Buyer Due Diligence Checklist for Small Online Businesses [2022]

If you’re an online business first-time buyer, you may not know the right questions to ask the seller to verify the claim of their business metrics. Plus it may be overwhelming, to say the least.

That’s why we’ve put together this in-depth guide to help you navigate the due diligence process and be sure you’re buying a business primed to make more profit. We facilitate the sale of lots of businesses, and these questions are based on what our users ask us most of the time. So we’re drawing from our experience and that of our users to help you acquire your first (or next) business with little to no hassle.

Keep in mind that the seller may want you to sign a non-disclosure agreement (NDA) before granting you access to the company’s data. Now that’s out of the way, let’s dive in.

Benefits of buying an online business rather than building

Should you buy or build an online business? Here are two reasons buying an online business may be more profitable for you and meet your expectations.

Time saving

Building an online business isn’t easy – it could take you years to gain traction. Many businesses on our platform are over 2 years old and have gone through some difficult phases in acquiring customers. You may have to go through these difficult phases if you decide to build yours. So buying an online business will save you time and hassle.

Market validation

In this modern day and age, many businesses including big tech spend time building products that are not product-market fit. Imagining spending time and resources developing a product only to launch it and discover that the market doesn’t find it valuable. Crazy, right?

Most of the businesses on our platform have already been validated and have customers (some are pre-revenue projects, though): all you have to think about is converting more of those subscribers. So buying a business with customers or subscribers will save you from building one that could potentially fail.

Now you’re convinced buying a business is a good decision, let’s get to the due diligence checklist.

How to Perform Due Diligence Buy Online Businesses

Why do you want to buy an online business? How does this business align with your existing business portfolio? What’s the model – selling physical products like an ecommerce store or providing services on a subscription as in micro-SaaS? And what’s the technical expertise required to run it? These are some of the first sets of questions you should consider before diving further to know more about the business.

When you’re done answering those, you can begin the due diligence. There are three types of due diligence you can carry out;

• Legal due diligence: verifying the ownership of the business and its assets including other aspects of the business to ensure you’re legally protected and have no potential regulatory issues.
• Financial due diligence: assessing the business’s financial health and ensuring the seller’s claims are true and that the business is sustainable.
• Commercial due diligence: this covers how competitive the business is by checking its competitors and growth potential.

Everything we’re going to discuss about conducting due diligence for online businesses like micro-SaaS startups, e-commerce sites, content websites, and web and mobile apps will be done under this framework.

However, before we start performing due diligence on the online startup we plan to buy, the first step is to assess the business risk.

1. Assess the overall risk

At first glance, does the business or model look sustainable? Based on the initial information and data provided, can you continue operating at its current level and scale it? Are there well-known competitors in that niche? What advantages has your business of interest got? These are some questions you should ask before committing to carrying out due diligence. You don’t want to buy an online business only to find out it’s got no potential.

2. Review the website’s domain

You can begin your due diligence by asking the seller for the startup’s URL and checking if it has a brandable domain or an exact one. Brandable domains like startups.com leave room for expansion while exact names like immigrationattorneys.com are more specific and may not be expandable to other niches.

Another factor you may want to consider is the site speed to analyze the site’s performance – you can use Pingdom.

Check for trademarks

This is a major part of the legal due diligence. Look out for copyrights or trademarks in the website’s names. Avoid sites with the name of a brand in its URL like guccihats.com or iphone14.com, so the original brands don’t submit a DMCA takedown notice to close your site.

To check for trademarks, you can use the following sites;

US trademarks: https://www.uspto.gov/trademarks-application-process/search-trademark-database

Australian trademarks: http://pericles.ipaustralia.gov.au/atmoss/falcon.application_start

European trademarks: https://www.tmdn.org/tmview/welcome

Top-level domain transfer

You also have to be sure the seller can transfer the domain to you. Some top-level domains like .com.au, .com.mt, and .com.ca have specific registration requirements and require you to have a presence in Australia, Malta, and Canada.

Verify ownership

The next step is to verify the site’s domain ownership and history on whois.domaintools.com and archive.org. This will help you know if the seller legally owns the domain name. Try to determine if there’s been a recent change of ownership by checking the site’s Whois History. Also, the hosting history will inform you of changes made to the hosting provider, IP address, and domain registrar (for the site’s age – a website that’s at least a year old will be a great place to start).

Type of content

You should also look out for the content type that’s been published on the website. If a website has been used for publishing adult content or entertainment content, this is a red flag. It won’t do you any good that the seller now uses it for selling micro-SaaS products.

3. Connect with the seller

Once you’re convinced the site looks legit and is transferable, the next thing is to try and establish a good business relationship with the seller. Having a personal relationship may not make the seller sell the business below the asking price. But it could help facilitate a smoother transaction.

You can have a 1:1 call with them. Try to know a bit about their business background and check out/connect with them on their most active social media platforms. This way, you’ll know if the seller is authentic and their plans for the startup.

4. Traffic

Not many listings are profitable, yet. That doesn’t mean there are no opportunities to attract customers and grow the business. This makes analyzing the site’s traffic one of the top due diligence to carry out. We’ll begin with observing the traffic trend.

Traffic trend

You can observe the traffic trends using Google Analytics, Ahrefs, and Semrush to get a picture of the traffic sources. This will also show you the traffic stability whether it’s an uptrend or downtrend.

1. Using Google Analytics

First, ask the seller to grant you guest user access to the site’s Google Analytics account. When granted access, analyze the following;

• Traffic sources: this should mostly be organic unless the site creates most of its content and promotion on social media
• Top pages getting traffic: if only one page is getting more than 15% of the overall traffic, you can question the seller
• Ranking keywords: this is especially important when it’s an e-commerce store or a micro-SaaS. You want to be sure most of the top keywords are relevant to what can bring in sales
• Geography: this should primarily be from countries in your target market
• Time on page: shouldn’t be less than a minute
• Pages per session: the higher the merrier
• Bounce rate: the lower the better
• Unique users

These are some of the things you can assess to understand the kind of traffic coming into the website.

2. Using Ahrefs or Semrush

Input the URL into either of these tools and analyze the organic search traffic chart. When you observe spikes or flatlines in traffic, make sure to ask the seller what was responsible for those trends to see if they’re repeatable.

One of the things you should look out for is the impact of the Google Algorithm’s update. In this case, ask the seller for the reason the site was impacted that way and the actions they took after the update.

When you observe a flatline before an uptrend, it could mean the original domain was repurposed – either the domain (aged domain) expired and the seller bought and rebuilt it or they stopped working on the site and resumed working on it later. So be sure to ask the seller if the website was built on an expired/aged domain and when they bought it.

If a website’s traffic is stable, it’s a good sign: however, check for growth potential. On the other hand, if you see a spike after a period of dormancy, also ask questions. There’s the likelihood the seller ran a content and backlink strategy that boosted the traffic or the site was built on an expired domain.

Backlink profile

You can also use Ahrefs or Semrush to check if the seller has used a legit backlink strategy. Input the URL and select “One Link Per Domain” from the Backlink menu to get a summarized view rather than viewing all the links from a domain - watch out for spammy links.

When checking for backlinks, you should stay away from startups that have built backlinks from Private Blog Networks (PBNs), adult sites, spammed international links (like those from .ru and .ch domains), and casino links. Also, check the anchor texts and the strategy used to get those backlinks (either comments or in-content links).

5. Financial analysis

When you’re done analyzing the business’s traffic and you’re convinced the website’s in good shape, the next point of call is the financials. Reviewing the traffic comes first as good traffic can translate to revenue for you.

Monthly revenue 

Begin by asking the seller to share the past 12-month financial standing (revenue, tax returns, etc.) of the project. Try to spot discrepancies in the income and expenditure, and ask about taxes so you don’t have to pay the arrears when the business is transferred to you. There may also be spikes and lows in monthly revenue: so inquire about the reasons for those.

Some businesses may not have this data, so you could ask the seller to create a spreadsheet for you.

Running cost

There are costs that come along with running an online business. Costs like web hosting, tech stack, content creation, design, and running ads. Inquire about these so you’ll know how much you’ll spend monthly, especially when it’s a pre-revenue project.

Also, consider the customer acquisition cost and channels such as organic, paid ads, affiliate programs, and outbound marketing.

6. Commercial

There are a couple of commercial-related questions to ask when doing due diligence. Let’s explore some;

Product

This applies to both e-commerce and software businesses. First, you need to know the product’s value proposition as there are likely competitors. You also want to ensure the products have lots of positive reviews and that there are no review manipulations that can potentially come off as red flags.

User data

For many businesses, the number one customer acquisition and retention channel is the email list. If the micro-SaaS or e-com store you’re interested in has one, try to find out the percentage of subscribers that engage with the seller’s emails and the list’s growth rate. This is important in gauging customers’ sentiments toward the brand and knowing what can be done to create a more positive outlook. You’ll also want the seller to introduce you as the new owner when you two reach an agreement.

Churn rate

Another important question you want to ask is if the brand segments its list or has VIP members, and how it encourages other customers to become VIPs. Most importantly, you want to ask about the churn rate – there’s the customer churn rate and revenue churn rate. Customer churn rate is the rate at which subscribers end their subscriptions while revenue churn rate is used to measure the monthly recurring revenue (MRR) a business loses from customers canceling or demoting their subscription packages. The average customer churn rate for small businesses is 3 – 7% per month or 31 – 58% annually.

Monetization sources

Does the micro-SaaS sell monthly subscriptions or one-time payments? Are there different payment options, affiliate programs, or partnerships to get more customers? Are there ways or add-on services you can make the prices more appealing? These are things you have to think about before buying the project.

If the site is a content site or newsletter, ask the seller if they make money through joining affiliate programs, AdSense (display ads), or writing guest posts. This will help you know ways you can improve the income streams of the website.

Pricing model

Before your soon-to-be customers will pay for your product, they’ll first consider the pricing structure – this can inform if they subscribe to your brand or choose a competitor. So you’ll want to ask if the micro-SaaS has a monthly or yearly subscription package or if it has a tiered or flat fee structure.

Operations

A couple of times, we see some businesses on our platform that are run by multiple people. There could be the owner(s), marketer, content creator, etc., so try to understand the employee structure. It’s important to know how tasks are delegated, the time required to complete each task, and their impact on the business’s revenue.

Customer support

One of the most important aspects of business growth for both micro-SaaS and ecommerce brands is customer service – this can make or break the business. So it’s important you find out if the customer service has a good reputation among customers. Do this by assessing customer satisfaction, and downgrade rates, reviewing the help desk or ticketing system, and checking the average response time.

You also want to think about the difficulty level of the questions –can you answer within a few minutes or are they very technical that may require expertise? Ponder on these things before striking a deal with the seller.

Competitor analysis

Whether you’re buying or building a micro-SaaS, competitor analysis is paramount. This is how you can identify your strengths and core competencies and find areas to stay ahead of the competition.

It begins with how familiar you are with the niche? How are your competitors positioned in the market? How easy is it for intending customers to buy from them? What’s their offering, UI, and pricing strategy like? Are they doing well regarding SEO and social media promotion? What are their strengths and weaknesses?

After asking those questions you have to inquire about your competitors. After doing that, you can inquire the following about your brand;

• What are the similarities and differences between the business you’re buying and your competitors’?
• What can you do better?
• Can you compete on price or value?
• Can you build more products to expand your offering?

When you have answers to these, you’re ready to claim your market share.

7. Technical

As opposed to traditional businesses, online businesses are built using tech tools. So you’ll want to know the following about the acquisition before moving forward.

Source code review

If you’re a technical founder, you may want to take out time to review the business’ source code as well as ask about the tech stack to see if they’re languages you’re familiar with. Most sellers have this documentation – not having this isn’t a good sign. And if you’re non-technical, you may want to ask someone to help you review the code. But first, check out our guide on how to buy a micro-SaaS startup as a non-technical founder.

When checking the source code, you should check out for how easy it is to understand, use, and make changes. Also, check out the error log to assess the code’s stability and reliability.

Tech stack

These days, many businesses are run using no or low-code software. Whether it’s for email marketing or website development, you want to ensure you've either got prior knowledge of the tech stack or hire a developer.

Micro-SaaS acquisition metrics

Some of the important metrics to consider when buying or running a micro-SaaS are;

• Customer acquisition costs (CAC)

This refers to the cost of acquiring a new customer – that is the cost of getting leads and converting them into paying customers. If the CAC is too high, chances are the business may not be profitable.

• Customer lifetime value (CLV)

This refers to the amount of revenue a customer will bring into the business through their subscription and how long they’ll stay loyal to the business. To be profitable, you’ll want the CLV to be higher than the CAC.

• Monthly recurring revenue (MRR)

This refers to the amount of revenue a business generates monthly and is useful in predicting monthly revenue trends over a period.

• Annual recurring revenue (ARR)

This refers to the revenue a business generates annually. This can be derived from the MRR if the business only sells monthly subscriptions. However, some businesses sell yearly plans.

• Net promoter score (NPS)

This measures customer satisfaction and how likely a customer is willing to recommend your brand to someone else. It’s measured on a scale of 1 to 10. You can then get the figure by subtracting the percentage of detractors from promoters. A positive score shows customers will be more willing to be brand advocates.

• Daily active users (DAU)

This shows how many users log in to use a product in a particular day.

• Monthly active users (MAU)

This measures how many users log in to use a product in a particular month. The higher the DAU and MAU, the more satisfied the customers are and the more likely they’ll be retained as customers as they see value in the product.

Conclusion

This has been a lengthy article, so you don’t have to put all these factors into consideration. Depending on the type of business you’re buying, some of these factors may not be applicable. And you may not get it right in your first micro-acquisition, but as you buy more businesses, you’ll become good at spotting businesses that are positioned for profit.

Now you know how to perform due diligence, it’s time to buy a profitable business. Browse through our listings to find profitable online businesses that you can scale. Or you can avail yourself of the opportunity of using our transfer service where we'll take all the hassles off your shoulders and assist you in buying your first online business.