, of course, when the car or motorcycle is going to randomly fail – that's on you. You just try to minimise that risk. Buying a website is no different.
In different terms, due diligence means "cover your ass". It means do the work that you have to do – don't skip it. That's the part that's "due".
As to what due diligence for buying a website should involve... read on!
Basic due diligence for a website
Due diligence for a website should start with some basics about a website.
The goal of basic due diligence is to answer the questions:
- What type of website is it – what's its general business model? (Affiliate, advertising/content etc.)
- Is it a legitimate entity? (Are the earnings reports for this website, does the traffic shape correspond to the revenue shape)
- What's the market like?
These are to check for
- Does the website have real history? Does it work? Clicking in to it, can you navigate it easily? Check on the Wayback Machine and make sure it used to look roughly like what it does right now (at least in terms of content)
- How old is the website? As a rule, I don't like to buy websites that are younger than 2 years old, and that have less than 1 year of revenue history. This is so I can observe seasonality without guessing. Your metrics may vary.
- Is the domain good? What is the rough value of the domain? You can either use GoDaddy's domain value calculator or you can "eyeball it". If it's gambling.com, you're in the money! But if it's TheGamblingMomOnline24.com.se then maybe not so much.
- Is the traffic and revenue roughly in line? For example, do traffic spikes in holiday seasons (or lulls in off seasons) correspond to revenue changes?
- How is the website monetized? Are there any obvious opportunities – like adding advertising on top?
- What market does the website operate in? Is it in technology, automotive, money-making schemes, etc.? It's up to you to figure out if that's a market you can operate in (i.e. you know something about it, and the prospects aren't bad).
- Who are the competitors? When you look at the search terms or the products that the website makes money from, who are the primary competitors out there? If it's giant companies, then you're in trouble; if it's a series of small blogs, then you have a chance.
Once you're satisfied that the website is legit, you can move on to financial due diligence.
Financial due diligence for buying websites
Financial due diligence is the meat (or the soybeans, if you're vegan) of due diligence. This is where you make sure the money is actually real!
The goal of financial due diligence is to answer the questions:
- Does the website generate revenue as you'd expect? I.e. in correspondence with the traffic, and the work done on the website?
- Will the website continue to generate revenue after transition?
- What are the financial risks that the website faces?
To analyse the financials of a website here's what I'd analyse.
- Revenue sources: Are the sources of revenue legitimately those of the website? Look at detailed Amazon reports, or screencasts looking at dashboards (images are easy to doctor, but screencasts are not), making sure that the codes and names are the same as those on the website.
- Revenue streams: What are the sources of revenue? How is the website's revenue split between different revenue streams? For example, what percentage of revenue is from product sales and what percentage from advertising, and how has that changed?
- RPM: What is the revenue-per-mille (sessions, users, or pageviews) of the website, and how does it correspond to the niche? E.g. for a content site, USD $10-20 is what you'd expect, but for a site promoting crypto currencies, up to $1,000 is not unheard of.
- Product concentration: If a website sells products (directly or via affiliate), which are the most popular products? Do those correspond to the most popular pages? And what percentage of revenue does each product sell?
- Category concentration: Like products, but analyse what categories (e.g. tools, toys, Kindle books) are the highest concentrations.
- Do users buy the products recommended? It's awesome if users are buying the specific products that the website recommends – and not something else in the category (second best) or some other random thing (third best). This reduces risk if the affiliate scheme (usually Amazon) changes the way it pays.
Note: In analysing concentration of products, you're also analysing risk. Too many eggs in one basket can be risk because that page might lose authority, Amazon might change that category's commission scheme, etc.
- Commissions or profit per product: What commission does a product/category earn? Has that been changed by an affiliate vendor, or how have product margins trended over time?
Quantitative due diligence
Quantitative due diligence on a website or app is looking at all the metrics that aren't financial and thinking "Does this make sense? Does it tie in with everything else I know?"
Because these are digital businesses, it's really easy to get swallowed up into a chasm of numbers. There's data for everything – various kinds of traffic, conversion rates, sources of traffic, yada yada. The best kind of analysis focuses on answering certain questions – eliminating risks and finding opportunities – rather than just looking at everything and getting lost.
- How much traffic is there? This is the easiest kind of traffic due diligence. Pick a traffic metric (I usually look at sessions or unique users) and make sure it's over a significant threshold like 10,000 per month. Lower than that and the data is just very "noisy" meaning it's hard to get much meaning out of it besides random fluctuations.
- What are the traffic sources? Check to make sure the traffic comes from the places you expect for the niche. E.g. for a product sales site, advertising traffic is to be expected, but for an affiliate site, you'd want most traffic to come from Google. If you're good at Facebook (or Facebook ads), then it's OK for traffic to come from those sources too.
- Where is the traffic coming from, and is there any over concentration? Location – is it coming mostly from high-revenue areas like North America, Europe, the UK, and Australia?
- What are the top pages (in pageviews/sessions, and the concentration? And do those top pages correspond to the top products sold and the categories sold? Is there too much concentration in just a few top pages? (That's a lot of risk if those pages get outranked)
- Conversion rates – get access to Google Analytics or to Tag Manager reports. What's the conversion rate from the page through to an Amazon link?
- How much seasonality is there? Intra-week, and annual. Does it follow the pattern you'd expect?
There are other parts of due diligence that involve numbers, like SEO. But that deserves its own section.
SEO due diligence of a website
Not every website relies exclusively (or even predominantly) on search engine traffic. Many profitable websites rely just on advertising traffic or on social media.
But search traffic is important for LOTS of websites. Every website in our own portfolio earns via search for at least half its traffic. Even if a website isn't SEO-first, Google is so huge that it just can't be discounted as a traffic source.
So SEO due diligence is its own section, even though it's part quantitative, and part operational.
The goal of SEO due diligence is to answer the general question: How "healthy" is the site's SEO strength? Basically if you list a new article, how quickly will it rank? And if a competitor lists an article, how easily could they outrank you?
You can analyse a site's SEO position by answering the following questions:
- What is the domain raiting/domain authority? Use Ahrefs or Moz to check how "established" the site is on the internet. The score itself doesn't matter as much as what it is vs the competition in the sector. If your website has a low score and is outranking other sites... that's great, but the position is very volatile.
- How many backlinks are there? And are they from high authority sites? Have the backlinks been growing in a natural fashion? Backlinks help the general domain strength. The more, the better.
- What off-page SEO (link building) has the site owner been doing to grow backlinks? They've either been doing the grunt work themselves (emailing places and asking for links), paid for backlinks, use a PBN, or bought PBN backlinks.
Note – part of that last question on what the site owner has been doing is a bit of a trick question. Sometimes it's obvious that the owner has been buying backlinks, like when links just start rushing up. If they have been buying backlinks, but say their strategy has been something like "outreach and guest posting" then I just move on.
- Disavows – Has the site ever had to disavow backlinks that hurt it? This has to happen sometimes after a site buys cheap links on a service like Fiverr.
- Use of PBN – Rarely will a site builder admit they've used a PBN or bought PBN backlinks. But when you buy through Empire Flippers (one of my favourite website brokers), this is disclosed.
It's good practise to use a third-party tool to analyse the keywords that the site ranks for. You can also get them to give you search console access or to get you a data dump of search console data (this happens if you're a serious buyer).
- Do the top keywords correspond to the top pages and products? – Do those keywords correspond to the top pages (and top products)? E.g. if "best light sabers" is a top keyword, and "/best-light-sabers" is one of your top URLs and you earn a lot of moey from light sabers, that's great.
- Are there many keywords, and is the number of keywords that the site ranks 1-3 for increasing? Over half of click-throughs come via the top three results.
When checking keywords, I like to sanity check the results by googling those terms myself, and seeing what the competition looks like.
Operational due diligence for websites
One (sometimes unpleasant) surprise for new owners of websites is just how much work they are to maintain and grow.
Owning a website is, after all, not passive income. You actually have to do a lot of work to keep it up to date, keep ahead of the competition, and make sure that you don't get left behind by a changing market!
So the following is a list of things I check up on when investigating owning a website.
- How is the website hosted? It's good news if it's on a generic host where you can have the whole account transferred over to your name easily. It's worse if it's on something like a private server where you'll have to pay an engineer a couple of hundred bucks to migrate it.
- What platform does the website use? Again, good news if it's WordPress. Bad news if it's anything else, unless you're familiar with it already. I find it convenient for everything to be on WordPress because it then means I can use the same hosts and engineers for everything. (That said, this blog is on Ghost.)
- Writers and researchers – How many writers/researchers does the website use? Will they stay on? What does the owner pay for content? You can get your own articles written, but it's definitely convenient to inherit a team.
- How often is content updated or published? Does the content have to be updated frequently? The answers to these are related to monetisation – e.g. a news site has to be updated frequently, and a tech blog has to have its products updated all the time.
- Are there well-documented SOPs? A really well-constructed business has SOPs for everything — research, writing articles, and marketing. Ideally, the business has kept the SOPs up to date so you can just follow them from day one.
- Are all the products and links up to date? All the products being in stock and all the links being live is an indication the site is well-built and well-maintained. If they're not, then there may be an opportunity for you, if you're up for some renovation work.
- What is the site page speed for top ranking (and bottom ranking) pages? High page speed is an indication the site is well-built. Low speed isn't a death sentence; actually it may be an opportunity (if you know how to get it fixed).
- What themes/plugins does the owners use? Are they up to date and paid for (and is the license transferable)? If you inherit an old theme or bespoke plugins, you may be in for a bit of a nightmare as you're forced to update everything, costing you engineering time and possible breakage.
- And finally... how long a hand-over period is included in the sale? A 30-day handover period is almost assumed, but try to get 60 or 90 days of support. You probably won't use it, but it's good for just in case you forget something important.
Qualitative (Soft) Due Diligence on Buying Online Businesses
In the real mergers and acquisitions world, "soft due diligence" is looking at things like employee culture.
In the online world, you may be inheriting some contractor relationships, but you probably don't care about the culture (neither do the people who are your contractors).
However, there are still some bits of soft due diligence that are very relevant when you're buying a website.
The goal of qualitative due diligence is basically to figure our: Is the seller someone honest and that you can work with?
- Has the site builder sold a site before? A first time seller can be a bit wet behind the ears in the process. If it's your first time, then the general chaos of two people who don't know how to do a transition can add to stress. (This is a good reason to use a broker.)
- Has the seller (or broker... heaven forbid) been dishonest or vague about anything? It's a bit hard to pick up, but if your instincts tell you that something is not right, then it's a good reason to be suspicious. Even if you think they are overplaying their hand, you're entitled to feel that way.
- Does the builder seem like a nice, honest person? It's really important (to me) to be able to gauge the owner as a decent person. After decades of trying to do this, I have learned to trust my gut. If they seem pushy and aggressive, or like they're exaggerating or hiding anything, it's a no-go.
That last point is quite important because it's not just the transaction you have to deal with. You have to deal with the handover, and also you might need their help with troubleshooting in the future.
It helps to have a common language, too. But I've found that with Google Translate and text chat, a lot can be communicated with sellers who aren't fluent in a language I speak.