Most buyers focus on revenue and EBITDA when evaluating a business before submitting an LOI. Both are important, but neither tells you the full story.
To understand what you're actually buying, you need to look beyond the headline numbers.
Here are 12 metrics worth reviewing before moving forward with an acquisition.
Revenue Quality
1. Revenue by channel (LTM and prior year). Request a breakdown of revenue from Amazon, Shopify, wholesale, and any other sales channels for the last 12 months and the previous year. If more than 80% of revenue comes from one marketplace, that's a concentration risk. A single policy change could significantly impact sales.
2. Repeat purchase rate. For direct-to-consumer (DTC) brands, look at how much revenue comes from returning customers. A business with a repeat purchase rate above 40% has a very different risk profile than one that relies heavily on paid advertising to generate sales.
3. Customer acquisition cost vs. lifetime value (CAC:LTV). If the cost of acquiring customers continues to rise while their lifetime value stays the same, profitability is likely to suffer. It can take 12–18 months before the full impact becomes apparent in the P&L.
Margin Structure
4. Contribution margin by SKU. Overall gross margin doesn't tell you which products are actually making money. A business may carry 50 SKUs, but if just eight generate 90% of its contribution margin, profitability is heavily concentrated in a small number of products.
5. Landed cost as a percentage of revenue. For businesses selling physical products, review the total landed cost of each SKU, including product costs, freight, duties, and preparation expenses. Looking at these costs individually helps identify products that may be especially vulnerable to higher shipping costs or tariff changes.
6. Return rate by channel. DTC return rates of 15–25% are generally considered normal, while rates above 30% may indicate issues with product-market fit. On Amazon, return rates exceeding 10% can put listings at risk of suppression.
Operations
7. Inventory turnover by SKU. Slow-moving products tie up working capital and may eventually need to be sold at a loss. Request an aged inventory report to understand how much inventory is sitting unsold and which products aren't moving.
8. Supplier concentration. Determine how much of the business's cost of goods sold comes from its largest supplier. If one manufacturer accounts for more than 60% of products, a quality problem, production delay, or geopolitical disruption could seriously affect operations.
9. Advertising performance over the last 90 days. Review return on ad spend (ROAS), click-through rates, and cost per purchase. Declining performance may indicate that customer acquisition is becoming more expensive. It could also mean the seller has reduced advertising spend to improve reported EBITDA before the sale.
Platform and Operational Risk
10. Amazon account health. Review order defect rates, late shipment rates, and valid tracking rates. These should all meet Amazon's policy requirements. Poor account health can create serious problems after the acquisition.
11. Review volume and rating trends. Look at how frequently new customer reviews are coming in and whether ratings are improving or declining. A sudden drop in review activity may indicate reduced listing traffic. Changes in ratings over time can be more revealing than the overall star rating.
12. Team dependencies. Understand who is responsible for running the business. If most operations depend on the owner and two virtual assistants, determine how those responsibilities will transfer after closing. Identify who handles each important function and ask about the transition plan.
How to Get This Information Before LOI
You probably won't receive audited financial statements before submitting an LOI, but you can still request enough information to identify potential concerns.
Start with:
- A seller-prepared P&L with revenue broken down by channel
- Screenshots or exported reports from Shopify or Amazon Seller Central
- A supplier list showing concentration percentages
- Advertising performance reports from the past 90 days
Most motivated sellers should be willing to provide this information.
If a seller is unwilling to share basic operating and financial data, that's something you'll want to understand before moving forward.