5 Key Areas To Focus on During E-commerce Due Diligence
Here are the key areas to consider before making an offer on any e-commerce business…
1. Website performance and metrics
2. Finances
3. Operational efficiency
4. Customer data and relationships
5. Legal and compliance due diligence
Let’s take a closer look at each of these aspects below…
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1. Analyze Website Performance and Metrics
As you already know, a successful e-commerce business heavily relies on the health of its website.
The website isn’t just a storefront, but also a critical engine for driving traffic, conversions, and sales.
Therefore, during due diligence, you should start by checking the website's performance and metrics to get an idea of its strengths, weaknesses, and opportunities for growth.
The key metrics to evaluate in an e-commerce business include:
Traffic sources
The most common traffic sources for e-commerce websites include organic search, paid ads, social media, or referral links.
A healthy balance between these different channels is a good sign.
However, over-reliance on a single source (e.g., paid ads), may pose risks if the strategy becomes too costly or ineffective.
Conversion rates
You should also measure how many visitors take the desired action on the site, e.g. making a purchase or signing up for a newsletter.
Low conversion rates may signal issues with the website design, product-market fit, or pricing.
Bounce rates and session duration
High bounce rates and short session durations can indicate poor user experience, slow site speed, or irrelevant traffic.
Investigate pages with the highest bounce rates to identify the potential causes.
SEO (search engine optimization) health
This is probably the most important metric of an online store as it determines its overall visibility on search engines.
To determine the SEO health of a website, check the following:
Keyword rankings: Determine whether the site ranks well for high-value keywords in its niche.
Backlink profile: A strong backlink profile boosts authority, but spammy or irrelevant backlinks can harm SEO rankings.
Site speed and mobile optimization: Google prioritizes fast-loading, mobile-friendly websites.
Best tools for website performance analysis:
There are plenty of useful tools out there that will help you simplify the whole analysis process for website performance and metrics. Some of these top tools include:
Google Analytics: Request access to the website Google Analytics. This will offer you a wealth of insights into traffic sources, user behavior, and key metrics like bounce rate and conversion rates.
SEMrush or Ahrefs: These tools can help you analyze keyword rankings, backlinks, and overall SEO performance.
PageSpeed Insights: Identifies issues with site speed and suggests improvements.
Hotjar: Offers heatmaps and user behavior insights to uncover navigation or UX issues.
Red flags to look out for:
While still at it, it’s crucial to look out for the following potential RED FLAGS in website metrics and performance:
Fake traffic or bot activity: A sudden spike in traffic might look appealing, but if it’s generated by bots or low-quality sources, it’s a red flag. Google Analytics can help you easily identify suspicious patterns.
Penalized SEO practices: Check for black-hat SEO techniques like keyword stuffing or spammy backlinks. These can lead to penalties from search engines.
High cart abandonment rates: This could indicate issues with payment gateways, shipping costs, or a lack of trust signals like reviews and secure payment options.
Pro Tip: Check the competition
You can use a tool like SEMrush to compare the website’s performance against competitors in the same niche. This will give you a clear picture of where the business stands in the market. This way, you can have a clearer perspective on its true potential.
2. Financial Due Diligence
When acquiring an e-commerce business, the numbers will tell the story if you know how to read them correctly.
In other words, financial due diligence offers you a clear picture of the business's profitability, stability, and potential for growth.
To dig deep and uncover the truth behind the financials, you’ll need to review these key financial documents:
1. Profit and loss (P&L) statements
These statements offer you a snapshot of the business’s revenue, expenses, and profits over time. Look for trends: Is the revenue consistent, seasonal, or declining? Are expenses under control, or do they seem inflated?
2. Tax returns
Reviewing tax returns for the past 2-3 years ensures the reported income matches reality. Watch for discrepancies between tax filings and P&L statements as they can signal potential red flags.
3. Cash flow statements
Cash flow is the lifeblood of any business. Evaluate whether the business generates enough cash to cover its expenses and invest in growth. Negative cash flow may indicate underlying issues.
4. Revenue breakdown
Ask for detailed revenue reports segmented by sales channels (e.g., organic, paid ads, marketplaces like Amazon). Consistent reliance on a single channel can be risky if that source dries up.
Red Flags To Look Out For:
Sudden revenue spikes or drops: A dramatic increase in sales might seem like a win, but it could be the result of one-off promotions or unsustainable paid ad campaigns. Similarly, unexplained revenue declines are a major warning sign.
Unexplained expenses: Large or irregular expenses without supporting documentation can signal mismanagement or hidden liabilities.
Over-reliance on paid traffic: If most of the revenue comes from paid ads, it’s worth investigating whether organic traffic and retention strategies are underdeveloped.
We found these helpful tools you can use to simplify your financial due diligence:
QuickBooks or Xero: Access the seller’s accounting software to verify financial records.
ProfitWell or Baremetrics: Use these tools to analyze subscription or recurring revenue trends.
Google Sheets or Excel: Build your own models to project future revenue and expenses based on current trends.
3. Operational Processes and Supply Chain
A smooth and efficient operational framework is key for any successful e-commerce business.
Evaluating the business's operational processes and supply chain will help you determine its scalability, efficiency, and potential risks.
Key areas to evaluate include:
1. Supplier Relationships
Ask the following questions to better understand supplier relationships:
Who are the key suppliers?
Are there exclusive agreements in place?
How reliable are the suppliers in terms of quality, pricing, and delivery times?
Ideally, you should look for the following:
Long-term contracts that ensure stability.
Diverse supplier networks (relying on a single supplier can be risky).
Competitive pricing agreements compared to industry standards.
2. Inventory Management
Check the online store’s current inventory management system, such as Shopify, TradeGecko, or Skubana.
You want to check the inventory turnover rate (i.e., how quickly products are sold and replaced).
Also, check stockouts and overstocking issues. Frequent stockouts may indicate poor planning while overstocking can tie up capital unnecessarily.
3. Order Fulfillment Process
Review the warehouse and fulfillment operations: are they in-house, third-party, or dropshipping?
Assess shipping times and costs.
Questions to Ask:
What are the current fulfillment costs as a percentage of revenue?
Are there bottlenecks in the process during peak seasons?
NOTE: Negative reviews mentioning late deliveries or damaged goods could signal a potential red flag!
4. Scalability and Automation
Evaluate the store’s operational framework for scalability. Can the business handle a significant increase in orders without major overhauls?
Assess the level of automation in processes like order tracking, email marketing, and customer support.
Red Flags to Watch For:
Dependence on a Single Supplier: If the supplier fails or raises prices, the business could be at risk.
Inefficient Fulfillment Processes: High error rates in order fulfillment can damage customer trust and retention.
Seasonal Scalability Issues: If the business struggles to meet demand during peak seasons, it may lack the infrastructure needed for growth.
Pro Tip: Before finalizing the acquisition, place a test order to experience the fulfillment process firsthand. This can reveal hidden inefficiencies or customer experience issues that might not be apparent in reports.
4. Evaluate Customer Data and Relationships
In the e-commerce space, the strength of customer relationships can make or break a business.
Loyal customers not only drive repeat purchases but also act as brand ambassadors, bringing in new customers through word-of-mouth and reviews.
Thoroughly analyzing customer data and relationships is therefore a crucial part of the website due diligence checklist.
It helps you understand the business's audience, retention strategies, and growth potential.
Key areas to evaluate include:
1. Customer Demographics and Segmentation
Review the customer base to identify key demographics such as age, gender, location, and buying behavior.
Evaluate segmentation strategies. Are the customers grouped based on factors like purchase history, preferences, or lifetime value?
Look for opportunities to target underserved segments or expand the customer base.
2. Customer Acquisition Channels
Assess how the business acquires new customers.
Are they coming through organic search, paid ads, email marketing, or social media?
Evaluate the cost of customer acquisition (CAC) compared to the customer lifetime value (CLV).
A sustainable ratio indicates healthy growth potential.
3. Retention and Loyalty Metrics
To correctly measure customer retention and loyalty metrics, consider:
Repeat Purchase Rate: How often do customers return to make another purchase?
Customer Lifetime Value (CLV): How much revenue does each customer generate over their relationship with the brand?
Churn Rate: Are customers dropping off after their first purchase, or does the business have strong retention?
4. Customer Feedback and Reviews
Analyze customer reviews on platforms like Trustpilot, Google Reviews, or Amazon.
Look for patterns in complaints. Are there recurring issues with product quality, shipping, or customer service?
Positive reviews can signal a strong brand reputation and customer satisfaction.
5. Email and Marketing Lists
Evaluate the quality of the email list for the e-commerce store you plan to buy. Specifically, check for:
Open rates and click-through rates (CTR)
Engagement metrics to determine how active the audience is
A well-maintained email list is a valuable asset for driving repeat purchases and promotions.
Red Flags to Watch For:
High customer churn: If the business struggles to retain customers, it may lack strong loyalty-building strategies.
Over-reliance on paid Ads: If most customers come from paid channels, it could signal a lack of organic brand loyalty or unsustainable marketing costs.
Negative brand sentiment: Repeated complaints or low ratings can indicate deeper issues with products or services.
Pro Tip: If possible, we suggest that you survey a small sample of existing customers to understand their loyalty, satisfaction, and pain points. Their feedback can provide valuable insights that aren’t immediately visible in metrics.
We Help You Buy / Build, Manage and Scale E-commerce Brands for an EXIT
E-commerce Simplified for Busy Individuals – We handle the buying, building, and scaling, so you can focus on what matters.
Growth-Focused Strategies – From sourcing to marketing, we drive growth and prepare you for a profitable exit.
Expertly Managed Exits – We build a high-value brand designed for a Lucrative exit.
5. Legal and Compliance Due Diligence
When acquiring an e-commerce business, legal and compliance due diligence is crucial to avoid unforeseen liabilities.
Overlooking this area can result in regulatory fines, intellectual property disputes, or contractual issues that could jeopardize your investment.
To ensure the business is legally sound, you’ll need to evaluate the following key areas:
1. Ownership and Intellectual Property (IP) Rights
Verify ownership of the business’s trademarks, logo, and branding elements. And ensure there are no existing disputes or pending applications.
Confirm that the online business owns its domain name outright. Check for expiration dates or any history of disputes.
Above all, ensure that all website content, product descriptions, and images are original or properly licensed.
2. Contracts and Agreements
Review all the agreements with suppliers, manufacturers, and fulfillment partners. Are they long-term or renewable?
Check terms of service, return policies, and privacy policies for compliance with local and international laws.
And be sure to verify the terms of any partnerships, affiliate programs, or marketing arrangements.
3. Compliance with Laws and Regulations
If the business collects customer data, ensure it complies with data protection regulations like GDPR (Europe) or CCPA (California).
Verify that the business has been paying all applicable taxes (sales tax, VAT, etc.) and has no outstanding liabilities.
Check that all products sold meet safety standards and regulations in the markets they serve.
4. Pending Legal Issues
Look out for any pending lawsuits, disputes, or complaints against the business.
Investigate previous legal claims to understand their resolution and impact.
5. Employee and Contractor Agreements
If the business employs staff or contracts freelancers, ensure all agreements are documented and legally binding.
Verify that there are no disputes over wages, benefits, or intellectual property created by employees.
Red Flags to Watch For:
IP disputes: Ongoing or unresolved disputes over trademarks or copyrighted material can pose significant risks.
Unclear contracts: Vague or informal agreements with suppliers or partners can lead to instability or unexpected costs.
Tax evasion: Incomplete or missing tax records might indicate non-compliance, resulting in future liabilities.
Pro Tip: Legal due diligence often requires specialized knowledge. Engage an experienced attorney with expertise in e-commerce and acquisitions to review all contracts, IP rights, and compliance documentation.
Final Thoughts
Acquiring an e-commerce business is an exciting opportunity, but without careful planning, mistakes can be costly.
Conducting thorough due diligence is crucial—it minimizes risks, uncovers hidden opportunities, and positions you for long-term success. With this guide, you're already on the right track to evaluating online stores like an expert.
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