"Like any purchase ultimately the principle of ‘caveat emptor’ or buyer beware applies, so you need to know what you are getting into before handing over the cheque."
The term you’ll often hear in any business acquisition scenario is ‘due diligence’, being the process of evaluating the potential investment across several categories and determining the risks associated with that acquisition. Note the vendor, or party selling the business, may also undertake some due diligence to assist potential buyers with their initial decision making process.
The process for buying an online business doesn’t deviate significantly from the traditional acquisition model from a legal or diligence stand point, though a few additional specific factors should be reviewed as part of the diligence process which are particular for an online store.
When undertaking due diligence of an online business, we would recommend considering the following factors:
The degree each of these factors is reviewed and weighed will be dependent upon the size of the investment and risks associated with the specific online business for sale. Any risks identified through these processes will also need to be weighed to determine if it is a deal breaker, or going to have a material impact on the amount you should be willing to pay.
1. Financial and/or tax diligence
Understanding the financial viability of the business is a critical component of any acquisition. You need to have a thorough understanding of the current and recent historical financial state of the business (generally back 2-3 years, though sometimes longer) to ensure that the business is sustainable and there are no hidden risks in the accounts. We would recommend you review at the very least (where applicable based on the business’s structure):
Depending on the nature, structure and complexity of the business, there are a raft of other sources of financial information which can and should be reviewed by a prospective buyer.
It’s worth reviewing and understanding both the assets being acquired with the business (such as inventory, depreciable assets (i.e. computers etc) and intangible assets (i.e. trademarks etc), as well as any historic and current liabilities which may be transferred as part of the business sale.
2. Legal diligence
Legal diligence can often be a difficult, but essential, area of review and any prospective purchaser would be well advised to get formal advice in this area.
Legal diligence should cover at a minimum:
3. Operational and commercial diligence
At a minimum you’ll need to understand the current processes and any commitments the current owner needs to run the business, such as the amount of time per week spent, what tasks need to be undertaken and any other responsibilities you’ll need to assume to continue the successful operation of the business.
You should also consider the current operational and commercial structures of the business including, but not limited to:
4. Technical diligence
The level of technical risk that a purchaser is willing to accept varies greatly depending on the purchaser’s previous experience, the systems in place and the complexity of the existing technology being used by the business.
The core platform of the online business should be reviewed to ensure it is both manageable and scalable for the purchaser, and to ensure there are no components that may jeopardise the business’s continuity. It is common to hear of online businesses that have grown from a simple, easy to manage website to a complicated, hobbled together platform with a mixture of third-party and free add-ons. Often a change in owners is a good time to clean up or change the platform, however the purchaser needs to be aware of the costs and effort that may be required to implement such changes and any potential downsides to the business while the site is modified.
There are some excellent online tools to understand how an online store is put together – for example builtwith.com – which can provide a detailed breakdown of the technologies used in an online store or website.
Additionally, it is rare in this day and age for a successful online business’s web store to function in isolation. Most business will have a range of back office and online systems and services which aggregate together to form the technical backbone of the business. This might include accounting packages, point-of-sale systems, shipping aggregators, payment gateways and other online tools for analytics and marketing. A purchaser should be aware of which systems are intrinsic to the business and any costs and issues associate with the usage, maintenance or replacement of those systems.
5. Online diligence – traffic volumes and conversion rates
Specific to the purchase of an online business is the need to understand who your new business’s customers may be and where they come from. There are a range of online tools available to assist with identifying this information, such as Google Analytics, and most vendors should provide comprehensive statistics about numerous visitor metrics (commonly by providing a guest log-in to the analytics tool they have been using).
We recommend reviewing a range of metrics, but some of the key ones include:
6. Reputational diligence
Online businesses are interesting in that it’s possible to separate the brand from the people ‘behind the counter’. However, it’s not uncommon that an online business has accrued a bad reputation through online feedback, or for the store to be associated with its owner’s reputation.
Due to the ‘facelessness’ of the online store, it’s important to understand what reputation you are acquiring with the business as it’s very difficult to separate from feedback and reviews once they are published on the web.
We generally recommend a deep dive into any feedback that the business may have acquired across all social media, any channel platforms (such as eBay) and any relevant forums or review websites. This in some cases can be as simple as a google search, but it is a critical part of the diligence process and can make or break a potential acquisition.
In addition to the necessary diligence a prospective buyer should ensure they understand the process for buying a business and have a reasonable basis for valuing the potential acquisition.
Many jurisdictions have regulations around the sale and purchase of assets, including shares in companies, and some high-level advice early on in the process can save significant hassles later.
Business valuations are as much art as science, though many of the traditional valuation models like discounted cash flows and, more commonly, earnings multiples are still useful to arrive at a meaningful figure for online businesses. There are some online tools which can assist to arrive at an indicative price, though their results can vary wildly for the same websites so should be taken with a grain of salt.
Need some help?
Most financial or legal advisors can provide some guidance in preparing for and managing the sale or purchase of a business, though will generally not be able to providing meaningful information around technical risks or online specific analysis which may be required for an online business. So depending on nature and complexity of the business, you should consider whether you need a deeper expertise.
We, at eCornerAssist, would be happy to discuss any questions with you, and we, and our partners, are here to assist you finding the right path for any online business transaction.