3 things to do as you buy a profitable website — for people who have never done it before.
So you want to buy an online business, but you’re not sure where to start, and/or you don’t feel comfortable taking on the challenge alone.
You’re not alone!
At Kingmakers, we talk to prospective business buyers every day that ask the same questions – “How do I buy an online business? Where do I start? What kinds of things do I need to pay attention to? How do I avoid getting screwed?”.
Providing solutions to these questions is the entire reason we exist! We’re going to outline 3 things that you should do while you are buying an internet business. These should provide you with more clarity on your business buying journey.
Do Your Due Diligence
Doing proper diligence on a business is the most important step in the acquisition process. You need to have a clear understanding of what you’re committing to with your time and money.
At Kingmakers, we like to split diligence into two phases:
Phase one diligence can be best described as “risk diligence”, or “buy and hold diligence” and represents the initial approach in the business analyzing process.
During this phase, you want to answer the question, “Is this a good buy and hold opportunity?”. In other words, if you bought this business and did absolutely nothing to it, is there a reasonable chance that it will grow or at least stay steady? If the answer is no, then our advice would be to pass on the deal. If the answer is yes, then it’s likely a good decision to move forward with the deal.
So how do you go about answering this question in the correct way? You will first need to gather initial diligence items from the seller such as:
- Profit and loss statements so you can understand the business’s finances. You may also want to ask for tax returns if you are going to use an SBA loan (which we talk about below).
- Access to the website’s Google Analytics so you can understand the business’s traffic.
- Have the seller fill out a questionnaire. This can be a list of questions specific to the business that you come up with. Don’t make it too long as you don’t want to overwhelm the seller and turn them off to working with you.
Once you have the above diligence items, you can start to analyze the business. Here are some things to think about:
- Does the business show a steady earning history? A sporadic history may be something to avoid. Seasonality is also something to consider.
- Is revenue diversified? You don’t want 90% of revenue coming from one source because that means there is a single point of failure.
- Does the business show a steady history and increase of traffic to the website?
- Is traffic diversified across the website? Once again, you don’t want 90% of your traffic going to one page on the website as this would be a single point of failure.
- Is there a personality risk? Does a majority of the business’s income hinge on the persona of the current business owner? If so, this may not be a deal killer, but you will need to plan for a 3-6 months transition to another personality so the business isn’t abruptly interrupted.
- Are there shady links or other questionable SEO tactics associated with the website?
- Does the business have a competitive advantage that would make it difficult for competitors to usurp?
There are many more things you should consider, but those are some of the basic and important questions to ask.
When you feel confident that the business is a good buy and hold opportunity, it’s time to send the seller a preliminary offer and Letter of Intent. Once the seller accepts these, you then move on to phase two diligence.
Phase two diligence is deep diligence and typically lasts around 30 days from the time you put in an LOI. During this phase, you are verifying all reports from the seller. For instance, you want to make sure that all of the income and expenses on their P&L statements are accurate, which means you will want to get access to their financial accounts and compare their transactional history to their financial statements, looking for any discrepancies.
You should take similar deep dives into other areas of the business as needed. Maybe interviewing staff, reading customer reviews and reviewing the competitor landscape.
Finance With SBA
By far one of the best ways to realize a significant ROI is to get stellar financing on a deal.
The SBA (Small Business Administration) is a US government-backed loan program that loans capital to acquire and grow small businesses. Historically, they have primarily funded offline brick-and-mortar businesses with tangible assets, but more recently they have shown great interest in funding digital assets like cash flowing websites.
If you think you might want to use an SBA loan to acquire a website, go to a big-name bank that you trust and ask to talk to their SBA lending department. They will work with you to get pre-qualified up to a certain amount to purchase a business.
At Kingmakers, 90% of our partner’s acquisitions are made with SBA loans, and we have developed relationships with several SBA lenders. We have the entire SBA financing process down to a science and can hold your hand all the way through.
Finding a great business to buy at a good price is fantastic, but financing that business with an SBA loan is where the real ROI is.
At Kingmakers, our partners are being loaned up to 90% of the purchase price of a business, with 6-7% interest over 10 years.
That means you can purchase a $1mm online business (which would likely be a business earning ~$333,000/year in profit at a 3x multiple) for only $100,000 down. After debt payments, the business would still be profiting almost $18,000/mo, which means you would have that $100,000 back in your pocket in ~6 months. And of course, all of this is assuming the business doesn’t grow or decline, which brings us to our next section.
Create A Growth Plan
You may have already decided that the business is a good buy and hold opportunity, but the benefits of owning a profitable online business really come from growing the asset after you acquire it.
That’s why at Kingmakers, we put together extremely detailed growth plans for every deal we help our partners buy.
During this part of the process, you will want to engage agencies that are appropriate for the kind of website you are buying who can analyze the business and identify growth opportunities. They can then help you put together an action plan to grow the business.
These agencies could specialize in search engine optimization, conversion rate optimization, link building, content, Fulfillment by Amazon, webinars, and more.
At Kingmakers, we have relationships with all of these agencies who look at every deal for us, but you can certainly find other agencies by doing some quick research online.
You want to have these experienced and specialized individuals identify all of the low-hanging fruit and other growth initiatives to execute on post-acquisition. You can then either do the work yourself or use the business’s cash flow to hire the agency to do it. Keep in mind, SBA is very agreeable when it comes to working capital, so if you finance the business with an SBA loan, chances are you can also get additional capital to invest upfront into growth.
We hope the above information is helpful and clarifies the process of buying an online business.
We also understand if you still feel overwhelmed and would like an experienced group to partner with to help you find, finance, de-risk, and grow the business. That’s why we exist! If you haven’t already, click here to apply to be a Kingmakers partner.