6 Common Mistakes to Avoid When Buying an Online Business

Buying a business is a big move. If you’re like many buyers, it represents a significant financial decision that affects both your personal and professional life. Therefore, it’s important to understand what to look for, as well as what common mistakes to avoid when buying an online business.

In this article, we’ll be discussing six common mistakes you should avoid when buying an online business. We’ll also be providing actionable tips to help you navigate the process with competence and professionalism.

Six Common Mistakes When Buying an Online Business

Many buyers do their homework, take the process seriously, and end up with a successful business that continues to grow under their ownership. Others, unfortunately, make one or more costly mistakes.

Six of the most common mistakes you should avoid, include:

• Not having a clear strategy
• Poor communication with the seller
• Buying above your budget
• Not looking beyond the multiple
• Sloppy due diligence
• Not executing a smooth transition

Not Having a Clear Strategy

When you start a business, it’s important to have a clear strategy. The same is true when you acquire a business. 

Without a clear strategy, it’s difficult to make smart decisions that align with your goals. Answering a few key questions helps you identify what businesses meet your investment criteria.

• Are you qualified to run the business yourself?
• Do you know how to manage a team that runs the business for you?
• Is there a clear growth strategy in place?
• What are your financial goals (i.e. short-term cash flow vs. long-term investment)?

“Without a clear strategy, it’s difficult to make smart decisions that align with your goals.”

When evaluating businesses to buy, it’s important to imagine how business operations will be handled under your ownership. If you’re qualified to run the business and have the time, then great! You probably won’t need to rely on others.  

However, if the business model is new to you, you may want to have a clear strategy for either hiring a manager or learning how to manage the business yourself. If that’s the case, you’ll need to have the skills to manage others.

In addition to understanding the daily operations of the business, it’s also important to have an effective growth plan in place. If it’s an e-commerce business, perhaps you’ll seek to expand a new ecommerce platform, improve its conversion rate, add payment options, reduce cart abandonment, launch Facebook ads, grow its social media presence, or optimize the checkout process. 

If you’re buying a SaaS site, maybe you’ll try to improve the sales process, increase the customer lifetime value, improve the user experience, reduce unhappy customers, capitalize on content marketing, or expand your customer base and target audience through improving your marketing strategy. Regardless of the industry, it’s wise to have clarity when taking over the ownership role. 

Another key consideration is the financial implications of buying a business. Ask yourself how the business will fit into your personal financial strategy. Will you rely on it as a steady source of income to cover your personal expenses each month? Or, will you reinvest the profits to grow a small business to sell it in the future? Your answers to such questions will inform you of what kind of business makes the most sense for you to buy. 

Poor Communication with the Seller

Some potential buyers think that all they need to do is make an offer and the deal is done. However, that couldn’t be further from the truth. 

“When working with a seller, it’s important to ask good questions and show genuine interest in their story throughout the buying process.”

Poor communication is another common mistake when buying  an online business. Sellers are human beings who care about more than just receiving a nice check when the deal is done. They want to understand who the buyer is, and feel like the next online business owner will take good care of the asset they’ve built. If you, the seller, are all numbers and no personality, there’s a good chance your offer will be rejected.

When working with a seller, it’s important to ask good questions and show genuine interest in their story throughout the buying process. If they feel that you appreciate their journey and have the necessary skills to grow the business, you’ll have a much better chance of having your offer accepted.

Buying Above Your Budget

Buying above your budget is one of those bad business habits that can get you into trouble. This is especially true if the business requires further investment to grow after the acquisition.

Like all purchases, it’s important to look critically at the numbers in order to identify what you can comfortably afford. You wouldn’t want to buy a house that leaves you struggling to make mortgage payments. The same is true for business acquisitions. 

“Like all purchases, it’s important to look critically at the numbers in order to identify what you can comfortably afford.”

Not Looking Beyond the Multiple

Every buyer wants to buy a business at a low multiple. In general, businesses valued at a lower multiple are often viewed as being better deals for buyers.

“When you look solely at the multiple, you fail to recognize the multitude of other variables that ultimately determine its desirability.”

While a low multiple may indicate that a deal is promising, it is by no means a singularly important variable. A business valued at a low multiple may be a great deal or a terrible deal. The same is true for businesses valued at a high multiple.

When you look solely at the multiple, you fail to recognize the multitude of other variables that ultimately determine its desirability. If you look only at businesses that have low multiples, you may miss out on golden opportunities.

Sloppy Due Diligence

Due diligence is your opportunity to validate the owner’s claims and understand the businesses on a deeper level. When you navigate the process effectively, you accomplish exactly that. However, with the wrong approach, things can go awry.

There are two general ways you can ‘mess up’ due diligence:

• Not looking critically at the business
• Mistreating the seller

If you don’t take advantage of the opportunity to examine the business, critical information could slip through your fingers. Every business has details and metrics that are important to understand. Whether you’re buying an eCommerce site or content business, make sure to verify the relevant information.

“Due diligence is your opportunity to validate the owner’s claims and understand the businesses on a deeper level.”

For example, it’s important to understand how an ecommerce website engages with each potential customer, as well as its customer service protocol. Due diligence is an opportunity to learn about such processes, as well as its overall business plan.

The other mistake buyers make is more sinister in nature. Unfortunately, some buyers use the due diligence process as an opportunity to pick apart the business. They look for any possible reason to claim that the business is less valuable in order to renegotiate the deal.

Do not try to take advantage of a seller who has accepted your offer. Of course, if you identify a legitimate concern during the process, you have every right to bring it up. However, don’t try to sneak your way into a better deal by making unreasonable claims or accusations. A smart buyer and business broker will see right through the unethical behavior.

Not Executing a Smooth Transition

After the contracts are signed, it’s time to complete the transition process. During this stage, it’s critical that you’re attentive, professional, and action-oriented. 

Often, there’s a thirty-day training period following the sale, although the timeframe can vary. Think of this period as a once-in-a-lifetime opportunity to learn as much as possible from the previous owner.

If a busy buyer fails to plan ahead, they may not be able to direct their full attention to the transition process. This is a major failure on their part. Not only would they lose the chance to learn from the seller, but they’d also make a poor first impression with the staff they’re going to manage.

When you buy a business, you should approach the situation just as you would a new job. Be responsive, ask good questions, and make sure that the team likes and respects you. Sometimes, this may require you to carve out considerable time in your schedule for a month or more. 

What to Consider When Buying an Online Business

When buying an existing business, it’s important to know what to look for. More than likely, your own personal skills and situation will inform what business is best for you to acquire.

There are several key considerations when buying an online business. Some of these include:

• Skillset
• Investment strategy
• Budget

What is Your Skillset?

Typically, it’s a wise idea to buy a business that uses a model that you’re familiar with. There are certainly exceptions, but often, industry knowledge gives you a clear advantage.

If you’re an entrepreneur who has extensive experience with an e commerce website, you may want to consider acquiring an online store that you would already feel confident managing. On the other hand, if SaaS is your specialty, it might make more sense for you to look for software businesses that match your criteria. Needless to say, if you have industry know-how, the seller will view you as a more qualified buyer.

What if you aren’t very experienced with online business?

If you’re not already a savvy online businessperson, there are certainly still great opportunities for you. However, you’ll want to make sure that you feel confident learning the necessary skills, as well as having reliable support or mentorship.

What is Your Investment Strategy?

It’s important to identify your goals when acquiring an online business. Two common acquisition objectives include:

• Buying a business to provide cash flow for other purposes
• Acquiring a business for long-term investment purposes

If you’re buying a business to fund your lifestyle, you probably want to find one that will allow you to extract sufficient cash without compromising its continued profitability. You also want the business to be relatively stable.

On the other hand, if your goal is to multiply the value of your asset for future gains, you’ll likely want to prioritize growth potential. In such cases, you might be willing to buy a business that has higher risks or requires continual reinvestment. Each of these are important elements in the process of valuing a business. 

How Will You Finance Your Purchase?

Your financing strategy will also affect your purchasing decision. If you’re buying with cash, you’ll have a lot more options. If you’re planning on using an SBA loan or seller financing, your options will be a bit more limited.

Some small business owners are more apt to accept seller financing than others. If the seller is highly motivated or the business is in distress, owner financing may be an option.  

SBA loans are extended to buyers who satisfy the SBA loan requirements. 

What is Your Budget?

Of course, your budget is a critical consideration when buying an online business. Failing to establish a budget is another common mistake when buying a business.

It’s generally advisable to establish your budget before looking at specific businesses. Your cash availability, funding sources, and the specific business idea all impact your buying budget.

Many buyers find it helpful to establish a business buying checklist before evaluating business acquisition opportunities.

Red Flags to Avoid When Buying an Online Business

Knowing what to look for is important, but it’s also critical to know common mistakes when buying an online business, and how to avoid them. There are a few red flags that you should steer clear of when looking for acquisition opportunities:

• Lack of growth potential
• High risks
• Poor documentation
• Barriers to transferability
• Dishonest sellers

If you’re like most buyers, you want to buy a business that has strong growth potential. If a business has exhausted its avenues for growth, you may want to look elsewhere. 

“Effective documentation makes it much easier to take over a new business.”

A high level of risk is another red flag that you probably want to avoid. If a business earns most of its revenue from a single product, it’s safe to assume that it’s a risky business. The same is true if the business is quickly losing market share to its competitors.

Effective documentation makes it much easier to take over a new business. If an online business is disorganized, it might be worth moving on to the next opportunity.

Some businesses are more transferable than others. For example, a business that relies on the owner’s personality will be much more difficult to successfully grow. Be wary of businesses that require the current owner’s continual involvement. 

Dishonesty is obviously a huge red flag. If you suspect that the seller is a scammer, it doesn’t matter how good their business looks on paper. Make sure you’re dealing with someone who is honest and has integrity. Exiting business ventures should always be done with complete transparency. 

In addition to learning various buying skillsets, these red flags can help you identify great deals and avoid the bad ones.  

Tips to Mitigate Issues After Buying a Troubled Online Business

Most buyers look for businesses that have positive growth trajectories. However, there are some who seek to acquire distressed companies in order to turn them around and realize a high ROI.

Troubled online businesses will often come with issues. While the kinds of issues can vary greatly, there are a few tips that apply to most of them:

• Eliminate wasteful spending
• Replace employees or contractors who don’t perform well
• Reengineer troubled supply chains
• Discontinue unprofitable products
• Take advantage of growth opportunities

Managing a troubled business requires eliminating all of the elements that are causing issues. Often, it is best to establish a clear strategy when negotiating a transition plan with the previous owner. When done successfully, you may be able to avoid much of the financial stress associated with a struggling business. 

In summary, understanding common mistakes when buying an online business will help you navigate the process more smoothly and successfully. By establishing smart criteria and setting clear goals, you’ll be in a great position to acquire a promising online business.