Part 3 – Potential Pitfalls of Buying a Website

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by nhussein · 0 comments

Keep the red flags flying

In the previous two articles, we’ve seen an overview of the virtual real estate market, looked at how things can go disastrously wrong if you go into this market without knowing what you’re doing, and how to find ideal targets to buy by looking in the right places. Now, we’ll take the next step towards making sure you don’t buy a dud. Here we’ll look at some things which should set your alarm bells ringing and have you raising some red flags of your own.

The due diligence process (and we’ll get to that in the next article) should weed out many of the serious flaws which a website might have. But DD is time consuming and expensive so it’s unlikely you’ll want to do this for every potential purchase you identify. Instead you’ll learn how to do a preliminary sifting by spotting the red flags and excluding from your list the sites which raise them.

Commonsense red flags

Some of the red flags will be raised before you even get as far as looking at the site that’s being sold.

Hype!!!

Look at the language being used to advertise the site – the sales hype. It’s natural that the seller will want to talk up the site’s assets, and that’s fine. But if the language used is enthusiastic to the point of being effusive, then you should start to worry – particularly if the listing is thin on factual detail.

Some examples:

  • Words that offer “cast-iron” guarantees of success: “killer”, “surefire”, “copperbottomed”, etc.
    There are no guaranteed successes in business, actually there is no guarantee in life ( except that we will all be dead longer than we are alive and that the greeks will not pay their debts back); there are too many things that can go wrong, even for the most talented and experienced entrepreneur.
  • “Potential”
    By the same token, wild projections of future earnings have little meaning. And the newer the site is, the less meaning they have. Remember, nine out of every ten businesses fail in the first year. A site offering nothing but potential is more likely to be a crock than a Kroc.
  • “Guarantee”, except in the context of a guarantee offering your money back.
    Even then, be wary: in the context of buying a business, it isn’t usual to offer a guarantee – precisely because so many things can go wrong that the seller has absolutely no control over, including the buyer’s own business ability.
  • Exaggerated claims: “floods of traffic”, “pots of cash”, “sales through the roof”.
    Be on your guard against unsubstantiated and/or unrealistic promises. Even if you’re laughing at the nonsense consciously, your subconscious mind is often less skeptical.
  • Words that describe a lifestyle: “money while you sleep”, “fire your boss”, “buy that […] you’ve always wanted”.
    This is just an appeal to your emotions. What the heck do they know or care about your lifestyle? They’re trying to make you dream because there’s no way you’ll buy the site on the basis of a rational decision.
  • Words that hint at special knowledge on the part of the seller: “secret”, “tricks”, “lift the lid”, “key”.
    Ask yourself a few commonsense questions. Why should the seller share their success, rather than growing their own business? Is a site valued at just a few hundred dollars really going to be earning thousands a month? And even if there really was a “secret”, how long is it going to remain secret if the seller’s spreading it?
  • Words that imply the buyer need do nothing more: “little or no work required”, “straight out of the box”, “no experience required”, “make thousands for as little as $1”.
    You can’t expect a business to carry on performing to the same level forever. Like a shark, if your business doesn’t keep moving forward, eventually it will sink to the bottom. So you’ll have to keep improving it – and that takes money, effort, skill and experience.
  • Exclamation marks, bold and/or colored text, yellow highlighting
    The odd exclamation mark here and there is understandable from an inexperienced seller. Any more than that, and you may start to feel that you’re being pressurized by a cheesy used car salesman. This feeling is probably no coincidence.

Perhaps counter-intuitively, we’re not suggesting that you simply ignore the hype – and by “hype”, we mean anything in the listing that isn’t purely factual information. Hype is actually a valuable indicator of how likely it is that underneath all the verbiage, the website itself is worthless. The more hype there is, the more effort is being made to disguise a lack of real value for the buyer.

Vital statistics

Now it’s time to move on and look at the information the buyer’s provided about the website itself and its performance.

One of the first things you should look at is: how old is the site? If it’s very new, then you should be ready to question the reason for a high valuation. In particular, be on your guard against claims of high traffic or high earnings – it takes time for a site to build up its presence.

Look at the claimed earnings. How long a period does the earnings history cover? The shorter it is, the more you should be asking yourself whether the seller’s done something to create a sales “spike” – for instance, paying for an advertising campaign to drive visitors and thus make the site overperform when normally its earnings are negligible.

Look at the asking price. If it seems like remarkably good value for the stated earnings, then once more you have to ask yourself why. One possible reason is that something has changed in the market the website business is in – perhaps a supplier has gone bust, or the site’s been blacklisted somewhere. Another possible reason is entrapment – the seller is in cahoots with a key supplier and the costs of vital supplies will suddenly escalate once the site’s been sold.

Bonuses

Some sellers offer bonuses as an inducement to buy. These may range from a year’s free hosting, to free post-sales support, to free courses in search engine optimization.

There’s nothing wrong with bonuses in themselves. But you may not need them – for instance, if you already have hosting that you’re happy with. Some “bonuses” are simply loss leaders in the hope of tempting you to buy more services later.

An offer of free post-sales support, on the other hand, is a little bit alarming. The seller should be telling you of any issues with the business before the sale. His interest in providing support –for a business he no longer has a financial stake in – is likely to wane rapidly.

The site itself

If you haven’t already been sent running for the hills by the listing, then it’s time to look at the website itself. Or maybe not quite yet.

What’s in a name?

A website’s domain name can reveal a lot about it. In most cases, this is a good thing – visitors will find it easier to remember and revisit your site if they can tell what it’s about from the domain name. However, there are some important exceptions.

A domain name that’s based on a third party’s existing brand is asking for trouble. Companies are very protective about their branding – and with good reason. Otherwise it’d be open to anyone to pass themselves off, say, as part of Apple or Coca-Cola and start selling substandard goods. The bigger the brand concerned, the more likely it is that the webmaster of an unofficial website will be slapped with a “cease and desist” order by the company’s team of hotshot corporate lawyers.

Besides, what happens if the company decides to rebrand altogether? This is a lesser concern, but still one worth thinking about as it shows how dangerous it is to base your own business on a third-party enterprise.

Exact match domains used to be very popular a couple of years ago. They were based on the notion that search engines would automatically favor websites that had the exact same search term as their domain name.

On the face of it, this sounds reasonable – for instance, you might expect a search for “Dairy Queen” would list “dairyqueen.com” first. But sites were being sold on the premise that, for instance, people searching for “nearest branch of Dairy Queen” would be presented with a link to nearestbranchofdairyqueen.com among the search engine’s top results, even if the site offered little or no worthwhile content. The search engines have gotten wise to this, and EMDs have little real value – but some sellers may try to persuade you otherwise. Don’t let them.

OK… now you can click through and look at that website.

Clone wars

Some people make a living from designing websites and selling them to other people, and that’s fine. Some of those people take this a step further and sell their websites as a “business in a box”, and that’s fine too – as long as everyone’s aware of what’s going on and no-one’s getting ripped off.

However, less scrupulous vendors create dozens or even hundreds of sites a month, all of them variations on a more or less identical theme; hotel or air ticket search engines are a popular one. They then try to sell these cloned sites to unsuspecting buyers as unique business opportunities.

Take a look at the source code behind the website (or ask a web-savvy friend to). You may well be able to identify where the search engine is being driven from. Chances are it’s an affiliate program that you could join yourself. As for the website, it’s likely built using a popular (and free) website software platform like WordPress or Joomla, with a custom skin that may be either free or commercially available.

There’s nothing essentially illegal or even morally wrong with any of this. The rip-off comes when the seller tries to sell it as a genuine opportunity, or as a tailor-made website.

The cost of building boiler-plate websites as described above is negligible to a moderately experienced website developer – a hobbyist could build it for no more than the cost of registering the domain name (perhaps $11 a year) and paying for hosting (perhaps $25 a year). Even a decent WordPress theme can be had for no more than $30. And the search engines are provided free by the program operators – they, like you, get their money through commission on sales. In other words, you could set up your own business for well under $100. If you’re being charged significantly more, you need to ask what value the seller is adding to justify the inflated price.

As for the “genuine opportunity”, there are thousands upon thousands of websites that already offer hotel booking and air ticket search engines. The vast majority of them earn peanuts in commission. And if you do buy the site, you can be sure that the seller will be constantly adding to the number of your direct competitors.

So ask yourself what the chances are of a brand-new clone site suddenly making the breakthrough. Then walk away, and keep your money for something that actually has value.

Building your expertise

Developing the ability to detect the “bad” sites even before you start asking more probing questions comes with experience, but you can quite easily learn how to spot the things which should raise red flags for you.

Every day for a couple of weeks, just visit one of the auction marketplaces or forums. It doesn’t have to be the same one every day – you can give yourself a little variety, and develop a feel for the different marketplaces available at the same time!

Have a look at a few of the websites on offer, and see if you can spot any blatant turkeys. After a while, you may find that the clones and the overhyped websites become more and more obvious after even a brief glance, as a pattern emerges.

After you have some experience under your belt of analyzing websites, you can quickly spot these patterns which trigger alarm bells. These could be the way listings are worded, a jarring disparity between the site’s age and the claimed traffic, or the appearance of the site itself.

Ultimately, you won’t get burned if you remember the Golden Rule:

Anything that looks too good to be true, IS too good to be true.

What’s next?

Even when you can see the patterns and understand the standard metrics, you can’t be sure that you’ve eliminated all the pitfalls. There may be some unexpected nasty surprises waiting for even an experienced website buyer.

It’s time to dig a little deeper and find out more about the website and the seller than is revealed in the listing. This process of investigation is known as due diligence.

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nhussein

Managing Partner at VRETycoons

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