How to Do Due Diligence When Buying an Internet BusinessMaria Valdez Haubrich
Last month on this site, we wrote about some of the positive signs you should look for when buying an Internet business. But in addition to these positives, there are also some negatives to watch out for. If you’ve found an Internet business that you think is the right fit for you, don’t be too quick to sign on the dotted line. First, do your due diligence in the following areas.
Finances: Just as with any business, when buying an Internet business you need to ensure that the financials the owners presenting are accurate. Enlist an accountant to help verify the financial information the seller is offering. You may also need to assess financials against website metrics. Do the numbers add up? Is the amount of sales being claimed too high to be realistic based on the actual website traffic and the profitability of the products?
Technology requirements: Often, people who start Internet businesses are technologically savvy and do a lot of the maintenance on their websites themselves. Get into the nitty-gritty details of what is involved in keeping the website up and running. Is this something you can handle on your own? If not, do you have someone on your team who can do it? Don’t buy a business until you know how you will handle the technology and have researched your options for hiring the necessary assistance. Never assume it will be easy to find someone to take the role, or guess how much that person will want to be paid. You need to figure these costs into your purchase.
Noncompete agreements: Business sellers generally sign noncompete agreements with the purchasers, guaranteeing that they won’t enter into competing businesses within a certain geographical range or a certain amount of time, or both. However, since an Internet business can sell products anywhere, noncompete agreements when buying an Internet business can get complicated. What if you’re buying the business so you can expand internationally, but the seller secretly plans to launch the exact same type of business catering to an international clientele as soon as he sells you the company? U.S. noncompete agreements generally can’t be enforced overseas, so this could leave you in a pile of trouble. Always consult an attorney experienced in online business law to help you develop and/or review any noncompete agreements involved in the sale.
Management and operations: What physical and human resources are involved in running the business? Is it located in a commercial office, or staffed by virtual employees? If the former, what type of lease is involved and can you take it over? How are payroll and other HR issues handled? What types of contracts exist with employees and/or independent contractors?
Intellectual property: Is the software that the website uses properly licensed? If any proprietary software is used, will ownership transfer to you upon the purchase? Have the business sellers registered and maintained the domain name? Are there any related domain names they also own (or that they should have purchased and didn’t)? If they did not purchase closely related domain names, are those names still available to register? You don’t want to buy a business that is easily confused with others with similar domain names.
Inventory and payment: What contracts exist with vendors or suppliers, and can you obtain the same terms going forward? If the site sells products online, agreements with online payment/credit card processing companies are important to continued operations and maintaining profit margins, so make sure any payment processors are willing to offer you the same terms.
Valuing an online business for sale can be more complicated than a traditional brick-and-mortar business, so it’s especially important to get help from those experienced in online business valuation if you have any doubts or concerns when buying an Internet business.
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Maria Valdez Haubrich
Maria Valdez Haubrich is Chief Liaison Officer of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Visit her company’s blog at SmallBizDaily.com.