For every online giant like Amazon, there are several smaller online startups that have the potential to grow into a large multinational corporation. Unfortunately, the vast majority of these startups will end up being abandoned or failing before they reach their true potential.
A common reason why these failures happen is that the owner is unable to dedicate the time and energy it takes to grow an online business. So even if the creator of an online business has a great product or service idea and has developed effective business tactics to help get results, they might still end up selling their company simply because it becomes too much for them to handle.
This is the perfect chance for another entrepreneur to swoop in and purchase the online business for a low price. However, before they start putting in any offers, they first need to ensure that the business is worth it. Here is how someone can complete the due diligence steps that should be completed when purchasing any online business.
Look at the Books
Financial due diligence is a huge part of any business deal, especially when it comes to purchasing an entire business. One of the biggest components of financial due diligence is looking through the accounting books. This is done to ensure that there is nothing troubling or out of the ordinary.
There are a lot of potential red flags that could be located in the books. One of the main things they are looking for is trends or patterns in the records of revenue and profits. Ideally, the online business should demonstrate that they have been steadily climbing in both revenue and profits recently. It is even better if they have been doing so since they first started.
Some minor drops in revenue are fine because this is their trial and error phase at the start. However, it is a bad sign if they have not achieved steadily rising profits in the last few months. If a business does not have a model that allows them to get sustainable revenue and profits, then it could be that the whole thing is a house of cards that only needs one big shake-up to come along and completely ruin the business.
Another thing that should be looked at is the source of the company’s revenue. If it is all being directly achieved through one main product or source, then this is not good.
A business with only one single source of revenue is far more likely to experience major periods of financial hardship. However, if a company has diversified itself and achieved many sources of revenue, then, even if one of them ends up failing, they should still be fine by supplementing their profits from the other sources.
Check the State of Any Licenses
Many online companies obtain licenses for various products or other assets that only last for a certain amount of time. Therefore, it is important for the potential buyer to look at the company’s various licensing agreements. If they are temporarily licensing the rights to a certain trademarked item and this license is about to expire in a couple of months, then they need to ensure that the cost to renew it or the consequences of it expiring will not greatly affect the value of the business.
Confirm Ownership of Assets
Depending on the specifics of an online business, they could potentially have many different assets associated with their company. However, not all of the assets that they possess could actually be owned by the business itself.
For example, having any leased or loaned equipment or property will result in their worth being valued at far less. Therefore, it is important for entrepreneurs to take the time and look through asset ownership to confirm that the business fully owns any and all of their assets before committing to purchasing the online business.
Completing all of this due diligence will ensure you don’t get stuck with a lemon. To get started on finding the perfect online business to purchase, visit Flippa today.