Ecommerce Due Diligence: A 9-Step Checklist To Do It Right

Conducting thorough due diligence when acquiring an ecommerce business is crucial for making the best decision and mitigating potential risks. Whether you're a seasoned investor or a first-time buyer, the due diligence process can help you understand the true value and the potential of a business you are interested in.

According to Boopos' CEO, Juan Ignacio García, the benefits of due diligence for buyers go beyond meeting a lender's requirement.

“They can also close a much better deal if they perform due diligence and then they can identify areas that need attention when managing the business once they take over.”

Ecommerce business due diligence checklist

Nate Ginsburg, CEO of Centurica, says there are different buckets of due diligence but only one ultimate objective.

“Financial, verifying the numbers, making sure that the revenues, expenses, and profit are what the seller is representing, as well as commercial diligence diving into the business. But for simplicity's sake, the most important thing to verify as a buyer is that the numbers are what the seller is representing,” says Ginsburg.  

A very important area to review is add-backs. Sellers are going to push for more add-backs, where professional firms can help you. According to Nate Ginsburg, from Centurica, it's quite common that they identify things that the seller is adding back that probably shouldn't be, and the buyer should push back on

Here's a simple 9-step checklist to ensure a successful acquisition:

1. Validate financial statements

2. Do a market analysis 

3. Ensure legal and regulatory compliance

4. Perform a customer analysis

5. Evaluate operational efficiency and scalability

6. Perform a traffic analysis

7. Analyze the business model

8. Evaluate tech infrastructure

9. Keep in mind the potential risks

1. Validate financial statements to prove financial health

First things first: understanding the financial situation of the company is key. This includes reviewing financial statements, bank statements, profit margins, cash flow, and revenue sources. 

Analyzing financial statements and records will provide insight into the business's revenue streams, expenses, and overall financial health. Pay close attention to any irregularities or discrepancies in the financial records, as they could indicate underlying issues that may affect the business's value or future business expenses.

Consider also looking at the following:

• Debt Analysis
• Tax Compliance and History
• Expense Breakdown
• Inventory levels and turnover rates

By understanding the business's financial performance, you can determine its value and potential for growth.

2. Do a market analysis to uncover opportunities

Understanding the market and industry in which the target business operates is essential for assessing its growth potential and competitive position. Conduct thorough research to identify market size, trends,  key competitors, and growth potential. Then, identify the business's unique selling points versus direct & indirect competitors. 

Understanding the market dynamics will help you assess the business' viability and growth opportunities.

Here you have some market analysis tools you can find (paid and free):

• MarketWatch:  Created by Centurica, this is essentially a deal aggregator for online businesses. They plug into a number of brokers and marketplaces that are marketing online businesses, allowing users to sort by what they're looking for, whether it's the type of business or size. It's a free tool designed to simplify the process of finding potential investments.
• Exploding Topics: This is a trend research tool for entrepreneurs, content creators, and investors. It helps identify emerging trends and topics before they reach mainstream recognition.‍
• CB Insights: Its market sizing tool makes it easy to estimate the size of the Total Addressable Market (TAM). You can also filter results by geography, identify adjacent industries, and more.‍
• Census Business Builder: This analysis tool provided by the U.S. Census Bureau is designed to offer small business owners, entrepreneurs, and researchers with easy access to important demographic and economic data. Using it is not as simple, but there are many guides and webinars.

3. Ensure legal and regulatory compliance to mitigate risk

Ensure that the ecommerce business you want to buy is compliant with all applicable laws and regulations, by reviewing contracts, licenses, and permits.

Anticipate to any potential legal issues or disputes by reviewing upcoming changes to the legislation, and even regulatory challenges that the industry as a whole may face. 

Non-compliance can lead to costly fines or legal action, so it's important to thoroughly assess the business's legal standing before proceeding with the acquisition.

By addressing legal compliance, you can mitigate risks and protect your investment. 

Click here to check the official U.S. Small Business Administration guide to comply with laws and regulations.

4. Perform a customer analysis to understand the user base

Understanding a company's customer base is crucial for assessing its customer acquisition and retention strategies. Analyze customer demographics, behavior, and feedback to gain insights into the business's customer satisfaction levels and potential for growth. Evaluate the business' conversion rates and customer lifetime value to assess its ability to generate sustainable revenue from its customer base.

5. Evaluate operational efficiency and scalability

Conducting the acquisition due diligence process when acquiring an online business is essential for making informed decisions and minimizing risks. One key process is the evaluation of the operational efficiency and scalability of the business, to determine its ability to grow and adapt to changing market conditions.

Review the status of the current business operations, including inventory management, fulfillment processes, and customer service.

Remember, due diligence sets the foundation for a successful acquisition and paves the way for future growth.

5 areas to look at

Here are five signs you can consider when evaluating the operational efficiency and scalability of your ecommerce business:

• Consistent sales growth: Look for a pattern of steady or increasing sales over time, which indicates that your operations are efficient and scalable to meet demand.

• Scalable infrastructure: Ensure that your website, hosting, and backend systems can handle increased traffic and transactions without significant performance issues.

• Inventory management: Effective inventory management practices, such as just-in-time inventory, can indicate operational efficiency and scalability by minimizing excess stock and maximizing turnover.

• Streamlined order fulfillment: Efficient order processing, packaging, and shipping procedures are essential for scalability, ensuring that you can fulfill orders quickly as your business grows.

• Customer service: A scalable ecommerce business should be able to maintain high levels of customer satisfaction even as the number of customers and orders increases, indicating efficient customer service operations.

6. Do a traffic analysis

Analyzing traffic sources (organic and paid) can give you an idea of the business's online presence and marketing strategies. Review its organic search traffic, paid traffic, and referral traffic to understand how visitors get to the site.

Evaluate SEO strategies, content quality, and social media presence. There are internal and external tools that can help you perform this task, but if you don't have access to internal data yet, here you have some options:

• SEMrush: This is an all-in-one platform that helps you analyze SEO for your site, as well as competitors, and PPC or social media marketing efforts.
• Similar Web: This tool allows you to easily understand your competitors by analyzing website traffic and user engagement, offering valuable insights into your market's landscape.
• Ahrefs: This tool is useful to analyze the traffic and structure of the site.

7. Understand the business model

Understanding the target business's business model is essential for evaluating its revenue streams and profitability. Evaluate its pricing strategy, sales channels, and customer acquisition costs to assess its ability to generate sustainable revenue. Consider the scalability and sustainability of its business model in relation to its target market and competitive landscape.

8. Pay attention to growth opportunities

Identifying potential growth opportunities is key to maximizing the value of the acquisition. Look for untapped market segments, new product or service offerings, and expansion opportunities that could help drive steady growth. Consider the business's competitive advantages and its ability to capitalize on emerging market trends.

9. Keep in mind the potential risks

Finally, consider any potential risks or challenges that could affect the success of the acquisition. This includes assessing the business's dependence on key customers or suppliers, potential regulatory changes, any legal issues, and competitive threats. By identifying and mitigating potential risks, you can make a more informed decision about the acquisition and ensure its long-term success.

Why conducting due diligence is key?

1. To mitigate risks: Acquisitions and due diligence go hand in hand. Due diligence in an acquisition refers to the comprehensive investigation and analysis that a prospective buyer conducts on a target company. It is a critical process that aims to assess aspects of the target company before completing the acquisition. The purpose of due diligence is to gather relevant information and evaluate the risks and opportunities associated with the acquisition.
2. To make a smart decision: The buyer’s due diligence efforts enable them to make an informed decision about the transaction and help in determining the fair value of the target company.
3. To get expert eyes on each part of the business: The due diligence process typically involves a team of professionals, including lawyers, accountants, financial advisors, and industry experts, who work together to examine various aspects of the target company.
4. To ensure regulatory compliance: During acquisition due diligence, the buyer typically reviews documents such as financial statements, contracts, legal agreements, intellectual property records, employee and customer information, tax records, and any other relevant financial documents provided by the target company.
5. To understand the state of things: The buyer may also conduct site visits, and interviews with key employees, and perform market research to gain a deeper understanding of the target company's operations, competitive landscape, and future prospects.

By evaluating these key factors, you can gain a comprehensive understanding of the target business and its potential for growth. Remember to seek professional advice from legal, financial, and industry experts to ensure a successful acquisition. With the right due diligence process in place, you can confidently pursue acquisition opportunities and maximize the value of your investment.

Lower the risk of investing

Conducting thorough due diligence is essential for acquiring an ecommerce business and making an informed decision. It involves research and analysis to uncover vital information and mitigate potential risks. At Boopos, we analyze businesses before adding them to our marketplace and we provide support throughout the selling process. Find a profitable online business today!