Purchasing an e-commerce or digital enterprise will require you to have another set of plays in your financial playbook compared to when you are acquiring a non-digital enterprise. The source of business acquisition funding in the digital world must take into account revenue, platform dependence, customer acquisition costs, as well as intangible assets such as software and brands. This is significant when considering the pricing of digital assets.
Understanding Digital-First Valuations
Digital-first valuations are based on recurring revenue and unit economics. MRR, ARR, LTV, and churn provide funding partners for business acquisition funding with critical signals of the expected reliability of future cash flows. Stable, predictable, repeating revenue from SaaS-type services will also often provide lenders a better chance of obtaining favourable loan terms since it represents a lower risk to the lender.
Revenue Metrics That Matter
Internet companies can tell a story of sustainability through gross merchandise value (GMV), MRR/ARR, repeat purchase rate, and customer acquisition cost (CAC). Business lenders providing business acquisition funding will thoroughly analyze these KPIs to forecast future cash flows and perform stress tests of the business under different economic conditions. A stable and well-planned recurring revenue stream history usually gives a business easier access to debt financing at lower interest rates than shops primarily selling inventory.
Types of Funding Appropriate for Digital Assets
There exist different funding options that buyers can explore. Conventional bank loans may be an option at times, though most lenders have shown affinity towards new funding models designed for digital assets. Revenue-based funding, seller financing, mezzanine debt financing, and digital business-specific loans exist as popular funding sources. Private equity firms and strategic buyers can supply funding in exchange for equity shares. Online-oriented business acquisition funding sources can fund businesses based on subscription revenue.
How Lenders Assess Digital Assets
The way finance companies look at digital businesses is different from how physical business finance companies look at them. A lender will look for 4 major components when determining how much to lend to a digital company compared to a physical business:
- Quality of its revenue
- Security of the technology stack used
- Level of dependence on third-party marketplaces (such as Amazon and Shopify)
- The level of legal/regulatory compliance of the company across all of the jurisdictions in which it operates
Intellectual property, such as domain names, proprietary code, and trademarks, will be given an asset category, but it must be documented through a paper trail to be valued. Lenders also consider the degree of risk inherent with customer concentration; i.e., if 70% of a company’s revenue comes from one single buyer, it presents more risk than if that same company had a diversified customer base.
Due Diligence for Online Business Purchases
Due diligence needs to be done in-depth. The buyers can expect scrutiny of analytics accounts (Google Analytics, Stripe, Shopify), marketing funnels, unit economics, and customer behavior. Code audits and infrastructure checks (hosting, data security, SLAs) are also expected in the context of SaaS transactions. Proper documentation ensures easy access to business acquisition loans since it reduces risk and speeds up the underwriting process.
Cross-Border Issues and Regulation
Digital native companies could sell their products across the globe, giving rise to cross-jurisdictional challenges related to taxes, privacy, and regulatory matters. Lenders offering business acquisition funding will be concerned with regulatory risks, such as GDPR in the EU or consumer protection in the US. Cross-border transactions could involve escrow, escrowed purchase price, and holdbacks to deal with uncertain liabilities.
Preparing Your Application
Creating and assembling a business loan application that will make it possible for you to get business acquisition funding at the best possible terms will require you to create a clean data room that contains your company’s financial statements, revenue insurance dashboards, customer cohort reports, company legal agreements, and any other relevant documents for your technology offerings. In addition to creating the actual application file, it is also critical to have a valid, conservative business forecast supported by historical metrics. By demonstrating a consistent, steady, recurring revenue stream, low churn, and diverse marketing channels to reach potential customers, you will significantly qualify yourself and create opportunities for more lenders and investors to finance your acquisition.
Choosing the Right Partner
Of course, it is not every lender that will understand the nuances of digital assets. You will look for lenders who have expertise in e-commerce, Saas, and online marketplaces. Their models for analyzing the credit and for the valuation of assets will be closer aligned with the digital business model. In fact, for most acquirers, it is the customized loan for purchase, which considers the subscription business model and the intangibles, that makes the difference between a successful purchase and going over your head and making a mistake.
Conclusion
Purchasing an e-business or online business requires specific financing for business acquisition that takes into account the nuances that exist in recurring revenue streams, technology, and regulatory issues. With proper education on the issues that matter most in lending, doing it the right way, and working in concert with lenders who have a full understanding of online businesses, acquiring financing that accurately captures value will put the acquisition on the right path.
