E-commerce · Checklist · Pre-LOI
The E-commerce Due Diligence Checklist: Put the Profit Back in the Right Month
The P&L is the seller's summary. The platform reports, the ad accounts and the inventory are the records behind it. Here's what to ask for, and who reads each one.
By Mark Hirsch, Founder, TrueQoE · Managing Member, Strategic Lever LLC.
Most e-commerce earnings questions are timing questions: which month a cost, a refund or a purchase belongs in. Ask for everything monthly. Annual totals are where timing problems disappear.
How to read the tags. “First Pass reports this” marks the only items a TrueQoE First Pass covers: tying each year to its stated totals, labelling each adjustment by its evidence, and listing missing records. Every other tag names who should check the item. Those items are guidance, not First Pass outputs.
Which financial records should an e-commerce seller provide first?
Short answer: The P&Ls, balance sheets and tax returns for every year the price relies on, monthly P&Ls, and the add-back schedule.
- Annual P&Ls and balance sheets for each year the price relies onEach year should agree with its own stated totals.First Pass reports this
- The seller's add-back schedule, line by lineEach owner add-back gets an evidence label and is pinned to its source line.First Pass reports this
- Monthly P&Ls and the accounting methodCash-basis books move inventory and ad costs between periods.Your CPA
- Business tax returns for the same yearsDifferences from the P&L need an explanation.Your CPA
What should you request from the sales platforms?
Short answer: The platform's own reports, by month, and a reconciliation of payouts to the revenue on the P&L.
- Sales by platform, marketplace and channel, by monthConcentration is a risk the P&L doesn't show.You
- Payout and settlement reports, reconciled to P&L revenuePayouts net fees, refunds and reserves together.Your CPA
- Account health, policy warnings and any suspensionsThe platform decides whether the account keeps selling.You
- Whether accounts, listings and storefronts can transfer to a new ownerRead the platform's terms with your attorney.Your attorney
How do you check ad spend, returns and refunds?
Short answer: Line them up with revenue month by month, and look for changes just before the sale.
- Ad spend by platform and month, with the revenue it's attributed toA cut before the sale lifts profit and shrinks later revenue.You
- Support for any ad spend added back as "brand building" or one-timeLabelled by the evidence in your upload.First Pass reports this
- Returns and refunds by month and by productCheck they land in the same period as the sales.You · Your CPA
- Chargebacks and customer complaintsA product with heavy returns is less of a top seller.You
What should you check about inventory and fulfillment?
Short answer: How inventory is counted and valued, where it sits, how fast it sells, and what it costs to store and ship.
- The latest inventory count by SKU and location, with unit costEnding inventory drives cost of goods sold.You · Your CPA
- Inventory aging, and slow-moving or damaged stockStock that won't sell at full price isn't worth full cost.You · Your CPA
- Purchase orders and supplier invoices for the largest orders, with payment datesOn cash-basis books, a large order paid in one year and sold in the next moves profit.Your CPA
- Shipping, freight, 3PL and marketplace fulfillment and storage fees by monthStorage fees from aged stock are a signal about the inventory.You
- Support for any freight or fulfillment cost added back as one-timeLabelled Documented, Needs support or Undocumented.First Pass reports this
What about the brand, suppliers and the owner's role?
Short answer: Who owns the brand, who makes the product, and what the owner does each week.
- Trademark registrations and domain ownershipWhose name the brand is in.Your attorney
- Supplier agreements, lead times and any single-source productsOne factory can be its own concentration risk.You · Your attorney
- What the owner does each week, and who else works in the businessThat work has to be paid for after closing.You
- Anything the First Pass lists as missingSend the list to the broker as your next request.First Pass reports this
If the seller can produce the platform reports and reconcile them to the P&L, most of this list gets quick answers. If they can't, that is the answer to the first question: the earnings figure hasn't been checked against the records it should come from.