Web-based companies are an attractive option for many aspiring business owners, even starting out as a side hustle. They offer a simpler acquisition process when compared with building a business from the ground up because there are fewer hoops to jump through. When it comes to eCommerce or web-based businesses, there are no physical properties or leases to deal with, and you can set your own schedule and work from home.
Web-based businesses have regrettably earned a reputation as scams, and it’s true that you’ll need to be selective and use good common sense when pursuing an online business. But approached correctly, it is still quite possible to find legitimate opportunities and make a good living on the Internet.
Before buying a website based business, there are important things you must consider. These tips will help you weed out the good opportunities from the scams, and ensure you’re pursuing a legitimate business with plenty of profit potential:
Online or offline, it’s still a business
We all want to start a business we’re passionate about, but that alone isn’t enough to make it profitable. Whether it’s a corner store or a website, it needs customers that are willing and able to pay for whatever products or services are being offered. As long as the profit margins are good and you’re buying a product or service that’s in demand, it’s worth considering, online or offline.
One of the benefits of buying a Web-based business is that the data trail it carries mitigates a number of the risks and uncertainties associated with starting your own business.
“When you buy an online business, you can look at the history and a proven track record, and know you are stepping into a business that’s already producing income,” says Bill Evans of Digital Business Investor, a resource for website brokers and marketplaces.
And what about that stigma and fear that Web-based businesses are a scam? As with any commercial investment, learning everything you can about the business in which you’re interested is the best safeguard against being hoodwinked.
In general, you should steer clear of:
- High pressure – If the seller is telling you that you’re going to miss out on something by not buying immediately, move on. This is often a tactic to stop buyers from doing adequate research and should raise a red flag. Legitimate business owners will allow you time to research and will provide you with the necessary information you’re requesting.
- Businesses where many are coming to market quickly – Don’t go for gravy-train businesses that are selling “the latest thing,” (along with everyone else) but don’t offer anything original.
- Businesses that make unrealistic claims – You know the old adage: if something seems too good to be true, it probably is. Avoid businesses that tout unbelievably huge or fast income claims.
Once you confirm you’re looking at a legitimate business, it merely becomes a question of whether or not the business you’re considering matches up with what the seller is presenting it to be.
What do you (and don’t you) need to learn?
The next step in buying a Web-based business is to get familiar with the concept you’re interested in and learn what variety exists in the market. Is it based off of Google Adsense, for example, or is it an e-commerce model where you’ll be selling digital or physical goods? In short, gain knowledge of the entire market in which you’re looking to buy.
Many buyers shy away from opportunities because they don’t believe they can run an online business without being a computer programmer. In reality, though, tech expertise on the part of the owner isn’t usually necessary. In most cases, coding and other tasks can easily be outsourced to others who are more capable.
Software-as-a-service (SaaS) businesses are more tech heavy, but that shouldn’t cause you to immediately cross them off your list either. Often times developers will stay on as part of the business and you can acquire their services along with the business itself.
In the case of e-commerce, many businesses run entirely on the Amazon platform, which is widely standardized and will be easy for your customers to use, and for you to monitor.
Do your due diligence
No matter what type of business you’re considering buying, always look at the financials. This includes bank statements, P&Ls and tax returns. You need to make sure the numbers make sense and that nothing is being hidden. Look at cash flow and make sure the business is profitable.
“You can weed out 80 percent of the businesses you’re considering based on that alone,” Evans says. He also cautions buyers to watch for any add backs in financial records, which can artificially inflate profits. Much less can be hidden on a tax return, however, which is why it’s important to request those as part of your due diligence.
There are different metrics to look at depending on the type of business you’re buying.
When it comes to eCommerce, look closely at the product being sold. Understand whether the business has its own brand or if it’s a reseller of other brands. Amazon is going to be a major competitor in the reseller model, which will have a huge impact on your chances for success.
In SaaS businesses, look closely at subscriber growth and churn. Lifetime value is crucial and can be measured by how long customers stick around once they’ve subscribed.
Have a Plan
Just like any business, one based online needs a business plan. If the current owner of the business doesn’t have a good business plan, and you can’t visualize one, this should be a red flag.
It’s also important to consult with an expert. Once you’ve acquired the requested documentation and information, it’s worth it to have an attorney or accountant look it over, just as you would with any other business. Once a contract is drawn up you will want an expert to review that as well. It’s money well spent, and not an area where you should skimp.
Interviewing others that have acquired or run similar Web businesses is also extremely valuable.
Determining the value of a web-based business
When it comes to settling on the value of the business you’re acquiring, consider the following:
Audience – When buying a Web-based company, always focus on audience. Give preference to businesses that already have their own audience. It will be much easier to launch new products in a company that already has fans and followers on social media, for example.
Age of the business – The older the business, generally the more valuable it is. Businesses that have been around for at least three years warrant the most serious consideration.
Profits and Pricing – Fair pricing for successful Web-based businesses will usually be somewhere around two to three times the company’s yearly revenue, although other valuation methods exist for specific industries and niches.
Following all of these tips will help ensure a smoother and more profitable online business acquisition.Digital & Social Articles on Business 2 Community