Checklist for the Evaluation of an Internet Business

I recently received an email asking us to value an online business and I developed a list of information that you should get to ascertain whether it is worth continuing in your investigations of the business.

When we are examining a business for business valuations or commercial litigation, we look at the financial statements, tax returns etc for the story that they tell about the business and comparing that to the story of the owners of the business.

Ideally those stories should agree, but it is not always the case.

Online businesses can be difficult to evaluate and appraise because often there is no physical presence. The site is hosted on a shared server, the software upon which the site is based is either free or used under licence. Is some cases there is no stock to count, no customers to see walking through the doors.

In fact, all the important measurement tasks rely upon others to collect the information. So how can you be sure that the information is correct, that you are being scammed, conned or not told the whole story.

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Statement of No Advice

We have been amazed at the number of people who are being asked to sign a "Statement of No Advice" by their financial Advisors. Why would the advisors ask you to do that? They don't have to take responsibility for…

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Using the Internet for Litigation Research

We use Google and the internet  as a valuable research tool in almost all our forensic accounting litigation matters. The information available enables us to check the stories of both the plaintiff and defendant against other sources of information.

Financial Statements tell a storyforensic_numbers

As forensic accountants, one of the first places we examine is the financial statements and income tax returns. To us they tell a story. The financial statements are a record of all the transactions of the business. We examine the trends and ratios of a business –

  • Are they consistent with a business of this type?
  • Are they consistent with the alleged activities and events of the parties?
  • Is there cash not being declared?
  • How is the business financed?
  • Is the growth or decline of the business consistent with other ratios and transactions in the business?

Use of the Internet as a Research Tool.

Once we have examined the alleged facts and the financial statements, we look to the internet to provide us with further confirmation of the facts and financial statements. The following is available on the internet:

Google

A simple google search of the individuals and the companies involved. We have found the following from a simple searches that only take a few minutes:

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Business Valuation Rules of Thumb

Rules of Thumb in business valuations almost always benefit the seller of a business. Rules of thumb are often used to justify or validate the value of a business that is either unprofitable or uneconomic.

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