6 Red Flags Found During 50+ Due Diligence Reports

After analyzing hundreds of businesses for sales, we've shortlisted major red flags during due diligence. Here are our findings.

Since the inception of our M&A agency, WebAcquisition.com, we’ve completed 50+ due diligence reports spanning all niches and types of online businesses. 

As our specialty is niche sites, most of our due diligence reports were for content-based blogs earning mainly from display ads and affiliate revenue.

Over the last 12 months, we are pleased to report that we were able to save hundreds of thousands for our clients by either advising them not to proceed with the purchase or warning them about the best approach to negotiating the price down based on our findings.

Here is a broad outline of our due diligence process:

  • Background check – We gather as much information as possible about the site, the domain history, and the owners themselves.
  • Revenue analysis – We delve deep into this aspect, always double and triple-checking all revenue data provided by the seller/brokerage.
  • Traffic and content analysis – While quite straightforward, it is crucial nowadays to recognize the true value of the content. Will it stand the test of time, or at least the next two years?
  • SEO analysis – Our focus is always on the backlinks, but we also cover other on-page SEO elements.
  • Niche analysis – We assess the strength of the competition and how much authority the site/business has within its niche.

Finally, our team, consisting of Mushfiq Sarker with 200+ exits, and Luka Juretic, who previously worked as a lead analyst at Investors Club, evaluating more than 500 businesses listed there from 2020 to 2023, was able to identify a few common red flags during the last 12 months. 

As these red flags are all equally important, they are presented in no particular order. Also, for obvious reasons, actual site names will not be mentioned in the article.

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pearl west amazon FBA acquisition firm
venture kite is a content website investment firm

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Double-check the P&L

This is your hard-earned money meant for investment, and it’s essential to exercise due diligence by carefully reviewing the Profit and Loss (P&L) statement, whether you’re making a purchase from an individual or utilizing a brokerage. While the P&L statements for content sites are typically simpler than those for e-commerce businesses, certain critical aspects should always be double-checked.

The primary concern revolves around the lack of standardized reporting in PnL statements, which can give rise to errors originating from both sellers and brokerages. Each brokerage utilizes its own P&L sheet so be sure to read the details on their sites. Additionally, there is the alarming possibility of encountering scams involving fabricated income data with counterfeit screenshots or revenue attributed to other websites and affiliate IDs.

During the last year, we encountered both situations and even conducted due diligence on one website where 30% of the revenue was misrepresented, and the potential deal was valued in the high six figures.

As for the expenses, in the niche site industry, profit margins consistently remain high, frequently exceeding 90%. However, it’s important to note that a significant portion of the expenses is allocated towards content and backlinks, which are often not included in the overall cost calculations. 

Additionally, many listings do not factor in essential expenses such as virtual assistants, publishers, and editors. We always advise our clients to account for these additional costs, especially if they do not already have a dedicated team working on other projects. 

Building a website operations team of writers, virtual assistants, and SEO experts can be expensive, particularly during the post-purchase phase, which is often the most labor-intensive period.

How We Analyze P&L

Based on our experience of examining thousands of listings over the past five years, we can estimate the site’s earnings just by looking at factors such as the niche, revenue sources, and traffic data.

Here is our simple step-by-step guide on how to “read” P&L and spot anomalies:

  1. If the P&L significantly deviates from our initial expectations, we dig deeper. First, we identify the primary revenue source, analyze the revenue timeline, identify outlier months (typically November-December), and assess the revenue trend.
  2. If everything checks out, we analyze the supporting data (screenshots, in some cases videos, etc.). If the deal is above 100k always do video verification.
  3. Display ads revenue is the easiest to verify. Simply compare the traffic data with the data from the screenshots provided by the display ads provider’s dashboard.
  4. Affiliate revenue can be a bit more challenging to double-check. If you suspect anything is amiss, always request a list of products sold using the respective affiliate ID. This is particularly important for the Amazon affiliate program; be sure to ask for a sheet containing all products sold under that AID. Sometimes, you will need to sign an NDA for this step.
  5. One of the things that sellers often overlook is the importance of asking questions. If you come across anything that doesn’t seem to fit, don’t hesitate to ask the seller for clarification.

Affiliate Earnings Red Flags

Faulty affiliate revenue has likely been the most frequently encountered red flag in our due diligence work over the last 12 months. Always make sure to double-check all affiliate networks, especially in alternative affiliate niches such as health and finance.

Undisclosed custom affiliate deals

We conducted due diligence for a large site in the healthy diet niche with over 30 affiliate deals. As you can imagine, verifying everything was a nightmare. While the site was listed with a well-known brokerage that was supposed to verify earnings, we discovered that 30% of the affiliate revenue was misrepresented. 

To elaborate, they had multiple sites in their portfolio in the same niche sharing the same affiliate deals. The reason behind this was their custom-tiered affiliate agreement where they earned a higher percentage from more sales. Having several sites with the same AID (affiliate ID’s) helped them achieve that. 

The most significant issue here is that our client was left in the dark, as neither the seller nor the brokerage disclosed this information.

Amazon Affiliate Revenue Red Flag

This point was previously mentioned in the heading above, but it’s crucial to reiterate the importance of double-checking the Amazon sheet containing the ordered products. While having unrelated products listed is not unusual, it becomes a concern when, for instance, you come across 20 vacuum cleaners sold through affiliate links in the bike niche. 

Some first-time sellers tend to use the same AID for multiple sites, and some sellers employ multiple AIDs for split testing purposes. Therefore, manually verifying the products ordered remains your safest approach. As a bonus tip, consider requesting video verification of the Amazon Affiliate Dashboard.

Some Brokerages Don’t Do Any Vetting

Yes, we are referring to Flippa. We recently conducted an easy wins teardown on a site that our client had purchased. Unfortunately, it became apparent, for various reasons, that the site was likely a scam. The significant disparity between traffic and revenue was quite evident. 

Since the listing was still active, we examined the revenue screenshots, and it became apparent that they were obviously fake. The scammer had been so “brave” that he merely falsified the revenue numbers while leaving the traffic and RPM figures unchanged.

You can always hire us to do a quick review, or seek advice from others; this type of scam shouldn’t work in 2023.


The “Conjoined Twins” Issue

During our due diligence process, we consistently perform background checks on the seller, examining their other ventures, websites, social profiles, companies, and more. Frequently, we encounter sellers who are not forthcoming about all the assets associated with the business they’re selling.

For instance, we recently conducted due diligence on a travel blog with over 200,000 monthly visitors, which had initially started as a personal blog. The seller listed only a generic, inactive Facebook page with no activity in the assets list, while in the same time, 15% of the traffic was coming from social media. 

Of course, there was a personal Instagram page with thousands of links pointing to the site. Our advice to the client was to ask for a discount of 15% off the listing price to account for this undisclosed asset, as this traffic could go at any time.. This is the beauty of due diligence, it saves you money!

In another example, we investigated a highly successful cooking blog that was listed for sale on a brokerage platform, with a price tag in the high six figures. 

During our examination, we found that the owner had transferred all the recipes and redirected 300+ URLs to another site three months before putting the blog up for sale. Surprisingly, this information was not mentioned anywhere in the listing. 

In conclusion, sellers may be enthusiastic about selling their businesses, but they often do not provide 100% honest information about what the business includes or what it included during the last 12 months (L12M). 

After all, when you purchase a website, it is based on the valuation period, and you want access to all the traffic and revenue sources that contributed to the site during that valuation period.

Does signing an NCC really help?

This is sometimes taken for granted, but in reality, we advise our clients that a signed non-compete clause doesn’t hold much weight in businesses under $1 million. To be frank, when you’re purchasing niche sites valued at up to $100,000, especially if they are relatively new, you should anticipate that the seller may attempt to replicate their success. 

Many individuals in the niche site community are based overseas, making it nearly impossible to address legal issues effectively. While you can attempt to use cease and desist letters, they will rarely work. So to conclude, a seller willing to sing non compete clause is not bringing additional value to the deal. 


Seasonality

Seasonality is typically easy to identify by examining the content or promoted products, especially in the case of affiliate sites, or by using Google Trends to track the performance of best performing keywords. The biggest challenge with seasonality lies in determining the site’s actual valuation.

For instance, we encountered a site on a tremendous growth that was also highly seasonal (gardening niche). The site was listed in September. 

This is where negotiation skills come into play, as it wouldn’t be fair for valuation purposes to solely rely on the last 12 months (L12M) or just the last few months, including the high season.

Unfortunately, we rarely come across fair valuations for such sites on brokerage platforms which is the reason why some of the sites sits idle for months.

In this case, we calculated an number that was way below brokerage valuation, explained our reasoning to both seller and buyer, and after a while the site was purchased. And, again we save a lot of money for our client 🙂

Here’s another interesting story: the site operated within the volleyball niche, take a look at Google Trends graph. Interest in the niche skyrocketed when the US women’s team reached the Olympics final, resulting in that particular month setting a revenue record and contributing to 30% of the annual revenue. 

We succeeded in excluding that month from the final valuation. However, the crucial lesson here is that neglecting such obscure details could have potentially cost our client $5k, as they would be at the mercy of Google updates for four years and the performance of our volleyball teams.


Traffic Red Flags

Direct traffic

If the site is not the “authority” site in the niche, there’s no reason for it to have more than 10% of direct traffic. Direct traffic can be problematic because it goes unaccounted for. While the transition to GA4 may resolve some of these issues, the best option is always to request Google Search Console (GSC) access.

If the site has more than 20% of direct traffic and it isn’t a significant brand, that’s something we warn our clients to be cautious about.

Social Traffic

On the other hand, having social traffic coming to your site is excellent, but it comes with its own set of issues. Social media traffic is rarely free, and you should request a detailed Standard Operating Procedure (SOP) from the seller on how they managed to attract social traffic. 

While most sellers are willing to cooperate with buyers, these costs are often not included in the PnL statement and can, therefore, affect the overall valuation from two perspectives.

First, it represents an additional cost and workload, not to mention another set of algorithms to worry about. 

Secondly, to maintain social media traffic activity, you cannot afford any downtime in posting, pinning, or sharing. Furthermore, the post-purchase period is often the busiest time.

Therefore, we always recommend that our clients come to an agreement with the seller to continue supporting them for at least two months after the purchase. This will provide you with ample time to catch up on tasks and continue improving social media traffic. Their time could be added as an extra cost to the final price, or you can choose to pay them on a monthly basis.


Unusual Revenue Sources

Sometimes, especially for lead generation and direct ads sites, it can be challenging to comprehend the source of all the revenue. 

Recently, we did a due diligence report for a site that claimed to earn 30% from a particular affiliate network, and the provided screenshots appeared legitimate. 

However, we have a secred check for any unusual revenue sources. We simply searched for the URL:”affiliate” on Google and found only one page with that term on the entire domain, which also didn’t rank for anything. 

After some investigation, we discovered that the revenue actually originated from a landing page on the affiliate partner’s site, not the site that was listed for sale. Again, that wasn’t mentioned in the listing.

Our recommendation to the client was to significantly discount those earnings, as the other site could remove that landing page at any time. 

The key lesson here is always to double-check any “unusual” revenue source. We have invested hundreds of hours reviewing deals, and even we are occasionally baffled by how some sites generate income.


AI Usage for Content Production

You probably waited for this one, but to be completely honest, some people tend to overcomplicate things. 

Some brokerages, like MotionInvest, deserve credit for having a FAQ section about AI usage. Of course, some sellers will be straightforward, and then it’s up to you to decide whether you want to purchase a site generated by AI. On the flip side, some sellers are not as forthright.

There have been debates on how to detect AI-generated content, but based on the sites listed in the past 6 months, it’s become quite easy to identify them just by examining the sitemap. 

Open the sitemap, and if you find more than 300 articles published in a year or if most of the URLs start with words like “how,” “is,” or “why,” you’re likely dealing with AI-generated content.

Our stance is that using AI for content is not necessarily a red flag if it’s disclosed, and the client is willing to proceed with the purchase.


301 Redirects

Using 301 redirects to enhance your domain, revive an expired domain, or merge two similar sites has become a common practice in the world of content sites. 

While debates continue regarding its effectiveness and whether it’s punishable, we believe that when executed properly with domains in the same niche, it shouldn’t cause significant harm to any of the sites. However, there are certain issues that we always caution our clients about.

High dependency on 301 redirects

The most significant red flag arises when a site has multiple 301 redirects that account for more than 50% of all do-follow backlinks from all referring domains with a Domain Rating (DR) above 20 (excluding web 2.0 domains like Blogspot). 

This situation can be likened to a ticking time bomb because your site lacks its own authority and relies heavily on the inherited authority from the 301 redirects. 

Additionally, we always verify the most significant 301 redirect using Wayback Machine and Ahrefs to confirm if the content has been transferred to the site that is being put up for sale. Unfortunately, these details are rarely mentioned in the listings.

Undisclosed 301 redirects

Secondly, some sellers do not disclose all redirects. Sometimes they may forget to mention a specific redirect, or in some cases, there might be a 301 redirect chain that isn’t listed in the additional assets. 

It’s crucial to always check the backlink profile of any digital asset you purchase. During our due diligence process, we conduct a comprehensive backlink analysis to identify and address such issues.


Conclusion

2023 is undoubtedly a buyer’s market. There are numerous websites listed on all major brokerages. However, red flags abound, including frequent Google updates, Google SGE, third-party cookie issues, and more. Over the past year, we have assisted clients in “protecting” their investments by identifying some of the red flags mentioned above.

Every site comes with its unique set of challenges, and the same holds true for different niches and business types. Through thorough due diligence, you won’t just identify red flags, but you’ll also gain a deeper understanding of your potential purchase beyond what’s presented in the listing.

Many of us are susceptible to “shiny object syndrome” and may overlook some of these red flags. 

That’s why you should hire us to prepare a comprehensive 25-30 page due diligence report, providing an additional set of eyes to assess that shiny object.

Due Diligence Services

These firms rely on our M&A expertise

These firms rely on our M&A expertise...

Venturr.io ecommerce firm
pearl west amazon FBA acquisition firm
venture kite is a content website investment firm

Hire our team to conduct due diligence on your online business acquisition.

Get a 20-page due diligence report jam-packed with insights.

Click your potential business type for details:

Photo of author

Mushfiq Sarker

Mushfiq is the founder and lead advisor at WebAcquistion M&A firm. He has actively transacted on 218+ website acquisitions since 2008. His expertise is in due diligence of content, Amazon, eCommerce, and SaaS businesses.