I will use some help from Investopedia when answering this question.
Due diligence is an investigation or audit of a potential investment or product to confirm all facts, that might include the review of financial records. Due diligence refers to the research done before entering into an agreement or a financial transaction with another party.
In simple terms, it’s an an audit done by the buyer of a website before buying the website. The audit is needed to ensure all information about the site is correct, and that the product you buy (the website), indeed is what you expect it to be.
It’s probably one of the most over-looked aspects of buying websites, especially for new-comers to the website buying-space. But it is still one of the most important if you want to withhold a solid, long-term website portfolio.
Before we start talking the ways of due diligence, it’s important we understand what it is, and the importance of it.
If you’re absolutely clueless about why website due diligence is needed, let’s take a tangible example to explain.
Imagine the following:
You’ve been saving for years, and finally you’ve gotten a loan from the bank to be able to buy yourself your first house.
You inspect the house, but when inspecting, you don’t really check all corners, walls or the broker simply doesn’t tell you the full story.
But you think it looks good, and you sign the contract.
On the day you move in, you find the first major problem.
And the day after, you find the next problem. You keep on finding problems, which would have been deal breakers, if you had only noticed them prior to buying the property.
Your newly bought house doesn’t feel the same – and selling it would be very hard, since it was just recently bought (by you).
You’re now stuck with a house that is in need of a major renovation, a mortgage and the feeling of you being the loser in the deal.
This scenario would suck, wouldn’t it?
In this scenario, I assume you would have some sort of buyer protection.
However, buying websites from a random person online does not usually include this type of protection.
Do you now understand the importance of proper due diligence?
Great! Now, let’s get into the guide.
2. Domain history
3. Niche research
4. Content quality
5. Traffic sources
6. Revenue sources (business model)
8. The multiple
Being able to scale a site into a business requires a good, brandable domain.
However, from a SEO point of view, it doesn’t really matter.
We will therefore keep this point very brief. But one thing we can add is that, if you value brandability and want to build a brand, you really should consider the domain name.
Domain history is probably the most important factor to consider. Has the domain been involved in any shady activities? Or does it have a manual penalty, that will affect the growth rate of the site?
These are factors one should consider when buying websites. Some people like to buy sites that have been hit with a penalty, get it out of it and rank the website higher.
As long as you’re aware of it, you should be able to make a wise decision.
So, from an non-Search Console perspective – what should I look at to figure out if a domain has a Google penalty?
Our recommendation is to google the site name, and see if it ranks for its own name. If the domain name is something very broad, like bookshelf.com, we should Google for “bookshelf.com” (instead of just “bookshelf”), if it ranks – it should be good.
If it doesn’t rank for it’s own name it might be hit by a penalty.
If it doesn’t rank, try to google for snippets of it’s content and see if it ranks for it’s own content, if it doesn’t – it’s either a site filled with duplicate content, or it has been hit. Probably not a good buy for most people.
As for domain history, if it has been used for “shady activities” (whether that being apart of a PBN, shady business operating with the domain name or has been spammed with bad links), you should stay generally stay away.
One way to check that is by using Wayback Machine, it’s a free tool to check history of how the site has evolved in terms of designs, content, etc. It usually only takes a few minutes, and it can save you a lot of hard-earned money.
In what state is the niche of the site? Is it a booming niche that is projected to grow?
Or is it a dying niche with a rather steep decline in overall interest? It might seem obvious, but sometimes we website buyers get too focused on the current revenues, when we should also consider the trend.
Let’s look at the interest for the term “best fidget spinner”, it’s a really good example.
While it’s almost like investing in the stock market, and one cannot predict the trends in the market – fidget spinners could technically be the biggest thing still.
But no matter what, buying a website within the fidget spinner niche in end of May (based on L3M) could be one of the worst buys.
Therefore, I’d never buy a site within a niche that is sky-rocketing in interest.
It might be good money for the first-movers who rake in loads of quick and valuable traffic for free (due to no competition), but as a website portfolio owner, one should really think about the long-term goal rather than trying to make a few quick bucks.
Think about the long-term goal, and try to keep a long-term mindset thorough the whole process.
It’s also interesting to see what type of niche the site is in prior to buying it.
Maybe it is in a niche you’re already in, and you have insights in what works for that specific niche (good keywords to easily rank for or high-converting affiliate programs to promote). Or maybe it is a niche you’re interested in adding to your portfolio.
One way of diversifying, and most of all amplifying the earnings of an affiliate site is to launch a product yourself and promote it.
You’ll have better margins per sold product, and essentially make more money even though you don’t sell as many as the most popular brand in the industry (that was listed as the prior #1 best product in the niche) 😉
See what the options are here, is it possible to launch a product in the niche?
If it is, then it’s yet another reason to buy the site.
Be careful though, with too much analysis on potentials and ways of growing, you’ll find yourself drowning in analysing different sites.
It might take too long, and the site has already been bought once you are ready to place a bid/buy the site.
While content quality might not seem like a very important aspect, it is important we ensure that the quality is 1) unique (no duplicate content), and 2) isn’t considered low quality.
Content as an expense for a small website owner can be quite costly, so many people try to take shortcuts.
However, this will lead to penalties, non-reliable rankings and possibly you being deindexed.
As a buyer, you shouldn’t have to completely re-do the content, you should focus on making it better, and making more of it.
Make sure to use a service like siteliner.com to ensure that the site has unique content published. If the content matches any other domains’ content, see if those sites are the copycats or if, in fact, it is the site you’re looking to buy that is copying them.
Traffic sources is probably within the top 3 of most important factors.
You should always get access to see the Analytics account, to make sure the majority of traffic is coming from lasting sources (such as SEO). One does not want it to be PPC, social media or any other channel where you have to continuously push your articles to get traffic (unless you’re interested in managing this type of site, of course).
While the traffic from SEO could technically decrease hard (either by a manual penalty or the sites’ ranking decrease due to higher competition), it is a much more lasting (and profitable!) source than the ones mentioned above.
We’ll talk more about link types and the risk/reward of PBNs in another article. Since it is a whole other discussion, but this should be accounted for as well.
What is the business model of the site? What does it make money from?
It is very usual that site owners accept guest posts and count this towards the overall revenue of the site. While it is a potential revenue stream for you as well, it is not a long-term revenue stream that will stay the same for years to come.
If you sell 10 guest posts at $200 each for 3 consecutive months, and you buy the site based on avg. profit over last three months (L3M), the profit will be boosted and you will have to pay $60,000 for a site that actually earns one-tenth of a site at that price.
It is also common that site owners offer services within their niche, and make a fair share of their revenue from it. Are you able to provide the same type of service? If not, that revenue source will be lost.
If a niche site is promoting a FBA product they own themselves, is the FBA product ownership included in the sale of the site?
Make sure that you understand the business model of the site, and how they make money currently. Have a plan on how you’re going to keep the business going and if the time you have to invest in the business model is worth it.
Last but not least, we need to make sure we have a proper look at the finances.
Sometimes you see these types of tables:
If you’ve done your proper due diligence on revenue sources, you should know how the revenue is split. That is great!
But you also need to know what the recurring costs are.
At first sight, this site seems like a good, profitable site to invest in. But could you make it even more profitable by cutting down on costs?
You have no idea on where money is spent, therefore this table doesn’t actually give us the most important info (especially for those looking to make it even more profitable and flip it).
That’s why I want all website builders to start using profit & loss statements.
Profit & loss statements are statements that report the expenses and revenues of a site, company or even sub-division in a company.
We have incorporated it on all our websites, which gives us and the future buyer of the site, a great insight in where money in flowing from and where it is spent.
Looking at this example sheet we see that a lot of money is going into links.
Are there way in which we could cut down on this expense by buying permanent links via guest posts, niche edits or even some outreach?
Or do we rather focus on scaling the site more with even more links, and more content – to make it even generate even more revenue and profit in the future?
This is totally up to you, but now you at least know what the possibilities are.
When talking finances it is also important to make sure to look at the multiple, and that is our next aspect.
The multiply you buy a website on varies a lot depending on a whole bunch of factors we will address in another article. But for now I think it is important to make a few things regarding the multiply clear.
There is no standard practice for this, since the market for established websites is so immature.
What figure the multiples the price is based on is decided by the seller. And sellers want the number to look the best possible.
Most will therefore say base it on 1 month of earnings. This is usually not a fair number, since the average for 3 months or 6 months could be way, way lower.
It depends a lot on what stage of the site is in, sometimes the 3 month average is more accurate than the 6 month average, especially if the site 6-9 months old.
It is also important to keep in mind the different things I mentioned before, such as trends and sponsored post-buffing of revenues that many people forget once looking at the average earnings.
To summarize, it seems that most factors we have talked about is related to actually digging just one layer deeper than what others do.
We want to make sure we invest money in something we have a total understanding of, otherwise we might buy something that is less than what we expected.
This rule should be followed when buying a house or a website. Good luck!