3 Factors That Distinguish an Actual Business From a Novelty
Some businesses are worth their asking price, while others are riddled with risk and amount to little more than novelty. It's not hard to tell the difference -- if you know what you're looking for.
Last year, I wrote about a one-week-old website that sold for $85,000, thanks in large part to some aggressive marketing and PR – not to mention a kitschy niche. While only time will tell whether that was a good business decision for the buyer, there were definitely some red flags that, in most cases, would have turned off an experienced investor looking for a long-term opportunity.
On the other hand, we have a business currently at auction that’s in the same niche. As a business, however, it’s an entirely different animal. Why? There are three major factors that differentiate a real opportunity from a novelty. Let’s take a look at what they are.
1. The business has some 'age.'
Smart, risk-averse investors would never be caught betting on a site that didn't have a long-term proven business model.
If a business has been around for a while, that fact alone shows that it's sustainable. Even with some fluctuation in traffic or sales, a history of evening-out over the long term indicates a much better investment than that of a site that hasn't stood the test of time. The value of a site should be measured in years -- or at least months -- and not in weeks.
Domain age can also be an important ranking factor with SEO. It isn't quite as important as high-quality content and a good backlink profile, but if you've been working steadily and consistently at producing good content and building links, you're probably outranking your competition. A site that is older means that you've had more time to work on these aspects of the business.
Bottom line: You need to find out if the site is generating revenue, and how consistent it is. Has it increased over time, or is it on the decline? Does it have a good track record, or no record at all? Unless you have money to throw away, you'll want to take these factors into careful consideration before investing in a site.
2. It clears all due diligence concerns.
The due diligence process is about examining your investment from a number of different perspectives, and identifying any risks that aren't readily apparent from outward appearances.
After taking a prospective business through a professional valuation, you'll quickly learn whether your potential investment is risky or unprofitable. When looking at a website for sale, an experienced broker can help in the due diligence process to either confirm or nullify any concerns you may have.
From a broader perspective, you need to evaluate six major factors:
- Traffic. It's necessary to look into traffic sources and identify whether there are any paid or sponsored links that haven't been declared. Customers' average time on the site, number of pages visited, traffic-to-financial ratios and related factors will also be assessed. Traffic sources should be well-diversified.
- Financials. The financial position of the business is evaluated from current and historical perspectives. It's necessary to check affiliate or merchant processor statements, and to request a live screen share with the seller.
- Ownership. You must verify who the owners are, and if they are indeed who they say they are. You'll want to ensure that the seller has a good track record.
- Operational. Figure out how much time it will take to run the business. Determine what tasks and responsibilities need to be handled and how much time each task will take.
- Technical. Determine if there are any technical risks that could prevent the business from operating normally after the purchase. Find out what plugins are being used and make sure they have been paid for or licensed, as required.
- Legal. Is the business model legal in your locality or country? Look into any trademark infringement or image licensing issues that could come up.
3. It Has a healthy SEO profile.
A business is worth investing in if it has a healthy SEO profile. This doesn't necessarily mean that it has a spotless or perfect SEO profile, but that it is steadily and consistently getting better over time. You need to look into:
- Visitors. Is the site getting traffic from a variety of different channels and sources? The less diversified the traffic is, the greater the risk the site poses. A good ranking in Google, for example, could change when the next algorithm update comes along. A site with many traffic sources is at less risk.
- Conversions. Is the traffic coming to the site actually converting? Is a good percentage of visitors opting in for email updates or buying the products and services? Conversion rates tend to be low at the best of times, but the better they are, the more relevant the site is likely to be to the user base or target customer.
- Bounce rate. The average bounce rate on a website is about 60 percent. A good bounce rate for a business really depends on the type of business you're looking to buy, but if it's a site with lots of high quality content that's serving its audience, it should have a relatively low bounce rate.
- Fresh content. Is new content being added to the site on a regular basis? Content is a major ranking factor and an invaluable marketing channel. Determine what content assets the business has that are valuable.
A niche industry doesn’t necessarily mean a business will have waning value. The key is to look deeper into the company’s past to gain insight into its profitability and longevity.
Become better at spotting the difference between a real business and a novelty business. Avoid the temptation to buy a website on hype. Do a thorough examination of the site before investing in it.