Guide: Website Due Diligence (Updated 2017)

Guide - Website Due Diligence

Website due diligence may be the most critical aspect when considering an investment in a website. Follow this easy to read guide to help you form your own effective due diligence process.

Feel free to start at the top and scroll your way down, or jump to a specific section you’re looking for.

 


 

What is due diligence?

Due diligence is an investigation into an asset in which you are considering an investment. In our case, the asset is a website. The end goal of the due diligence process for investing in websites is to verify all statement’s made by the seller and to verify the site’s claims regarding its traffic, revenue, expenses, and more.

Basically, you’ll get out your magnifying glass, place it over the website you’re looking at potentially purchasing, and make sure the site is what the seller says it is. 

What is Website Due Diligence

Keep in mind, however, the full process of due diligence isn’t solely to verify the website’s claims. It’s also a great system to find opportunities to further improve the website.

Why conduct due diligence?

Scammers! They’re ripe in the virtual world and have high hopes for you being a lazy bugger and not doing your research.

Always, and I mean always conduct due diligence when you’re spending your hard earned money. Let’s take a step back, and consider other items you may purchase, let alone invest in. How about a brand new TV.

When you buy a shiny new TV, do you simply head to the store, and buy the first one claiming:

  • INFINITY PIXELS!!! LOOKS BETTER THAN REAL LIFE.
  • LITTLE 0:00 HOURS WORK REQUIRED. AUTOMATICALLY SETS ITSELF UP IN YOUR HOME.
  • HUGE POTENTIAL TO BECOME A BETTER TV WITH NO EFFORT AT ALL.

Sorry about the caps. It was painful writing them. Nonetheless..it had to be done. Back on track.

No (at least hopefully) you don’t. You research a bit, compare the TV to others on the market, see what your friends think, maybe check out some online reviews. Hell, you may even test it out in store to make sure you like what you see, and that it does what it claims.

That process right there…that’s due diligence. You might not have realized it, but you were doing it.

So why would you not follow a similar process when purchasing a website? Are you so gullible that you’re willing to believe anything and everything the seller claims? No. You’re not.

Who does due diligence? Can anyone do it for you?

Hopefully your enthusiastic and interested enough to take on the task yourself, but hey, I get it, sometimes you have other things to attend to. Like catching up on the 91st episode of The Walking Dead…

If that’s the case, there are a number of online companies offering website due diligence services for a fee. I’ve never used any of the following, and can’t comment on their expertise. Merely awaring you their services are available.

Centurica – Due Diligence and Live Verification – USD $549 – Link

nEquity – Website Due Diligence Service – Free quote available – Link

NewOpps – Due Diligence Service – USD $250 minimum – Link

Think about for a second, if you don’t understand due diligence and how the process works, what happens if the website does end up in your hands? You won’t understand the business and how it works.

Conducting your own due diligence allows you to understand the website, how it works, and what’s required to keep it going and then improve it.

Website due diligence compared to other investments

How does a website investment analysis differ against other, more commonplace investments such as real estate or shares? Not by much.

The main difference is the online factor (unless it’s eCommerce). Sure, the individual details of the process may be different, but the end goal is still the same. Analysis and verification.

Buying shares in a company? You’ll likely investigate their historical financial statements, compare them to others in the same industry, and maybe even give them a call to ask them some more questions.

Thinking about real estate? You’ll visit the house to make sure the photos are a true representation of the premises, you’ll check to see if there are any infestations the owner hasn’t declared, and hopefully verify they are the true owners.

Different, but the same.

The most important part of due diligence

I;d like to thank the team over at EmpireFlippers for this one. A simple, yet unbelievably powerful sentence summing up the whole process.

Look for reasons not to buy the website.

Always look for reasons, that lead you to believe the website is not a suitable investment. It can be easy to get caught up in the emotional excitement of a potential new purchase, thinking about how quick you can grow the revenue, and how in 2 months you’re going to flip it for triple the price.

Excitement can be blinding. Blinding you of any potential flaws, leading you to dismiss them even when they’re valid concerns.

You’re an investor. Leave your emotions at the door, and focus on the cold hard facts. You’ll come to the right conclusion every time.

Website due diligence process

On to the good stuff! What you’ve all come here to read, an extensive guide to effective website due diligence. I do recommend following the same order. Simply because you’ll want to weed out the bad ones as quick as possible and move on to the next.

Owner’s statements

You’ll find some pretty ridiculous claims at this stage of the process. Basically, you’re looking for the owner contradicting themselves, or hitting you with a straight up lie.

Take the following notes from a seller:

Potential Website Investment - Owners Statement

Over $200,000 has claimed to be sold across Amazon and Alibaba over the past two years. What happened when I checked the claims? See for yourself.

Potential Website Investment - Owners Statement Check

Nothing. You’d think a product would at least need to be listed to sell even a single dollar! Walk away.

Of course, not all are as easy to fault as this one. Read all the information carefully, and verify every claim they make. If they slightly contradict themselves, they may have just made a mistake. Ask them to clarify and see what they say.

If they backtrack or aren’t sure which answer you’d prefer to hear, walk away. 

Owner’s statements are at the top of the list because they’re the easiest way to find a reason not to buy the website.

Traffic verification

Next up, traffic. How can you check the claimed visitors to the website are real? The easiest and most common way to get started on this step is to ask for read-only access to Google Analytics (GA).

See here if the seller is unsure how to add you as a user to the property. If the seller isn’t using GA, ask them if they’ve been living under a rock. It’s simply a near necessity to track your website’s traffic with GA. You’ll be hard pressed to find a valid excuse for not using it these days.

If they don’t have GA, head on over to SEMrush and plug their domain into the search bar. From there, compare the keywords listed for those they claim to be ranking for. It’s not 100% accurate, but it’ll get the job done.

Search in Google for the keywords as well. **Make sure to use the most relevant Google country of the visitors. E.g. If many of the visitors are from Australia, use the .com.au version.

If the do have GA, awesome, that makes your job a whole lot easier.

The first step is to check for straight up spam that the seller hasn’t filtered out. Spam traffic can come under the language section, referrals, certain pages, and even keywords. The image below represents active spam traffic currently causing havoc around the world.

Website Investing - GA Spam Traffic

Good news is, there is a pretty simple way to filter all the nonsense out, and only leave the real stuff (it may not all be real, though). I’ve found oHow.co has the clearest, and easiest to follow guide to removing spam traffic.

Once all the spam has been taken care of, it’s time to verify what’s left. Go ahead and take a look at the countries in the default Audience > Overview page. If the majority is coming from India, China or Russia, you may want to back away slowly.

Homer Back Away From Investment

Unless of course, the site is targeting either one of those countries. Then you may want to reconsider regardless, as traffic from these countries is usually deemed “low-value” by advertisers, merchants, and many others.

Don’t see any of those countries? Great! But you still need to dive deeper. Click on the top 2 or 3 countries on the list (go further depending on the distribution), and examine the individual cities. Is a large majority coming from single cities? How about cities that may have no interest in the website content?

Would people living in Kansas City (middle of the USA), be overly interested in a site focused on buying and maintaining sailboats? Unless climate change has gone and raised the sea levels 10m overnight, I don’t think so.

Large amounts of traffic from single cities is likely bot traffic the scammer seller has bought. Follows the same actions of the .gif above.

Next, head to the Acquisition > Overview section. Has the seller claimed large portions of their traffic are sourced organically through Bing or Google? But you then check the page and see organic is at the bottom of the list…something isn’t right.

More areas of interest are extremely high or low values for bounce rate, session time, and pages/session. E.g. Session time comes in at 20 seconds, but pages/session has blown out to 10. I don’t know about you, but I don’t know anyone real that visits a page every 2 seconds.

It may be difficult, to begin with, but once you gain some more experience analyzing traffic, you’ll be able to quickly tell whether the stats and visitors are genuine users.

Revenue verification

Despite what many other due diligence guides advise, I believe this is the easiest step to verify. From my experience, if the seller isn’t willing to completely open their financial books, they’re hiding something.

I won’t go into detail as to verifying each type of monetization method here, but you can find them in other guides on the site.

Simply put, ask for any and every report you can think of. Just about every payment processors have filters to exclude other sites, so don’t accept any of that “but it’s on the same account as other sites and I can’t show you that information”. Although, some less common monetization methods may be different so in comes the next step. Video calls and screen sharing.

On the call, the seller should take you through all the reports they have available. Sophisticated scammers may get a bit tricky here, and install local copies of well-known sites (such as Adsense or Amazon) to forge the earnings. If you suspect them of this, ask them to close the browser, open up a new one, and go to the site from Google.

Look for reasons not to buy the website. If you feel hesitant in any part of the call, back out. It’s better to wait for another investment than to risk it on a potential scam.

Owner verification

Surprisingly, this is one of the most overlooked steps in the whole process. Some buyers (even myself at one stage) solely focused on the traffic and revenue, and simply took the seller as being a genuine person. Unfortunately, I only learned this lesson the hard way, don’t make the same mistake.

If you’re buying through a broker, they will likely verify the owner before taking the next step. Marketplaces, however, they’re a different story.

Take Flippa for example. They have a neat little section on a user’s profile, called User Trust. It allows the seller/buyer to verify themselves through 7 different checks as seen in the image below.

Investing in Websites - Flippa User Verification

Email address, phone number, full name, all easily faked. You know how easy it is to create a Twitter, Facebook, or LinkedIn account as well.

Buyer Certification? All that is is a $5 hold on your credit card. Who’s credit card? Anyones. See here for their description of the certification.

Summing it up, a profile can be easily forged on many sites. So how can you make sure they are who the say there are?

Firstly, check the WhoIs data. Look for pieces of information that link to their profile such as names, email, or location. If not, on to the next step.

Reverse engineer it from Google. See if they have a presence anywhere else online. If they don’t, ask them for some more information. You don’t explicitly need their real name, but if they aren’t willing to provide you with anything else, it may be time to walk away.

Scammers tend to regularly use new user profiles, whereas genuine people tend to have a real presence across the web.

On the odd occasion, you may come across a new seller who genuinely doesn’t have any more information to give you. What then? Video calls and screen sharing. If they defer or come up with excuses, walk away.

Verifying the owner is one of the most important steps in website due diligence. Know who you’re buying from, and you’ll be safe every time.

*Website ownership is normally taken care of before the site can be listed on the marketplace. If you’re purchasing a website directly from the owner, make sure you’re talking to the right person by asking them to upload a certain file to the server (same process as Google Search Console verification).

Expense verification

Sure, revenue’s important, but expenses are as well. You’ve verified the earnings, purchased the site without checking the expenses, all’s good and dandy until…you’re running at a loss.

Expenses of the site (hosting, cost of sales, writers etc) exceed the total revenue. You’re 75% projected ROI has done a full 180° into a -15% ROI. That can happen. It’s happened to people I know, and believe me, they were not happy Jan!

So, how can you verify the actual expenses of the site?

For hosting costs, ask them for the monthly bandwidth, and file size of the site. These are the two main factors in determining how much additional hosting you’ll need. If the site is download focused (think fonts, game maps or other files), the bandwidth is going to be considerably higher than a similar content based site.

eCommerce stores form their main profit from their margins (selling price less cost of purchasing the product). Ask them for supplier invoices of the products they sell, and make sure to check the site is selling it first! If they don’t blur out the supplier details (unlikely), look them up, get in contact with them, and see if the prices are similar.

Determining the cost of the content is a bit more difficult. Say the seller claims they write all the articles themselves (which are in perfect English), but they don’t communicate with you fluently, something’s up. If you aren’t keen on writing yourself, you’ll want to know how much new content will cost. Unfortunately, prices vary dramatically.

As a general guide – high quality, researched articles can range from $5/100 words, up to $15/100 words.

If the seller conducts any paid advertising, ask for reports. Refer back to Google Analytics to double check the sources they’re advertising on as well.

Social Media Accounts

Social Media Fake Followers Website

That image alone should prompt you to investigate the legitimacy of any social media accounts and it’s followers. If the majority of the account’s followers are indeed fake, it can be detrimental to the brand.

Bring it to the real world for a second, I’m going to dive into a bit of a Black Mirror scenario.

Imagine a Walmart, or any other large retail store. It’s packed full of customers, and from the looks of the car park, the store is extremely popular at the moment, so you decided to head in.

Once you get there, you browse the aisles looking at the various products…but something isn’t right. No one else is moving. They’re all just…standing. Not buying, not engaging, not talking..just..standing, staring. What would you do?

Would you continue to shop like normal? Nope! You’d get the hell out of there as fast as possible, and probably never return!

That’s how real people think when they see a social media account with thousands of followers, with no community engagement.

The easiest way to find fake followers, check the engagement rate. If there’s nothing there, it’s worthless. If there is, use your judgment. Is it a reasonable amount of engagement for the amount of followers in the industry?

There are also a number of tools you can use to supposedly check if followers are fake:

Twitter – Twitteraudit.com – Link

Instagram – Followercheck.co – Link

Facebook – Unfortunately no tool available.

I can’t comment on the validity of any of the above. They seem to be used quite often, though.

Maintenance (time required)

This section is just about making sure truly understand how much of your time is required to maintain the website at its current state.

With content based sites, the majority of the work required revolves the content! Who would’ve guessed? You may wish to continue to write articles at the same pace or increase the output. Beware of how long it may take you to conduct your article research if you’re venturing into a new industry.

eCommerce generally requires more time as you have a physical product. And with that physical product comes more responsibility. You may have to deal with customer inquiries, maintaining supplier relationships, sourcing new products, dealing with complaints, processing refunds, the list goes on.

Sites receiving the majority of traffic through social media will require you to maintain and engage the community on the various platforms.

Once you fully understand all the components of the websites, you can coherently comprehend exactly how much of a time commitment the website requires.

Time & Maintenance for Website Investment

Technical side

Think back to when you were applying for jobs. More than likely, each position you sent your resume to, required some sort of technical knowledge. You’d also read the job description, and understand whether your technical skills were capable of performing the required task.

Same goes for websites. Don’t start investing in websites which you aren’t fully capable of running…yet.

Ask the current owner what skills they believe are required. Better yet, confirm with another webmaster/programmer regarding the technical aspects of the site.

You’ll rarely need to consider this section, but it’s best discussed than left out. There may come a time when you come across and unbelievable bargain, but aren’t too sure on the legality of it.

Common examples include industries/products legal in some countries but banned in others. Think vaping products, smoking accessories, various types of research chemicals, or online gambling.

The best way to check is to simply do some online research. If you’re unable to find anything online, you may wish to consult a lawyer if the opportunity demands it.

But remember! If it’s illegal, and you do end up getting questioned, saying some guy on a forum said it was legal, won’t get you out of it.

SWOT analysis

Ah, the classic old SWOT analysis. If you’ve taken a class in economics, business, finance, accounting, or anything along those lines, you’ve likely come across this process before.

For those who haven’t – SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

This is a great tool to use in analyzing many business situations, including the purchase of a website. It covers a range of factors and situations that currently, and may affect the website in the future.

You should seek to answer the following questions:

Strengths (internal, positive attributes)

  • What advantages does the website currently have other competitors?
  • Are there any internal strengths of the site – great design, proven user-friendly interface
  • Are there many repeat visitors? Does the site have a strong brand presence?
  • Are the traffic sources diversified across multiple platforms?

Weaknesses (internal, negative attributes)

  • Do users repeatedly report errors whilst browsing the site?
  • Does it have negative reviews across other boards?
  • Is it limited by the range of topics the site can cover?
  • Has the site been previously penalized by Google?

Opportunities (external, positive possibilities)

  • Can the site expand into other niches?
  • Is there untapped potential in the social media realm?
  • Can the UX be vastly improved with a few tweaks here and there?
  • Are there changes to the monetization method you can make to increase the earnings?

Threats (external, negative possibilities)

  • Is the site new in a niche where many big competitors may move to operate in?
  • Are there any possibilities of a downwards trends in the niche?
  • Is the site in a niche which may be made illegal in the near future?
  • Can the site be affected by any changes in international relations between countries?

Not all of the above questions will be applicable to every site. It’s up to you to determine the right questions to ask, and discover the answers that follow.

Emulate the intended user

Use the website as someone who’s searching for the site would. This requires a bit of skill, as you need to be able to effectively change your state of mind to think like another person.

Land on the site, and do what a user would do. Is the navigation easy? Can you browse other parts of the website? What happens when you click on an advertisement or submit your email per their request.

In fact, check your email and see what they’ve sent you! Is it from them or have the immediately passed it on to someone else?

If it’s an eCommerce store, try purchasing a product. Better yet, actually purchase the product and have it shipped to you. Extreme? I don’t think so. If you’re spending upwards of $10-$15k on an eCommerce store, you’ll want to physically hold the product and understand it’s features and qualities.

This step will not only allow you to find potential flaws in their system but can also expose any opportunities the current owner has failed to take advantage of.

Miscellaneous methods

Backlinks

You should always check out a site’s backlink structure before committing to the purchase. I personally use Majestic and SEMrush, as I find them the simplest to navigate and understand.

Majestic have awesome tools (even for free users) showing the number of backlinks and referring domains over the past 90 days. Google’s currently gaining an astonishing amount of new backlinks/day as seen from the graph below.

Google Backlinks - Majestic Website Investing

If the potential website investment has seen a large spike in organic traffic recently, you’ll definitely want to use this tool. The seller may have undertaken some non-SEO friendly tactics which have helped in the short term but will be extremely damaging in the near future.

Ask the seller if they’ve adopted any backlink methods, and compare their answer to your analysis. If the contradict each other, the seller may be hiding something.

 Wayback Machine

As its name suggest, the Wayback Machine is a tool used to look way back into the past! The virtual past that is.

Alexa Internet, in cooperation with the Internet Archive, has designed a three-dimensional index that allows browsing of web documents over multiple time periods – taken from their FAQ.

Basically, the site periodically takes screenshots of publicly available sites which automated crawlers are aware of.

You should use this tool to check the history of the site, and whether or not it’s anything to worry about such as:

  • Major changes the seller hasn’t disclosed
  • If the website has undergone a massive redesign recently
  • Sites operating in a completely different niche than they were one year ago

Check Wikipedia for example. There are screenshots going all the way back to 2001.

Wayback Machine - Wikipedia

Google Penalty Indicator

This neat little tool, presented by one of the industries brokers, FE International, allows you to compare website’s organic traffic with updates in the Google Algorithm.

Great way to visually check whether a site has been previously affected, either negatively or positively, by updates such as Penguin or Panda.

See Buzzfeed for example. Throw in their URL in, and we can see that it was negatively affected by the Penguin updated in October 2014.

Buzzfeed Negative Google Penalty

Generally, be wary of sites that have received a penalty. Google states they’re making it easier for sites to bounce back, and only target individual pages sometimes instead of penalizing the whole site. Just have to wait and see.

Plagiarism

You’ll want to make sure the articles they’re claiming as original and unique, are in fact so. There are two main methods to use when checking for plagiarism, Google, and an automatic checker. I’d recommend using a combination of both.

First off, copy some of the text on the site (under 30 words is best), throw it in the Google search with quotations around it, and hit enter. If you see lots of bolded search results…Ding! Ding! Ding! You have copied content. If not, awesome! Head on to the next step.

You’ll make use of your preferred plagiarism checker tool here. I’d recommend the following:

They are both free, but you can upgrade to premium on Grammarly for added features.

Plagiarism Check - Website Due Diligence

List of all tools used

Tool – Google Keyword Planner

Description – Great tool for webmasters in all industries. Allow you to research monthly keyword volumes with a range of filters you can apply. A recent update downgraded the free version to become quite ineffective. Simply spend any amount (<$5 will do) on an Adwords campaign to start receiving exact search numbers again.

Cost – <$5 for full functionality.

Link – https://adwords.google.com/KeywordPlanner


Tool – SEMrush

Description – One of the most recommended tools out there. Keyword insights, competitor analysis, backlink structure, and much more.

Cost – USD $69.95/month for Pro. You can trial a Pro account for 2 weeks at no charge (maybe 3 if you ask nicely).

Link – https://www.semrush.com


Tool – Majestic

Description – Has one of the largest backlink databases in the world. A must use for determining the backlink structure of potential website investments and its competitors.

Cost – USD $49.99/month for Silver.

Link – https://majestic.com


Tool – Wayback Machine

Description – Past screenshots of websites. Used to determine the history of the site, and if it may effect any future traffic.

Cost – Free.

Link – http://archive.org/web


Tool – Google Penalty Indicator

Description – Compare updates in the Google algorithm with changes in organic traffic.

Cost – Free.

Link – https://feinternational.com/website-penalty-indicator


Tool – WhoIs

Description – Verify registrar information such as contact details, address, name servers, and more.

Cost – Free.

Link – https://who.is


Tool – Plagiarism Checkers

Description – Verify content on the site is unique and original.

Cost – Free, upgrade available if required on Grammarly.

Link – http://www.copyscape.comhttps://www.grammarly.com/plagiarism-checker

Bringing it all together

Congratulations! I reckon you’ll definitely be wanting to bookmark this page to come back for a refresher every couple of weeks. As you already know, your due diligence process is one of the most important aspects of making a website investment.

I’ve made the process as user-friendly as possible, trying to exclude any high-cost tools that some advanced investors may have in their arsenal.

As such, many tools out there which are useful in the process haven’t found there way here. I simply chose the ones I believe to be the most effective, cost-friendly, and easiest to use.

Do you have any other resources you currently use? I’d love to hear your suggestions!

Write me a reply in the comments below and I’ll check them out.

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4 Comments

  1. Steve says:

    Hi Michael,

    Just wanted to leave a comment saying thanks for the great content and keep it up! I’m mostly a lurker and have never bought a website myself, but find it fascinating to read about!

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