Due diligence: Auditing Profit

Profit Verification

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Continued from Profit Evaluation:

Caveats when evaluating the profits of a business

- Screen shots can be forged! And one doesn't even need to be adept at Photoshop. This site, for example, will forge a screenshot of Adsense earnings to whatever figure the user wants! Developers have tools like Firebug that can do the same thing.

- Treat every claim with scepticism. If you can't verify it then it's not true. Even Adsense stats can be verified - see below.

- You can use screen sharing software to see - live - what's on another person's screen. This is particularly useful in situations where the seller is understandably reluctant to provide his login for someone else to use - like Adsense. Crossloop seems to be a good program for this.

- Hidden perks: A hardware site claiming it gets free hardware to review (and keep), a software site claiming similar free software gifts, a book review site claiming free books, a holiday review company claiming it gets free holidays ... may sometimes try to sneak those perks in as earnings. If they are not regular incomes in cash that appear in the statements, can be proven and can be quantified then their value contribution is safely ignored.

- Off the record "cash" income: It's illegal, it's unquantifiable and it's not something that should ever be assumed as part of the profit. It's best to make clear to the seller right at the start that any unproven, off the record income is not going to play any part in your valuation of the site.

- Be conservative, be conservative, be conservative. When approximations, estimations or projections need to be made, make them on the conservative side in your favour.

- Learn to distinguish the site-facts from the site-frauds. Claims that the relevant keywords are searched for 100 million times a month, that the main keyword costs $15 a go in Adwords, that the product itself costs $50K a pop are distractions. Even if they are technically true the fact that they are being used to talk up a price make them frauds. Those figures have nothing to do with the site itself but refer to the general market. It's as good as saying I own a help site for MS Windows and since Windows helped make Bill Gates the richest man in the world this site can make you fabulously, stinking rich.

- There are third party programs - such as spyfu - that allow you to spy into what keywords a site is using to advertise. Spyfu also tells you what keywords the site is ranking organically for, who its competitors are and other useful information. Spyfu does offer some free information but the paid option offers a much better insight and is good value. Confirm that what the site claims to be doing with PPC is what they are really doing.

- I made $500 last month is not the same as I make $500 a month. Too often sellers try to project a particular month's profit as a steady regular income. It's a lot more difficult to generate regular, long term income than to show a flash in the pan.

- Check the figures behind "average income". Sellers choose a favourable time frame for averages. Compute what that the average would be over six months, a year and three years.

- Don't assume scalability. A site spending $50 in Adwords Pay Per Click per month and making a profit of $100 won't automatically make $100,000 if the ad spend increases to $50,000 (even if Adwords can really send that much of traffic).

(more to come later - please bear with us, we are working on this page)

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