Friday, July 20, 2007

Acquiring Websites - due diligence

I just bought my second website. The first one was a simple domain acquisition with no content. This website acquisition was much more complicated and expensive since I acquired:
  1. A domain
  2. Applications on the domain
My reasons for acquiring (not in any order):
  1. I wanted the applications to deploy onto one of my educational websites
  2. I wanted the highly rated site (in several search engines) to drive traffic and send "google juice" to my other educational sites
  3. I'm trying to learn to make money from advertisements & affiliates (ie, not subscriptions) and this seemed like a good way to learn it.
It was not cheap but the the seller, whom I contacted initially to buy the technology that I had seen on the site, would only sell the website in its entirely, not just the technology. So I bought the website, pretty much at his asking price.

I went through, what I think of, as an appropriate amount of "due diligence". "Due diligence" means the process through which a potential acquirer evaluates a target company and its assets to ensure that the price is fair and that the buyer understands the assets appropriately. It is a legal term for publicly-held companies (and others with fiduciary legal obligations) that the management must go thru to not be reckless with the funds entrusted to them.

Actually, here's (simplified) what I've done.
1. Had initial discussions with the buyer. I approached him as interested in buying the technology on the site. He responded by saying that he was trying to sell the whole site. I asked "why" and "how much?"  He answered.

2. I considered his answers to why and how much to make a go/no go decision on the purchase:
- I wanted to pursue it at that level of asking price
- To think about whether he was "for real" or a dishonest or flakey person. If I felt that either of the latter were likely, I would not pursue it at all. I have decided to not deal professionally with people that are lunatics or lying (to me or themselves). I checked up on the info that he provided, reviewed his sites and their links to get an overall picture of his online activities and decided that he was a "good egg" and someone that I wanted to go thru the acquisition process with.

I cannot overemphasize how important making this decision is. The ONE time that I decided to buy with someone who seemed "too-amazing", I wasted a huge amount of my and my colleagues time and money on an acquisition that did not close since as we got into the details of due diligence, it turned out he was not just exaggerating, he was totally lying. I knew at the beginning that there was something wrong with his story and I wish I had, based on simple intuition, walked away.

3. I gathered all the independent stats that I could to evaluate it.
- many independent lists of incoming links such as those provided by
- alexa etc

4. Check hosting status (including blacklisting) using

5.  I asked them to supply to me:
- traffic by month for the last year with explanations of traffic trends
- data on referrals by country and domain
- disclosure on relationships for sites with links and sites providing traffic
- I had thought about the possibility of fraud here before when I looked at SEO due diligence.

6. Looked at other similar sites that might be for sale and followed some discussions to go from being a novice to an expert. I looked at but preferred: . In fact, they had a great free guide to Buying Websites.

7. I found a lawyer that I like, trust, is experienced with small acquisitions, and that I had good access to. This is nearly impossible. I was incredibly lucky.
8. Put in critical data in the purchase agreement in the "reps and warranties". This means that they, as part of the contract, represent that they've disclosed the truth about the data that they've supplied me (which I made part of the contract as an attachment).5. Staged acquisition with payment tied to deliverables.

BTW - if there is much interest in this, I could write more extensively. I think this is a huge new business growth area for me (acquisitions) and generally, there will be lots of growth thru deals on the web.

No comments: