Quality of earnings and financial models for e-commerce businesses

An e-commerce business reports revenue the moment a card is charged, but the cash arrives through settlement reports, after refunds, chargebacks and platform reserves. Between those two numbers sits most of the diligence. I start from the settlement data, not from the accounting system, and rebuild revenue from there.

Revenue quality

Marketplace sales booked gross when the platform reports net, refund rates that spike in one quarter, chargebacks sitting in a receivable nobody ages, and reserves held by Amazon or Shopify that the balance sheet treats as an asset. None of these is fraud; all of them change what the business is actually worth. In a quality of earnings review each one is reconciled to the platform's own numbers, and what survives is the earnings a buyer can underwrite.

Inventory is where profit hides

Aged and dead inventory is the classic e-commerce adjustment. Stock purchased for last season still sits at first cost, a write-down nobody has taken, and the reported gross margin quietly includes it. I age the inventory by receipt date, test turns by SKU, and state what a real write-down would do to EBITDA. The same pass covers landed cost — freight, duty and fulfilment fees that should sit in COGS but often end up in opex, where they flatter gross margin and confuse the comparables.

Marketing spend and unit economics

Blended ROAS is the least informative number in e-commerce. One channel may carry the account while three others lose money on every order, and a blended figure conceals which is which. I rebuild contribution margin by SKU and channel after landed cost, payment fees and the ad spend attributable to that channel, then test payback periods per channel. Where a model is wanted beyond the transaction, the operating model carries that structure forward as a monthly driver build with seasonality and inventory financing built in.

Buying or selling an e-commerce business

For buyers, the diligence questions are the ones above: revenue quality, inventory honesty, channel economics and how much of the growth depends on ad spend that scales worse than the pitch deck assumes. For sellers, the same analysis done early removes the surprise before a buyer's adviser finds it. Where a transaction is live, my due diligence support covers the working capital peg, debt-like items and the data-room questions that follow.