Prior to making a decision to acquire an online business in these unstable economic times, it is necessary to consider five fundamental steps. By following smart purchase strategies from the traditional business world, you will place your new investment beyond failure despite the outlook of the economy.
These are the five vital steps to buying an online business during the recession:
1. Ensure the Site is Generating Positive Cashflow
The seller of the online business should make available to you year-end financial reports and other short-term statements including tax returns. This rule generally applies to offline property investing, and also applies to online business.
Taking the current economic climate into consideration (“thanks” to COVID-19,) you should ask to see the financials from the present date to the past 12 months, including the financials from the previous 12 months and the 12 months prior to that. Look at the profit and loss reports and balance sheets. With these you would have an idea of how healthy the business has been.
It is not wise to invest in a web business if financial statements are not available. Remember, don’t buy a cat in a sack!
2. Identify Hidden Costs
Many online business owners attempt to boost the company’s outlook by using cuts to increase profits; this gives the illusion of high earnings. When examining financials, thoroughly inspect expenses for marketing, web hosting, payroll and advertising and compare the figures to income or sales. Additionally, the balance sheet should inform you whether owners or shareholders gave money to better the website’s bottom line.
You need to be aware of cash injected by the owners and avoid misrepresentations.
3. Examine The Customer Base
In buying an online business, a complete understanding of the customer base is essential. Even though the balance sheet may look good, online sales might indicate problems. Review the product and learn keyword tendency.
You should be concerned if competition is growing or if demand is declining. Website owners may want to off-load web assets if it is expensive to sustain them or if their sites are no longer generating cash-flow. You should avoid becoming the next owner of such online businesses. However, if you decide to buy a web business that is diminishing in sales, ensure that the price is reduced accordingly.
4. Bargain the Asking Price
After conducting a complete examination of the financials, try to agree a price that is proportional to how the business is currently performing; this price should also reflect the possibility of future failure. Negotiating a performance based deal is vital, particularly if the financials show loss.
5. Request Seller Financing
For many banks and financial institutions this is not the right time to purchase a business and the possibilities of you receiving a loan for buying an online business is almost zero, particularly if you have no existing relationship with the lender. For this reason, it is essential to negotiate in such a way that the seller is willing to finance the purchase or the biggest part of it. This enables you to pay for the business over a number of years. If paying monthly, make sure payments are lower than the income generated by the business otherwise you will have to subsidise payments from your personal budget or from other businesses.
Remember, a web property should pay for itself and produce additional income for you otherwise it is a liability and you should not acquire it.
Takeaway
Investing successfully in web assets includes acquiring cash-flowing online businesses, that are self-financed and self-managed, while taking the lowest possible risk.
Regardless of the economic climate, it is enlivening to own an online business, so allow nothing to prevent you from making this dream come true.
