Phase 1: The Preliminary “Filter”

Before you hire a lawyer or spending money on a technical audit, you apply the “Napkin Filter.” Most businesses fail here.

Platform Risk

What is the store built on?

• Shopify/Shopify Plus: The Gold Standard. Easy to transfer, easy to hire for. High liquidity.
• WooCommerce: Common, but requires a deeper technical look. Is it maintained? Are plugins updating? Read our WooCommerce to Shopify Migration Guide to understand the risks.
• Custom/Headless: High risk for non-technical buyers. If the previous owner wrote the code, can you maintain it?
• Legacy (Magento 1, OpenCart): Hard Pass or immediate discount. You are buying a migration project, not a business.

The “Hero Product” Problem

Does one SKU drive 80% of revenue? If that single product gets a bad batch, a supplier issue, or a new competitor, the business dies. The Metric: No single SKU should represent >40% of sales unless it’s a subscription box.

Traffic Diversity

Where do customers come from?

• Healthy: 30% Organic, 30% Paid Social, 20% Email, 20% Direct/Referral.
• Dangerous: 90% Facebook Ads (Meta). If Mark Zuckerberg changes the algorithm (again), your business evaporates overnight.
• Dangerous: 90% Organic Search. One Google Core Update can wipe out your asset value.

Phase 2: Financial Due Diligence (The SDE Audit)

You are buying future cash flow. You need to verify it exists.

Recalculating SDE (Seller’s Discretionary Earnings)

Sellers love to “Add Back” expenses to boost their valuation. *”We spent $50k on a Mastermind trip to Bali, but that was personal, so add it back to profit.”* Fair Add-Backs:

• Owner’s personal salary.
• Personal travel/meals.
• One-time legal disputes.

Fake Add-Backs (Do NOT accept these):

• “One-time” website redesigns (Websites always need work).
• Ad spend experiments that failed (“We won’t make that mistake again”).
• Inventory write-offs.

The Unit Economics Test

Forget the P&L for a moment. Look at a single order.

• AOV (Average Order Value): $100
• COGS: -$30
• Shipping/Fulfillment: -$15
• Payment Fees: -$3
• CAC (Blended): -$40
• Contribution Margin: $12 (12%)

If the Contribution Margin is below 10%, the business is on life support. One shipping rate hike or ad cost increase will turn it unprofitable.

Trends Analysis

Year-over-Year (YoY) growth is the standard metric, but Month-over-Month (MoM) tells the real truth.

• Is the business seasonal? (Q4 heavy?)
• Did they slash ad spend in the last 3 months to make profit look higher? (This is known as “Dressing the Pig”).
• Compare Gross Revenue vs. Net Revenue (after returns). A high return rate (e.g., in fashion, >20%) is a massive hidden operational cost.

Phase 3: Technical Due Diligence (The Code Audit)

This is where non-technical buyers get burned. You need to look under the hood.

The “Spaghetti Code” Check

If the store has a custom theme, who wrote it?

• Clean Code: Modular, documented, follows platform standards.
• Spaghetti Code: Hardcoded text, unused scripts, 50 app fragments left over from uninstalled plugins.

The Test: Run Google PageSpeed Insights. If Mobile Performance is <30, the code is likely bloated. Read more about The Cost of Cheap Development to see why this matters.

The App/Plugin Bloat

Go to the “Apps” or “Plugins” section.

• Ideal: 10-15 essential apps (Email, Reviews, Upsell).
• Red Flag: 40+ apps.

Every app is a recurring cost (often hidden in the P&L as “Software”) and a performance drag. We often see stores spending $2,000/mo on apps they don’t use. This is prime candidate for Zero-Based Budgeting.

Integration Fragility

Does the store talk to an ERP (NetSuite, SAP) or a 3PL? How is that connection built?

• Fragile: A custom PHP script running on a random server in the owner’s basement.
• Robust: A recognized middleware (Celigo, MuleSoft) or a direct API integration.

If the integration breaks, can *anyone* other than the seller fix it?

Phase 4: Operational & Marketing Audit

Technical and Financial audits tell you the past. Operational audits tell you the future.

Supplier Concentration Risk

Do they have one supplier in China? What happens if:

• Tariffs increase?
• The factory shuts down?
• Supply chain lead times double (e.g., from 30 days to 60 days)?

Requirement: You need a backup supplier or a contract that guarantees pricing for 12 months.

Customer Concentration (B2B)

If the business does wholesale (B2B), does one retailer (e.g., Walmart, Nordstrom) make up 50% of sales? If that buyer retires, you lose the business.

Email/SMS List Health

The seller claims a list of “100,000 subscribers.” The Audit:

• What is the Open Rate? (Benchmark: 20%+)
• What is the Click Rate? (Benchmark: 1%+)
• The Trap: They ran a “Win an iPad” giveaway 3 years ago. 80,000 people signed up for the contest and never opened an email again. You are paying for dead weight.
• Action: Ask for a segment report of “Engaged in last 90 days.” That is the real list size.

Ad Account Health

Login to Meta Ads Manager / Google Ads.

• check the Change History.
• Did they drastically ramp up “Retargeting” (High ROAS) and turn off “Top of Funnel” (Low ROAS) in the last 60 days?
• This artificially inflates the ROAS to make the business look profitable for sale, but it kills future growth.

Phase 5: The Legal & Compliance Check

Often overlooked, but critical finding Hidden Startup Costs.

Intellectual Property (IP)

• Do they own the Trademark? (In key markets: US, UK, EU).
• Do they own the Domain Name? (Is it locked? Is it in the company name or personal name?)
• Do they own the Content? (Did they hire a photographer but not get a “Work for Hire” agreement? The photographer might technically own the copyright).

Data Privacy (GDPR/CCPA)

Has the store been collecting emails from EU citizens without a cookie banner? You could be liable for fines.

Sales Tax Nexus (US)

If they have a warehouse in California, are they collecting California sales tax? If they crossed economic nexus thresholds in 20 states ($100k sales usually), are they registered? The Nightmare: You buy the business, and 6 months later, the State of Texas sends you a bill for $50,000 in back taxes.

Phase 6: Growth Potential (The Upside)

Due diligence is usually about finding reasons *not* to buy. But you also need to find the “Alpha” – the hidden value.

The “Low Hanging Fruit”

• Email Automation: Do they have a Welcome Flow? Abandoned Cart? Post-Purchase? If not, that’s instant revenue you can turn on.
• CRO (Conversion Rate Optimization): Is the conversion rate 0.8%? If you can optimize the Product Page UX to get it to 1.2%, you just grew revenue by 50% without spending a dollar on ads.

New Channels

• Are they selling only on their site?
• Opportunity: Launch on Amazon, TikTok Shop, or Wholesale.

Pricing Power

• Have they raised prices in 3 years?
• Inflation exists. A 10% price increase often flows directly to the bottom line with minimal volume loss.

Conclusion: Partnering for Success

Buying an e-commerce business is one of the fastest ways to generate wealth, if you buy right. It is an engine. If the engine is sound, you can pour fuel (capital) on it and go fast. If the engine is broken (technical debt, bad unit economics), pouring fuel on it just causes a fire.

Don’t go it alone. Partner with Presta for your Technical Due Diligence. We review the code, the traffic, and the stack so you can negotiate with confidence.

Sources

• Empire Flippers: State of the Industry Report
• FE International: SaaS & E-commerce Valuation Data
• Quiet Light Brokerage: Advanced Due Diligence
• MicroAcquire: Acquisition Multiples
• Shopify: Enterprise Commerce Guide