Buying an existing online business can be one of the best moves you ever make. It can also be one of the biggest disasters you get yourself into.
There are thousands of legitimate businesses making their way onto the open market every single day, waiting for investors like you to take them over. But there are also just as many unscrupulous business owners looking to pawn off their problems onto some unsuspecting buyer.
If you’re thinking about buying an online business, there are certain questions you need to ask yourself before you dive in head-first.
The 25 questions below are questions I ask entrepreneurs when they are trying to evaluate a business. These questions will help you determine whether buying the business is a good investment, or one that you should run from as fast as you can.
#1 – How long ago was the business started?
When you’re thinking about an established business, avoid any that have been started in the last 12 months.
While the business may have experienced incredible growth, 12 months simply isn’t enough time for you to figure out whether or not the business is going to be sustainable, especially after you buy it.
When I see entrepreneurs selling a business within 12 months after starting it, I think they know that it could be in a bubble, or they are afraid of being able to sustain its growth themselves.
I recommend buying businesses that have been around for more than 2-3 years, with 4+ years being ideal. These businesses are easier to establish value than new and underdeveloped businesses are.
#2 – Who are the major players and competition?
I often see businesses that are being sold because the competition in the niche, market, or industry has become so stiff the current owner sees a decrease in revenue happening in the near future.
Other times, they may know that there is new competition coming. They are afraid of their own prospects leaving, or being able to stay relevant against the new competition.
Unless the owner is willing to be honest with you about why they’re selling, it’s hard to determine whether there’s new competition. If you get a hint that competition is the reason, figure out if you’re able to do what the previous owner couldn’t, and stay relative in a highly competitive marketplace.
#3 – Is the business going to become obsolete?
There are quite a few different reasons a business could become obsolete, including:
- The technology they used to establish themselves in the market has become outdated.
- Government has begun regulating their industry
- Their market has simply moved on or gotten older.
Whatever the case may be, I see some entrepreneurs selling their business because they know it is soon going to become obsolete. They don’t have the creativity to innovate and capitalize on what they’ve built.
You need to be experienced in the industry of the business you’re wanting to purchase, and understand how their market is reacting to their products and services if you’re going to buy a business under these circumstances.
#4 – Can you verify the business’ revenue?
Any legitimate business that’s being sold should have a revenue history attached to it.
Bank account statements, credit card processor statements, tax returns, and other financial documents should be provided by the owner before you proceed forward.
If you’re not able to verify their earnings, you’ll be left with nothing more than the word of the entrepreneur selling their business. And, in many cases, they are more interested in making a quick sale than telling you that they’re lying about their finances. So shady things can happen.
Make sure there is a financial history that you can verify before you submit any offers.
It should go without saying, but many businesses are bought and sold based on shady or fudged accounting information. This leads the next owner into muddy waters when they figure out the problems that existed before they bought the business.
#5 – How has the business grown, annually?
I also see many businesses that are being sold as they’re trending downward, or if their revenue has become stagnant. This shouldn’t always raise your alarm bells, though.
There are a number of reasons for a loss in revenue, including:
- The business owner has simply lost interest in the business
- They have had personal or health issues arise
- They are ready to capitalize on their initial success and move forward into other, bigger projects.
If the business has grown annually since its inception, chances are high that it will continue growing into the future. This is, of course, contingent on you using the same marketing and growth strategies that made the business successful in the first place.
If it has started trending downwards, figure out why. Then determine whether or not you have the skills and capacity to get it moving in the right direction again.
#6 – Does it have an established customer base?
If the business has generated revenue, it should have an active customer base that’s included in the sale. This customer database can be a huge source of future revenue, especially if the previous owner hasn’t tapped into it properly.
Before you buy the business, ask if the customer database is coming with it when you buy it. Then, determine whether or not you can turn those existing customers into repeat customers once you’ve taken over the operation.
#7 – How is the business’ reputation?
Reputation is huge. If the previous owner has recently tanked their business’ reputation, a major lawsuit has been filed, or the market has started reacting negatively to their business, you could be purchasing a disaster waiting to happen.
To avoid this, I recommend you do some digging when you are thinking about making an offer on a business.
Find out if there’s any negative press that’s been looming over the previous owner, if the business has started losing its reputation in the market, or, worse, if there are any lawsuits that are pending that you could be responsible for when you take it over.
#8 – Are there any BBB complaints against the business?
The Better Business Bureau can tell you quite a bit about a business that you’re wanting to purchase. Mainly, how the previous owner has treated their customers and handled any complaints that have been lodged against them.
While doing your research, make sure you check the business’ BBB rating.
If there have been complaints lodged against the business, make sure you read through them to figure out how the previous owner handled them. Were they resolved efficiently? Was the customer left happy and satisfied?
The Better Business Bureau can help you judge how hard it’s going to be for you to take over the business, or if you’re going to inherit customer service issues.
#9 – Can you verify the business’ daily traffic?
Any business that has been run properly is going to have some sort of analytics or tracking installed on their website so that they can measure the performance of their marketing campaigns. This will tell them how many visitors they’re converting into paying customers.
This data should be accessible to you whenever you’re thinking about submitting an offer to buy the business.
You can’t just take the business owner’s word on the daily traffic numbers, traffic sources, and conversion rates. You need to be able to dig in and verify the information yourself.
I require business owners to provide their analytics data before I begin looking for investors. But if you’re not working with a broker you need the owner to give you access so you can verify what they’re telling you.
If you’re serious about buying the business and ready to submit an offer, the business owner should give you temporary access to login and check the traffic stats yourself.
#10 – Does the business rank in the search engines?
Search engine traffic can be some of the most targeted, high converting traffic a business owner can drive to their website.
If the business you’re thinking about buying doesn’t already rank in search engines, it could mean one of two different things:
- The business owner has gotten the website penalized for shady and spammy search engine marketing strategies.
- They haven’t done any search engine marketing at all.
A good way to see the difference is to search for the business by its own name. If it doesn’t show up in the search results for its own name, chances are high that it’s been penalized.
If it does show up for its own name, but doesn’t show up for any relevant keywords, it could mean that the business owner simply hasn’t marketed the business properly in the search results. That could lead to a ton of new revenue for you after you buy the business.
#11 – How many backlinks does the site have?
Digging into the backlink profile of the business website you’re thinking about buying can tell you quite a bit about how well it will perform in the search engines after you’ve bought it.
If there are a ton of spammy, low quality links, or links from websites that are full of low-quality content and seem to link to anything and everything, you could have your work cut out for you.
However, if the website has links from highly authoritative websites and publications, implementing proper search marketing campaigns can be dramatically reduced and substantially more powerful.
I see a large number of sites that are being sold while relying primarily on paid advertising. In this case, the number of backlinks won’t necessarily break a deal, as long as those links aren’t coming from shady or blackhat sources.
#12 – Who supplies the business’ products?
Figure out how the business is getting the products that they are selling to their customers.
If they are selling services, look into how those services are being fulfilled and what personnel are required to do so.
However, if the business is selling physical or digital products, find out what suppliers they use and how healthy the relationships are.
If there are issues in the relationships, or the supplier is tapped out and unable to sustain any further growth, you’ll need to think about additional options for supplying increased quantity of products before you buy the business.
#13 – Does the business come with inventory?
Some business owners will show you revenue growth over the last 12 months, while pushing hard to deplete the inventory that they have in the business before they decide to sell it.
This is done to maximize how much money they make from the business. But it’s bad for you because you’re going to be left on the hook for buying new inventory to sustain the business’ growth.
On the flip side, the business could come with a large inventory, but they could be products that don’t sell well and the owner is simply looking to offload them after selling off the products that they can move.
Look into what inventory comes with the business and compare it to where the sales have come from. Make sure that you’re not being put into a position where you are responsible for buying new inventory after the business has been purchased.
Or, worse, that you are left with a warehouse full of inventory that won’t sell.
#14 – Does the business sell an information product?
If the business sells information products, it’s positioned to be a huge passive income generating asset for you if you buy it.
However, before you rush in and think that you’re sitting on a potential gold mine, there’s something that you’ll need to consider.
When people purchase digital information products, they typically have questions that they expect the expert who created those products be able to answer.
Are you able to answer their questions? Do you have the same expertise? Can you continue what the original owner started?
If not, you could find yourself losing a loyal following because they have come to love the previous owner of the business and you’re not able to fulfill their needs the way the previous owner has.
I’ve helped sell businesses that are completely hands-off, requiring zero additional work from the new owner (which makes them perfect if you don’t have expertise), and other businesses that will require you to have the same set of skills the previous owner had.
Because information product businesses can be so lucrative, you’ll either need to learn how to automate the business so you don’t have to develop the same skills, or plan on developing the same skillset the previous owner had so you can pick up where they’ve left off.
#15 – What ongoing expenses does the business have?
There’s no point in buying a business that generates $100,000 per month in revenue if that comes at a 5% profit margin. $5,000 per month would hardly be worth your efforts.
Before you make an offer to purchase a business, verify the ongoing expenses that you’ll be required to pay each month.
By looking through the expenses, you may be able to get rid of things that the previous owner sees as requirements but you are able to find creative solutions for.
Likewise, there may be monthly expenses that make buying the business a bad decision for you. These can cut into profits so badly that you simply can’t fix the scenario to work in your favor.
#16 – What marketing strategies have been used?
For the business to be established and profitable, the previous owner will have had to implement various different marketing strategies.
It’s your job to figure out what those strategies were, whether or not you can capitalize on those same strategies, or identify new ways to get in front of your target audience.
If you’re not able to market the business, it will eventually dwindle into nothing. And you’ll have made a bad investment.
However, if you are able to pick up where the previous owner left off, or even implement new strategies that the previous owner couldn’t, you can drive new sales and revenue into the business and create a perfect scenario for yourself.
#17 – Has the business owner paid taxes?
Purchasing a business where the owner hasn’t filed taxes, or hasn’t filed them properly for multiple years at a time, is one of the worst positions you can find yourself in.
There’s nobody worse to have on your back than the tax collector.
To ensure you’re not going to be falling into a potential land mine, make sure that the business owner has filed tax returns each year the business has existed, and then verify that their claims are true.
It’s worth the extra time (and money) to pour through the tax returns to make sure you’re not going to get hit with penalties after you’ve bought the business.
I’ve had business owners attempt to hide this fact while having me sell their business, and the hidden tax issue came out during the due diligence process. Not only did the deal fall flat, but I refused to help them sell the business until the issues were resolved with the IRS.
#18 – Does the business currently have any debt?
When you’re thinking about debt to the tax collector, you also need to think about debt to any other sources that the previous owner may have borrowed from.
Whether this is from financial institutions or shareholders, if the previous owner has debt to anyone or any company, you are going to be responsible for that debt after the business has been purchased.
If this is the case, you may want to make stipulations that the debt must be paid off once the business has been purchased. You can also renegotiate the terms of the deal to ensure you’re not taking on the debt, or that you’re paying less for the business in light of the debt being taken care of.
#19 – When does the business license expire?
While this may be a minor issue, it’s something you need to think about before you make an offer.
If the license has expired years ago, and the previous owner has been doing business illegally, you could find yourself dealing with a sticky situation after you’ve purchased the business.
However, if it’s set to expire in the near future, you’ll need to make accommodations for securing a new license once you have taken over.
#20 – Does the business have a valid SSL certificate?
If the business sells products or takes credit card and other sensitive information on their website, you need to ensure that there is a valid SSL certificate in place.
An SSL certificate encrypts the private information that your customers are transmitting on your website. It can keep you out of trouble when hackers are trying to access your customer’s sensitive information.
If they don’t have a valid SSL certificate, and the business gets hacked after you’ve purchased it, you could be on the hook for repairing the damage done.
If they do have a valid SSL certificate, you need to know when it expires so you can keep it up to date and avoid potential problems down the road.
#21 – How long is the business’ domain registered for?
This may seem like another minor point, but it is definitely one you need to consider. Potential squatters are waiting to buy domain names they know have value attached to them.
If the business’ domain name is set to expire shortly after you purchase, or right before the deal is being made, you need to ensure there are terms in your deal that require the previous owner to secure the domain name for at least another 12 months.
This will give you time to familiarize yourself with the business and purchase the domain name for an extended period of time.
If the domain expires while the deal is being done, squatters can come in and buy it. They can then charge you a substantially higher fee to purchase the name back from them or, worse, create a new business around the name.
While there are ways to secure a domain name if you have lost it, it can create far more problems than you want to deal with once you have taken over a new business. Make sure the domain name is taken care of before you submit your final offer.
#22 – What type of hosting does the business use?
Some profitable, established businesses were built around a $10~ per month shared hosting account. (Like Bluehost)
While this does save money for the previous owner, it could be costing you big money when you’ve bought the business.
New visitors will, on average, stick around for 2 seconds before they click the back button and search for another website.
If your new business has been built on a shared hosting account, especially if you’re sending paid traffic to the website, you could be losing out on thousands of new customers.
Shared hosting accounts, as the name implies, share a hosting server between hundreds of other websites, and the load gets distributed to each of those different sites.
That means your own website could have longer load times, and could be losing customers.
Depending on how much traffic the website generates on a daily basis, your legitimate hosting bill could be hundreds or thousands of dollars per month. That’s something you need to consider when you’re weighing whether or not you should be buying the business.
While upgrading the hosting account could mean a ton of new business for you, it’s also a much larger expense that the previous owner isn’t accounting for in their financials.
#23 – How reliable is the business’ hosting?
Just as a shared hosting account can cost you potential customers because of slow load times, a website that’s always down because of an unreliable host can cost you just as many sales.
Many hosting companies promise 99.9% uptime, but very few actually live up to those claims. (BigScoots does. For real!)
Check in on the website and verify how quickly it loads, or whether the site loads at all.
If there are times when the site is down or unresponsive for you, you can expect to have to change the website over to a new host, which can cause you to incur unexpected expenses and downtime, especially if you’re not able to migrate the site over yourself.
#24 – Are you technically able to manage the website?
While we’re on the topic of being able to migrate the website over to a new hosting account by yourself, or thinking about how much a developer is going to charge to handle the process for you, you also need to think about whether or not you’re able to manage the website without outside assistance.
(Psst, Patrick here! My favorite managed WordPress hosting provider, and the one I use, is BigScoots. Amazing service!)
Some websites are simple to operate and manage, especially if they’re built on a content management system like WordPress.
Other websites, though, have had custom development and require substantially more work to maintain them.
In those cases, you’ll have to handle the work yourself, or plan on paying for an expensive developer to maintain the website for you if you’re not able to or don’t understand how to.
This is something you need to consider before you go into the deal, and one area that many entrepreneurs don’t think about before they start making offers to buy a business.
#25 – What payment terms are required to buy the business?
Depending on how you have structured the deal that you’re about to make, some investors may require you to make 100% of the payment up front. Others may be willing to be more flexible on the terms.
Some other scenarios could have you making 50% of the payment up front, with an additional 50% of the payment happening after the business has hit certain revenue goals once you have acquired it.
Know the payment terms and have them clearly outlined before you go into the deal. If you require assistance from the owner to help you work your way into the business after you’ve bought it, make sure that time period is clearly defined.
Likewise, if you want to ensure the business is going to continue on an upward trend, put in stipulations that a certain portion of the payment is due once the owner has helped you reach those goals, and you have figured out how to run the business the way they have in the past.
Clearly define anything that needs to be negotiated with the owner in the terms of your agreement.
If it’s not in paper and signed by both parties, it’s not enforceable and can be reversed if one party sees fit. In other words, if you don’t have it in writing and the previous owner decides they don’t want to live up to your “gentlemen’s agreement”, you’re out of luck.
Get it in writing. This is another area that I help both buyers and sellers with during the negotiation process, and any reputable broker that you work with should be able to help you, too.
Work with a broker to make the deal happen.
If you can’t answer these questions yourself, or you think the process seems overly complicated but still want to invest in an established online business, working with a broker is another option for you.
Rather than finding a business and going through the buying process yourself, working with a broker will help you move through the process while ensuring that you are being protected the entire time.
Reputable brokers only work with reputable business owners and reputable investors. You can rest assured that you’re not going to be buying a “lemon” of a business, or risking money that could have been spent buying a business that wasn’t going belly up.
They can help you through the due diligence and negotiation stages, all the way through closing the deal, and answering your questions along the way.
The 25 questions listed here are ones I’ll personally address before I list a business for sale or pass it off for their investors to consider. Working with a reputable broker can help you ensure you’re not going to be taken to the cleaners.