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Killing Risk: Developing Your Due Diligence System
By Quiet Light
While buying an Internet business can offer great returns on your investment, it also comes with significant risk. Buyers who make bad decisions can quickly see their investment evaporate to a point where they are left with little to no value.
The key to protecting yourself against risk is to develop a strong due diligence system. But what is involved in creating a due diligence system? How does one begin to formulate a system for buying websites?
We were joined by Justin Gilchrist of Centurica for a fantastic presentation on developing a due diligence system to eliminate risk from your buying process. In this system Justin focused primarily on developing a “stoplight” system for evaluating the subjective side of due diligence.
What Is Subjective Due Diligence?
When most buyers consider due diligence, they consider the objective aspects of due diligence: do the financials verify, is the traffic legitimate, will the vendors transfer, etc. These are, of course, highly important.
However, it is just as important to evaluate several subjective criteria as well. For example:
- Do I believe this industry is going in the correct direction? Years ago we saw a lot of sellers who wanted to sell their MySpace custom background websites. Obviously we did not take them as clients since this was a dying industry.
- Do I want to work in this particular industry? A business may have great numbers, but the industry may be one that you simply do not enjoy. For some people this doesn’t influence their passion for business, but for others it can become an achilles heel to the success of the business.
- What style of business do I want? Running an inventory based e-commerce shop is significantly different than owning a subscription-based educational website. But both will be listed as “Internet businesses”. Get to know the business format you are drawn to, and eliminate those that won’t work.
In the presentation Justin examines several other highly important criteria that you will want to consider.