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If you plan to buy an online business, you must perform due diligence to protect your investment.
A successful e-commerce business can be an excellent investment, but there are many moving parts and important details to verify. We’ve created this e-commerce due diligence checklist to help make the process smoother.
Want a downloadable PDF copy of this due diligence checklist for e-commerce websites? Subscribe to our email list and get it as a free bonus.
Ecommerce Due Diligence Checklist
Want a downloadable PDF copy of this due diligence checklist for e-commerce websites? Subscribe to our email list and get it as a free bonus.
What You’ll Need to Perform Due Diligence
To complete this due diligence checklist, you’ll need:
- Access to the site’s Google Analytics reports (or other analytics programs)
- Financials provided by the seller
- Customer reports provided by the seller
- Semrush or Ahrefs
Note: The following due diligence checklist is intended to be thorough, but it’s important to remember that the size of the deal will likely impact the level of due diligence needed. For example, due diligence for a $25 million acquisition will be more intense than for a $25k purchase. For small deals, sellers may hesitate to provide data for extensive due diligence.
It’s a good idea to start the due diligence process by evaluating the products sold. Of course, the products are the heart and soul of an e-commerce business and are critical for its long-term sustainability and profitability.
At this stage, you’ll need to get familiar with the products, especially the top sellers. If possible, get access to some of the products so you can evaluate them firsthand. The seller may be willing to provide you with some product samples, or you may want to buy some to test.
1. Product Categories
What categories do the products fall into? Does the site sell a wide range of products (like Amazon or Walmart, for example), or is it focused on a particular type of product or niche?
The product categories should be a good fit for the type of business you want to run. Many buyers prefer a tightly focused niche approach, allowing a business to become an authority or go-to brand within that niche.
2. Expansion Opportunities
If you’re buying an e-commerce business, you’ll want to know that you can grow it and increase profitability. Evaluating the possibilities for expansion provides insights into the business’s potential for growth.
Are there other products that can be created within the existing categories? Are there different product variations that allow for expansion? Can you expand into other closely related categories that would appeal to the same target audience?
If the business already has an established customer base, creating more products to market to the same audience is one of the best and most practical ways to grow.
3. Market Trends
Understanding the current market trends and the competitive landscape is crucial for assessing the business’s potential for success. Industry reports can provide valuable data on market size, growth rate, and trends.
These metrics offer a bird’s-eye view of the marketplace, helping you evaluate whether the business is operating in a growing, stable, or declining industry.
✅ Passing Grade: The product categories are closely related and would appeal to a specific target audience. There are opportunities to add new products and/or variations of existing products. And the industry is stable or growing.
❌ Failing Grade: The product categories are scattered, and there’s no clear target audience who would be interested in products across multiple categories. Or, the expansion opportunities are minimal because the site already sells all of the relevant products within its categories. Or the industry is declining.
Diving into the operational aspects of an e-commerce business allows you to understand the efficiency, scalability, and potential pain points. Of course, you can make changes after acquiring the business, but you need to understand the current process first.
1. Inventory Management
One of the pillars of a successful e-commerce business is efficient inventory management. This includes details like where the inventory is stored, how inventory levels are tracked, when the inventory is replenished, and how inventory is inspected after manufacturing.
As an e-commerce business grows, inventory management is extremely important. The process must be scalable if you plan to add more products into the mix.
Additionally, the storage conditions of the inventory—whether it’s stored in-house, drop-shipped, or managed by third-party logistics—can impact overall operational costs and efficiency.
Examining supplier relationships is vital, as they can influence product quality, lead times, and pricing.
2. Order Fulfillment Process
The order fulfillment process is critical to the success of any e-commerce business. Today’s shoppers expect to receive orders quickly.
Analyze the length of time it takes for orders to be fulfilled, average shipping time, the prevalence of back-orders, and the reliability of shipping partners.
Delays in shipping or frequent stock-outs can be red flags, indicating supply chain inefficiencies or forecasting errors.
3. Employee and Contractor Details
You’ll need to know how many employees and contractors are needed to run the business, where they’re located, their roles, and how much they’re paid.
You’ll also need to know if the current team members are interested in continuing to work for you after the acquisition. If they’re not staying, you must have a plan for continuing to run the business in their absence.
Of course, the complexities of this will vary depending on the size and structure of the business. If it’s a small organization with only a few team members, the process is generally easier than evaluating a business with a larger team.
4. Technology Stack
Evaluate the technology and platforms that power the business, including the content management system (CMS), shopping cart, payment processors, email marketing provider, plugins, and other programs or systems critical to the business.
Some of these details are easier to change than others. You’ll need to be sure that you can continue to use the same technology or that moving to your preferred alternative is feasible.
5. Customer Support
Last but certainly not least, understanding the quality and efficiency of customer support can offer insights into customer satisfaction. You’ll need to know who is responsible for customer service and what platform or system is used to accept and manage customer requests.
Review metrics like average response time, resolution time, and the channels used (e.g., email, chat, phone). Look at what existing customers post online, not just the details provided by the company. Check reviews on Trustpilot, Google, Facebook, and more.
Superior customer support can be a significant advantage for an e-commerce business, and bad support leads to negative revenues and missed opportunities.
✅ Passing Grade: The overall operations are streamlined and clearly defined. A change in ownership will not significantly impact business operations, and team members are in place and can continue to operate in the same way. Minor issues that can be overcome may provide opportunities for improvement that will lead to higher profits.
❌ Failing Grade: Major issues with any of the factors listed in this section could be enough to deter you from buying the business.
Marketing & Traffic
No matter how exceptional a product is or how streamlined the operations are, an e-commerce business’s viability ultimately rests on attracting and retaining customers. Marketing and traffic metrics offer invaluable insights into a business’s reach, cost-efficiency, and the long-term value it derives from its customer base.
1. Traffic Trends
Of course, website traffic is essential for any e-commerce business. Check Google Analytics (or whatever analytics program the seller uses) to check the overall traffic trends. Is the site’s traffic trending up or down?
It’s also worthwhile to check the average value of a visitor and see if that’s trending up or down or holding steady. Take the monthly revenue and divide it by the number of monthly visitors to get the average value of each visit.
Note: It’s essential to recognize that many e-commerce businesses are seasonal or have some level of seasonal impact. Analyzing traffic trends over different time frames—monthly, quarterly, and yearly—can offer significant insights into seasonality, the effectiveness of marketing campaigns, and overall market interest. When looking at the short-term, it may seem that the site’s traffic is trending up or down when seasonal impact is the cause.
2. Analytics and Traffic Data
After evaluating trends, it’s important to look at other analytics data. Check key performance indicators like traffic sources, bounce rates, average session duration, and conversion rates. These metrics can shed light on the user experience and the effectiveness of the existing sales funnel.
You may find some red flags here, but you can also find areas for improvement that will lead to higher profit.
3. Customer Acquisition Costs (CAC)
Understanding how much it costs to acquire a new customer is crucial for any e-commerce business. Break down the Customer Acquisition Cost by various marketing channels—such as paid search, organic, social media—to understand which avenues offer the most cost-efficient acquisition.
A high CAC relative to the lifetime value of a customer can spell trouble for the long-term profitability of the business. On the other hand, a low CAC may indicate that there’s room for growth.
4. Customer Lifetime Value (CLV)
On the flip side of acquisition cost is the Customer Lifetime Value, which indicates how much revenue a customer is expected to generate throughout their entire relationship with the business.
A high CLV relative to CAC confirms a healthy profit margin and suggests strong customer loyalty and repeat business. A low CLV relative to CAC may be a warning sign that something needs to be improved.
5. SEO Metrics
Search engine optimization (SEO) is usually a major source of free traffic for e-commerce businesses. Use a tool like Semrush or Ahrefs to check the site’s SEO health. You can see what pages are getting the most search traffic, what search queries are driving traffic, and where the site ranks for important keywords.
Ideally, you’ll find some opportunities for improvement and growth. For example, if the site ranks between #5-10 for a lot of keywords, you may be able to drastically increase traffic with better SEO. Getting those pages to rank #1-5 would result in exponentially more traffic with only modest improvement in rankings.
6. Link Profile
A site’s link profile (the other site’s linking to it) is extremely important for SEO. Before buying a website or online business, you should check the site’s inbound links and look for any red flags.
Semrush‘s Backlink Audit Tool provides a Toxicity Score of 0-100. Enter the website’s URL and run the audit to see the site’s score. If it’s in the red, Semrush thinks the site has a high percentage of toxic links, which is bad for SEO.
Note: All established websites will have some spammy links. Google generally ignores these links rather than penalizing the site for them. However, if the toxicity is too high, the site could be vulnerable to a penalty or a significant drop in an upcoming Google algorithm update. Semrush’s link toxicity tool is helpful because it provides a score and indicates if you should be concerned.
7. Email Marketing
With one of the highest ROIs among marketing channels, email marketing should not be overlooked. Check the email list size, subscriber growth rate, and engagement metrics like open and click-through rates. These metrics can provide insights into the quality of the email list and the effectiveness of email marketing strategies.
Also, evaluate the email marketing strategies, including:
- How email subscribers are being enticed and collected
- The sequence of emails new subscribers receive automatically
- The frequency of broadcasts that are sent to the list
- The types of emails that are sent
- Any segmenting that’s used to organize the list
Evaluate the current approach and see if there are ways to improve it.
8. Social Media Presence
Social media is another important aspect of marketing for an e-commerce business. A strong social media presence can indicate brand health and customer loyalty.
Start by looking at the platforms where the brand has an active presence. Review the performance analytics across those platforms and evaluate engagement rates.
Look at the types of content the brand uses on social media and the frequency of posts. Are there opportunities for improvement on the platforms that are already being used? Are there other platforms that could be used to reach the target audience?
✅ Passing Grade: The healthy trends and metrics indicate that the business should continue its current trajectory. Customer Acquisition Costs (CAC) are low relative to Customer Lifetime Value (CLV), meaning that the business can continue to grow through proper marketing. The SEO, email, and social media aspects are stable or present minor issues that provide room for improvement.
❌ Failing Grade: Negative traffic trends (factoring in seasonality) are a cause for concern and may be a deal killer if severe. High CAC relative to CLV is another area of significant concern that may indicate poor health. Toxic links can also be a major problem that should cause concern. Other SEO, email, and social media results can be improved, so minor issues should not cause you to walk away from the deal.
If you’re considering buying an e-commerce business, one of the most invaluable resources at your disposal is customer data. This data will show who the customers are, what they respond to, and how loyal they are to the brand.
1. Customer Demographics
Start by examining the demographic profile of the existing customer base. Data on gender, age, geography, and other factors offer rich insights into who the business is currently serving.
Demographic information can help you gauge whether the existing customer persona aligns with your vision for the business and whether there are untapped markets you could explore after buying the business.
It can also help you determine what additional products or product categories may interest your customers. And you can also use this data to see if the business’s current branding effectively speaks to the audience it serves.
2. Customer Behavior
Dig deeper into customer purchase histories and buying patterns. Are customers making one-time purchases, or are they coming back for more? How much money are they spending on their first purchase compared to repeat purchases? What’s the frequency and seasonality of these purchases?
This data is useful because it can highlight potential revenue streams and areas where the business might be leaving money on the table. You can also learn how customers feel about their purchases based on additional purchases they do or do not make. You may find potential issues or areas of concern, for example, a high percentage of one-time customers with few repeat orders of a consumable product.
3. Customer Retention Rates
Another crucial data point to examine is the customer retention rate. A high retention rate indicates customer satisfaction, while a low retention rate could be a red flag.
The cost to acquire a new customer usually far exceeds the cost to retain an existing one. As a result, this is a key metric in assessing the value proposition of the business you’re looking to buy.
New marketing methods or ways to attract customers may be extremely valuable if retention rates are high.
✅ Passing Grade: Demographic information shows a clear user profile, or multiple user profiles, that you can use to know how to reach the target audience. The existing customers show appreciation for the brand’s products by returning to buy more after the initial purchase.
❌ Failing Grade: The scattered demographic data does not help you to know who the average customer is, making it difficult to market the products. Customer behavior shows that most purchases are small and one-time, indicating a lack of affinity for the brand.
When evaluating an e-commerce business, the financial statements are among the most critical factors in your decision. With many moving parts and complicated metrics to analyze, it’s essential to break down these numbers to get a clear picture of where the business currently stands and its growth potential.
Each aspect of the financial due diligence is independent, so we’ll look at passing and failing grades individually rather than for the overall financials.
1. Profit and Loss Statements
Start by examining the Profit and Loss (P&L) statements for at least the last three years. This will provide insights into the company’s revenue streams, cost structure, and profitability.
Look for revenue growth or contraction trends, as well as operating cost fluctuations. A stable or increasing revenue coupled with controlled expenses may indicate a healthy business. On the other hand, erratic or declining figures can be red flags that require further investigation.
✅ Passing Grade: The business has had steady revenue growth over the past few years, while expenses have stayed relatively stable. Profits are consistently positive and growing year-over-year.
❌ Failing Grade: Revenue has stagnated or declined for multiple years, with increasing expenses that have eaten away at profits. This trend indicates that the company is struggling to remain competitive.
2. Balance Sheets
Review the balance sheets to comprehensively view the business’s assets, liabilities, and equity. Assets should ideally outweigh liabilities, providing you with the working capital needed to operate the business.
Pay particular attention to inventory levels. Excessive stock could mean poor inventory turnover or possibly obsolete goods. Conversely, low inventory levels could indicate stronger-than-expected sales or ineffective inventory management.
Also pay attention to the ratio between current assets (cash and other liquid assets) and current liabilities (short-term debt). This indicates how well the business can cover its short-term obligations.
✅ Passing Grade: The P&L statements show steady, increasing revenue with controlled expenses, indicating a healthy business. The balance sheets reveal high asset levels and a favorable current assets to current liabilities ratio. Inventory turnover looks good, with no excessive amounts of stock.
❌ Failing Grade: The P&L statements show erratic or declining figures, which could indicate a struggling business. Balance sheets reveal low asset levels and an unfavorable current assets to current liabilities ratio. Inventory turnover is poor, with excess stock that has been sitting for a while.
3. Cash Flow Statements
Reviewing the cash flow statements will help you understand how money moves in and out of the business and if there are enough funds to cover operations.
Cash flow can be a significant challenge for e-commerce businesses (more than most other online business models) because of the amount of time between when inventory is purchased and when the business ultimately sells it and receives payment from the customer.
Adding new products can present additional challenges, as stock may need to be purchased in advance despite uncertainty about how much of the product will be sold or how fast it will sell. Proper cash flow management is essential for a successful e-commerce business, especially one attempting to grow quickly.
✅ Passing Grade: Cash flow statements show good liquidity and adequate funds for operations. The company has been able to manage cash flows, such as purchasing inventory and receiving payments from customers efficiently.
❌ Failing Grade: Cash flow statements show inadequate funds for operations or planned growth.
4. Tax Returns and Filings
It’s important to review the business’s tax returns and filings for accuracy. These statements may have discrepancies or inaccuracies that could potentially result in problems with the IRS or state authorities.
✅ Passing Grade: Tax returns and filings are up-to-date and accurate with no discrepancies. The business has a clean record of compliance with all government regulations.
❌ Failing Grade: Tax returns or filings are not current, and there may be discrepancies in the reported figures.
Reputation & Legal
It’s also important to look for any potential legal issues you could face if you purchase the business. We’ll also include reputation in this section because legal issues and reputation sometimes overlap.
1. Business Licenses and Permits
Check whether the business has all the necessary permits and licenses to operate in its current location. The absence of critical permits could result in hefty fines or legal actions that could disrupt business operations and tarnish the brand.
Check for federal and local requirements and industry-specific certifications to ensure you’re inheriting a fully compliant operation.
2. Intellectual Property
Review the business’s intellectual property, including patents, trademarks, and copyrights. Make sure there are no infringements or potential liabilities related to these assets.
You’ll also want to investigate whether the company is using any third-party material that could be subject to copyright infringement or licensing fees. This could include copyright-protected images or videos used on the website or unlicensed products that violate someone else’s intellectual property.
3. Contracts and Agreements
Analyze any contracts or agreements the business may have with suppliers, vendors, partners, contractors, and customers. Ensure there are no contractual obligations you cannot fulfill after purchasing the business.
4. Pending or Past Litigations
Be aware of any pending or past litigations involving the business. Legal disputes can be both financially and reputationally damaging. Even if a past litigation was resolved, the circumstances surrounding it can provide valuable insights into potential operational or ethical issues within the business.
5. Online Reputation and Reviews
A business’s online reputation can significantly impact customer trust, especially for first-time customers without personal experience with the company.
Look at customer reviews on platforms like Trustpilot, Google, and Facebook, as well as social media mentions. A high number of negative reviews, especially if they cite recurring issues, could indicate underlying problems in product quality, customer service, or operations.
✅ Passing Grade: The business has all the required licenses and permits, does not cause any significant legal concerns or threats, and has a strong online reputation.
❌ Failing Grade: The business does not have the required permits or licenses, you have concerns about the possibility of litigation or legal issues, or the brand has a large percentage of negative reviews online.
Before buying a business, evaluating the current owner is essential. You’ll want to know that you can trust the person selling you the business and that they will be forthcoming throughout the process. You should also evaluate the owner’s role in the current operation of the business to see how you will be impacted when they’re removed.
1. Key Man Risk
Key man risk involves the business’ dependence on its owner for day-to-day operations and the business’s success. This is especially relevant to small online businesses where the owner plays a major role in daily operations.
You need to identify what skills, relationships, or knowledge the owner has that are critical to the business. Then, assess how easily these can be transferred or replicated once ownership changes. The more reliant a business is on its owner, the more risk you assume in the transition period following an acquisition.
If the business owner plans to leave after the sale, you’ll want to ensure there isn’t too much risk associated with their departure. This means evaluating whether the company has a solid team and operational processes that can take over when the owner departs.
It’s also important to evaluate the character of the owner. Are they reliable and willing to answer questions or provide documentation when requested? Do they have a track record of successful and ethical business dealings?
While legal contracts will provide some protection, the integrity of the person you’re dealing with is also important. Gauge their character through multiple interactions and consider doing a background check or requesting references from industry peers or associates.
Evaluating the owner or seller may not be as straightforward as reviewing spreadsheets or contracts, but it’s an indispensable part of your due diligence process. Their role and integrity can dramatically impact the ease of transition and the future success of the business you’re planning to acquire.
✅ Passing Grade: Your evaluations indicate that the current owner is honest and ethical, and the business can function as needed without the owner’s presence.
❌ Failing Grade: You have concerns or discover significant red flags regarding the owner’s character, or the owner’s absence would present major challenges for daily operations.
Ecommerce Due Diligence Checklist: Final Thoughts
Evaluating an e-commerce business before you buy can be complex and time-consuming. However, it’s essential to ensure you’re getting what you pay for and that the transaction is in your best interests.
Following this buyer due diligence checklist helps to ensure no important factors are overlooked when assessing the opportunity. You can make the most informed decision possible when buying an ecommerce website with thorough research and analysis.
Download the Due Diligence Checklist for Ecommerce Websites
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