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Thread: What Is Due Diligence? How Do You Conduct DD On A Website?

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    Administrator Clinton is a Premium Member
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    What Is Due Diligence? How Do You Conduct DD On A Website?

    This is a new sticky thread.

    Due diligence is the research you conduct prior to making a purchase or signing a contract. In the case of buying a website, due diligence applies to the auditing you conduct to establish the veracity of claims made by the seller, including on those claims which seem to have irrefutable proof. You conduct due diligence also to assess the risk inherent in the proposition.

    Due diligence is about having the skills to ferret out facts that are not immediately apparent. In addition to meticulous and careful analysis of presented data like stats, finances and contracts, you need to source independent data where available. You then need to probe, to dig, to cross reference information, to ask the right questions and to draw informed conclusions based on what you know about the market, what you know about business and what you've been able to find out about the website you're considering buying.

    There are seven components you need to conduct an effective DD - BIYAAD:
    - Basic Information Provided by the Seller
    - Information You Can Get From Public Tools (WHOIS, Alexa etc)
    - Your Own Background Knowledge of Business / Finance / Websites to interpret the information
    - A Questioning Mind, one that has the right level of skepticism (too little and you miss vital clues, too much and you lose out on a good buy)
    - Ability To Ask The Right Questions and get them answered
    - Drawing The Right Conclusions Based on the above (which conclusions lead to further questions)

    At marketplaces like Flippa they provide the "I" - Information From Public Tools - and refer to it variously as "due diligence", "due diligence tools" or even "complete due diligence". I would caution against buyers being lured into complacency by a seller or any third party. No one tool can do your due diligence for you and any tool that claims to do that should be treated with caution. I've compiled some further information on DD in relation to websites and we have a due diligence forum where you can discuss DD matters.

    The Wikipedia page on DD claims nine areas of a business that require auditing. With websites, especially at the sub-$100K of the market, buyers tend to focus mainly on establishing the true position on these three:
    - Visitors (Visitor/Customer/Subscriber Numbers)
    - Revenue (Turnover, Costs and Net Profit)
    - Legal (Background, Contracts, Business Liabilities, IP ownership, Potential Future Liabilities etc)
    The size of the investment and the complexity of the business usually determine how much effort is expended on DD and the areas that are audited.

    Contrary to what seems to be popular belief, DD is not a walk in the park that any first timer can do effectively. There are many very sophisticated ways for a seller to hide the truth or dress mutton up to look like lamb and they fool even experienced buyers, so be careful out there!
    Find the right business brokers to maximise the value you extract from your business and improve the chances of selling your business.

  2. The Following 4 Users Say Thank You to Clinton For This Useful Post:

    akirk (31 May 2012), bwelford (31 May 2012), Kay (1 March 2013), TheodoreK (31 May 2012)

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    An additional view / counter-part to this is warranties
    A warranty is a part of a sale / purchase legal contract... it allows you as the buyer to get the seller to warrant certain facts - useful for those facts which make a big difference to the price but which might be difficult to prove... It makes contractual with implications if not honoured any claims they might make... and much easier to take action against a warranty, then against claims made in other ways...
    So they might warrant visitor numbers / sales / IP / etc. - an important one could be that they warrant no current or impending action against them (e.g. if they were mis-using IP and were being sued)
    Some sellers might refuse warranties, but if they are sensible ones then they are a part and parcel of sales...
    You might also have a certain % of purchase price in escrow against warranties for a fixed time period - e.g. payment of 50% and 50% held in escrow against a 90 day warranty that xyz...

    It is not a reason to not do due diligence - but it sits comfortably alongside...

    Alasdair

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    Administrator Clinton is a Premium Member
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    Thanks, Alasdair, and I agree about warranties. However, in most transactions for the purchase of websites, warranties are pretty worthless. First, they have a high cost to get drafted properly - the cost of an attorney to draft the contract could exceed the benefits derived from the warranty. Second, the cost of legal action to enforce a guarantee far exceeds any award you are likely to obtain. When the transaction is cross-border, the costs escalate very sharply. It's for the buyer to decide what level of investment merits a written warranty and whether he has any recourse to the seller in the event of the warranty not being honoured.

    Marketplaces like Flippa banned sellers from making guarantees and warranties in their listings because of this very reason - it looks good in the sales pitch but it's completely useless to the buyer (in 99.99% of auctions) as enforcing it is near impossible. However, as listings are not moderated at most of these marketplaces, guarantees and warranties are often used to give the appearance of "added value".
    Find the right business brokers to maximise the value you extract from your business and improve the chances of selling your business.

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    Thank you Clinton - valid points - def. if buying a websit in the xx - xxxx range - but maybe into 6 figures and it starts to make sense...
    The difficulty of enforcing it is why putting some of the purchase price into escrow can work as if reality is not up to what was claimed it makes life easier to adjust the figures

    Alasdair

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    Quote Originally Posted by Clinton View Post
    Due diligence is the research you conduct prior to making a purchase or signing a contract. In the case of buying a website, due diligence applies to the auditing you conduct to establish the veracity of claims made by the seller, including on those claims which seem to have irrefutable proof. You conduct due diligence also to assess the risk inherent in the proposition.
    Perhaps another factor that's worth mentioning is the trust-worthiness of the seller. There are a variety of ways you can attempt to get your own assessment of that, A current thread is discussing some of those:
    http://experienced-people.net/forums...atter-of-trust

    In practice a good transaction is not adversarial but is a good deal for both parties. The buyer and the seller have a joint interest in making a satisfactory deal that they are both happy about some months after the transaction is completed. I believe an important part of DD is making sure you are dealing with someone who shares this view.

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    Clinton (31 May 2012)

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