Acquiring an eCommerce business is a substantial investment that demands thorough research. A prudent investigation is especially important, as a significant majority of business acquisitions— ranging from 70 to 90 percent, ultimately prove unsuccessful. Therefore, it is imperative to conduct a comprehensive investigation.
Due diligence is an audit performed to confirm facts, liabilities, risks, and financial and operational records about the target company. It can help you assess the true value of the business and make an informed buying decision.
However, taking this initiative can be challenging if you buy an online business for the first time. This guide will discuss key assessment tips to ensure that you effectively address all aspects during the due diligence process.
1. Verify Financial Claims
Carrying out an independent assessment of the prospect allows you to discover the revenue and cash flow it generates monthly and yearly. Based on this information, you can decide whether or not investing in that particular eCommerce company is profitable. If the financial records don’t match the seller’s statements, it is better to look for another opportunity.
To ensure you are making an informed decision, you must review the financial information to assess the following:
- Revenue: Analyze the company’s revenue based on its location, products, customers, and suppliers. These factors analyze if the company is offering its products to the right population.
- Cost: Examine the allocation of profits towards recurring business expenses. This includes marketplace fees, advertising budget, manufacturing costs, and other related factors. If the operational costs exceed the profits, it indicates that the business is operating at a loss and may not be a viable investment opportunity.
- Financial Statements: Review a minimum of one-year-old financial statements to ensure the company generates a stable income. A fluctuating financial statement shows that the business is an investment risk, as it can go into loss any day.
Accessing a business’s financial documents is a confidential matter that often necessitates signing a non-disclosure agreement (NDA). This agreement ensures that the sensitive information contained within the financial records remains protected and confidential. For first-time buyers, navigating the legal processes and understanding the intricacies of due diligence can be difficult.
In such cases, seeking guidance from a buy-side broker can be highly beneficial. These professionals specialize in assisting buyers with the legal aspects of acquiring a business, including facilitating secure access to financial documents while maintaining confidentiality. Their expertise and guidance throughout the process can provide first-time buyers with the assurance and support needed to navigate the complexities of due diligence effectively.
2. Assess Website Traffic
Assessing website traffic is a crucial step. Understanding the volume and quality of traffic the website receives provides valuable insights into the business’s potential customer base and market reach. Here are some tips to consider when assessing website traffic:
- Analyze website analytics: Review the website’s analytics data to evaluate the number of visitors, unique visitors, page views, and average session duration. This data helps gauge the website’s popularity and user engagement.
- Examine traffic sources: Determine the sources of website traffic, such as organic search, paid advertising, social media, referrals, or direct visits. This analysis allows you to understand the effectiveness of marketing efforts and the diversification of traffic sources.
- Consider audience demographics: Explore the demographic information of the website’s visitors, such as their age, gender, location, and interests. This data helps determine if the target audience aligns with the business’s products or services.
- Assess conversion rates: Evaluate the website’s conversion rates, including the percentage of visitors who make purchases or take desired actions. This information gives insights into the website’s effectiveness in converting visitors into customers.
- Compare historical trends: Examine the website’s traffic trends over time to identify any significant growth or decline. This analysis helps assess the business’s stability and potential for future growth.
3. Review Legal and Intellectual Property Issues
Legal due diligence entails conducting a comprehensive examination of the prospect’s legal and commercial profile to ensure the proper registration of intellectual property (IP) rights, including trademarks, patents, and codes. By scrutinizing these details, potential lawsuits can be mitigated in the event of inaccurate registration documents.
Additionally, it is crucial to verify the organization’s ownership of digital assets, such as email and domain, and intellectual assets—including product designs, logos, symbols, product names, and images, among others. Registering these assets safeguards their use, helping to avoid potential legal ramifications.
4. Analyze Market Competition and Trends
Understanding the competitive landscape and current market trends provides valuable insights into the business’s positioning, potential challenges, and growth opportunities. Here are some tips on how to effectively analyze market competition and trends:
- Identify key competitors: Identify the main players in the market who offer similar products or services. Evaluate their strengths, weaknesses, market share, pricing strategies, and customer base to assess the level of competition.
- Assess market trends: Stay updated on the latest market trends, consumer preferences, and emerging technologies that impact the industry. Analyze factors like shifting consumer behavior, market growth projections, and industry regulations to identify opportunities and potential risks.
- Conduct a SWOT analysis: Perform a comprehensive SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis for both the target business and its competitors. This analysis helps identify the unique selling points, areas for improvement, and potential threats in the market.
- Study customer reviews and feedback: Explore customer reviews and feedback regarding the target business and its competitors. This provides insights into customer satisfaction, product quality, and areas where the business can differentiate itself.
- Seek expert opinions: Consult industry experts, market research reports, and industry-specific publications to gain a deeper understanding of the market landscape, competitive dynamics, and future growth potential.
- Consider barriers to entry: Evaluate the barriers to entry in the market, such as high competition, brand loyalty, regulatory requirements, or technological advancements. Understanding these barriers helps assess the sustainability and potential challenges for the business.
5. Evaluate Operational Processes
Operational processes shed light on internal or operational issues within an eCommerce brand. Conducting due diligence in this area involves analyzing the company’s goals, objectives, and strategic planning. It is essential to compare the ongoing goals with the ones achieved to assess team performance.
Additionally, analyzing the current work environment and understanding the coordination between management and employees is crucial. This helps gain insights into internal functioning and team coordination. Based on these findings, strategic planning can be adjusted, and necessary staff changes can be made to mitigate internal risks in the future.
6. Examine Customer Satisfaction and Reviews
Examining customer support is very important during due diligence, as 94% of buyers prefer to repurchase from a brand after having a positive customer service experience.
Assessing the quality of customer care provides valuable insights into the business’s reputation, product quality, and after-sales service. You can look for customer reviews on various platforms to gauge overall satisfaction levels. Pay attention to recurring themes, both positive and negative, to understand the business’s strengths and weaknesses.
You can also engage with customers directly through surveys or feedback forms to gather more specific information. Analyzing customer sentiment, response times and complaint resolution demonstrates the business’s commitment to customer satisfaction. This assessment helps evaluate the store’s potential for growth and build trust with existing customers.
7. Legal and Regulatory Compliance
When conducting due diligence, assessing the business’s legal and regulatory compliance is of utmost importance. This involves thoroughly reviewing the business’s adherence to applicable laws, regulations, and industry standards. Here are some common regulatory compliance areas that most businesses are required to follow:
- Privacy and data protection regulations (such as GDPR or CCPA)
- Consumer protection laws
- Intellectual property rights and trademarks
- Advertising and marketing regulations
- Payment card industry compliance (PCI DSS)
- Employment and labor laws
- Environmental regulations
- Import and export laws
8. Evaluate Technology Stack and Infrastructure
Evaluating the technology stack and infrastructure is crucial. This involves assessing the underlying technology and systems that power the business’s website, operations, and overall digital presence. This examination ensures that the business has a robust foundation for its online operations and can support your growth plans and strategic objectives.
Here are some key areas to consider during this evaluation:
- Website platform and content management system (CMS)
- E-commerce platform or shopping cart software
- Payment gateways and transaction processing systems
- Customer relationship management (CRM) software
- Inventory management and order fulfillment systems
- Analytics and reporting tools
- Security measures, including SSL certificates and data protection protocols
- Scalability and flexibility of the technology stack to support future growth
9. Consider Transition and Training
You can ensure a smooth transition by assessing the need for training, knowledge transfer, and support during the handover period.
- Identify the key personnel involved in the business’s operations and understand their roles and responsibilities.
- Plan for comprehensive training sessions to familiarize yourself and your team with the business’s processes, systems, and customer base.
- Establish clear communication channels to address any potential issues that may arise during the transition.
- Consider utilizing the expertise of the existing team members or seek external assistance to facilitate a seamless transition and ensure business continuity.
When purchasing an eCommerce business, conducting due diligence is essential to comprehensively assess its legal, financial, operational, and technological aspects. This information is crucial in determining the viability of the investment and aiding in negotiation processes.
It is highly recommended to conduct due diligence independently or enlist the expertise of a professional buy-side broker who can provide guidance throughout the process.
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