9 Serious Red Flags when Buying an Online Business
Buying and selling online businesses has grown immensely in popularity the last few years.
Where buying and selling businesses in the old days was hugely complicated, the introduction of platforms like Flippa has made it a lot easier.
Flippa, for example, is a popular marketplace where people buy and sell, a.k.a. “ flip” online businesses. It connects buyers and sellers of websites but also buyers and sellers of apps with each other.
Flipping websites can be a profitable endeavor if you manage to separate the wheat from the chaff. However, platforms like these also attract a lot of websites that seem profitable but turn out to be complete trash when you buy it.
In this article I’ll cover 9 red flags that you should absolutely not ignore when buying an online business.
Trend based websites
Trend based websites are often e-commerce stores that are focused on some social trend that is currently going viral. Remember fidget spinners? And hoverboards? Or these gold flakes that can use to make your beard turn gold?
These are several examples of what I’d like to call viral products. They go viral, millions of people buy them within a very short span of time and then…. they die.
They just instantly, simply die. Sales often plummet over 90% within a few months and all the organizations who sell them are left competing for the scraps.
Selling viral products can be extremely lucrative for early movers. For people who are able to adapt to trends in the market very quickly.
The earliest hoverboard and fidget spinner e-commerce stores made huge revenues.
The irony is that as soon as such a trend is about to pass, you suddenly see these e-commerce stores pop up for sale on platforms like Flippa. The owners of the business know the viral period is over, that the product is about to die and are trying to abandon ship before it sinks.
While abandoning ship they hope to squeeze out some last profits by finding some fool who doesn’t do his due diligence well and buys their website for much more than it is worth.
You can recognize trend bases websites by the following characteristics.
- The website isn’t that old yet but has huge revenues. Revenues that are disproportional to its age.
- Its revenue and profits didn’t slowly build up over time but look more like an overnight success.
- The website is often focused on one specific product or product category.
- The price that the website is being sold for is disproportional to its revenue. Where quality websites with a sustainable stream of revenue often go for 20x monthly revenue, these websites often go for 3-8x monthly revenue. This is because the owner wants to get rid of it fast.
Businesses that rely on just one income source
When you build an online business, ideally you’ll want to have multiple possible income sources.
You don’t have to utilize literally every option but at least you’ll want to utilize a few different sources for when shits hits the fan with an income source. For many online businesses this is no issue. Drop shipping stores often have different drop shipping suppliers and blogs can earn money from advertising, affiliate sales and possibly e-content.
Because the online business scene is literally more crowded than the streets of Bangkok, online business owners become more and more niche oriented.
Being niche oriented is fine and perhaps even your best strategy to build a profitable online business, but it also has some dangers. Some people push the niche focus so far that their online business is built around one specific brand with one specific product.
You often see this in the beauty, physical exercise and weight loss scene. There are businesses that are created solely to sell this one new weight loss formula or one specific type of detox tea. They have built a complete website around the sole purpose of drop shipping this one branded product.
And then the drop shipping vendor goes bankrupt or simply decide to pursue a different hobby.
The result is that the entire online business is near worthless. The domain and website are focused on a brand and product that no longer exists and drop shipping revenues plummet to zero.
There are no alternative income streams to compensate for the loss of the other. Buying a business with one income stream is a huge risk.
New online businesses with an unrealistic organic visitor growth
Many online businesses rely on organic traffic as the main source of their visitors.
Building a business that receives a lot of organic traffic takes time. It requires a technically optimized website, quality backlinks and domain age also plays a role in it. Organic traffic is the best website traffic because it is a free and mostly stable form of traffic.
However, because achieving success takes long, there are people who try to take shortcuts. They implement “black hat SEO” tactics or commit visitor fraud.
Black hat SEO is basically trying to mislead search engines like Google into giving your website a higher search ranking than it should have. Common practices are buying backlinks, keyword stuffing and using invisible text.
After all, search engines are merely machines that operate on algorithms. And algorithms have flaws. These activities however, are seen as fraudulent by search engines and can lead to penalties. When your website is penalized, its search ranking is severely negatively impacted, which in turn significantly hurts your organic visitor count.
Another strategy that people sometimes employ is visitor fraud. Visitor fraud is basically buying fake visitors to visit your website.
Both activities result in a website that “seemingly” has a lot of traffic and hence a lot of potential. Online business scammers implement black hat SEO and visitor fraud to boost a website’s organic traffic before they try to sell it.
After this, they try to sell it, claiming it has a huge potential due to its fast organic visitor growth. Most of the time they try to sell the website as fast as possible with a more than lucrative offer for the buyer. They do this because they know it is a ticking time bomb before the search engines find out and penalize the website.
If you end up buying such an online business, it is very likely that one day your business is penalized and loses a big chunk its organic visitors. Or that your website has a nonexistent organic ranking in the first place and all the traffic is bought.
So how do you recognize websites like these?
It is a combination of things. For starters, it is often a very novel online business with visitor growth that looks a lot like an overnight success. The business often has no revenue model or active income streams. It’s merely being sold as a new website with “huge potential”.
The seller often claims that the website does so well because it focuses on a newly discovered niche market or because they know some secret the rest don’t.
To prevent being scammed, there are a few checks you can do, or better yet, should do always when you buy a website.
For starters you should check its backlink profile. You can check its backlink profile on a platform like Ahrefs. If a website claims to have strong organic presence but a low quality backlink profile then this is a huge red flag.
The next thing you should check is its entire visitor history. Sellers often post a screenshot of a limited time frame and hope you don’t dig deeper. A website seller can and should always give you read only access to all their analytics platforms such as Google Analytics, Google Search Console, Bing Webmaster Tools and so on.
At last, you should check the penalty history of a website. You can check its penalty history on FE International.
If the website you’re about to buy has been penalized once or more in the past, this is a huge red flag. Do beware though, that being penalized is not always the result of illegal black hat activities.
Search engine penalties are also executed by algorithms that are just as flawed as their ranking algorithms. But, a website being penalized is a good reason for you to be cautious.
New businesses that are the only player in a new niche
Flippa isn’t only an online business marketplace but also a source of inspiration for people.
Many people search for creative business ideas that they can copy and then with better execution than the business listed on Flippa. This is one of the main reasons that many of the larger businesses on Flippa are advertised anonymously and require you to sign an NDA to even see its contents.
And even then, the owners of these businesses often see lots of copycats showing up in the market just after they have listed their business on Flippa.
Sometimes there are people who find a perfect combination of a product and a new niche but do not have the time or the resources to make it grow. They launch the business to prove that it has potential and then put it on Flippa to sell it.
Buying a business like this seems to be a great opportunity but don’t be fooled so easily. A new business in a new niche that has little to no history also has little to no authority in the niche.
By the time the deal is done and you own the business there will be numerous copycats. Copycats who, due to your limited authority in the market are on the same level of the playing field very quickly. Soon the niche is crowded and you will have to share your bone with all the other dogs.
When you buy an online business that is tailored to one very specific niche, it’s best to buy a business that has authority in the niche. A business that has a history, a solid returning customer base and a strong brand authority. If the business you’re about to buy doesn’t have a solid authority then be aware of the risk you’re taking.
Online businesses from owners whose previously sold businesses are all dead
If you’re about to buy an online business, look up the business owner’s history. Chances are that it isn’t the first time that this person is selling an online business. Many people make a living off selling online businesses.
You could call them serial flippers.
If you’re thinking of buying a business. Look up the seller’s history. If you find any historical data, then take a good look at their previously sold businesses.
How are these businesses doing at the moment?
Are they all thriving?
Or all they all dead or left for dead by their new owners?
If the seller sold ten businesses in the last few years and eight of them are now giving you a 404 error then you should consider this a huge red flag. This is a strong indication that the businesses this person sells have no growth potential.
Online businesses that don’t fit your skill level
Contrary to all the other types of online businesses that you shouldn’t buy, this is perhaps a business that you should actually buy. But you also shouldn’t buy at the same time…
If you are buying an online business you plan on maintaining all by yourself, don’t overestimate your skills to do so. What I mean is, don’t make the mistake of buying a business you can’t maintain.
If you have a hard time figuring out how to use a simple CMS like WordPress, don’t even think about buying a fully customized recruitment platform that runs on a custom CMS. Or an app that requires expert coding skills to maintain. Unless the business is profitable and large enough to outsource these tasks of course.
When you buy an online business for yourself to maintain, always make sure that you have the skills to do so.
Websites that completely rely on organic traffic
Many websites rely on organic traffic for a great deal. Apart from the time and effort it costs to get a good ranking in search engines, organic traffic is free. You don’t have to pay someone up front for every visitor and then hope the visitor will convert so that you didn’t pay for nothing.
There are lots and lots of websites that solely rely on organic traffic.
The issue with organic traffic is that search engines update their ranking algorithm now and then. With these updates they change the way they rank websites in their search results. An algorithm update can cause a website to lose a good organic search position and severely impact its amount of organic visitors.
In the worst case an algorithm update can even cause a website to be penalized.
If you buy a website that completely relies on organic traffic, you’ll have to live with the risk that one day it can lose almost its entire authority.
Ideally, you’ll want to buy a business that relies on multiple traffic sources. A mix of organic traffic, external links, possibly advertising or affiliate marketing and one or perhaps more social channels.
Businesses that nobody else seems to be buying
As you’ve been able to read in this article, there is pretty much a set of rules that determines which kind of businesses you shouldn’t buy.
If you count out all these businesses then all there will be left is a handful of businesses that do have potential.
Most of the reasons why people sell an online business are b.s. reasons to hide the fact that the business, the model or something else about it is bad. After all, If you’d own the perfect business, why would you sell it?
If you think you’ve stumbled upon that one unicorn and you find out that you’re the only one who is interested in it, you might want to scratch your head. If 95% of the businesses being sold are garbage then the remaining 5% must be immensely popular right? I can tell from experience that this is very accurate.
So, if a certain business has zero people attracted to it, ask yourself what is wrong with it first. Before you flatter yourself for outsmarting others. Usually something is wrong and everybody has noticed it except you. And not the other way around!
Some last tips for buying an online business
Even if you follow all of the advice in this article, you always risk making a bad deal. Or even worse, you risk getting scammed.
Below are some extra tips that you can implement while buying an online business.
Always ask read only access to the analytics tools on the website
As a website owner it is incredibly easy to add someone to your website’s Google Analytics and other analytics tools as a spectator.
Before buying a website you should therefore always request access. Once you have access you can check the website’s entire Google Analytics history. Visitor counts, visitor sources, growth over time and so on. If the seller refuses your request and has provided limited info, cut off negotiations. Period.
Be careful with so called “verified” Amazon FBA revenue
Many platforms, like Flippa for example, allow sellers to verify their Amazon FBA revenue by linking their Amazon id to their seller’s account. This way a seller can sell his Amazon FBA storefront and have its storefront revenue verified by the linked account.
However, there is one issue at play here.
The linked account looks at the Amazon FBA revenue of one’s entire Amazon account and not just that one storefront that is being sold. In theory, one can own ten Amazon FBA websites that all generate a little revenue and make it look like the total revenue is earned from a single website they’re selling.
In other words, the so called “verified revenue” is in reality not so airtight.
Be careful with screenshots
Flippa website ads often come with screenshots of online accounts. Visitors, revenue, and so on. Screenshots are incredibly easy to manipulate. You don’t even need to use Photoshop for it anymore nowadays. All you have to do to manipulate a screenshot with earnings is change some settings in the inspection element of your browser like I’ll show you below.
My last, and also the best tip that I can give you is to meet face to face or have a Skype session with the seller. This way you can directly converse with the seller and he or she can show you all the information live on their screen.
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