7 Step Checklist for Ecommerce Due Diligence

It’s estimated that 218.8 million US consumers shopped online in 2023, bound to increase in 2024. If you’re not in the ecommerce business game, now it’s a great time to invest into this lucrative industry.

This ecommerce due diligence checklist will help you succeed in your business acquisition process.

Top Due Diligence Service Providers for Ecommerce

Due diligence for online businesses is no different to traditional businesses. You go through the same steps.

Let’s first introduce some of the top due diligence firms companies that provide ecommerce due diligence services.

Durkin Group

  • Financial Health Assessment: Durkin Group delves into the financials of target companies, providing thorough reviews of financial statements, accounting practices, and potential risks.
  • Operational Review: Beyond just numbers, they evaluate the operational aspects of a business, assessing efficiencies, processes, and potential areas of improvement.
  • Compliance and Legal Checks: They ensure that all compliance and legal aspects are vetted, offering peace of mind in the legality and legitimacy of the transaction.

Centurica

  • Financial Due Diligence: Centurica rebuilds the Profit & Loss (P/L) statement to verify the accuracy of the seller’s financials.
  • Operational Due Diligence: Centurica delves deep into the operational aspects of the business to identify the biggest risks. They also pinpoint value creation opportunities, ensuring that potential buyers are aware of areas where they can enhance the business’s performance.
  • Commercial (Market) Analysis: An in-depth market analysis is conducted to identify the most significant growth opportunities. Centurica ensures that the future of the business is sustainable by analyzing market trends and potential shifts.

Instrinsic, LLC

  • Financial Health Assessment: In-depth evaluation of financial statements and accounting practices.
  • Risk Analysis: Identifying and assessing potential risks associated with the acquisition.
  • Operational Review: Analysis of the operational efficiencies and processes within the target company.

Marcum LLP

  • Financial reviews, record analysis, and strategic evaluations.
  • They amalgamate all documents necessary for a buyer’s due diligence, including contracts, financial statements, and corporate governance records.
  • Marcum LLP aims to identify and address potential issues well before they emerge during the transaction, helping with a seamless progression.

Flippa

  • Red Flag Report ($1500): A basic report identifying high-level risks and opportunities. It includes limited financial and traffic data over 12 months and compares the asking price to similar businesses, without verifying source financial documents.
  • Standard Report ($2000): Building on the Red Flag Report, this covers a 24-month period and includes checks against source documents with limited coverage.
  • Enhanced Report ($2500): The most comprehensive option, offering detailed risk and opportunity analysis. It extends over 36 months with financial and traffic information, and verification of seller-provided data against source documents. It also includes an industry overview and key trends.

7 Step Due Diligence Checklist To Secure Your Acquisition

Now for the actual ecommerce due diligence checklist. Following these seven steps can make or break your online business acquisition.

While some of them are time consuming, you can not skip over them in your due diligence. Check out this case study of how due diligence saved this ecommerce acquisition.

Step 1: Initial Assessment and Dealbreakers

The first step in online business due diligence is conducting an initial assessment to quickly identify any glaring issues that could be dealbreakers.

This stage is crucial for determining whether it’s worth proceeding with a more in-depth analysis.

Website Design and Usability

  • Professional Appearance: Check if the website has a modern, professional look.
  • Ease of Navigation: Ensure the site is user-friendly and easy to navigate.
  • Mobile Responsiveness: Verify that the website is fully functional on mobile devices.

Financial Overview

  • Revenue Streams: Identify the primary sources of revenue and their stability.
  • Unexplained Fluctuations: Check for any unexplained spikes or drops in financial performance.

Legal Compliance

  • Pending Legal Issues: Check for any ongoing legal disputes or liabilities.

Market Position and Reputation

  • Brand Perception: Gauge public perception and brand reputation in the market.
  • Competitive Standing: Assess the business model and position relative to other e commerce businesses in the niche.
  • Customer Feedback: Look at customer reviews and feedback for potential issues.

This initial assessment is designed to filter out unsuitable acquisition targets early, saving time and resources for businesses that warrant a deeper investigation.

Step 2: Technical Due Diligence

The second step on the due diligence checklist focuses on assessing the technical foundations of the ecommerce business.

This involves a detailed examination of the website’s infrastructure, domain history, hosting solutions, and security measures to ensure they meet industry standards and support the business’s needs.

Website Infrastructure and Performance

  • Content Management System (CMS): Review the CMS for functionality, customization options, and ease of use.
  • Site Load Speed: Test the website’s loading speed, as it impacts user experience and SEO.
  • Uptime Reliability: Check the website’s uptime history to ensure consistent accessibility.

Domain History and Stability

  • Domain Age: Consider the age of the domain, as older domains often have more authority.
  • Ownership History: Look into the history of domain ownership to spot any potential red flags.
  • Past Penalties: Investigate if the domain has ever been penalized by search engines.

Hosting Solutions

  • Hosting Provider Quality: Assess the reputation and reliability of the hosting provider.
  • Scalability: Ensure the hosting solution can scale with the business’s growth.
  • Data Backup and Recovery: Verify the hosting service includes regular data backups and recovery options.

Technical due diligence is vital for understanding the technical capabilities and limitations of the ecommerce platform. It ensures that the technical infrastructure is robust, secure, and capable of supporting current operations and future growth.

Step 3: Content Analysis

The third step on the due diligence checklist is content analysis. Ecommerce businesses, like any other online business, live or die based on their content quality.

This process involves evaluating the quality, originality, and effectiveness of the website’s content, along with the overarching content management strategy.

Good content not only engages and retains customers but also drives organic traffic and enhances SEO.

Quality and Originality of Content

  • Plagiarism Check: Use tools to ensure the content is original and not plagiarized.
  • Relevance and Accuracy: Assess whether the content is relevant to the target audience and factually accurate.
  • Engagement Metrics: Analyze user engagement with the content, such as page views, comments, and social shares.

Content Management Strategy

  • Editorial Calendar: Review the planning and frequency of content publication.
  • Content Diversification: Check the variety of content types (blogs, videos, infographics) to cater to different user preferences.
  • Future Content Potential: Evaluate opportunities for expanding or enhancing the content strategy.

Audience Engagement and Response

  • User Feedback: Consider user feedback and comments for insights into content reception.
  • Social Media Interaction: Look at how content is shared and discussed on social media platforms.
  • Conversion Rate: Analyze how effectively the content drives conversions or other desired actions.

Content analysis is crucial in understanding how the website communicates with its audience and the effectiveness of its content strategy in driving traffic and engagement. It provides insights into how well the content aligns with the business goals and audience needs.

Step 4: Website Traffic and SEO Analysis

The fourth step on the due diligence checklist is a comprehensive analysis of the website’s traffic and search engine optimization (SEO) strategies.

This step is crucial for understanding the site’s online visibility, the quality and sources of its traffic, and its standing in search engine rankings, which are critical for sustained online success.

For best results, use a tool like Google Analytics or Ahrefs for this step.

Traffic Sources Analysis

  • Diversity of Sources: Evaluate the mix of traffic sources, including organic, paid, referral, and direct traffic.
  • Geographical Distribution: Assess the geographical spread of the audience to understand market reach.
  • User Behavior Metrics: Analyze metrics like bounce rate, session duration, and pages per session to gauge user engagement.

SEO Strategy and Keyword Performance

  • Keyword Ranking: Review the rankings for key search terms relevant to the business.
  • On-Page SEO Factors: Assess elements like meta descriptions, header tags, and keyword density on the website.
  • Off-Page SEO Factors: Evaluate backlinks profile, including the number, quality, and relevance of backlinks.

User Demographics and Engagement

  • Demographic Breakdown: Analyze the demographic composition of the website’s visitors (age, gender, interests).
  • Engagement Levels: Look at engagement indicators such as page views, time on site, and return visits.
  • Conversion Rates: Assess how effectively traffic converts into desired actions, like sales or sign-ups.

SEO Health and Compliance

  • SEO Best Practices Compliance: Ensure the website adheres to current SEO best practices and guidelines.
  • Mobile Optimization: Check if the website is optimized for mobile devices, a crucial factor in both user experience and SEO.
  • Technical SEO Audit: Perform a technical SEO audit to identify and rectify technical issues impacting search engine visibility.

Traffic and SEO analysis provides a clear picture of how well the online business attracts and retains visitors and its effectiveness in ranking high on search engines. This insight is invaluable for understanding the potential of the ecommerce business and identifying areas for improvement in its online strategy.

Step 5: Financial Due Diligence

The fifth step in the ecommerce due diligence checklist involves a thorough examination of the financial aspects.

This critical stage focuses on understanding the financial health of the business by reviewing its financial records, revenue streams, profit margins, expenses, and overall financial trends.

Examination of Financial Records

  • Accuracy and Completeness: Ensure all financial records are accurate and complete.
  • Revenue Verification: Confirm the authenticity of revenue reported, checking against bank statements, invoices, and payment processor records.
  • Expense Breakdown: Analyze all expenses, including recurring business expenses and variable costs, to understand the cost structure of the business.

Profitability and Margin Analysis

  • Profit Margins: Evaluate the gross and net profit margins to assess the profitability of the business.
  • Trend Analysis: Look for trends in profitability over time, noting any seasonal variations or market changes.
  • Comparison to Industry Benchmarks: Compare profit margins and financial metrics against industry averages.
  • Interest Expenses: Assessing revenue allocated to debt servicing, like repaying other investors.

Revenue Analysis

  • Diversification of Revenue: Check for a balanced mix of revenue streams to reduce dependence on a single source.
  • Sustainability of Revenue: Assess the sustainability and reliability of each revenue stream.
  • Customer Lifetime Value and Acquisition Cost: Understand the cost of acquiring customers and the long-term value they bring.

Analysis of Historical Financial Trends

  • Sales Trends: Review historical sales data to identify growth patterns or concerning trends.
  • Financial Stability: Assess the overall financial stability of the business, looking at factors like cash flow and debt levels.
  • Capital Expenditures: Review past capital expenditures to understand investment in the business’s growth.

Financial due diligence is essential for ensuring a sound investment, revealing the true fiscal health of the business. This step uncovers not just the current financial situation but also helps in projecting the future financial trajectory, allowing for a more informed acquisition decision.

Step 6: Day-to-day Operations Review

The sixth step in the ecommerce due diligence process involves a comprehensive review of the day-to-day operations. This critical evaluation covers key operational areas like order processing, customer service, inventory management, and supplier relationships, providing insights into the efficiency and scalability of the business.

Order Processing and Fulfillment

  • Efficiency of Processes: Evaluate the efficiency and reliability of the order processing and fulfillment systems.
  • Automation and Systems Integration: Assess the level of automation and integration of systems for order tracking, inventory management, and shipping.
  • Return and Refund Policies: Review the return and refund policies and their impact on customer satisfaction and operational efficiency.

Customer Service and Support

  • Quality of Service: Assess the quality and responsiveness of customer service.
  • Support Channels: Review the variety and effectiveness of customer support channels (e.g., email, live chat, phone).
  • Customer Satisfaction Metrics: Look at customer feedback and satisfaction metrics to gauge the effectiveness of customer support.

Inventory Management

  • Inventory Turnover Rate: Analyze the turnover rate to understand the balance between stock availability and overstocking risks.
  • Supply Chain Efficiency: Evaluate the efficiency and reliability of the supply chain and inventory management systems.
  • Inventory Storage and Handling: Assess the logistics of inventory storage, handling, and associated costs.

Supplier and Vendor Relationships

  • Reliability of Suppliers: Examine the reliability and reputation of key suppliers and vendors.
  • Contract and Terms Review: Review contracts with suppliers for terms, conditions, and potential risks.
  • Dependency on Suppliers: Identify any over-dependence on a single supplier or vendor and assess associated risks.

Operational review is essential in understanding how the business functions on a regular basis and its operational strengths and weaknesses. It highlights areas that are well-managed and those that may require improvement, providing a clearer picture of the business’s potential for smooth continuity and growth post-acquisition.

Step 7: Legal Due Diligence and Compliance Check

The seventh step in the ecommerce due diligence process is the Legal and Compliance Check.

This phase is crucial for ensuring that the ecommerce business is in compliance with all legal standards, has secured its intellectual property rights, and is free from any potential legal liabilities.

This step helps in mitigating risks associated with legal non-compliance which can have significant financial and reputational repercussions.

Compliance with Business Laws and Regulations

  • Business Licenses and Permits: Verify that the business has all necessary licenses and permits for its operation.
  • Adherence to Ecommerce Regulations: Ensure compliance with ecommerce-specific laws, including consumer protection, sales tax collection, and data privacy.
  • International Trade Compliance: If applicable, check compliance with international trade laws, including import/export regulations.

IP Rights Verification

  • Trademark Registrations: Confirm that all trademarks related to the brand, including logos and product names, are properly registered.
  • Copyrights and Patents: Ensure that the business owns or has licenses for all copyrighted material and patents.
  • Domain Name Ownership: Verify that the business legally owns its domain names and any related intellectual property.

Review of Contracts and Legal Agreements

  • Supplier and Vendor Contracts: Examine existing contracts with suppliers and vendors for terms and potential liabilities.
  • Employee Contracts and Agreements: Review employment contracts, non-disclosure agreements, and non-compete clauses.
  • Customer Agreements: Assess the terms and conditions, return policies, and other customer-facing legal agreements for compliance and potential risks.

Assessment of Legal Liabilities

  • Pending Litigations: Investigate any ongoing or past litigations involving the business.
  • Legal Disputes or Claims: Look for any disputes or claims against the business that could pose a liability.
  • Compliance with Data Protection Laws: Verify adherence to data protection laws like GDPR, CCPA, or others relevant to the business’s operations.

The Legal and Compliance Check is an indispensable step on the due diligence checklist, safeguarding against the acquisition of a business with hidden legal issues that could affect its valuation and future operations. This thorough legal scrutiny is integral to a successful and compliant business transition.

Conclusion

Proper due diligence can make or break your business acquisition process. Any experienced entrepreneur knows to take it seriously, because it’s the difference between massive profit and an agonizing few years of trying to fix someone else’s mistakes.

Take the easy road. Spend too much time on due diligence if that’s what it takes to avoid a bad investment decision.

This guide will help you get started. But don’t hesitate to contact Centurica for professional due diligence help.

Last Updated: April 15th, 2024

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