Due Diligence

E-Commerce Business Due Diligence Checklist

Due diligence E-commerce

The World Trade Organisation defines e-commerce as ‘distribution, production, sale, marketing or the delivery of goods and services by electronic means’. In the Indian context, the term has many definitions depending on various legislations.

The Consumer Protection Act of 2019 defines e-commerce under Section 2(16) as “the buying or selling of goods or services, including the digital products over the digital or electronic network”.

In the Central Goods and Services Act of 2017 under Section 2(44), e-commerce is defined as ‘the supply of goods or services or both, including the digital products over digital or electronic network’. In simple words, a company or individual conducting business through any electronic means, mainly through the Internet, amounts to e-commerce. After the advent of Internet services, the sector of e-commerce around the world has experienced a boom period. Similar to offline commercial transactions, some requirements are also there which must be followed by the entities that carry out e-commerce.

Due diligence in E-Commerce

Die diligence in e-commerce refers to the checks upon knowing the present state of the business as well as the future value of the business. We also look for who is going to be the potential buyer for a specific business. Do the current operators of the business need coaching? We check whether the business is worth the money we spend. And if the answer is yes, what are going to be the growth strategies? Like if you are in a B2B business, there needs to be a sales force. If it is a B2C business model, you need to have a nurturing process.

There are many available e-commerce businesses for sale, so they can also be great acquisitions for entrepreneurs who are trying to build their portfolios. Sometimes, people avoid selling their business because they are failing or might have other time commitments. So, a buyer needs to be very thorough while conducting e-commerce due diligence.

The E-Commerce sector has been categorised into three parts as given below:-

Business-to-Business (B2B)– It is the form of transaction which occurs between businesses like wholesaler to retailer or manufacturer to wholesaler.

Business-to-Consumer (B2C)– It is the transaction between businesses and consumers, the product’s end users.

Consumer-to-Consumer- It is the dealing between two people on the basis of their needs and requirements.

Checklist for E-Commerce Due Diligence

The checklist for due diligence in e-commerce includes but is not limited to

  1. Background story of the business- How and why the business came into existence. The storyline creates trust in the buyers. A background check on the owner and employees of the business is very important. Because sometimes the business might be completely online, or some might be working from abroad in their time zones. One can also perform due diligence by checking the professional and social media accounts of the employer and the employees or any other available OSINT sources. One can resort to HUMINT as well. The verification should also be done about whether the registered owner is the actual legal owner of the business.

2. Legal Compliance- The assessment of the legal compliance of the business is extremely important. It involves a thorough review of the adherence of the business to the industry standards and applicable laws. Some major areas of compliance that most businesses need to follow include-

3. The reason why the business needs to be sold.

4. Points regarding the reasons for the business are valuable.

5. Documentation A list should be prepared of all the documents that must be reviewed thoroughly to arrive at the final decision. These documents include-

  • Business registration documents
  • The documents that relate to the Intellectual Property Rights
  • The internal and external docs.
  • The up-to-date financial documents

After that, these documents must be verified by a professional attorney. The understanding of these financial documents of the business is a time-consuming process. If there are any financial liabilities, in that case, agree with the owner to sort them out before acquiring the business or agree to deduct these liabilities when calculating the final price at which the online business will be sold.

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When making an offer to acquire an online business, the average monthly income must have a check. Depending upon the income, the appropriate purchasing offer should be approx. 30 times the monthly profit.

6. Prepared financials– Team costs, profit margins, etc.

7. Analytics– It helps the buyers understand the channels driving the business.

8.To check the online presence of the business- Most of the online businesses are connected to websites and online pages by which the marketing takes place, which one is acquiring to run the business. The traffic of the business can be checked too and other important numbers. Many online tools are also there that can check the website’s performance, like Google search console- https://search.google.com/search-console/. If a speciality is needed, one can hire a digital analyst to provide an explanation of the data.

Since the online business depends very much upon the website traffic, understanding the details during this step is crucial.

Duties of a buyer

The buyer must analyse the traffic status and the profile of the business. The buyer should keep a check on the annual and monthly Google Analytics for each channel of the business. It is the first stage of the traffic analysis.

The desired trend is obviously for steady and slow growth across all sources, but it is also completely acceptable to see some sources diminish and grow in importance over a period of time. It is also crucial to observe the spikes in the data set and explore reasons for the same, to ask direct questions of the seller if the need arises.

The buyer might ask these questions-

  1. Do the traffic spikes correspond to the specific actions of the owner?
  2. Does it correlate to increased revenue?
  3. Or can it be repeated?

Infrastructure and Technology Stack

It refers to the investigation of the existing technology and systems that the business uses and the overall digital presence of the business. It ensures that the business has a powerful foundation and it can support the growth objectives. The key areas for this audit include- The Content Management System (CMS), shopping cart software, payment gateways, order fulfilment systems, the business’s security measures, SSL Certificates, the flexibility of the technology and its scalability and so on.

Customer Reviews & Customer Satisfaction

If the customers are satisfied, they prefer to repurchase from a brand, which is why the examination of customer reviews is important. The assessment of customer care provides insights into the reputation of the business, the quality of the products, etc. The customer reviews on different platforms can also be gauged for overall satisfaction levels. The business’s strengths and weaknesses can also be identified by paying attention to the recurring themes.

Direct engagements with the customers can also be done through feedback forms and surveys, etc., to seek more specific information.  

Competition in the Market

The competitive landscape helps to understand the positioning of the business and the potential challenges.

The competition in the market can be analysed by

  1. Identifying the Competitors– The market’s main players should be identified who are offering the same services or products. The evaluation of the market share, pricing strategies, and customer base is also crucial to understand the level of competition.
  2. To see the market trends– It is the assessment of the prevailing market trends, consumer preferences and emerging technologies that impact the industry. Here, the factors which play an important role are the market growth projections, consumer behaviour and industry regulations.
  3. SWOT Analysis refers to strengths, weaknesses, opportunities and threats. It is the analysis of both the competitors and the target business. It helps to identify the areas for improvement and potential threats in the market.
  4. Feedback and reviews of the Customers– It includes the study of customer reviews. In order to seek expertise, industry experts can be contacted, and the market research reports need to be studied thoroughly. It also provides the areas where the business can differentiate itself.
  5. Expert Opinions– The consultation can be obtained from industry experts, and the industry-specific publications can be analysed to have a deeper understanding of the competitive dynamics and the potential of the industry.
  6. To consider the entry barriers– We need to also understand the entry barriers in the market, the regulatory requirements and the technological advancements. It helps to identify the potential challenges for the business.
READ  IP Due Diligence – Everything You Need to Know

Legal Provisions

The e-commerce laws, as defined in the FDI policy, are of two models-

First is the Marketplace Model– The registration of e-commerce on an electronic network to serve as a facilitator between the seller and the buyer is commonly known as the marketplace-based model. The marketplace also charges commissions to the sellers for the service it renders. Nowadays, the online marketplaces which are operating in the nation are Shopclues and Naaptol.

Another is the Inventory Model– It is a type of business that engages in e-commerce using an inventory-based model that possesses a supply for the services and products sold directly to the customers. Hence, the seller is the online retailer which stocks it straight from the sellers and brands; an example includes Myntra.

The initiatives of the Government of India, like Digital India, the funds allocation like the Bharatnet Project1, cashless economy promotion and the Reserve Bank of India launching the Unitied Payment Interface have all contributed a lot to the growth of the e-commerce sector in India.

The laws that are applicable to the e-commerce sector include-

FDI Policy, The Companies Act 0f 2013; the Foreign Exchange Management Act, 1999; Information Technology Act, 2000; General Data Protection Regulations (GDPR), The Consumer Protection Act, 1986; Payment and Settlement Act, 2007; Legal Metrology Act, 2009, The Income Tax Act, 1961, Indian Contract Act, 1872, The Patents Act, 1970 and so on.

The e-commerce business must comply with the labelling and packaging requirements set out by the Metrology Act, 2009, and read with Legal Metrology (Packaged Commodity) Rules, 2011. The product page must include information about the weight, size and other attributes.

The requirements for the proposal communication and acceptance and the contract creation between the intermediaries and buyers are all regulated by the IT Act of 2000. In addition to this, the terms of service of the online platform and the return policies must be enforceable contracts.

All the copyrights and trademarks for the texts/products which are intended to be used must be secured. Though India has a legal framework for protecting IP rights, we have yet to update the laws to have good efficiency in the online world. For instance, we need laws to prevent domain name deception.

The information which the entity’s shipping policy and sales must provide is given under The Sale of Goods Act of 1930. The policy should also state about the availability of the refund/return options.

Conclusion

The e-commerce sector has become more prevalent than the real markets today. Platforms like Amazon, Myntra, etc., have received great love and support from consumers and buyers. But at the same time, we cannot forget that since we are new in the e-commerce sector, it needs to be regulated properly. We are still lacking laws on the same. The protection of data becomes extremely important on the e-portal, given that the infringement of the same can lead to great loss overnight. So, the data protection policies need to be strengthened further.  

FAQs

  1. What is the meaning of due diligence in commerce?

    The due diligence in e-commerce refers to the checks upon the online marketing platforms like Myntra, etc.

  2. What is the meaning of due diligence?

    Due diligence, in general, refers to the investigation of the operations and conduct of the business. To see whether the business aligns with the prevailing rules and regulations of the nation.

  3. What is due diligence in commercial terms?

    It is a process by which the buyer analyses the target company from a commercial point of view.

  4. What is the meaning of due diligence in accounting?

    When we talk about the financial world, due diligence refers to the investigation of all the financial documents of the company or business before entering into a transaction with the other party.

  5. What is an example of due diligence?

    Examples of due diligence include the implementation of new business information systems or integration with another firm.

  6. What are the 3 examples of due diligence?

    Examples of due diligence include purchasing new property, purchasing new equipment and integrating with another firm.

  7. What is a good example of due diligence?

    A good example of the same could be an underwriter who is auditing the issuer's business and operations before selling it.

  8. What is an example of a due diligence process?

    Examples include thoroughly inspecting a property before buying it to ensure it is an investment worth the money.

  9. What is due diligence, in simple words?

    In simple terms, due diligence refers to the audit or review performed to confirm the facts or details of a matter under consideration.

  10. What are the three principles of due diligence?

    The first purpose is to avoid adverse impacts on people; the second is to avoid the adverse impacts upon the environment and society; and lastly, to prevent the adverse effects of the same linked directly to operations and services via business relationships.

  11. What is due diligence and its types?

    Due diligence is the investigation to see whether the business runs according to established rules and norms. The types include-
    1.       Tax due diligence
    2.      Financial due diligence
    3.      Legal due diligence
    4.      Operational due diligence
    5.      Commercial due diligence, and so on.

  12. What are the types of due diligence?

    There are several different types of due diligence which are performed. Examples include-
    1.       Tax due diligence
    2.      Operational due diligence
    3.      Commercial Due diligence
    4.      Financial due diligence
    5.      Legal due diligence

  13. What is the due diligence concept and types of investigation?

    The concept of due diligence is very simple. It is a proper check on the functioning of the business and its compliance with the prevailing laws.
    The types of investigation include checks on different areas, which are legal, financial, commercial, etc.

  14. What are the types of due diligence adjustments?

    The adjustments shall include EBITDA during due diligence, non-recurring expenses like restructuring costs, and expenses that relate to mergers and acquisitions, etc.

  15. What is the role of due diligence?

    The role of due diligence is to see whether the transaction is fully legal or not. It is also to apprise both the buyer and the seller about as many facts as possible in the deal.

  16. What is the role of due diligence in finance?

    In finance, due diligence refers to the checks on the business's financial status. It means to check the financial records thoroughly.

  17. What is the role of due diligence in M&A?

    After the mergers and acquisitions, the due diligence process helps the stakeholders understand the potential scalability of the business.

  18. What is the main objective of due diligence?

    The main objective of due diligence is to avoid legal actions which might appear due to the non-compliance of the businesses with the prevailing rules and regulations of the nation relating to businesses. It also assesses whether the employees of the business are engaged in any illegal activity or not.

READ  Financial Due Diligence Checklist

References

  1. https://usof.gov.in/en/bharatnet-project

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