Fraud in Website Acquisitions

The #1 Rule When Buying an Online Business



Buying online businesses often involves a significant learning curve, especially when dealing with more complicated businesses that come with a lot of moving parts. You need to know what’s the fair price to pay, how to complete proper due diligence, how to organise the handover of the business, what to do with the business after you’ve bought it and much more.

But everybody needs to get started somewhere. Because of this, I’m often asked questions along the lines of “what’s the one thing that I need to always bear in mind” or “what’s the one piece of knowledge that I absolutely need”. It’s a trick question, as most of what I’ve listed above is almost equally important, but if I must come up with the one most important thing that all web business buyers should know, then it would definitely be:

 

Don’t Take Anything You See at Face Value

This applies to almost everything you’ll encounter within the acquisition process – from the seller’s claims on how many hours per week the business takes to run, to how much money the site makes, to scans and copies of any documentation that you see.

Unfortunately, we’re operating in an industry where fraud and misrepresentation are an every day occurrence. This isn’t to say that there aren’t high-quality, non-fraudulent properties out there – of course there are. But at the same time as a buyer, you need to be as vigilant as humanly possible.

Let’s look at a few specific examples:

 

Broker Prospectus – One mistake that I see buyers make extremely often is taking what’s in the Broker Prospectus as “proof”, of sorts. There are two separate things to bear in mind here: Firstly, that the broker prospectus (or memorandum, or info-pack – however you want to call it) is a marketing document, and should be treated as one. Secondly and more importantly, these documents are prepared by brokers (not sellers), and in many cases aren’t even signed off by the seller. This means that unless the broker you’re dealing with takes responsibility over the claims provided within their prospectus (which is rarely the case), nothing that’s in there can be considered a warranty.

Any claims made within the prospectus that you believe are crucial to your purchase decision should therefore be added into the Purchase Agreement as warranties, as that’s the only way you can hold the seller liable should it turn out that there’s been some misrepresentation.

 

Profit & Loss Statement – Similarly to prospectuses, Profit & Loss Statements are unfortunately often prepared by brokers, based on incomplete information that they’ve received from the seller over phone or email. More reputable brokers publish strictly the numbers that they’ve received from the seller and don’t ever edit Profit & Loss Statements (with the exception of formatting, as well as elements like add-backs), but this is certainly not the case industry-wide. Many sellers and brokers alike also tend to publish approximates, rather than exact figures.

For this reason, I personally always recommend sellers to add a copy of the provided Profit & Loss Statement into the Purchase Agreement as an appendix, as similarly to claims provided within the prospectus, you want to stay secure should it turn out that any numbers on the P&L have been misrepresented.

 

Copies of Tax Returns – Whilst it’s becoming increasingly common for buyers to request copies of Tax Returns prior to purchase, I’m also noticing many buyers giving tax returns far too much credit than they deserve. Not only are tax returns usually provided on a piece of paper (or more commonly – a PDF file), making them extremely vulnerable to forgery, in the majority of cases it’s not even possible to tell whether the finances shown on tax returns have been generated by the asset that’s being sold, rather than side-activities of the company.

 

Owner Responsibility Claims – Even if the misrepresentation isn’t intentional, owner responsibilities is an area where problems often occur. This happens mostly due to the fact that the time it takes to perform certain tasks always differs from person to person – and more often than not, the seller being experienced in running the business, they spend much less time on routine tasks than the buyer would.

Always try and get a full understanding of ALL tasks involved in running the business, then figure out how long those tasks would take YOU to perform, and finally use your common sense to try to identify tasks that the seller has (intentionally or unintentionally) forgotten about.

 

In summary, when going through the acquisition process, always question every piece of documentation or information that the seller (or their representative) provides you with. Then disregard everything that you can’t either verify through third parties or logically explain, and make your purchase decision solely on the materials that remain.

It’s far easier said than done, especially as even at the higher end, purchase decisions are often at least partly emotional, but it helps to keep this in mind and try to follow the rule as good as you can, as it greatly reduces the risk of spending a small fortune on a low-quality business or worse – on a scam.

Share this!

37 Comment

  1. Howdy! Someone in my Myspace group shared this site with us
    so I came to give it a look. I’m definitely loving the information. I’m bookmarking and will be tweeting this to my followers!
    Exceptional blog and brilliant design.

  2. I used to be recommended this website by way of
    my cousin. I’m no longer positive whether or not this submit is written via him as nobody else realize such exact about my problem.

    You’re amazing! Thank you!

  3. Usually I don’t learn article on blogs, however I wish to say
    that this write-up very forced me to take a look at and do so!
    Your writing taste has been amazed me. Thanks, very
    great post.

  4. Great post. I will be experiencing many of these issues as well..

  5. Thanks for sharing superb informations. Your web-site is very cool. I am impressed by the details that you have on this site. It reveals how nicely you understand this subject. Bookmarked this website page, will come back for extra articles. You, my friend, ROCK! I found simply the info I already searched all over the place and simply couldn’t come across. What a great website.

  6. Hey I know this is off topic but I was wondering if you
    knew of any widgets I could add to my blog that
    automatically tweet my newest twitter updates.
    I’ve been looking for a plug-in like this for quite some time and was hoping maybe
    you would have some experience with something like this.
    Please let me know if you run into anything. I truly enjoy reading your blog and I look
    forward to your new updates.

  7. My coder is trying to persuade me to move to .net from PHP.
    I have always disliked the idea because of the expenses.
    But he’s tryiong none the less. I’ve been using WordPress on several websites for about a year and am worried about switching to another platform.
    I have heard very good things about blogengine.net. Is there a way I can transfer all my wordpress content into it?
    Any help would be greatly appreciated!

  8. Your means of describing everything in this article is really nice, all be capable of simply
    know it, Thanks a lot.

  9. What’s Going down i’m new to this, I stumbled upon this I have found It positively helpful and
    it has helped me out loads. I hope to give a contribution & aid other customers
    like its aided me. Great job.

  10. With havin so much content and articles do you ever run into any issues of plagorism or
    copyright violation? My blog has a lot of completely unique content I’ve either authored myself or outsourced but it looks like a lot
    of it is popping it up all over the web without my permission. Do you
    know any ways to help reduce content from being ripped off?
    I’d really appreciate it.

  11. Hello, after reading this amazing paragraph i am as well delighted to share
    my know-how here with colleagues.

  12. Hi there, after reading this awesome piece of writing i am as well happy to share my experience here with friends.

  13. I wanted to thank you for this fantastic read!! I absolutely loved every little bit of it.
    I have got you book-marked to check out new stuff you post…

  14. Asking questions are actually fastidious thing if you
    are not understanding anything fully, however this article gives good understanding yet.

  15. hello!,I really like your writing so a lot!
    proportion we keep in touch extra about your article on AOL?
    I need a specialist in this house to unravel my problem.
    May be that is you! Having a look forward to see you.

  16. I have been exploring for a little for any high quality
    articles or weblog posts on this sort of space . Exploring in Yahoo I ultimately
    stumbled upon this website. Studying this information So i am
    glad to exhibit that I’ve an incredibly excellent
    uncanny feeling I discovered exactly what I needed.
    I most indisputably will make sure to do not put out of your mind this web site and provides it a
    look regularly.

  17. Hello! Do you know if they make any plugins to protect against hackers?
    I’m kinda paranoid about losing everything I’ve worked hard on.
    Any suggestions?

  18. Woah! I’m really enjoying the template/theme of this blog.
    It’s simple, yet effective. A lot of times it’s tough to get
    that “perfect balance” between superb usability and appearance.
    I must say you have done a very good job with this.
    Additionally, the blog loads extremely fast for me on Firefox.
    Excellent Blog!

  19. Hi there! I know this is kinda off topic but I was wondering if you knew where I
    could find a captcha plugin for my comment form?

    I’m using the same blog platform as yours and I’m having problems finding one?
    Thanks a lot!

  20. Hello there, You’ve done an excellent job.
    I will certainly digg it and personally suggest to my friends.
    I am confident they will be benefited from this website.

  21. I was able to find good info from your blog articles.

  22. Hi! I just wanted to ask if you ever have any problems with hackers?
    My last blog (wordpress) was hacked and I ended up losing months
    of hard work due to no backup. Do you have any solutions
    to prevent hackers?

  23. Wonderful post! We are linking to this great article on our site.
    Keep up the great writing.

  24. Hello! This is my first visit to your blog! We are a collection of volunteers and starting a new initiative in a community in the same niche.
    Your blog provided us beneficial information to work on. You have done a extraordinary
    job!

  25. Good day! Do you know if they make any plugins to assist with SEO?
    I’m trying to get my blog to rank for some targeted keywords but I’m
    not seeing very good results. If you know of any please share.

    Thank you!

  26. Hey! I realize this is sort of off-topic however I had to ask.
    Does building a well-established website such as yours take a lot of work?
    I’m completely new to running a blog however I do write in my journal
    every day. I’d like to start a blog so I can easily share my experience and views online.
    Please let me know if you have any recommendations or tips for brand new aspiring bloggers.
    Thankyou!

  27. This information is worth everyone’s attention. How can I find out more?

  28. you’re truly a excellent webmaster. The site loading pace is incredible.
    It kind of feels that you’re doing any unique trick. Furthermore, The contents are masterwork.
    you’ve done a wonderful activity on this topic!

  29. Hi to all, how is everything, I think every one is getting more from this web page, and your views are
    pleasant in favor of new viewers.

  30. Hi everyone, it’s my first pay a quick visit at this web site, and article is really fruitful in support of me,
    keep up posting such content.

  31. Since the admin of this site is working, no question very shortly it will be famous, due to its feature
    contents.

  32. Hi it’s me, I am also visiting this web site daily, this web
    page is really fastidious and the viewers are actually sharing nice thoughts.

  33. Good day! I could have sworn I’ve been to this website before but after browsing through many of the articles I realized
    it’s new to me. Nonetheless, I’m certainly pleased I found
    it and I’ll be bookmarking it and checking back frequently!

  34. Excellent article. I’m going through many of these
    issues as well..

  35. wonderful publish, very informative. I ponder why the other experts
    of this sector don’t notice this. You must proceed your writing.

    I’m confident, you’ve a huge readers’ base already!

  36. I was suggested this web site by my cousin. I’m not sure whether this post is
    written by him as no one else know such detailed about my problem.
    You are incredible! Thanks!

  37. This is my first time pay a visit at here and i am genuinely impressed to read everthing at one place.

Leave a Comment