Digital Acquisitions for Beginners – An Overview of Commonly Used Jargon

Posted on April 5, 2019 by - Blog

Overview of Commonly Used Jargon

You’re thinking about buying an online business. Now what? If you want to enter the world of digital acquisitions, you’ll want to make sure to come prepared.

While negotiating the deal, you might come across terms you’re not quite familiar with. Digital acquisitions share many terms with the acquisitions of traditional businesses, but there are some critical differences to remember.

If you want to know the basic terminology of buying an online company, here’s what you need to know.

When Looking for a Company

The first step in digital acquisition is finding the best company to invest in. This is also the most important step, as it will ultimately determine how fruitful your investment will be. Here are some of the main value metrics to keep in mind:

CTR

Click-Through-Rate is a metric of online ad effectiveness. It shows the percentage of ads that were clicked on.

DCF

Discounted Cash Flow is a way of valuing an investment based on its projected future cash flows.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. Compliant to GAAP accounting practice, this is the number that many stock market analysis and financial reports concentrate on. It reflects a business’s operating profitability but you’ll have to dive deeper than that, as there are many ways for accountants to manipulate EBITDA.

FCF

Free Cash Flow is all the money that a company has after meeting all CAPEX (capital expenditures) and operating expenses. An increase in FCF usually precedes higher income.

Revenue per User

Total revenue that a platform generates divided by the number of users, which can be divided into subscribers and advertisers and more, depending on the platform.

SDE

Seller’s Discretionary Earnings represent earnings before taxes, interests, non-cash expenses, and the current owner’s compensation. After the purchase, the leftover can be used for paying off debt, personal income, or operational capital.

When Negotiating a Deal

Digital acquisitions aren’t easy. The preparation and negotiation process can be quite long and tough. Here are some of the terms you might encounter during negotiations:

Agency Disclosure

A necessary document if you’re using a broker. It explains all the roles that the broker will play in the transaction process.

Audited Financial Statements

The target’s financial statement prepared by an independent accountant. They show the current position of the business and the results of prior operations.

Agreement of Sale

Also named Purchase and Sale Agreement (P&S), it’s a contract where the seller promises to sell and the buyer promises to buy under the agreed-upon conditions.

Business Plan

An essential part of every business which highlights the business’ mission, vision, strategy, sales projections, and other relevant information. It’s something that a prospective buyer can learn a lot from, provided it’s up to date. However, there are businesses that don’t update their business plans as they go along.

Due Diligence

Detailed appraisal of a business done by the prospective buyer, or evaluation of the buyer done by the current owner.

Letter of Intent

An agreement made by the buyer and the seller during the acquisition period. Explains the terms and conditions that both parties set and usually presented before the final purchase.

Goodwill

Very common in digital acquisitions as an online company’s value is measured by factors beyond the financial. It’s a part of the price that covers customer loyalty, brand name, and intellectual property rights.

Memorandum

An outline of the business’ history, services, products, mission, and other relevant factors. Can be used to plan future business moves.

NDA

A Non-Disclosure Agreement is essential since online businesses usually have a lot of sensitive data. An NDA protects confidential data that the seller has disclosed to a buyer. It can include supplier information, client list, financials, and other sensitive information that needs to stay between the buyer and the seller.

Owner Financing

A situation where the seller offers a loan to the buyer so that they can cover the portion of the purchase price. It usually goes from 30-60% of the value, the rest to be paid by the buyer’s funds and other sources of financing. It’s becoming increasingly common in digital acquisitions, especially when the seller really believes in the business.

SIC Codes

Standard Industrial Classifications codes that categorize businesses by sectors and types. Frequently updated due to the complexity of online businesses.

After You’ve Bought a Business

Since we’re talking about online businesses here, here are some of the terms you’ll want to pay attention to if you want to ensure the growth of your business:

A/B Testing

Also referred to as “split testing,” it requires you to compare two versions of a web page or online ad to see which one will perform better.

CLV

Customer Lifetime Value is a predicted monetary value that a customer could contribute over the course of his entire relationship with your platform.

Conversion Funnel

Highlights all the steps that each visitor of your platform needs to go through before they get to the point of conversion.

Growth Hacking

A fairly new term that reflects how you use product engineering, traditional marketing, and analytical thinking to gain exposure for your company and sell your products and services.

mCommerce

Crucial if you’re buying an e-commerce business. Signifies the use of mobile devices for buying and selling products online, as opposed to just in-house tech.

Turnkey

A software product created in such a way that it can be sold as a finished product to any buyer.

Upselling

Giving your customers an opportunity to go for an upgraded (and more expensive) version of your product or service so that you can maximize their value.

Final Thoughts

These are only some of the most common terms you’re likely to hear while trying to acquire an online business. The jargon may continue to expand due to the growth rate of such businesses.

If you familiarize yourself with these terms, you’ll have a better understanding of some of the main concepts surrounding the process from start to finish. This can give you a head start on the language that you’ll be speaking once you enter the world of digital acquisitions.

5 Reasons Why You Should Make a Digital Acquisition

Posted on April 2, 2019 by - Blog

digital acquisition

In this day and age, online businesses are the Holy Grail of success. Naturally, you might think that it would be a good idea to start one. However, you may want to think twice, as there’s an even better option.

Digital acquisitions have proven to be superior to starting your own business in many situations. If you’re looking to invest, there are very few options as good as this one.

So, why should you buy an online business? Here are some of the reasons to think about.

Instant Access to a Global Market

If you were to start a business, how broad would your audience be? How long would it take you to establish the desired market presence?

But if you were to acquire an existing online business instead, you’ll be able to skip all of that and more. Many online businesses have a global reach, so the potential is huge. Moreover, buying an established business includes all their existing customers, as well as the growth potential.

This can be quite a shortcut towards the success you’re looking to build. What adds even more to this is the power of an established brand. If you choose an internet business that already has a great reputation, you’ll save yourself a lot of time you’d have to spend on brand building and customer acquisition.

Of course, it doesn’t mean that you’ll just open your wallet and watch as your new business grows. You’ll still have to make sure that the business is able to scale and expand its reach, but you’ll definitely get a big head start if you play your cards right and choose a business that’s in the growth phase.

Low Risk

Many new businesses fail within a few months, though half of them may make it to a couple of years. This is not to say that any new startup of yours is going to fail, but the statistics aren’t in your favor. This isn’t the case with digital acquisitions.

Buying a business that already stands on its two feet means that you don’t face the risk of it failing before it even takes off. Better yet, you get to skip the trial and error phase and own a business that does things the right way from the get-go.

Bear in mind that this still doesn’t mean you’re risk-free. Buying a business should only be the first step towards your success as an entrepreneur. No matter how well-developed the business you’re buying might be, its future lies in your hands from the moment the acquisition is complete.

Still, this is one of the main arguments in favor of buying a business instead of starting one. You get to skip the most volatile and risky years and gain a stable foundation on which you can build your success.

Return on Investment

Today, internet businesses are one of the best ways of securing a good ROI. This is versus other forms of investment, as the comparison with traditional businesses is to come.

It’s not like investing in real estate or stocks either, where you’d have to rely on macro trends and market changes that tend to be quite volatile.

With an online business, you wouldn’t expose yourself to this issue. Sure, there are new business trends emerging on a regular basis, but it’s you who controls the direction of your business. You have much more control than you would with many other investments, so your ROI is a lot less dependent on external factors.

This by no means implies that you’re immune to what’s happening outside of your own backyard, but it does mean that you’re less likely to suffer the consequences of actions outside of your control.

More Focus on the Big Picture

Building a business from the ground up is rewarding, but it can also be a dreadful and time-consuming. Defining policies, building a website, designing a logo – all of these tasks are essential to creating a stable base, but the time and effort required makes them overwhelming.

This is why digital acquisitions can be a much better option. You get everything ready-made for you, so you can focus on the top-line strategy, as opposed to mundane tasks. This can allow you to come up with fresh, creative ideas to lead and scale your business.

In essence, your main job becomes ensuring sales and business growth. Of course, this is no easy task, but buying an online business means that you go into your ventures with a clear head.

Low Overhead Expenses

One of the biggest upsides of owning an online business is high margins. These are mainly the result of low overhead expenses compared to a traditional brick-and-mortar business, which would have to cover leases, retail space, bloated workforce, and other costs that could put a crimp on your bottom line profits.

Not only does this reduce the financial risks associated with running a business, it also makes sure that a lot of weight is taken off your shoulders. Having a drop-shipping agreement, for example, makes it much easier to handle everyday operations and offers a lot of financial flexibility.

The result of all this should be high profit margins, which are essential for investing in further business growth. Instead of wasting your money on big operations with low margins, you can improve the business functions for a much bigger impact on your success.

Final Thoughts

These are only some of the many reasons why digital acquisitions are gaining traction. An online business is among the best investments you can make today, as they’re the most likely to yield the desired results.

Of course, this doesn’t mean it’s an easy process that should be taken lightly. On the contrary, you need to be extremely careful about where you’re putting your money. There are many factors and metrics to think about, so leave enough time for due diligence.

You can concentrate on finding a company that’s worth investing in. With the right approach, you could reach your business goals in a much shorter time than most.

7 Risks to Avoid When Buying an Online Business

Posted on March 20, 2019 by - Blog

online business

Taking risks is definitely mandatory when it comes to business. Whether you are new to the business world or a businessman with years of experience, you will often find yourself in situations that demand some risk if you want to profit. That is the “good” kind of risk-taking.

On the other hand, there are situations that you should absolutely avoid, where risking it all just isn’t worth it. If you still can’t distinguish those situations from the other ones, don’t worry. We know that digital acquisitions require knowledge and that’s where this article will go over some of the risks that you’ll want to avoid when buying an online business.

Buying an Online Business That’s Completely Wrong for You

The first risk that you need to avoid, when buying an online business, is buying something that doesn’t match your interests. It doesn’t matter if you want to hire a manager to do most of the work or if you are planning to do it yourself, this mistake is likely to curtail the company’s growth.

You need to find an online business that you can be passionate about. After all, one of the things that entrepreneurs cherish is the choice to work on something that appeals to them. With that in mind, find a company that you share interests with and that matches your personality.

Not Researching the Seller

This mistake is incredibly common when new entrepreneurs decide to buy online businesses. They see an offer that looks simply delicious to them as it fits their budget and/or other goals, not realizing what actually lays ahead.

If an interesting offer catches your eye, be sure to research the seller as much as you can. Maybe the seller just wants to get out of a business that’s broken beyond repair and that’s currently in some stage of going under. Once you become the captain of that ship, you will realize what you’ve got yourself into.

Another risk is that you will end up competing against your seller after the sale. The seller could just be selling in order to start something even bigger. Since the seller knows what they are selling, he could be a potential mountain you will have to climb in order for your new online business to succeed.

Not Processing and Analyzing Chargebacks or Disputes

Every online company has found itself in this situation multiple times since its existence. Errors, shipping delay, carrier delay that’s out of the company’s control, customer change of mind, you name it. Many things can go wrong when it comes to shipping, especially if you are shipping all across the world.

That will result in dissatisfied customers and bad company reviews. Since we already discussed that becoming a captain of a sinking ship is a fool’s errand, you need to do a little bit more research.

This time you will be researching the reviews that previous customers left about the company’s website. Take your time and go through as many as possible. Once you’ve done that, you should be able to get a full picture of the company you are trying to buy.

High Website Maintenance

There are unavoidable website maintenance routines and procedures that have to be done every day for a site to work properly. What you should do before buying an online business is contact its current owner and ask them about their current maintenance routines.

That way you will be able to figure out the amount of resources you will need to dedicate to the website’s maintenance on a weekly basis. If it is too much for you to shoulder, you might have to figure out if you can afford to hire a team the job for you, or simply choose a different online business.

Going Over Your Budget

Before you do anything, you have to know precisely what your budget is and just how much money you are willing to pay for a specific online business. Many entrepreneurs make the mistake of going over budget.

They see an interesting online business offer that suits their intentions, but at a price that’s way over their budget. What do they do? They decide to risk it thinking that it will work out later. The most usual scenario is that it never does.

Avoid going into debt, potential bankruptcy, and risking your entire team’s work and simply either wait until you have sufficient funds or move on to the next online business offer.

Not Having a Good Purchase Contract

Once you find the perfect online business that you would like to purchase, it is time to sign the purchase contract. Before signing, you need to talk with the current owner and lay out your own terms. You should be concerned about the property, assets, stock, bills, etc.

It would be wise that you hire a corporate lawyer with years of experience and first consult with them or let them oversee the entire process.

Not Knowing the Value of an Online Business

This step will prevent you from losing extra money when in reality, you don’t have to. There are business owners who could trick you into buying their online business at a price that’s more than what business is actually worth.

In order to avoid that mistake, you should consider doing a detailed evaluation and financial analysis of the business that you would like to buy.

With that being said, you will need to look up or request the company’s profit and loss statement, key assets, balance sheets, cash flow statements, etc.

If accounting isn’t one of your strong suits, you can hire an account or let your broker boil it all down. Only then will you get to know just how much this online business actually costs.

Conclusion

Here at Digital Acquisitions, we make sure that you learn everything that you need in order to prepare yourself for the world of business. Now that you know the 7 risks you should avoid when it comes to buying a new online business, you should be ready to go.

 

5 Common Mistakes When Buying an Online Business

Posted on February 21, 2019 by - Blog

buying online business

Buying an established online business can be a lot easier than starting a new company from scratch. For one, most of the start-up kinks have likely been ironed out, and an already-existing supply chain means you can hit the ground running. Plus, an established business already has a customer base, and much of the digital marketing like SEO may already be in place.

But what if you’ve overlooked a key factor in how the business operates? Have you done due diligence to ensure you can afford to run the company (and that the company you’re buying is right for you)? Without proper checks, you could be walking into bankruptcy.
Thankfully, there are steps you can take to avoid disaster. Read on to learn about the top five mistakes made when buying an online business and how you can avoid these common pitfalls.

Due Diligence

As the adage goes, if something looks too good to be true, it probably is. Not everything described by a site owner may be as it seems, so the first step that must be taken when buying an online business is to complete due diligence. Without proper checks of the company’s history, revenue, and operations, you won’t know what you could be potentially buying.

Even though you’re excited to get started with your new digital acquisition, there could be a reason why the current owner is selling. While not an exhaustive list, due diligence should at a minimum include:

Background

To help project future growth, collect information like click conversion, customer traffic, marketing campaigns, and the current SDE or EBITDA value.

Profitability

You need to know what potential income (or loss) you’re buying. Ensure revenue breakdown listed on any reports can be tied directly to the business.

Costs

Overheads can quickly eat away at your profit. A detailed P&L statement should include all business expenses including current marketing and advertising costs. Services like SEMrush can be useful to ensure there aren’t any unreported paid traffic sources.

Assets

If the business sells goods and not just services, check what stock you will be inheriting. If possible, physically visit the site where the stock is held or at least request a video of the goods. Pictures can be more easily manipulated (and video shouldn’t be hard to get).

Ensuring you gather as much information as possible before entering into an agreement is the first step in avoiding buying the wrong online business.

Buying the Wrong Website

There are literally thousands of websites for sale at any given time, with many of these being sold by unscrupulous owners trying to offload a bad investment. Completing due diligence will help safeguard against many of these scammers,. However, to further protect your time and money, it’s important to take a careful approach with any new digital acquisition.

To ensure you’re buying the best business for you, ask yourself the following questions:

What is the seller’s motivation?

Are they selling to get away from a financial catastrophe or is the sale genuine? Is the seller getting out because the business has run its course? Look at trends in the market you’re wanting to enter to ensure the business is future-proof.

What is the business’s reputation?

It can be near impossible to improve the reputation of a tainted business. Check the Better Business Bureau for complaints against the site.

How does the business rank on search engines?

Search engine traffic helps drive business to your site. If you buy the business, will you need to employ an SEO expert or does the site rank well enough as is?

Does the business fit your interests and goals?

Establish some criteria to help narrow the scope of your search. Setting profit, maintenance time, and sale price parameters is a great start.

Will the business grow?

There’s no point buying a business if there’s no chance for growth. Setting up a realistic, time-based business plan with achievable goals can help lead you in the right direction.

With careful consideration, you can ensure you’re buying a business that will last the test of time.

Paying Over Market Value

Prices for online businesses vary greatly, from a few hundred or thousands of dollars to many hundreds of thousands of dollars. When buying an online business, many new owners overestimate the value of a business they’re buying and end up paying too much.

To avoid this, it helps to know how online businesses are valued. A general rule of thumb is to multiply the business profits by a factor of two to three. While this is a good guide, a more accurate measure often employed is to work out the Seller’s Discretionary Earnings, or SDE.

Generally used for selling businesses under $1,000,000, SDE is based on the owner’s total cash flow rather than being based solely on profit. The basic formula to work out the SDE is:

Total Profit – Cost of Goods Sold – Expenses + Owners Compensation

While SDE is the main method used to price online businesses, this is only part of the equation. The final sale price will be influenced by a number of additional factors, including:

• Profit
• Brand recognition
• Domain name
• Web traffic
• Social media presence
• Customer database
• Physical assets

Overextending Finances

A common mistake of many new business owners is going into debt. While it can sometimes be hard to avoid, running any business requires capital so you need to know how much you have to work with. If you have a business loan to cover as well as general expenses, will you be able to offset these costs with only the cash flow from the digital acquisition?

One of the easiest ways you can avoid going into debt is to wait until you have sufficient funds to cover the cost of buying the business. Even with low profit, it will be easier to run the business without a monthly loan payment looming over your head.

Another option is to look for investors. Giving up partial ownership of the business may seem drastic, but it can also provide the necessary funds to make the purchase. Investors don’t just provide capital in return for a percentage of the profit; as they’re buying a piece of the business, they also share in any losses, thus mitigating your risk.

Not Using a Broker

One of the easiest ways you can avoid these mistakes is to enlist the services of a reputable broker. As brokers only work with reputable business owners, they can ensure your new digital acquisition isn’t on its last legs.

Brokers can help with due diligence and negotiations and as experts, they can field any questions you might have.

Final Word

Buying an online business for the first time can be a daunting experience. There are so many sites for sale and even more business types to look through, so it’s easy to make mistakes.

To help safeguard your time and money, carry out due diligence and learn as much as you can about the business that you want to buy. Investigate the motivation for sale, and ensure you pay a fair and reasonable price by using the SDE formula. If you are unsure about anything, speak to a professional advisor. They will not only protect you from buying a failing business, but they can lead you through the process and ensure you pay a fair price.