Checklist for the Evaluation of an Internet Business

I recently received an email asking us to value an online business and I developed a list of information that you should get to ascertain whether it is worth continuing in your investigations of the business.

When we are examining a business for business valuations or commercial litigation, we look at the financial statements, tax returns etc for the story that they tell about the business and comparing that to the story of the owners of the business.

Ideally those stories should agree, but it is not always the case.

Online businesses can be difficult to evaluate and appraise because often there is no physical presence. The site is hosted on a shared server, the software upon which the site is based is either free or used under licence. Is some cases there is no stock to count, no customers to see walking through the doors.

In fact, all the important measurement tasks rely upon others to collect the information. So how can you be sure that the information is correct, that you are being scammed, conned or not told the whole story.

What information do you need to make a confident decision about the business.

One of the great advantages about internet based businesses is the statistical information that is available and like financial statements those statistics tell a story, and it is a matter of finding out if all those stories agree.

28 Areas to check when buying an internet business

Some of this information is freely available so you don't have to ask the vendor for the data. You can cross check what the owner is telling you with other other external data.

1. Google Analytics reports - Get a Google Analytics report for at least the past year and across multiple years if available. Google Analytics has in excess of 80% market share and growing.
2. Link reports from Yahoo and Majestic SEO. Are the links temporary or paid? Will they continue it the future?
3. Proof that the vendor owns the domain name? The vendor might not be aware that the domain name is actually registered to an old business partner, a different company within the group or their website developer.
4. Conversion rate statistics - What percentage of the traffic converts to buyers?
5. Where does the income come from Adsense, product sales, affiliate commissions?
6. Where does the traffic come from (google, PPC, advertisements, email, referrals, affiliates etc)?
7. Does the site employ white hat or black hat SEO strategies?
8. Do they have an email list, how often is it mailed, what is the open and click through rates, is it confirmed optin?
9. Where did they get their email list from? Past customers, free offer, purchased list etc.
10. Who is their email service provider?
11. What written systems do they have in place - explaining how they process orders, send emails, sell products etc?
12. Do they own the copyright to the code, content and images?
13. Are the earnings consistent over time or are they only providing a small snapshot of earnings?
14. Are you buying the right site or only a portion of the entire business?
15. Income tax returns and financial statements of the business. Do these agree with other data?
16. Have they included all the expenses such as: paid links, PPC costs, affiliate commissions, hosting costs, development costs, shipping costs?
17. How many backlinks do they have? Will they continue, how much do they cost per month, per annum?
18. Why are they selling the business?
19. How many hours per week do they spend in the business?
20. How much profit are they making per annum after all expenses? Does this agree with the tax returns?
21. How many pages are indexed by Google?
22. What keywords does the site rank in the top 3 in Google for?  Are they the right keywords?
23. Have they done split testing of their PPC ads? What were the tests and what were the results?
24. Have they done split testing of their landing pages? What were the tests and what were the results?
25. What are their sales per week, month etc? Does this agree with the tax returns and financial statements?
26. What are their costs of operation per month? Does this agree with the tax returns and financial statements?
27. What agreements do they have in place with suppliers, providers, hosts, ISPs etc.
28. Is the business subject to any litigation or investigation?

The object of this list is not just to collect it and therefore the due diligence is done, but to analyse it to find out what stories does the information tell. Do the stories all match. Does traffic and conversion match sales and do those sales match the tax returns?

The above list is not meant to be a complete list but to provide you with a starting point of questions to ask and areas to examine. The information required will change depending upon the complexity of the business and the transaction.