5 Key Things to Evaluate Before Investing in Websites

If you have been looking for an online business for sale, now is the right time to do some due diligence to drill down a bit deeper and see if the investment is worth doing.

For the past few years, at BlackBook Investments, we have repeatedly advocated doing your due diligence. Irrespective of how appealing a digital asset looks from the outside, a thorough review and comprehensive analysis of the business and the market in which it operates should be the way to go to determine whether or not it is a solid investment.

Below are some key things to evaluate before making an investment in a website.

Market

Understanding the practices used to value websites and digital assets holds the key.  It will allow you to figure out if the asset you’re investing in is actually undervalued or overvalued. Moreover, figuring out the things (especially the common multiples) different types of online businesses get is also important. For instance, SaaS-based online business models often end up getting higher multiples than, say, advertising and affiliate sites.

Another risk-free way to invest in websites is to understand the market in which they operate. By investing in a market you know, you can make a better projection of the potential success of the venture. It makes it easier to figure out what’s going on in the market, work out the things working for and against the business, and see what sort of competitive edge the online business has been able to establish to keep competitors at bay.

Keep in mind that investing in a fiercely competitive market experiencing a slowdown means that the market value of your business is all set to shrink with time.

Things to Ponder

• Am I really eager to enter the market of this website?

• Am I well placed with the degree of risk inherent in a website operating in this market? Do I even recognize what the risks are?

Website

Investing in a website is a lot like buying a house or a car.  You start by looking around, and then when you find something interesting that’s worth pursuing, you dig a little deeper and start doing your due diligence.

There are many such things to think about; it’s important to figure out if you are a good fit for the website you want to invest in. It’s also important to make sure that the digital asset has a scalable business model so that it can grow to a degree in which you will recoup your investment as well as make projected returns.

In addition, there are a few key questions that you need to ask yourself when evaluating the value and future potential of a website.

Things to Ponder

• What kind of a work commitment does it take to maintain the website, let alone grow it?

• Would it be economically viable to source out work at an affordable cost?

• Is there anything to dislike about the products and services that the website promotes, its partners, the seller, or the website itself?

Monetization Strategy

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When it comes to website investing, it is the first dollar that matters. There is absolutely no point to investing in a website that cannot financially sustain itself so a solid monetization strategy is key.

As a website investor, you need to have a clear idea of the monetization strategy that works best for you.  There are quite a few ways to monetize your website, and the niche/market, traffic sources, traffic volume, target audience, and visitor behavior will all determine which options are the best fit for the website you’re looking to invest in.

Whatever you’re intending to do with the website, make sure you don’t try all options at once. Give it some time to find out what works best for you and your target audience.

Things to Ponder

• Am I completely aware of how this website earns its revenue?

• How much work is required to keep up or increase the earnings of the website?

• Which monetization strategy could best fit my skill level, risk appetite, and time requirement?

Traffic

Online businesses simply don’t bring in the money without a good amount of traffic, just like traditional businesses don’t make money without customers.

As a buyer, you need to understand where the traffic is coming from. You need to find out whether the traffic sources are likely to increase, shrink or remain stable over time. In addition, it is a very good practice to compare traffic to revenue because both these factors often work together and have a good degree of correlation.

Things to Ponder

• What is the volume of traffic from each source? Are the figures accurate?

• Are the traffic sources well diversified?

• How much effort is necessary to keep the current traffic coming?

• Is there an opportunity to generate more traffic to the website by engaging with the target audience directly?

Financials

It helps to validate the accuracy of the income statement, cash flow statement thoroughly during the due diligence process so as to avoid any embarrassment later. Drill into the revenue history and look for any specific trends (seasonality) and make sure that the number of revenue streams is fairly encouraging. It is also important to pay attention to and pose questions about the direct and indirect costs linked to running the business.

If there is any dip in the performance of the main source, it could be due to a fundamental issue with the online business. If there are some costs that seem to have been omitted, figure out why the seller has decided to leave it out.

Generally speaking, traffic and financials should be analyzed together with the income statement. That way, you can pick up the trends and see how traffic and financials track together. If traffic is on the rise but financials are stable or plummeting, chances are there could be some concerns with the conversion that need to be addressed at the buyer’s cost. Look for sites that have a good track record of stable income

Things to Ponder

• Is the monthly revenue ramping up, dropping or stable?

• Is there a seasonal effect in play?

• Is the business overvalued? How does the current financial performance of the business justify the current valuation?

To conclude, as a potential investor in a website, you should evaluate the above-mentioned factors. Follow your instincts and ask yourself if this online business solves a real problem or concern in the market and, importantly, if it makes sense to your customers and to your portfolio. If you do not find anything valuable, go to the next.

Don’t fall for the opportunity to grab a quick bargain. Do your due diligence and position yourself for a fairly new investment landscape with tremendous potential to offer unprecedented returns.