Many individuals disregard looking further into the reason why an excellent investment opportunity is provided on a silver platter. Due to this, potential buyers fail to see the problems that they’re taking full responsibility for when purchasing such an online business. Due to this, it would be in your best interest to be extra vigilant and understand why this business is being sold.
The reason behind this is that you’re unaware whether this specific online business has a promising plan for the future or is slowly declining in performance and revenue. When it comes to purchasing an online business, you need to be strategic about your investments. It isn’t good enough if you’re only seeing the potential of this business from a surface-level perspective. You’re required to dig deeper and fully comprehend this online business’s operations and structure. Due to this, executing due diligence for buying an online business before proceeding with the acquisition is essential when securing a favorable investment opportunity.
However, the concept of due diligence and the way to ensure you’re practicing this when purchasing an online business is unknown by most prospective investors. For this reason, we have formulated a detailed guide to implementing digital due diligence when securing a new investment opportunity. Here is everything you need to know before forking out the money for an online business:
What is Due Diligence?
Generally speaking, due diligence is seen as the activity when one conducts a comprehensive investigation or audit of a potential investment, such as the purchase of an online business. This is conducted before finalizing a financial transaction.
Due diligence can be performed by the prospective buyer of the online business, as well as the seller of the respective investment. The seller can perform due diligence to identify whether the buyer has enough resources to complete such a purchase. On the other hand, potential buyers can also conduct due diligence through searching this company before they decide to finalize a sale. This sale can be for the business as a whole or shares for part-ownership.
Various steps accompany the procedure of performing due diligence and are dependent on the shares or business you’re ultimately going to buy. It’s necessary to conduct soft due diligence and hard due diligence if you wish to receive a holistic understanding of the particular business.
Professionals also choose to separate soft due diligence from hard due diligence when it comes to acquisitions and mergers. Due to this, you should know the difference between these two types of due diligence if you plan on acquiring a share of a company or a whole business.
Soft Due Diligence
Soft due diligence can be classified as the study of an organization’s intangible factors. This includes features like
- interpersonal relationships
- culture, and
- other human elements.
This type of due diligence is something that can be observed with your own eyes and isn’t susceptible to being tampered with, overemphasized, or manipulated like hard due diligence is. Performing soft due diligence is vital because it provides you with an idea of how your future employees are likely to relate and work with one another.
It’s no secret that many potential buyers typically focus on hard diligence. However, it’s also wise for prospective investors to look at the culture surrounding an organization. This is mainly because you’re provided with a more well-rounded and holistic view of the specific business you’re planning on buying.
Hard Due Diligence
Hard due diligence involves the study of
- the business structure,
- Assets and liabilities,
- intellectual property,
- costs, and benefits.
This study is conducted to gauge the strengths (or weaknesses) of a business. This type of due diligence is driven through hard data, such as legalities, statistics, and mathematics. In most cases, the best numbers are likely to be highlighted by the business that’s being sold. This is done to make the company look more appealing to prospective investors.
Why Is Due Diligence Crucial When Purchasing an Online Business?
As we have previously mentioned, you should refrain from investing in a business that you haven’t researched. You’re required to do the necessary research to ensure that you’re making an educated decision and purchasing a smart investment. This logic also applies to investing in an online business, website, or blog.
We’re in a digital age when acquiring an online business with excellent potential can deliver a greater ROI than offline businesses. Nonetheless, it can be challenging to pinpoint which online businesses are worthwhile investments. This is mainly because of the sheer volume of online businesses that want to offload their assets.
It’s incredibly easy to manipulate and fake online assets held by various online businesses. Due to this, prospective buyers must treat this acquisition with caution. This is especially the case if you’re dealing with an online business that you aren’t entirely familiar with.
Nonetheless, you have many methods of gauging and measuring the legitimacy of online businesses or websites. This is measurable and underhanded manipulations and fake information being easy to dig up with the help of digital footprints. Due to this, you need to focus on the correct metrics and rubrics.
This can be done by performing due diligence on a potential online financial acquisition to make sure it’s a smart decision.
The Essential Due Diligence Checklist
In this section, we’re going to explore 10 of the online metrics that you should use when conducting due diligence on an online business model. As a prospective investor, you’re required to learn how to accurately interpret these metrics to have an educated grasp on the e-commerce business you’re attempting to purchase.
Here are some elements that you should incorporate in your due diligence checklist when looking at potentially buying an online business or website:
#1 Organization and Ownership of the Online Business
It’s practically a given to meet the owner of a traditional business when you’re getting serious about purchasing the company. Many people think this is also a given during the process of acquiring an online business, but you would be surprised at the number of online business owners who don’t verify their identity to interested parties before going ahead with a deal. This could pose a serious problem further down the line especially if you encounter issues with this digital business and can’t hold any person liable.
Generally speaking, it isn’t necessary to meet the owner of the digital business you’re interested in before going forward with the purchase agreement. However, you should at least be able to verify the identity of this business owner. The bare minimum would be to see this business owner on social media sites, like LinkedIn, Twitter, or Facebook. This step comes highly recommended as it decreases the likelihood of you investing your time and money into a scam. Not to mention, you can also traceback accountability if something amiss occurs in this digital business.
#2 The Financial Information
It isn’t difficult to understand that the financial information of a digital business is one of the most crucial pieces of data you can collect while conducting due diligence. Before going ahead with any digital company or website purchase, you should have access to this information. Being a smart investor means that you’re aware of the previous and current financial position of the business you’re interested in, as this helps you make a viable and educated purchase decision.
During this time, it’s also highly recommended to gain a live screen share with the seller of this digital company. This applies when you’re accessing the back end of the company’s website. At the same time, the online banking portals should be investigated to verify that the financial information you’ve previously been provided. In addition to this, you’re also allowed to prove the legitimacy of ownership.
It would also be beneficial to trace all the loans, debts, and liabilities associated with the digital company before you sign on the dotted lines. A general rule to follow when conducting this part of due diligence is that you can’t ever be too careful when reviewing the financials of this online business. Your primary objective when taking control of this online business is to earn from it. As a result of this, taking over an online business that’s already on its decline isn’t going to be worthwhile for you as the buyer.
#3 The Taxes of the Online Business
You must make sure the online business you’re interested in acquiring has been paying the appropriate taxes. You want to avoid embarking on a long-winded legal battle about unpaid taxes. You might end up losing more than the tax that needs to be paid. You’re also likely to struggle to gain the appropriate legal assistance as a result of your lack of due diligence.
Each legal business transaction is equipped to leave a footprint. This is especially the case when it comes to online companies or websites. When conducting simple data mining, individuals can easily tell if the taxes paid match the necessary amount that’s in line with the business’s revenue. As an interested party, conducting this check and having access to such data is critical if you wish to have an effective and efficiently-running online business in the future.
#4 Contractors or Employee Information
No company is going to function correctly without the work provided by its contractors or employees. This is no different for online businesses. As a result of everything being digital nowadays, individuals generally forget that behind each function is a normal employee performing what’s expected of them. As an interested party, it’s your job to familiarize yourself with the specific employee structure and the incorporation of contractors present within the respective business that you’re interested in purchasing.
Something you should ask yourself when conducting this step in your due diligence process is to see if there are any gaps present in the division of work. As a potential owner, you should ask if there are irregularities with the services offered by this online company concerning the work produced by the employee. Adding to this, it could prove to be helpful to understand what happens behind the digital aspect of the business’s structure. Check that you completely understand the culture and organizational structure of the human factors in your potential or future digital business.
#5 Legal Verification
There’s a massive difference between purchasing a digital company that provides you with a sure ticket to unexplainable success and making sure that this venture is operating within regulations that bind the laws of the land. Due to this, the seller of this business must be running it legally. From here, it’s your responsibility to continue operating it under the law.
Several of the biggest problems involved in websites and digital websites are image licensing and trademark infringements. Due to this, it would be incredibly useful to make sure this company is studying under the correct terms. This helps mitigate the risk of trading illegally or stealing intellectual property.
After concluding that the seller and owner of this digital business were managing its operations legally, you can ask how you can apply these practices to make sure that you’re conducting business operations under the correct regulations. By performing this, you can make sure a high possibility of growth and continuity is offered to your digital company.
Finally, we also have an important recommendation to avoid legal issues in the running of your business by conducting diligent legal verification. Once you spot any irregularities, you should make your legal adviser aware of this and see if they are able to resolve these issues for you.
#6 Intellectual Property and Technology
You often receive everything that comes with a business when you acquire it. This includes its intellectual property. This is one important matter that needs to be dealt with s*eriously. The primary reason for this is that IPs are one example of tools that involve licensing and owning a specific material.
If you’re interested in purchasing an online business, you should learn about the intellectual property that you acquire from the selling of this business. It’s important to consider whether you can properly enforce this operational technology and intellectual property.
One of the most important things you can do is exercise this diligence in regards to these IPs by confirming the rights involved in business ownership on the IP. After confirming that this claim is valid, you need to make sure that the selling contract includes the direct and active reinforcement against any third-party entities.
It’s also extremely helpful to identify any possible problems. Many issues come with acquiring IPs. One example of this is the exploitation of existing technology that works to block the operation of the business’s IPs. It’s no secret that the digital world is broad and difficult to navigate where to emphasize the most focus when conducting this diligence. Nonetheless, having unique concepts protected by these IPs is going to help enhance the success of your newly-purchasing digital company.
#7 Information about the Website Traffic of the Online Business
One method to gauge the potential and existing success of an online platform is often to see the traffic report, which details the clicks, visits and conversions on a website. The more traffic a digital platform attracts, the more potential clients are likely to be incentivized to buy the goods or services you offer.
If you’re interested in taking over an operational business from sellers that have received good traffic, you can investigate and see the possible reasons for this good traffic. Conducting this research helps you identify if this traffic is legitimate and helps you consider the revenue potential of such a digital enterprise.
In this digital age, many methods are present that work to manipulate online traffic, which is able to make it like a digital platform is gaining an overwhelming number of customer interactions in a short period. One popular example of this type of manipulation is by purchasing spam and bot customer accounts that bring automatic traffic to a specific online platform.
Nonetheless, you are able to link up the respective pages and increase traffic by implementing legal methods, which include displaying ads and other strategic digital marketing tools. When conducting this digital marketing due diligence on digital platform traffic data, you need to check:
- Average time that’s spent on a specific page on the website.
- The number of pages being visited by potential customers.
- Traffic in comparison to the conversions.
- The analysis of where online traffic is first originating from.
#8 Its Operational Process
Before you take the step and sign on the dotted line, you need to make sure that you understand how to operate the business without the help of the original owners or sellers of this digital company. This entails that the number of responsibilities and the smallest task needs to be conducted by the new owner of this business. You need to understand the operational process of this specific online company to successfully perform these various business runnings.
It’s imperative that you understand the structure processes implemented into this digital business, as this helps to inspire growth. You are able to learn the inner workings of the online company and deal with the most crucial issues faced by the business owner. In addition to this, you can also investigate how the original business owner handled problems within the business. The task you’re handed, which is to aid in developing the business, isn’t a problem when you fully comprehend the size of the responsibility you’re buying into.
#9 The Products and/or Services Provided
One of the essential aspects of an online company is the products and services that you offer customers. When looking at the bigger picture, people are only going to visit your online business if they see potential in what you’re selling or if these prospective clients have already experienced your business’s excellent customer service beforehand.
If the prospective digital company you’re interested in is product-centric, it would be best to look at the supply chain of these products. Based on the information you’ve found on the supply chain, your goal would be to find a way to enhance the processing and delivery of these items. On the other hand, if you’re interested in a service-provision digital company, it’s important to provide the best customer experiences because you’re able to inspire patronage.
#10 Client Information
One important element of due diligence that can’t be forgotten is customer information. Before acquiring a digital business, you should research and analyze the existing client data from the previous management. From this data, you can see the behavior of your customers and check if customers follow the community guidelines present within the webpage of the business you want to buy.
You might find this to be a daunting task. If this is the case, you can make use of software programs, which are equipped to help with the following:
- Consolidate customer information from every source.
- Real-time screening from the CRM.
- Harnessing all of the existing relationship networks present within the organization.
- The storing of due diligence documentation.
- Automate beneficial owner verification systems.
- Screen any potential violators, as well as recommend the sanction of users.
All of these programs are available online for you to make use of when you’re conducting an extensive due diligence investigation before purchasing an online business or website.
A Comprehensive Due Diligence Questionnaire
We have provided you with a detailed process for researching factors that ultimately affect due diligence. However, asking some telling questions to the internet business owner can also help you gain a better understanding of this business. Here are some of the best questions to ask the original owner of the online business you’re interested in:
Why Have You Chosen to Sell Your Online Business?
What would be the gain of selling a business if its model is robust and the revenue is good? Knowing the answer to this question can help you find the path you should take when it comes to creating your own business objectives for the online company you wish to purchase.
Have You Previously Tried to Sell This Online Business Before?
Understanding why previous deals, if any, have reached completion or fallen apart is critical. This is because it aids in having a better understanding of the business, its merits, and its problems.
How Complex Do You Believe the Business Model to Be?
It’s no secret that several business models are straightforward to comprehend. However, others are notably more complex to understand and handle from the beginning. It might be useful to conduct the necessary research on this business model of a company that you’re interested in, especially if you’re a novice business owner. It’s also crucial that you can handle the complexity of a specific business. Nonetheless, you should also try to have as much fun as possible while you navigate your way through this initial process.
Who are Your Business’s Current Competitors?
Answering this question about your prospective business’s biggest competitors is crucial. This is because it gives you a point of reference when you’re looking at the competition and performance levels in the respective market. From here, you can learn who your competitors are and understand what plan of action you should develop and implement to meet the objectives you’ve set out for this business.
How Easy is it for Someone Else to Enter the Same Market?
If you aren’t already an expert in the field this online business is trading in, it might be challenging to enter the market and expect that you run the business without encountering massive problems. Nonetheless, you aren’t likely to face many problems when adjusting if you already have prior knowledge of this specific type of work. With that being said, the key to adjusting to an unfamiliar environment is to have patience and research frequently to grow your knowledge and understanding.
Are You Willing to Sign a Non-Compete Agreement?
This is one of the most crucial questions you can ask the existing business owner. You always want to hear that this owner isn’t planning on developing a business with the smoke business model anytime soon. There’s no point in purchasing a business if you’re going to end up competing against this same person who already knows your exact business like the back of their hand. That’s why a non-compete agreement is a crucial part of any due diligence process.
The Bottom Line: Our Final Thoughts
Performing due diligence is one of the first activities you should perform if you’re given the chance of buying a business and growing it to its fullest potential. When it comes to the concept of due diligence, this is about completely understanding all aspects of a business. This covers the business’s hard data and interpersonal relationships that are present among contractors, employees, customers, and other stakeholders.
The purpose of conducting this due diligence is to ensure that the specific business structure and overall development of the online company are stable and sound. These characteristics show that such an investment in the online company is smart and fiscally viable. After conducting this due diligence, you gain the information that highlights whether you should invest in such an online enterprise. From here, you can make your purchase decision.
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