Performing due diligence on a website acquisition is following a set of guidelines that are customized to validate your investment criteria.
When I do due diligence, I am looking for ways to say NO to the deal; essentially finding the red flags that go against my investment criteria. There are two stages of due diligence that I perform: quick sniff-test and deep-dive.
In the quick due-diligence phase, I spend no more than 5-minutes to understand the overall structure of the website, and if I am interested in pursuing. If the website fits my criteria, I move on to the deep-dive due diligence which can take 24-48 hours depending on how responsive the seller is.
In this guide, I will cover what my “sniff-test” due diligence framework looks like. Let’s get into it!
The Sniff Test Due Diligence Framework
These are questions that are running through my mind as I do the quick “sniff test” on a deal:
- Website URL: Is the URL brandable? Are there any trademark/copyright issues?
- Traffic Trend: Which direction is traffic trending? Stable, upwards, or downwards?
- Toxic Links: Any easy-to-spot toxic links?
- Monthly Earnings: How much does it earn monthly?
- Monetization Sources: What are the monetization sources?
At the initial stage, I do not ask for Google Analytics access to view traffic, P&L spreadsheet, revenue screenshots, or anything that requires significant effort. This is because I do a “sniff test” due diligence first to see if I am interested in the website. If I find it interesting, I go into a deep-dive due diligence phase.
Let’s break down the above framework.
1. Website URL
I like to buy brandable domains as opposed to exact or phase match domains. Here are examples:
- Brandable: Kitchenista.com, KitchenExpert.com, KitchenGuide.com
- Exact Match: BestAirFryer.com
With a brandable domain, you have room to expand into shoulder niches within the main niche. With the kitchen example above, if one had an exact match domain about air fryers, it would be strange to have unrelated products such as cookware on the site.
Note, however, that the phrase and exact match domains are perfectly alright to use; my investment criteria do not allow for it.
I also look for any trademarks/copyrighted names within the domain. Stay away from domains that put a brand name in the URL. For example, NikeShoes.com. Any brand can submit a DMCA takedown notice and you will have to take the site offline or get into a legal battle, which you will lose.
Here are the steps to follow:
- Ask for the URL from the seller
- If you think the URL is branded, use the USPTO Trademark database to search for the brand keywords
Sniff Test #1: Walk away from the deal if it’s trademarked/copyrighted by another brand. Buying a brandable website is best but it’s a personal choice that you need to make.
2. Traffic Trends
You have to set forth your investment criteria of what type of sites you are interested in. The first criteria to consider is the overall trend whether stable, up-trending, or down-trending. The second criteria considers how many months the trend has to be valid.
Here is the “sniff test” process I follow to find traffic trends:
- Obtain the URL from the seller
- Plug it into AHREFs or SEMRush
- View the Organic Search traffic chart
- Review All Time, One Year, and Last 30 Days traffic trends
Depending on the traffic trend and your pre-determined investment criteria, it will provide you more insights on what questions to ask in the next deep-dive phase of due diligence.
To make this more clear, I took snapshots of random sites’ traffic via AHREFs to provide examples of how I obtain insights.
Note: AHREFs and SEMRush are just tools that provide rough estimates. However, as a quick analysis, their overall trends in traffic are spot on.
This specific website was impacted by the Google Core Update in May 2020 due to the quick jump down in traffic. The site then stabilized at its equilibrium after the update. The owner definitely made some updates causing the recent uptrend.
Quick follow-up questions to ask:
- Any ideas why the site was impacted by the Google Algorithmic update in May? (note: this is a leading question to see if the seller is honestly stating the facts)
- What changes were done to the site post-Google update?
This site was impacted by the Google Core Update in May 2020. The site has stabilized at 30% of the traffic it was getting (again just an estimate). The site has not been able to recover from the algorithmic Google update.
If you see a flatline and then growth, this usually means the original domain has been repurposed by a new owner. This can happen in one of two ways: (1) the same owner shut down the website for whatever reason and then later decided to continue growing it, or (2) the domain expired, the seller purchased it and started building.
The most likely scenario is #2.
Quick follow-up questions to ask:
- Was this built on an expired domain? If so, where was the domain obtained from? When was it purchased?
Extremely high-growth in a 1-year time period. This can happen in these situations:
- A powerful expired domain with very low competition keywords
- Powerful backlinks and content added simultaneously; the blitz approach
When you see growth like this, make sure to ask further questions on what was the strategy. Do a “sniff-test” if the strategy follows your investment criteria.
Note: in the example above, this was an expired domain that was rebuilt.
This is self-explanatory. The site has been stable over the last year.
At first, seeing a site like this is great. I, however, personally do not move forward unless I see easy wins for growth. A stable site is a dividend-paying investment but without growth potential, the ROI is not accelerated. That’s my criteria. Yours will differ.
Sniff Test #2: Overall, set your traffic trend criteria and stick to it. Analyze the website in AHREFs or SEMRush and gather insights on the trend. If it meets your criteria, then you can ask follow-up questions.
3. Toxic Backlinks
I personally stay away from websites that have backlinks from Private Blog Networks (PBNs). That’s part of my investment criteria. However, I know people who do very well with PBNs. It all depends on what you are comfortable with.
Typical types of links that raise a red flag for me:
- Spammed international links (.ch, .ru)
- Adult links
These types of links can be spotted at a glance from various tools like Ahrefs, SEMRush, Moz, Majestic, among others.
Here is the process I follow:
- Plug in the URL into your favorite analysis tool (mine is Ahrefs)
- Go to Backlink on the menu bar
- Choose “One Link Per Domain”. This reduces multiple links from the same domain to give you a more summarized overview
- Sift through the first 2-3 pages
- Make a note of spammy links
Sniff Test #3: Do a quick glance look over the Backlink report for the website. If any red flags, make note for further questioning. Walk away if it does not meet your criteria.
4. Monthly Revenue
In the quick due diligence phase, I do not ask for P&Ls or revenue screenshots.
I do ask for an indication of what a site is earning monthly. Many sellers will provide a monthly average in the form of Last 3 Month (L3M), Last 6 Month (L6M), or Last 12 Month (L12M) averages.
At a glance, I can reject a site if it’s not earning enough for me to get involved, or if it’s earning too much that the sale price would be out of my budget range.
Sniff Test #4: Get a quick indication of monthly revenues. Do a back of the envelope calculation of 30X times monthly average profit. Determine if that’s within your purchase budget. Determine if the monthly revenue is enough for you get interested.
5. Monetization Sources
In your criteria, make sure to also have an understanding of what types of monetization sources interest you.
For example, I only get involved in content-based sites earning from display ads, affiliate marketing, or digital products. I do not get involved in content sites that sell leads to local businesses, or content sites that sell services.
In the quick due diligence phase, I ask the seller to list out major revenue sources.
Sniff Test #5: Understand what your core competency is in terms of monetization sources. Walk away if the site does not meet the criteria.
A sniff-test due diligence phase is a must if you are looking to review deals consistently. Currently, it’s a seller’s market. As a buyer, you need to move quickly to give a tentative answer so the seller may give you more focus during the in-depth due diligence phase.
Your investment criteria will be different than mine. However, the framework for a “sniff-test” due diligence in its basic form will be the same for all investors. To summarize, here are the 5 major steps:
- Website URL
- Traffic Trend
- Toxic Links
- Monthly Earnings
- Monetization Sources