If you’re thinking of buying an existing website, it’s vital to know what you’re getting for your money. Our Website Due Diligence Checklist covers the various factors that need to be taken into consideration when valuing an online business and the checks you need to make before doing the deal.
Buying an existing website vs. starting your own from scratch
Starting an online business from scratch takes time. Websites have to earn visibility in search engines before you can realistically monetise your enterprise. If you don’t have time to create income streams, the alternative option is to purchase an existing website.
Sidestep Setup Costs
Even websites that don’t make a profit can be hugely valuable. Consider the setup costs of a website and the time involved. If you can buy an operational website that has had thousands of pounds and hundreds of hours invested into content, setting up social channels, customising the Content Management System and so on, you could be onto a winner.
Assuming you can afford the upfront cost (the asking price), you’ll then just need to focus on areas for growth and optimising the site to perform well.
Establishing a website to rank well in Google usually takes 6-months on concerted effort but can take up to two years, depending on the industry.
If a website owner has given-up after 12 months, you might be buying a valuable website at a low outlay and one that is primed to do well.
However, it is imperative to audit the website before you purchase otherwise you could pay a lot of money for a lot of inherited problems. Buying an existing business requires due diligence. You need to evaluate the digital footprint and understand what operating costs are involved in relation to the potential income of the website. This article will help organise the questions you need to answer in order to weigh up the advantages and disadvantages of buying an existing website.
How to value a website
Business analysts recommend the value of a business is ten times the gross profit, five times the average revenue or twice the total revenue of the two previous years. Other financial advisors claim an online business is typically worth three to six times more than the profits made through a website before interest and taxes are deducted.
Website valuation calculators
Before you begin evaluating a website, here is a word of warning: during your research you will no doubt discover website valuation calculators. Should you choose to use them, treat them as little more than curiosity as you will soon come to realise they are unreliable at best and useless in most cases.
Website appraisal calculators such as siteprice.org, webuka.com and worthofweb.com are fun tools, but in reality offer little more than entertainment value. Calculating the true value of a website involves a lot of data gathering and thorough due diligence verifying the information you have to hand is accurate and reliable. No automatic tool can give you a good website valuation.
The fact of the matter is, a website is only worth as much as a buyer is willing to pay for it.
Whether you are buying an existing website or you’re an online business owner looking to profit from your cash cow, you need to know how much your website is worth.
Accurately valuing a website can be a challenging proposition. But if you have relevant data and a clear idea in your mind about the pros and cons of a specific website and the potential profitability of the market, carrying out due diligence will help you make a decision with your head and not your heart.
What is Website Due Diligence?
Due diligence is required to verify the authenticity of a website, so that you can ensure the website is performing the role the seller claims it is. The majority of information about a website should be provided by the seller and it’s your job to double-check it all stacks up. While you can perform some checks using free online tools, most of these, from keyword checkers to website auditors aren’t reliable.
Here at The Content Works we are website consultants who carry out DD on the websites our clients are considering investing in. We sign an NDA, giving us full access to the website back-end and reporting packages, allowing us to audit a website as part of the due diligence process and help our client establish the true value of the business.
Website Due Diligence Checklist
Before you purchase anything, the first step of website due diligence is to know the seller has legal ownership of the domain name or names. The easiest way to verify who owns a domain is to use a WHOIS tool like http://whois.domaintools.com/.
Most companies will own more than one domain name. Although it’s highly likely they’ll only use one for each of their websites (therefore, vital), they may keep domain names parked, so that others can’t register them.
While most domains cost around £10 a year to renew, there are some, such as .law or .luxury that cost over £300 a year to maintain. So it’s important to understand what domains you’re buying, what value they add or what their potential liability is.
The contact information of the domain’s owner should be clearly available. In some cases, the owner will elect to use a third-party to manage their domain or mask their email. It is sometimes the case that the web designers hired to build the original website are listed as legal owners, and not the business owner themselves. This can mean there’s not a clear owner from the WHOIS search alone.
Of course, the seller should also be able to provide you with reports from their analytics package, like Google Analytics for example. These reports can be exported by link or PDF and should come with the Heads of Agreement package.
2. Confirm traffic and continuity
Not all existing websites that become available on the market will be making a profit. Often website owners lose interest in their website as it isn’t making money or they’re spending their time on another project. The owner is simply looking to cash in on their investment and recoup some of their time but there may be a good opportunity in there and a revenue stream that the current owner hasn’t fully explored.
The amount of revenue a website is making is not always relevant. The key factor is the potential a website has to turn a profit. The potential of a website can be determined on the most basic level by the volume of traffic. Any self-respecting website will have an analytics package such as Google Analytics configured. If this hasn’t been set-up, it’s a huge red flag.
There’s not a lot of value in a website with no traffic but equally if a website has a lot of traffic but it’s not focused or transactional – we call this vanity traffic – it too is of limited value.
The data we like to see from Google Analytics is from the previous 30, 90 and 360 day periods. These time frames enable you to see the continuity and stability of the website. If a website is an ecommerce business, it may have seasonal variation, so it’s important to look at a longer view.
Here are 5 Google analytics reports that give you a deeper understanding of a website:
- Unique users, sessions and page views
- Traffic acquisition sources
- User geo location
- Event tracking and goal completion data
- Top pages and bounce rate
Unique users, sessions and page views
AUDIENCE > OVERVIEW
It’s important to know where traffic is coming from together with the consistency of traffic a website receives. Spikes in traffic could be due to marketing campaigns, a press release or social mention which can skew the data.
On this note, it is worth gathering information from the existing owners on which of their online marketing tactics have been successful and which have been unsuccessful. Finding the best advertising solution is often trial and error. So it’s always best to tap into the knowledge of the existing owners.
Traffic acquisition sources
ACQUISITION > ALL TRAFFIC > CHANNELS
Ideally, the primary source of traffic should come from organic results in search engines. But it is equally important to determine that an increase in traffic has been a steady progression upwards. A change in search engine algorithms can negatively affect the rank of a website which raises a question over its SEO structure and the owners past SEO strategies.
User geo location
AUDIENCE > GEO > LOCATION
If you’re buying a local florist in the UK but the majority of the website’s traffic comes from India, it’s not likely these visitors have any potential to turn into customers.While most websites play it straight, some owners can use services to artificially inflate the number of website visitors.
Event tracking and goal completion data
BEHAVIOUR > EVENTS > OVERVIEW
Ecommerce websites should have Event Tracking and Goals enabled. This will show you the potential of a website as it can show you how many of your visitors transact, the average basket value and where they drop off.
During due diligence, look for trends. Does the conversion rate have an upward trend in revenue over the lifetime of the website, or is it a seasonal business that peaks and troughs over the course of the year?
Top pages and bounce rate
BEHAVIOUR > SITE CONTENT > ALL PAGES
In this report you’ll see the most visited pages on your site and be able to sort the results by the pages with the highest Bounce Rate. It’s likely that a high bouncing website isn’t providing its reader with exactly what they’re after but, like a high-street shop with a lot of footfall but no sales, there’s an opportunity for you to convert those visitors into customers.
3. Domain history
The history of a domain is important on a number of levels. Older websites that have been well maintained typically earn more trust with search engines thus rank higher. The better a website performs in search engines, the more promise you have to grow the business.
Websites can be negatively affected by Google penalties and updates. In order to create a ‘level playing field’ Google penalised webmasters that attempted to manipulate search results by using black-hat tactics to improve their SEO. Each of Google’s major updates has a name, like Penguin which was to catch websites spamming search results and Panda which was designed to weed out low-quality content.
Furthermore, the domain you are purchasing may not have always been used for the company who now own it. This could negatively affect how you rank because of the types of backlinks to that domain. Use the Internet Archive: Wayback Machine to verify the history of a website with the information you get from the seller.
Backlinks are vital to any website as they help search engines like Google establish the quality of your site simply by looking at who links to you.
Deep-linking backlinks, i.e. backlinks that link directly to a specific page on your site can help your site improve its ranking.
Backlinks also send referral traffic, people click on backlinks and come directly to your site.
In short, they’re hard to get and great to have. A site with a lot of backlinks but a poor user experience or badly setup e-commerce store could be a huge opportunity waiting to be tapped.
We carry out backlink audits for our clients, to help them establish the true potential of a website.
5. Sources of revenue
The monetary value of a website can be earned from various sources. Other than selling products and services, a website can make profits through alternative sources such as Adsense, Affiliate Programs, guest posts and sponsored advertising.
Not only is it important to know how potential income streams can make a website profitable, you also have to consider how strategies to monetize a website can have a diverse effect. For example, a website that is saddled with third-party advertising is off-putting to visitors and could have a damaging effect on trust and authority scores.
6. Assess running costs
Websites typically have annual or monthly running costs. The principle costs are web hosting, domain registration and SSL certificates. Ecommerce websites that use SaaS platforms will incur a monthly subscription fee.
An online business also requires ongoing maintenance. In order to attract customers and maintain or improve SEO, you should be publishing regular content via a blog, landing pages and updated product pages.
Content creation and other digital marketing strategies are likely to be your biggest running cost and should be taken into consideration when buying a website. Is the current owner an expert in their field and able to create content relatively cheaply. Are they staying on as part of the earn-out process?
How much will content marketing cost if the main source of content creation isn’t part of the package? A website that already has visibility in search engines does not require as much marketing investment as a website that does not rank very well.
You should also consider the quality of any existing content. Poor quality content may need to be rewritten and this will rack up your costs. To assess the quality of existing content you need to know whether the content is unique or whether there is a chance it could have been spun. You should also check product pages for duplicate content. Ask the current owners if they have an in-house content writer, whether they hired a freelancer or whether they have been using a machine to spin content. If it is the latter, you should consider rewriting the content.
7. Calculate net profit
The potential for future profits is the number one reason why business owners purchase a pre-existing website. When performing due diligence offset gross profits against running costs and analyse cash flow data to confirm the financial health of a business.
It is highly unlikely that the value of a website is based on the amount of profit it generates. As a result, verifying the potential profitability is complicated, but can be used to the advantage of a buyer in the purchasing process. Verifying the amount of source income can save thousands of pounds in negotiations.
8. Organic Traffic
While the search volume for your product or niche may vary wildly, even with low search volume, organic traffic is almost always the best source of traffic as users using search engines have intent and therefore convert better. Organic traffic can be a low-overhead, sustained source of traffic and therefore valuable.
During website due diligence, it is important to understand how keywords affect a website. Search engines index web pages in relation to keywords. If the website you intend to buy ranks organically for keywords that are valuable and have a high Cost Per Click (CPC) that is a valuable asset.
We use Google Search Console to extract the keywords that any website is being surfaced for. We then check the monthly search volumes of those keywords and where the website ranks in its country-specific Google search engine. From here we can calculate the potential the website has.
If it is ranking on page two for 80% of the keywords it is being surfaced for, then that website has a lot of potential to drive more traffic and more sales by optimising existing content.
9. User Data
The potential scalability of a website can be assessed by the number of existing users that are signed up to an email list. Ask the seller if they have an email list of registered users. This is not only important for marketing purposes, but can be utilised to introduce yourself as the new owner and look to make a positive start with your customer loyalty program.
However, consumer data can be inflated by sellers so it is important to know which subscribers are still active customers and what percentage of existing users can be persuaded to stay or return.
How customers feel about the current business will have an impact on your early profits. If the current owners have a bad reputation, you have to decide whether you can remedy the problem and if so, how you will go about it.
Accruing reliable information about a website gives you a clearer understanding of its potential worth. But all data needs verifying and questioning. Conducting thorough due diligence will help identify areas you need to question and will uncover potential problems that could damage future profits of the website.
How we can help
Here at The Content Works, we specialise in website audits. If you’re looking to buy a website, talk to us first. We can carry out due diligence on your behalf and help you establish the true value of a website. Call us on 0207 305 5599.