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Dropshipping Due Diligence Checklist

An 8-area framework for evaluating a dropshipping business acquisition: paid traffic and ad account health, supplier documentation, COGS verification, SKU concentration, Shopify store audit, legal review, customer assets, and transfer planning.

Paid Traffic Dependency is the Defining Dropshipping Disclosure

  • Most dropshipping businesses generate 80-100% of revenue from paid ads; the ad account health and ROAS trend are the business.
  • Ad accounts (Facebook, Google, TikTok) cannot transfer between business entities; budget for a 4-12 week cold start period with 30-60% higher CPMs.
  • Sellers must provide the full creative library, campaign walkthrough, and pixel export; without these, the cold start period is longer and more expensive.
  • A seller who cannot or will not share 24-month ROAS data and payment processor statements is the single biggest red flag in any dropshipping acquisition.

The 8-Area Dropshipping Due Diligence Framework

1. Paid Traffic and Ad Account Health

  • Request read-only access to all active ad platforms (Facebook Ads Manager, Google Ads, TikTok Ads)
  • Pull 24 months of monthly ad spend, ROAS by campaign, and cost per purchase by ad set
  • Map ROAS trend: 3+ consecutive months of decline indicates creative fatigue or audience saturation the buyer inherits
  • Verify ad account policy status: request Account Quality page screenshot (Facebook) and confirm no active violations, restricted audiences, or recent strikes
  • Assess platform concentration: 90%+ of ad spend on a single platform is higher risk than diversification across Meta, Google, and TikTok
  • Review creative library: 20+ tested creatives in multiple formats is more resilient than a single winning ad set
  • Understand that ad accounts cannot transfer between entities; model the ad account cold start cost (4-12 weeks, 30-60% higher CPMs) in the offer price
  • Request ad account performance history exports (Facebook Ads, Google Ads reports) in addition to platform access

2. Supplier Due Diligence and Relationship Verification

  • Request all supplier agreement documentation: written pricing agreements, 12-month order history exports, MOQ terms, return policy
  • Contact the supplier directly (independently of the seller) to confirm willingness to continue under new ownership at the same pricing
  • Assess supplier concentration: if a single supplier fulfills more than 70% of orders, verify a documented backup supplier option exists
  • Review supplier lead times: above 21 days is a customer satisfaction risk; verify stated lead times against Shopify order tracking data
  • Check whether the supplier relationship is exclusive (preferred terms) or open (any buyer can source on the same terms)
  • Verify no supplier entity changes, insolvency proceedings, or ownership changes in the past 24 months
  • Request 6 months of supplier invoices to cross-reference against the COGS documentation in the P&L
  • Confirm supplier accepts payment methods the buyer can access (Alibaba Trade Assurance, wire transfer, Alipay)

3. Financial Due Diligence and COGS Verification

  • Request the full 24-month P&L with itemized COGS: product cost, international shipping, import duties/VAT, payment processing fee (2-3%), Shopify transaction fee
  • Verify COGS documentation against supplier invoices and payment processor reports; cross-reference unit cost on invoices against COGS per order in Shopify
  • Request 24 months of payment processor statements showing: gross revenue, processing fees, chargeback count and dollar amount by month, and rolling reserve balance at time of sale
  • Confirm rolling reserve balance is disclosed and negotiated in the APA as a working capital item
  • Verify gross margin after all direct costs is 35-50%; below 30% indicates COGS understatement or a margin-thin product catalog
  • Request 24 months of bank statements for businesses generating more than $3,000/month in net revenue
  • Review the SDE calculation: confirm all add-backs are legitimate, owner time is accurately estimated, and no recurring expenses are excluded
  • Cross-reference monthly revenue in Shopify analytics against the P&L gross revenue figures

4. SKU Concentration and Product Catalog Risk

  • Export 12-month revenue breakdown by product from Shopify; calculate top SKU concentration (above 50% of total revenue is high concentration)
  • Review 24-month sales velocity trend for the top 3 products: declining unit sales combined with declining ROAS is a double red flag
  • Assess return rate by product: above 10% for the primary winning SKU indicates product quality or description accuracy issues
  • Review product pipeline depth: 5+ validated products with growth potential is more defensible than a 1-2 product business
  • Check the product review profile on all sales channels: below 4.0 stars or visible negative recent review trend signals quality deterioration
  • Verify no products are in categories with regulatory, customs, or payment processor restrictions (health products, electronics, weapons accessories)
  • Confirm no prior product listing bans, payment processor holds, or customs seizures related to the product category
  • Assess competitive moat: are the winning SKUs easily replicated by competitors, or is there a differentiated angle (private label, exclusive design, custom packaging)

5. Shopify Store and Technical Audit

  • Review Shopify admin with read-only staff access: verify monthly order volume matches P&L, confirm refund rate matches stated figures
  • Audit all installed Shopify apps: document each app, monthly cost, function, and whether the license transfers or requires a new subscription under the buyer
  • Confirm custom domain registration expiry date and auto-renewal status; a domain expiring within 90 days of close is a risk
  • Verify Shopify Payments eligibility for the buyer's business entity; reapplication requires KYC approval (1-3 business days)
  • Run Core Web Vitals via PageSpeed Insights for primary product pages on mobile; below 50 on mobile indicates technical optimization needed post-acquisition
  • Confirm HTTPS with valid SSL certificate set to auto-renew
  • Review the Shopify theme: confirm it is either a free theme or a purchased theme with a transferable license
  • Check for any outstanding Shopify plan invoices or payment method issues that could cause store suspension at close

6. Legal and Compliance Verification

  • Request payment processor dispute dashboard screenshots showing monthly chargeback rate for trailing 12 months; above 0.7% is approaching the processor threshold
  • Confirm FTC compliance for ecommerce: shipping time disclosures, return policy display, and country-of-origin disclosures for international shipments
  • Verify business entity structure: confirm the legal entity, any outstanding liabilities, and whether asset or entity purchase is appropriate given chargeback history
  • Review terms of service and privacy policy: confirm they are current and accurate for products sold, including disclaimers for international shipments
  • Confirm no active customer disputes, attorney general complaints, BBB complaints, or payment processor holds are outstanding at time of sale
  • Verify product compliance for any regulated categories: safety certifications, import documentation, FCC/FTC labeling requirements
  • Confirm no prior ad account bans or payment processor terminations; ask directly and verify against the stated account history
  • Review the APA representations and warranties: seller should warrant chargeback rate history, absence of outstanding disputes, and supplier relationship status

7. Customer and Email Asset Review

  • Request email list size, platform (Klaviyo, Mailchimp, or equivalent), and 12-month email analytics: open rate, click rate, revenue per send, and list growth rate
  • Verify whether the seller has an active email marketing program (target: 15-30% of total revenue) or an undeveloped list that represents post-acquisition opportunity
  • Assess repeat purchase rate in Shopify: above 20% signals customer satisfaction and brand loyalty that reduces paid traffic dependency
  • Request 6-month customer service history: review complaint patterns (product quality, shipping delays, customs issues) to identify systemic problems
  • Confirm email list compliance: verify explicit opt-in collection (not imported or purchased) and that the ESP account is transferable
  • Verify any active SMS marketing programs and confirm phone number list is transferable
  • Review post-purchase flows in Klaviyo or the ESP: document the automation sequences that drive repeat purchases and confirm they transfer with the account
  • Assess the customer review profile across all platforms; confirm no suppressed or manipulated reviews

8. Transfer Planning and Closing Checklist

  • Document the Shopify store transfer mechanism: owner transfer in admin, Shopify Payments reapplication, DNS transfer for custom domain, app subscription reactivation under buyer billing
  • Document the ad account cold start plan: seller provides full creative library export, campaign walkthrough video, targeting documentation, and ad account structure notes
  • Budget for the ad account cold start period (4-12 weeks, 30-60% higher CPMs); negotiate this cost as a purchase price reduction or extended seller support obligation
  • Confirm supplier introduction: seller introduces buyer directly to supplier contacts with written confirmation of continued fulfillment under new ownership
  • Document email marketing transfer: ESP account transfer or list export and import into buyer's account, including all automation sequences
  • Confirm domain registrar transfer or push to buyer's registrar account with updated DNS settings
  • Structure closing through Escrow.com with staged release tied to: successful Shopify store ownership transfer, confirmed payment gateway activation, domain DNS transfer, and a minimum 7-day post-transfer review period
  • Negotiate a 30-60 day transition support period covering ad account setup, supplier introductions, Shopify operations training, customer service playbook delivery, and product testing methodology

Dropshipping Due Diligence Benchmarks

MetricStrongCautionRed Flag
Blended ROAS trend (24mo)Stable or improving1-2 months declining3+ months declining
Gross margin after all COGS35-50%+25-35%Below 25%
Top winning SKU revenue shareBelow 35%35-60%Above 60%
Chargeback rateBelow 0.3%0.3-0.7%Above 0.7%
Supplier agreement documentationWritten agreement, assignableEmail terms, responsiveEmail only, unresponsive
Email revenue share15-30% of total revenue5-15%Below 5% (undeveloped)

Dropshipping Due Diligence FAQ

What is the most important area in dropshipping due diligence?

Paid traffic continuity and supplier relationship documentation are the two most critical areas. Most dropshipping businesses generate 80-100% of revenue from paid ads, so ad account health and 24-month ROAS trend are foundational. Understand that ad accounts cannot transfer between business entities and budget for the cold start period. On the supply side, verify supplier agreement documentation exists in writing.

Can ad accounts transfer when buying a dropshipping business?

No. Facebook Business Manager, Google Ads, and TikTok Ads accounts are tied to the originating business entity and cannot transfer. The buyer must create new accounts and will face a 4-12 week cold start period with 30-60% higher CPMs. The seller should provide the full creative library, campaign walkthrough, and pixel data history exports to shorten the ramp. Budget $2,000-$5,000 in excess ad spend for a store spending $10k/month.

What are the biggest red flags in dropshipping due diligence?

The five highest-severity red flags: (1) ROAS declining 3+ consecutive months; (2) single supplier with no written agreement; (3) chargeback rate above 0.7%; (4) top winning SKU above 60% of revenue with declining reviews; (5) pixel data unavailable or ad accounts recently created. Any one confirmed warrants a 20-40% price reduction or exit.

Does the rolling reserve transfer to the buyer?

The rolling reserve (5-10% of gross revenue withheld by Stripe or PayPal for 90-180 days) must be negotiated in the APA. If the seller closes their payment processor account post-sale, the reserve releases over the hold period and stays with the seller unless negotiated otherwise. Always request payment processor statements showing the current reserve balance and treat it as a working capital adjustment.

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