How to Create an Ecommerce Due Diligence Checklist

There are numerous advantages of buying an ecommerce business. Not only can ecommerce businesses generate a strong ROI, but they can also provide tremendous fulfillment for the right entrepreneur. In order to identify the right business and close the deal, however, it’s important to establish an effective strategy. Creating an ecommerce due diligence checklist is an essential part of any ecommerce business acquisition process.

In this article, we address several important questions regarding ecommerce due diligence checklists, including:

• Why an ecommerce due diligence checklist is important
• How to create an ecommerce due diligence checklist
• What you should include in your ecommerce due diligence checklist
• How to carry out your ecommerce due diligence checklist

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The importance of creating an ecommerce due diligence checklist

Before discussing how to create a due diligence checklist, it’s important to understand why they’re important. When used wisely, a due diligence checklist can help you:

• Establish clarity for both parties
• Understand the business on a deeper level
• Negotiate with confidence

Establish clarity for both parties

Your ecommerce due diligence checklist sets the foundation for gathering the right information. It establishes all of the key information you want to obtain in order to make a full and complete evaluation of the investment opportunity.

Without a clear checklist, it can be easy to overlook crucial information that could impact your decision. Like any checklist, it provides both parties with an established list of verification documents that must be presented during the due diligence process. 

Once you receive the required documents included on your checklist, you can verify the claims made by the seller. Even with trusted parties, it’s typical to review third-party documentation that supports the seller’s claims.

“Your ecommerce due diligence checklist sets the foundation for gathering the right information.”

Understand the business on a deeper level

By helping ensure that all necessary information is obtained by the potential buyer, the due diligence checklist plays a crucial role in the entire due diligence process. Of course, a key component of the process is making sure you, the buyer, understand the business on a deeper level.

When executed correctly, due diligence allows you to understand the business model, trends, and other key details with greater clarity. This allows you to gain a clear picture of the business’s strengths as well as opportunities. Needless to say, having a lucid understanding of the business is crucial when it comes to instilling confidence in your investment decision.

“When executed correctly, due diligence allows you to understand the business model, trends, and other key details with greater clarity.”

Negotiate with confidence

As mentioned, an ecommerce due diligence checklist helps ensure that you’re able to obtain all of the necessary information you need about a business. In turn, that information allows you to negotiate with confidence if there’s a discrepancy between how you and the seller view the business.

For example, if due diligence reveals that production lead times are significantly longer than expected, that could be important to be aware of during negotiations. If there’s clear documentation supporting that fact, it will help with business case development.

How to create a due diligence checklist when buying an ecommerce business

To create an ecommerce due diligence checklist, start by identifying what information is relevant to examine. Then, establish what specific documents should be requested to provide that information.

Identify what’s important to look at

Every business is different, so it’s important to identify what information is relevant to the business you’re considering acquiring. For example, if the business sells exclusively through Shopify, it doesn’t make sense to ask for Amazon Seller Central reports. Data that reveals SEO opportunities, however, might be a prime target.

The following section includes a list of key items that are relevant for many ecommerce businesses, but it’s wise to spend some time thinking about what variables you think are important to look at. Make a list of questions that are important to answer. You’ll use those questions to help decide what information to include on your ecommerce due diligence checklist. 

“Every business is different, so it’s important to identify what information is relevant to the business you’re considering acquiring.”

Establish the specific information you want to obtain

Once you’ve established your questions, the next step is to identify what documents will help answer those questions. For example, if you want to understand traffic trends (more on this below), you’ll probably want to obtain specific Google Analytics reports.

Typically, the items on your ecommerce due diligence checklist should correspond to the platforms on which the business operates. If the business operates on Amazon, be sure to ask for the necessary Amazon reports. If it uses Mailchimp for email marketing, ask for Mailchimp reports. Just identify the tools and platforms the business uses and include the appropriate due diligence items for those. And for businesses in all ecommerce niches, be sure to request bank statements to verify the information contained in the balance sheet and other financial documents. 

Items to include and things to keep in mind when buying an ecommerce business

Most ecommerce businesses have numerous moving parts, making it no surprise that there’s a lot to examine. Below, we’ve compiled a list of several key variables to look at when evaluating an ecommerce business acquisition.

• Traffic volume
• Traffic sources
• Sales data
• Returns
• Trends
• Financial statements
• Competition
• Supplier invoices
• Employment or contractor agreements
• Licenses, permits, and intellectual property
• Standard operating procedures

Traffic volume and sources

Traffic is an important factor for all ecommerce businesses. There are a few different approaches you can take when evaluating an ecommerce business’s traffic volume.

Google Analytics, Ahrefs, and other analytics platforms can provide you with key insights about the business’s traffic. When you review these sources, make sure the third-party documentation you look at lines up with the reports the seller provided. 

“Ideally, the business has multiple traffic sources and doesn’t depend on just one.”

In addition to examining the traffic, pay attention to where that traffic is coming from. Is it generated through effective content marketing? Or, is a majority driven by paid ads? Understanding the business’s traffic acquisition strategies can help you identify both strengths and weaknesses. 

Ideally, the business has multiple traffic sources and doesn’t depend on just one. For example, maybe the business has twenty blog posts that each generate a relatively equal share of traffic, as well as a few paid ad campaigns on various platforms. All else being equal, a business with diversified traffic sources is more stable than one that is dependent on a small handful. 

Sales and returns data

Third-party platform sales reports can be a useful way to verify sales information. In many cases, gathering this information can be as simple as gaining viewer-only access to the relevant accounts.

Similar to sales data, product returns are often shown in ecommerce platform accounts. However, you should also pay attention to banking statements for this information (more on this below).

Trends

A business’s trends are an important part of determining its future performance. As such, you should always pay close attention to the direction it’s headed.

The most high-level trends to pay attention to are revenue and earnings. These can be identified by looking at financial statements, but you always want to verify that data through third-party sources such as banking and credit card statements. A business’s trends play a significant role in determining its value.

Additionally, make sure to look at trends that relate to ranking, organic traffic, advertising, CTRs, and other relevant ecommerce metrics. These numbers can provide important insight into understanding what’s happening within the business, including where there may be opportunities for improvement. 

“A business’s trends are an important part of determining its future performance. As such, you should always pay close attention to the direction it’s headed.”

Financial statements

Of course, you’re going to want to take a close look at the business’s financial statements. For ecommerce businesses, it’s best to obtain monthly profit and loss statements on an accrual basis. Accrual accounting provides a much more nuanced view of performance compared to cash accounting. 

As previously mentioned, all financial statements that the seller provides should be verified by third-party sources, such as banks and other financial institutions.

Competition

Competition is an important element to be aware of when evaluating an ecommerce business. Try to look at competing businesses and products to identify where the business you’re considering fits into the market. Is it the premium brand in the market or involved in price wars? Also, pay attention to whether it’s gaining or losing market share. If it’s losing share over time, that could be concerning. 

Supplier invoices

In addition to banking statements, supplier invoices help verify inventory purchases, including quantities, costs, and lead times. They also help verify payment terms, which is an important part of forecasting cash flow. In general, supplier invoices aren’t relevant for businesses that only sell digital products. 

Contractor and employee agreements

Employment and contractor agreements are used to verify staff, salaries, and other compensation practices. Smaller businesses may not have these items, but it’s always worth checking. 

Licenses, permits, and IP

Licenses and permits can show the business is operating in accordance with laws and regulations. In some cases, these may not be relevant. Certain products and materials are subject to specific licensing requirements, however, so it’s important to do your research about the products the business sells. Additionally, be sure to verify trademarks, patents, or other intellectual property.

Standard operating procedures

If a business has standard operating procedures (SOPs) in place, it’s worth reviewing them. SOPs can provide enormous insight into how the business is managed. This allows you to understand what you’re getting yourself into. Additionally, it enables you to have a clear road map when you step into the role of owner.

“SOPs can provide enormous insight into how the business is managed.”

How to carry out your ecommerce due diligence checklist

Once you’ve created your ecommerce due diligence checklist, it’s time to apply it to the acquisition process. To gather the information you’re seeking, start by simply providing your checklist to the seller. 

Ideally, the seller will provide the requested information in an organized manner. For example, they might send over a collection of folders containing different types of documentation. One folder may contain intellectual property, another the SOPs, and a third might have supplier invoices.

Be aware that many sellers may be hesitant to provide sensitive information, especially in the beginning. This is an understandable concern. After all, many businesses rely on confidentiality as part of their strategic advantage. Most ecommerce businesses wouldn’t want their supplier list falling into the hands of a competitor. This is true whether you’re examining a Shopify or Amazon business.

On the other hand, as a buyer, you want to have a full understanding of the business you’re acquiring. To navigate the process gracefully, both parties need to be willing to work together. This might mean accepting documentation for only some of the items on your checklist at first, while the seller withholds the most sensitive information. A broker can help facilitate this process in a way that feels good for both parties.

Stay organized

Because there’s a lot of information being exchanged during due diligence, it’s important to stay organized. Again, ideally, the seller will provide everything in an organized manner. But in the event that information is scattered across multiple email threads or folders, be sure to keep track of it. In many cases, it might make sense to also keep a list of what items you’ve reviewed and “approved.” In other words, make sure to keep track of which documents have met your standards of acceptable verification.

“Because there’s a lot of information being exchanged during due diligence, it’s important to stay organized.”

Respect the seller’s time   

Throughout the process, keep in mind that the seller’s time is valuable. It’s okay to make reasonable requests, but don’t drag the process on unnecessarily. And of course, the last thing you want to do is act like you’re doing the seller a favor. 

Staying organized makes it easier to keep communication running smoothly and efficiently. You definitely don’t want to waste the seller’s time by requesting information they’ve already provided. Instead, you should reserve your communication for important requests that drive the process forward. 

Like all activities in business, it’s important to have a clear strategy and process for implementation. By creating a well-researched ecommerce due diligence checklist and carrying it out effectively, you’ll be able to gather the right information to help you proceed with confidence.