M&A & Due Diligence
M&A Due Diligence for eCommerce: The Seller's Checklist
Ecommerce M&A due diligence spans 7 categories (financial, commercial, legal, tech, HR, tax, IP), each with 30 to 100 specific document requests, and runs 4 to 12 weeks during exclusivity. Sellers who prep 12 to 24 months ahead spend $50K to $250K on readiness, while skipping prep typically costs 10 to 25 percent of deal value. Compressing the process below 6 months almost always reduces the final price.
Most ecommerce sellers underestimate the depth of M&A due diligence. They've prepared the financials, hired the banker, signed the LOI — then the buyer's diligence team starts asking for 47 specific documents per category, and the seller spends the next 8 weeks scrambling instead of negotiating. Here's the full checklist + the 12-24 month prep playbook.
The 7 categories of diligence
1. Financial diligence
- Quality of Earnings (QofE) review of 24-36 months
- Working capital trailing-12-month analysis + target negotiation
- Debt schedule + payoff letters
- Tax returns (federal, state, local) — 3 years
- Audited or reviewed financials
- EBITDA add-back schedule + supporting documentation
- Monthly P&L + balance sheet for 36 months
- Cash flow statements + bank reconciliations
2. Commercial diligence
- Customer concentration analysis (top 10 customers + revenue %)
- Channel concentration (Amazon %, wholesale %, DTC %)
- Cohort retention curves
- Market share + competitive positioning
- Marketing channel performance + CAC trends
- Product roadmap + new SKU velocity
- Geographic distribution of customers
3. Legal diligence
- Material contracts (suppliers, 3PLs, key customers, influencers)
- Pending or threatened litigation
- Change-of-control provisions in major contracts
- Trademark + copyright registrations
- Domain ownership
- Privacy policy + GDPR/CCPA compliance
- Terms of service
4. Tech diligence
- Platform inventory (Shopify, integrations, third-party apps)
- Security audit + data breach history
- Customer data + PII handling
- Tech stack documentation + dependencies
- Internal tools / proprietary code
5. HR diligence
- Employee list + compensation + employment contracts
- Contractor classification (1099 vs W-2 risk)
- Equity grants + cap table reconciliation
- Severance + retention agreements
- Benefits + insurance
- Compliance with employment law
6. Tax diligence
- Federal income tax returns + state returns
- Sales tax filings + nexus analysis
- Payroll tax compliance
- 1099 issuance history
- R&D credits claimed (or missed)
- International tax structure if applicable
7. IP + brand diligence
- Trademark registrations (US + international)
- Copyright on creative + content
- Domain registrations + renewal status
- Social media handle ownership
- Photography + creative-asset licensing
- Patent filings if applicable
The 12-24 month seller-side prep playbook
Months 24-18: foundation
- Entity structure review with tax advisor (C-corp vs S-corp vs LLC implications)
- Audit or review financials engagement
- Banker relationship + interview top 3 firms
- Accounting cleanup — switch to accrual if still on cash, clean up inventory carrying values
Months 18-12: documentation
- Material contract inventory + change-of-control flags
- IP audit — trademarks current, domains owned, social handles secured
- Cap table cleanup in single system
- HR cleanup — contractor classification, equity grants, key employee retention
Months 12-6: optimization
- Sales tax nexus analysis + remediation
- Working capital optimization (extend DPO, tighten DIO without stockouts)
- EBITDA add-back schedule with supporting documentation
- Customer concentration mitigation if exposed
Months 6-0: launch prep
- Seller-side QofE commissioned
- CIM (Confidential Information Memorandum) drafted
- Banker engagement + initial buyer outreach
- Data room populated
What it costs
- Seller-side QofE: $30-150K
- Legal cleanup: $40-100K
- Tax structure work: $25-75K
- Audit (if first time): $40-100K
- Banker retainer + success fee: 1-2% of deal value
Total cost of prep: $50-250K depending on starting state. Cost of NOT doing prep: typically 10-25% of deal value (vs the optimized outcome).
The biggest seller-side mistakes
- Starting prep when LOI is signed instead of 12-24 months earlier
- Skipping seller-side QofE and discovering issues during buyer diligence
- Ignoring sales tax nexus exposure
- Not documenting EBITDA add-backs with supporting receipts
- Letting working capital drift before sale
- Holding contractor relationships that look like employees (1099 misclassification)
Frequently Asked Questions
What does M&A diligence look at?
7 categories: financial, commercial, legal, tech, HR, tax, IP. Each with 30-100 specific items.
How long does diligence take?
4-12 weeks during exclusivity. Smaller deals 4-6 weeks; mid-market 6-10.
Biggest seller-side mistake?
Not doing the prep 12-24 months ahead.
Should I commission my own QofE?
Yes if $5M+ EBITDA. $30-150K cost, saves more in deal value.
When to start M&A prep?
12-24 months before exclusivity. Compressing below 6 months almost always costs deal value.
Related
Planning a sale 12-24 months out? Talk to a CFO on the prep timeline.