Top Mistakes People Make When Buying Content Sites

Ask Yourself These 10 Questions Before You Buy a Business

When you’re looking to buy a business, start by preparing a list of questions ahead of time.

This helps you to narrow down your options and identify the best opportunities based on your specific set of criteria.

To guide your decision-making process, I’ve identified some important questions to ask both yourself and the seller.

10 questions to ask when evaluating an online business:

  1. Am I qualified to assess this business?
  2. Am I buying a business or a job?
  3. Does the business have diversified revenue and traffic?
  4. What is the barrier to entry in this business?
  5. Is this a trending or growing market?
  6. Do customers like this product or service?
  7. How does this business stack up against the competition?
  8. Is the business stagnant, declining, or growing?
  9. Do I have the skills to grow this business?
  10. How much is this business actually worth?

Let’s take a closer look at each one.

1. Am I qualified to assess this business?

Am I familiar with this industry? Do I have the necessary knowledge to assess this business?

When you’re hunting for a new business, you’ll see thousands of opportunities in many different industries and verticals. It can be overwhelming.

But it’s really important to understand the industry before you make a large acquisition.  

One challenge of buying a business in an industry where you have little experience is the difficulty in properly evaluating the opportunity and handling the due diligence.  Each industry has subtle nuances, and if you’re not well versed in these, you could find yourself on the losing end of a deal.

Let’s look at a few examples.

  1. For sale on a marketplace: I stumbled across a business that helps customers scrape data, to build lookalike audiences on Facebook and to increase the revenue of their business.  If you’re not familiar with Facebook ads, this is against their Terms of Service.  “You cannot scrape data from public websites or download email lists from people who have not given you permission to contact them or use their data.”
    When I brought this issue to the seller’s attention, this was their response:

As you can see, the seller doesn’t care that the business he’s selling violates the terms of service of Facebook and would likely get your account banned.  

  1. For sale by a broker: A payday loans affiliate and lead generation website with $18,000 in monthly profit. On the surface, this might look like a solid business until you understand how payday loans work. Payday loans are extremely unethical because the lenders must keep borrowers in debt to stay in business. If a borrower repays their loan quickly, there is zero profit for the lender. These businesses prey on lower-income individuals who are in need of fast cash. There are many state-specific regulations about the legalities of these loans, and businesses advertising these services have been banned by other companies (including Google).

2. Am I buying a business or a job?

It’s not uncommon to find a business for sale that is operated by a single person. This is usually true for smaller sites in the affiliate or e-commerce space.

We see these in the range of $50,000-$150,000 earnings before interest, taxes, depreciation, and amortization (EBITDA). When you look at the profit and loss statement for this kind of business, it rarely takes into account the expense of hiring an operator to replace the current owner. 

This cost is important for the following reasons:

  1. The business may not have the cash flow to hire a replacement. For example, if the current owner is an excellent marketer and his replacement costs $50,000/year, a business that had a $75,000 profit per annum would be reduced to $25,000 in profit if you make that hire.
  2. Hiring a replacement not only changes the forecasted profit of the business, but also the multiple you think you’re paying for it. If the business has a net revenue of $75,000, and the sale price is $225,000, that’s a 3x multiple on net profit (a standard multiple for many businesses depending on the model and industry). But, if you decide to hire a marketer, the multiple ends up being 9x the net profit, i.e., $25,000 x 9 = $225,000. This is significantly higher than industry standards.
  3. If you purchase the business and don’t replace the current owner, then you’re doing the work and essentially buying yourself a job. This is fine so long as you understand the situation. It might also be a temporary phase. As you grow the business and increase revenues, you’ll have the ability to hire additional team members to help you with the workload.

3. Does the business have diversified revenue and traffic?

Every person has a different risk tolerance. I prefer to minimize risk during acquisition by finding businesses that have diversified revenue and traffic streams.  

I’ve seen too many examples of businesses relying on a single source of traffic, only to find themselves at the mercy of Google updates or the Amazon algorithm.

We looked at one affiliate website for Onfolio in the News & Education vertical, with a monthly net profit of $18,725, priced at a 32x monthly multiple.

It was only when we started digging into the analytics that we discovered that 50% of the traffic was going to a single landing page.

 Additionally, while looking at the traffic source, we noted that 38% of visitors were from India — which can impact the revenue generated from display ads because of the lower cost per mille  (CPM).

Ultimately, we decided to pass on this website. The risk profile was too great for a site with a $600,000 price tag.

Let’s look at three sales of businesses that relied on SEO for traffic.

The first is an online business that sold for approximately $5,000,000. Here’s what happened after one of Google’s algorithm updates:

The second shows the decline in a business that sold for $3,000,000:

This last one shows traffic, post a $1,000,000 purchase:

Do you see a pattern? 

There are also countless horror stories from Fulfillment by Amazon (FBA) sellers, recounting how Amazon suspended a seller’s product or service. 

Sometimes all it takes for a business owner to see Amazon destroy their business is for one competitor to buy a product and then complain that it was in some way hazardous to them.

If you’re looking at an e-commerce business with 100% of the revenue generated by Amazon, you have to ensure that you understand all the risks associated with this platform, and be prepared to deal with them as they arise.

4. What is the barrier to entry in this business?

You must understand the barrier to entry in the market you’re joining with your potential acquisition.

A high barrier to entry means that it is harder for new competitors to enter the field, and could make the business more sustainable over a longer period of time. It might also mean that you’ll see a higher price multiple to reflect this advantage.

A business with a low barrier to entry has greater competition and it may become increasingly difficult for you to compete in the market.  

Let’s review two common examples which demonstrate the opposite sides of the barrier to entry equation: A content affiliate website and a Software as a Service (SaaS) site.

Content Affiliate Websites

Content sites have an extremely low barrier to entry because they are easy and cheap to start.  All they require is a domain name ($13), a hosting account ($5/month), and a content management system (CMS) like WordPress — which is free. The difficult (and expensive) part of growing these businesses is producing content and acquiring backlinks.  

Backlinks are an important part of content affiliate websites as they are a significant Google ranking factor, and help a website rank well for keywords that drive traffic to a website.

However, if the owner is knowledgeable about a specific topic, and is a decent writer, they can produce the content themselves. 

Additionally, they might be able to obtain backlinks for free. This is especially true if they create quality content and build authority and connections in their industry. 

Another common method site owners use is to buy backlinks which cost from $50 – $500+ per link, depending on the quality and authority of the link.

There are many online courses that teach newbies how to make money using this method, and, as a result, it attracts a lot of competition.

With the proliferation of artificial intelligence (AI) content, this model is becoming easier to implement, as users flock to AI tools to help them produce content at scale. This business model is extremely saturated, which is why the multiples for these businesses are on the low end of the spectrum. After all, there are only so many unique ways to write an article about the best dog food for Fido.

Software as a Service (SaaS)

SaaS businesses are extremely difficult to start and grow. They require specific knowledge of the industry that the software services in in order to identify the right problems and build a solution to solve them.

This is not a business anyone can start unless they have the technical skills and/or finances to pay someone for development.

Building a SaaS product can take hundreds, or even thousands of hours of development work.

Growing a SaaS business is also more difficult than other businesses because it’s usually built around a recurring billing model which requires consumers to pay every month for the service (that’s why looking at churn rates when evaluating a SaaS business is crucial).

Recurring revenue is the holy grail of business models because it allows companies to easily understand and predict their revenue numbers. This enables owners to allocate expenses and assign a proportion of the revenue to growth. These benefits are the reason that SaaS businesses sell for larger multiples than most, if not all, other types of business models.

5. Is this a trending or growing market? 

Where is the business heading?

When considering business opportunities, sometimes it’s best to take a step back and look at the entire industry in an attempt to predict where the industry might be heading.  

A useful tool to start with is Google Trends. You can also research industry reports and trends on Google to see how the industry has performed over time. For example, if you think a downturn is coming, you could research whether the industry is recession-proof or whether it tends to decline in harsher economic conditions. Fun fact: pet businesses are recession-proof.

One of the best ways to stay up to date on industry verticals is to stay actively involved in the space. There are forums, Facebook groups, and subreddits covering all types of topics, and the amount of information you gather from these platforms is invaluable.

It’s generally a good idea to avoid businesses that are built around viral trends. These tend to decline quickly once the trend passes and consumers move on to the next shiny thing.

6. Do customers like this product or service?

It’s amazing to see how many listed businesses have completely tarnished their reputation in the market. 

They’ve done this either by providing a terrible product or service or by failing to offer good customer service. As a result, these businesses have lost their goodwill and the means to recover their position.

A simple method to determine a business’s reputation is to Google “business name + [reviews] or [scam] or [trustpilot]”. This is a handy way to see what customers think of a particular business and to find out what kind of complaints their customers have.

You should address any negative reviews or comments with the seller. Of course, if there are too many negative reviews, it might be safer to pursue other opportunities. That’s because the cost involved trying to recover from this kind of reputational damage might not make financial sense.

7. How does this business stack up against the competition?

When looking to acquire a business, you should run a competitive analysis to determine how it stacks up against its competition.

The business model will determine the kind of analysis you do. 

If it’s an e-commerce business, it’s helpful to compare the quality of the product and the pricing with its competitors. Does this business have any unique features that offer a unique selling proposition (USP).  

If it’s an industry where customers are price sensitive, they might care less about the quality of the product than the price. In this case, you’ll want to make sure your products and shipping are both competitive in the industry.

With an affiliate or content business, the most important things to look at are the quality of the content and backlinks. Read the content yourself or, if you have an editorial/content team, have them review the quality and compare it to the competition. 

For backlink reviews, I like to use Ahrefs which allows you to see incoming backlinks for a website. If you’re not familiar with the process of evaluating backlinks, find someone who is well-versed in SEO to help you.  

If it’s a SaaS business, you’ll want to get a developer to review the code. This isn’t something you can compare against the competition because you won’t have any insights into how their SaaS is coded. However, you should still understand the quality of the code for the business you’re evaluating.

At Onfolio, we passed on a business where one of the main issues was the code quality. Our developer reviewed the site code and advised that it wasn’t optimal, and needed refactoring into more manageable code. The refactor would have been important for us to easily add new features as well as simpler code maintenance — which is vital for code of this size and complexity.  Our developer stated that it could take many months to complete the job. 

Regardless of the business you’re assessing, you need a thorough understanding of how it’s positioned against its competitors. This gives you the full picture before you sign on the dotted line.

8. Is the business stagnant, declining, or growing?

While you’re evaluating opportunities, make sure you get access to Google Analytics or other traffic analysis tools the business uses. Look at historical data to see how the website has performed over time. Is there any seasonality in the business or common dips during specific periods?

Ideally, the business you buy has been growing steadily for at least the past 2-3 years.

Many business owners attempt to sell when their business is on the decline. 

If that’s the case — and you want to take the risk that you can turn the business around — you’ll want to uncover the reasons for the slide, and have a plan in place to rectify this after purchase. The multiple you pay should be on the lower end of the spectrum to compensate for the extra risk inherent in the business.

Also, be careful of businesses that show sudden increases — either in traffic or revenue.

The images below show examples from a business we looked at back in 2017. Not only is the site lacking any decent history (for evaluation purposes), but it also shows a sudden increase in traffic, followed by an abrupt decrease. This is a bad sign, and sites like these should be avoided.

Sometimes businesses are seasonal — or have giant spikes around certain holidays and promotions — which is why it’s best to look at data over a longer timeframe.

9. Do I have the skills to grow this business?

Running a business is difficult.

Don’t be fooled by all those blog posts that promise turnkey solutions and easy riches. There’s no such thing as a passive income when it comes to online businesses. 

Take a look at a business that sold for around $2,500,000 and check what happened a few months after the sale.

This is not an isolated example. I see this countless times; when a new owner doesn’t have the skillset or know-how to run the business they just purchased.

If you’re new to running an online business, you should have a solid team in place to assist you. Ideally, buy a business with an existing team. Regardless, it’s up to you to educate yourself on the different moving parts of the business, from digital marketing to finances, etc. Each element is important to running a successful company.  

One common reason I notice for a business’s decline after sale is that the buyer hasn’t contributed the same effort and passion as the previous owner.

This is especially true for sites where the seller has built a business around their specific passion. The success of these websites depends on the enthusiasm of the new owner or operator for that niche. When this is missing, the business suffers.

10. How much is this business actually worth?

As anyone will tell you, a business is only worth what someone is willing to pay for it.

The seller’s job is to extract as much money as possible for the business they are selling.  As a buyer, your job is to make a smart determination on the valuation of that business.

Before doing so, you’ll need access to all the traffic and financial data for the business.  

Let’s look at a business we evaluated in 2021, with an asking price of $160,000.

It appears that the business was doing well, profiting between $10,000 to $15,000 a month in late 2020 and January 2021.

Over time, profit began to decline and, by September 2021, the business started losing money. 

According to the prospectus, this website was heavily reliant on Facebook ads, and as the space was getting more competitive, the owners were no longer able to make those ads profitable.  

After reviewing this business, I contacted the broker to confirm that the asking price was really $160,000 for a business that was losing money. This was his response:

Broker conversation

As you can see, the price quickly plummeted from $160,000, with the broker suggesting I put in a bid of just $10,000.

The value of a business is subjective.

The crucial factors to look at are the business model, traffic, revenue, profit, profit margins, diversification of traffic and revenue (to minimize the risk), along with the sustainability and performance over time, and the barrier to entry.

Certain business models, like e-commerce and SaaS, have other specific metrics to take into account, These include the churn rate, lifetime customer value, and customer acquisition cost. 

If you have trouble evaluating a business or understanding the value, it’s always better to consult with an expert who can guide you towards the right decision.

Wrapping up

When you’re diversifying your asset base, buying an online business is one of the largest investment decisions you’re likely to make. There’s a lot at stake.

It pays to understand which business is the best fit for you, as well as to identify whether your purchase will provide the income and opportunity you seek in the medium to long term. 

Hopefully, this list of due diligence questions will put you in a better position to evaluate and acquire a business that satisfies those goals.

Photo of author

Yury Byalik

Yury Byalik leads the acquisitions team at Onfolio. Yury is a seasoned marketer with over 15 years’ experience driving growth for businesses. He brings a deep understanding of growth marketing, deal sourcing, evaluation, and due diligence to the Onfolio team. Yury is a sought-after speaker on digital trends, profitable business models, and acquisition strategy. For Yury, flexibility, transparency, and trust are the essential elements of a successful deal.

Leave a Comment