Using Smart Due Diligence to Buy Established Websites for Less
Over the last few years I have written a fair few articles about due diligence and how to avoid buying sites that simply aren’t worth the risk. Today I’m looking at due diligence from a whole different angle. Sometimes there might be certain red flags in place that just aren’t enough to make a site a bad purchase, but knowing what they are will almost always help you get a better price!
No Website is Perfect
Something that many buyers of online businesses tend to not realise is that doing proper due diligence on sites that you’re about to buy not only allows you to back off from purchases that would likely end up in a disaster, but more often than not, you can get a better deal on the sites that you do want to buy!
This is because of one simple rule. No site is perfect!
In Centurica, we used to assign each website that we analysed a Due Diligence score between 1 and 100. The score, calculated from over a hundred different metrics, illustrated the overall risk level of buying the site. An interesting fact is that having completed a relatively large number of DD analyses, there has yet to be a single website scoring the maximum of 100! No matter how good the site is, there are always some flaws present.
Define Your Risk Tolerance
One of the most important decisions to make before buying a business is what level of risk are you willing to accept. Different buyers have different risk tolerance – some may be interested only in relatively safe investments (and are willing to pay a premium for these), whilst others are willing to accept more risk, compensated by a lower multiple or potential for quick growth. It’s up to you as a buyer to decide how far are you’re willing to go, but it’s a decision that needs to be made before looking at prospective sites.
As I’ve mentioned above, no due diligence analyst will give you a simple “thumbs up” or “thumbs down” (and if they do, then they’re probably not very good at what they do!). The best outcome you can hope for from due diligence is a clear description of all the potential risks involved. Based on this, you can decide whether the overall risk level falls into your acceptable criteria or not.
Put Your DD Knowledge to Good Use
Once you’ve decided on your risk tolerance, you need to perform proper due diligence on the business that you’re thinking of acquiring, not only to find out whether the site falls within your tolerance limits, but also to get valuable information that will later help you in price negotiations.
As I pointed out earlier, no site is perfect and every site, no matter how low-risk, has at least a few flaws. The good news is that having defined your risk tolerance you can make an educated decision as to whether the flaws are sufficient or not to back off from the deal, but even better news is that should you decide to pursue the deal, these very flaws instantly become powerful weapons in your negotiation arsenal!
Use Your DD Knowledge to get Bargain Deals
In most cases, all you need to do is get in touch with the seller, inform them of the results of your due diligence (be it performed by yourself or outsourced), and assuming that your information and assumptions are backed by facts, they’ll usually have no option other than admitting that their business isn’t perfect after all.
You may be surprised how many sellers don’t realise the flaws in their business until they’ve been specifically pointed out. At this point though, it’s often very easy to reach a deal that’s below their asking price, especially if they know other potential buyers are likely to approach them with the same info.
Often enough, all that is needed is a quick “Look – I’m willing to purchase the site despite the obvious flaws of X and Y but we need to reach a better deal on the price”.
Try it out the next time you’re buying a site!
P.S. I realise that this strategy is not overly suitable in an auction environment such as Flippa.com, however even on auctions, a number of sites (especially those at the higher end) tend to be sold outside of active bidding, by negotiating a mutually acceptable Buy-It-Now price.
P.P.S. Some brokers will argue that using due diligence results to negotiate price is unorthodox, and that DD is typically only done once the client is under an LOI, meaning that an offer has already been made and accepted. This may be the case, but at the same time – post-DD price negotiations are unavoidable, as in the majority of the cases the actual market value of the property can only be identified after due diligence phase, as that’s where all the books are opened and the necessary information made available.