Ecommerce Businesses for Sale: What Buyers Underwrite
When a founder decides to take an ecommerce business to market, the initial conversation almost always revolves around two numbers: trailing twelve-month revenue and EBITDA. These are the headlines. They determine the rough neighbourhood of valuation in which a conversation might take place.
However, experienced acquirers, whether private equity firms, strategic buyers, or family offices, do not buy headlines. They buy future cash flows. The process of verifying whether those cash flows are sustainable, defensive, and scalable is called underwriting. With deal multiples remaining elevated across the market, rigorous underwriting has become more critical than ever.
To successfully navigate a sale, it is vital to understand that a buyer is not merely auditing your past performance. They are building a financial model to predict the future. If you understand the specific levers they pull to build that conviction, you can structure your operations today to maximise value tomorrow.
Here is how sophisticated buyers underwrite ecommerce assets and the specific metrics they scrutinise.
Unit Economics: Moving Beyond Gross Margin
In the early stages of growth, many founders focus on top-line revenue and basic gross margin. While gross margin (Revenue minus Cost of Goods Sold) is important, it is often insufficient for a buyer trying to understand the true profitability of a transaction.
Buyers will strip your P&L down to calculate Contribution Margin. This metric isolates the profitability of an individual sale after all variable costs are accounted for. It is usually analysed in three layers:
- Contribution Margin 1 (CM1): Revenue less the cost of the product and inbound freight. This is essentially your gross margin.
- Contribution Margin 2 (CM2): CM1 less fulfilment costs (pick, pack, and ship) and payment processing fees.
- Contribution Margin 3 (CM3): CM2 less variable marketing spend (customer acquisition costs).
Why this matters to a buyer
A business might show a healthy EBITDA because it has kept fixed overheads (rent, salaries) low. However, if the CM3 is thin or negative, the business model is fundamentally flawed. It implies that the core transaction yields very little profit after paying for the product, shipping it, and acquiring the customer.
Buyers underwrite the stability of CM3. If your logistics costs are rising or your advertising efficiency is dropping, your CM3 compresses. A buyer will model this compression into the future, which lowers the valuation they are willing to pay today.
Customer Cohorts and Retention (LTV)
Revenue is not created equal. $10 million in revenue derived entirely from new customers is worth significantly less than $10 million in revenue where 50 per cent comes from returning customers. The former requires a constant, expensive treadmill of ad spend; the latter implies a brand asset.
Buyers assess this through Cohort Analysis. They group customers by the month or quarter they were acquired and track their spending behaviour over time.
They are looking for the Lifetime Value (LTV) relative to the Cost of Acquisition (CAC).
LTV:CAC Ratio
$$ \text{LTV:CAC} = \frac{\text{Lifetime Value of a Customer}}{\text{Cost to Acquire a Customer}} $$
While the formula looks simple, the nuance lies in how LTV is defined. Founders often calculate LTV over a 5-year horizon. Buyers are rarely that generous. They typically underwrite LTV based on a 12 to 24-month horizon.
If you spend $50 to acquire a customer who generates $150 in gross profit over 12 months, your LTV:CAC is 3:1. This is generally considered a healthy benchmark. If that ratio drops below 2:1, the buyer will view the business as risky; if marketing costs rise even slightly, the business becomes unprofitable.
To prepare for an exit, focus on extending the "tail" of your cohorts. High repeat purchase rates in months 6, 12, and 18 signal to a buyer that the product has genuine utility and loyalty, reducing the pressure on paid acquisition.
Marketing Efficiency and Platform Risk
In the post-iOS14 world, the volatility of digital advertising is a central concern for acquirers. Customer acquisition costs have risen significantly across the industry, driven by increased competition, stricter privacy rules, and rising digital ad costs. A business that relies exclusively on Meta (Facebook/Instagram) for 90 per cent of its traffic is viewed as a fragile asset. A single algorithm change or account suspension could wipe out the business overnight.
Buyers underwrite marketing efficiency using two primary lenses:
- ROAS (Return on Ad Spend): The direct revenue attributed to specific ad campaigns.
- MER (Marketing Efficiency Ratio): A holistic view of total marketing health.
$$ \text{MER} = \frac{\text{Total Revenue}}{\text{Total Marketing Spend}} $$
While ROAS helps manage day-to-day bidding, buyers prefer MER because it accounts for the "halo effect" of brand building and organic traffic.
The Diversification Premium
Buyers will discount valuation heavily for platform concentration. If you can demonstrate a mix of customer acquisition channels, such as SEO, email marketing (owned audience), influencers, and perhaps Amazon alongside direct-to-consumer (DTC) efforts, you reduce the risk profile.
When underwriting, a buyer might run a sensitivity analysis: What happens to EBITDA if Facebook CPMs (cost per thousand impressions) rise by 30 per cent? If the answer is that the business breaks even or loses money, the deal structure will likely shift from cash-at-close to an earn-out, transferring that risk back to you.
Working Capital and the Cash Conversion Cycle
Profit is opinion; cash is fact. Nowhere is this truer than in ecommerce, where growth consumes cash through inventory requirements.
Buyers pay close attention to the Cash Conversion Cycle (CCC). This metric measures the time lag between spending cash to buy inventory and receiving cash from customers.
$$ \text{CCC} = \text{Days Inventory Outstanding} + \text{Days Sales Outstanding} - \text{Days Payable Outstanding} $$
- Days Inventory Outstanding (DIO): How long stock sits before being sold.
- Days Sales Outstanding (DSO): How long it takes to collect cash (usually zero for DTC, but relevant for wholesale).
- Days Payable Outstanding (DPO): How long you take to pay suppliers.
The trap of the "Asset-Heavy" model
If you have a CCC of 120 days, it means your cash is tied up for four months before you see a return. As you grow, you need to buy more inventory, which sucks up more cash. A buyer sees this as a "working capital drag." They will need to inject extra capital just to sustain growth, which ultimately lowers the effective purchase price.
Conversely, if you have negotiated favourable terms with suppliers (e.g., paying 60 days after receipt) and turn inventory quickly, you might have a negative CCC. This is the holy grail of ecommerce: the business generates cash as it grows. Buyers pay a premium for this efficiency because the business effectively funds its own expansion.
Inventory Quality and Supply Chain Resilience
Finally, buyers underwrite the physical reality of your product. During financial due diligence, they will look closely at the "ageing" of your inventory.
Dead stock is a liability that founders often ignore. If you have $500,000 of inventory on the books, but $100,000 of it is over 12 months old and unlikely to sell without deep discounting, a buyer will exclude that value from the working capital calculation (the "PEG"). They will not pay you dollar-for-dollar for stock they cannot sell.
Furthermore, the resilience of the supply chain is now a key underwriting criterion. According to the 2025 MHI-Deloitte Annual Industry Report, 55 per cent of supply chain leaders are increasing their technology investments, with ecommerce growth driving companies to find better ways to anticipate demand changes and fulfil orders more quickly. Single-source manufacturing in a geopolitically sensitive region is a risk factor. Buyers prefer to see:
- Diversified manufacturing: A primary factory and a backup, ideally in different regions.
- Quality Control (QC) documentation: Low return rates (RMA) rooted in strong QC processes.
- Freight reliability: A clear history of landed costs and lead times.
If your margins fluctuate wildly because of spot-pricing on shipping containers, a buyer will underwrite the worst-case scenario to protect themselves.
Aligning with Buyer Expectations
Selling an ecommerce business is about more than handing over a Shopify login and a P&L statement. It requires demonstrating that the engine behind the revenue is tuned, efficient, and resilient.
Buyers underwrite the sustainability of your unit economics, the loyalty of your customers, and the efficiency of your capital. They are looking for reasons to believe that the business will continue to perform when you are no longer at the helm.
By shifting your focus from vanity metrics (revenue growth) to quality metrics (contribution margin, LTV, and working capital efficiency) 12 to 24 months before you intend to sell, you align your business with what buyers actually value. This preparation does not just increase the likelihood of a sale; it directly impacts the multiple a buyer is willing to pay.
If you are thinking about an exit and would value a discreet, no-pressure conversation about how the market might view your business, get in touch with our team.