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 the 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:
Click-Through-Rate is a metric of online ad effectiveness. It shows the percentage of ads that were clicked on.
Discounted Cash Flow is a way of valuing an investment based on its projected future cash flows.
Earnings Before Interest, Taxes, Depreciation, and Amortization. Compliant with 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.
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
The total revenue that a platform generates is divided by the number of users, which can be divided into subscribers and advertisers, and more, depending on the platform.
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:
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 was 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.
An essential part of every business which highlighting 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, some businesses don’t update their business plans as they go along.
A detailed appraisal of a business is done by the prospective buyer, or an evaluation of the buyer is done by the current owner.
Letter of Intent
An agreement is made by the buyer and the seller during the acquisition period. Explains the terms and conditions that both parties set and usually present before the final purchase.
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.
An outline of the business’ history, services, products, mission, and other relevant factors. Can be used to plan future business moves.
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.
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 believes in the business.
Standard Industrial Classifications codes 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:
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.
Customer Lifetime Value is a predicted monetary value that a customer could contribute throughout his entire relationship with your platform.
Highlights all the steps that each visitor of your platform needs to go through before they get to the point of conversion.
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.
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.
A software product is created in such a way that it can be sold as a finished product to any buyer.
Allow your customers to go for an upgraded (and more expensive) version of your product or service so that you can maximize their value.
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.