There are many ways you can get scammed when buying a website, this article will discuss the three main categories of scam and what we can do about them.
The first category is intentional deceit, the outright scams where the things that a seller tells you simply are not true.
The second category is unintentional deceit where things are not understood well or not communicated well or accidentally left out.
And the third category that is not to be ignored is self-deceit, you enter a deal and you’re fooling yourself about your intentions and/or your ability to operate the site after you buy it.
We can avoid scams, but how?
Your first line of defense against scams, both intentional and unintentional, is to use a broker. You are looking for a higher quality broker as they will do a good job of vetting the websites they are brokering and the vetting that they do is usually best looking backwards. In other words, they’re pretty good at uncovering sellers providing numbers that are inaccurate or untrue or incomplete. A broker is a good starting point because they look at so many pieces of data and can provide an analysis of the historical accuracy of information being provided by the sellers.
Brokers are not so good at analyzing the future prospects of a website and you must take the things that they say about future opportunities or growth with a grain of salt. They have a selling hat that they put on and sometimes, they have a really hard time taking it off when they’re representing a seller to a buyer.
You must do your own due diligence
Just because a broker has may have vetted the historical numbers that doesn’t take the responsibility away from you. What do you do during due diligence to avoid scams to make sure that the numbers or the information that the seller is providing to you is accurate and isn’t fabricated or isn’t wrong or unintentionally missing something important?
First and foremost, you want to build a good business relationship with the seller as this will give you more opportunity to get the information you need to make an informed decision. You are looking to collect as many pieces of information as you can from the seller and particularly collect different views of the same data. So, for example, if it’s sales data, it’ll be nice to see sales data from a shopping cart system, from the credit card processing system, from the bank statements system, from conversion tracking within Google Analytics.
From these different viewpoints you can compare them one to another and find any discrepancies that can be a red flag for you – an indicator that you need to dig deeper into that data to see if something is amiss. You know if PayPal says one thing for a particular time period about a particular kind of sale, the shopping cart system says something different, you need to know the reason for that discrepancy.
The clues are in the data
Gather as many kinds of information and views of information as you can get and you’re going to be able to uncover little things that aren’t quite right and maybe some potential scams and deceit inside the data.
The same goes for things like traffic data, you can get a lot of different traffic data from different systems and there’s legitimate reasons why the data may be different but in general it should track together, and it can be a strong indicator for you as to whether something is wrong.
You might have Google Analytics, you might have search console, you may have Google Ad Sense, you may have a third-party ad network or ad provider all of whom give you some version of the traffic. When you superimpose those graphs on top of each other they should trend and track together, more or less, even if they’re the absolute numbers are quite different.
Technology is your friend
You will want to do screen shares with sellers where you can ask for new pieces of data where they have very limited opportunities for manipulating what they tell you and that you can see them real time.
You want to ask for sort of unusual things like ‘show me emails that you’re getting from your customers’, ‘show me the tickets that your customers are putting into the helpdesk system’, ‘show me the kinds of responses that your people are making to those tickets.’ You want to see the kind of comments that the website is getting on blogs because the intangible or the soft information is important, it will give you insights into whether there’s something wrong with the business.
Pay attention to the financials
The seller’s expenses and their relationship to the website’s revenue stream are important indicators as to whether everything is kosher in the numbers. Let me give you one example, in the e-commerce area you know when you’re selling a product there are several cost components of that product; there is a cost of goods sold – what it actually costs to make the product, there are usually advertising expenses to sell the product, there may be sales fees that you’re paying to Amazon or another party to help you sell the product, and then there’s things like shipping costs and in return numbers and then maybe credit card fees.
There are four or five major components of cost with every product that you sell, right? If you look at the amount that you’re earning, the revenue from that product sale and then you look at the percentage of each of those components: advertising, sales fees, shipping credit card fees etc. then those percentages of the costs as ratios of the expense to the revenue should be pretty similar and they should, as the revenue moves up and down, those expenses should also move up and down in a similar fashion and those ratios should stay largely the same.
Look for patterns and correlations
There’s reasons why those ratios are going to change, for example, your advertising may become more efficient over time you might drive more sales from the same advertising spend or it may become less efficient as there’s more competition or things change in the marketplace – you want to look for those changes and see if there’s a good explanation and if there’s not a good explanation that can be a signal to you that something amiss is going on. In every business there’s some correlation between expenses or other metrics that’s related to revenue and you get good insight by tracking those ratios as revenue moves over time and those other numbers move over time.