Contract Basics: Everything you need to know about buying an online business

Have you seen The Hobbit: An Unexpected Journey? Before setting off for the Lonely Mountain, Bilbo is handed a great long parchment with various addendums sewn onto the edges of his contract with the Dwarves. (Note that he does actually take the time to read it and question some of the terms before signing it and joining the quest.)

So what do Hobbits have to do with buying websites, domains, or apps? – A reminder that you don’t actually need a formal document and a signature to create a binding contract.

You can form a contract through an exchange of emails or private messages, through a telephone call or a combination of those activities. In the case of contracts, actions can speak louder than words.  The beauty of having something in writing is that you have a permanent record of what was agreed, whether a formal contract or exchange of written messages.  Something in writing can be useful even a few days after you have concluded the deal because most people have imperfect memories.

The basic elements of forming a contract are:

  • Offer
  • Acceptance
  • Consideration through payment of money or taking an action
  • Intention to create legal relations

Whenever people want to dispute terms there is an opportunity for technical legal arguments, but in most cases, the fundamentals will apply.  Gain confidence in the understanding these elements and you won’t be unpleasantly surprised with your purchase.

1. What’s the offer?

Any seller posting a listing on Flippa is offering to sell you what they have described in their listing before it ends, either at no reserve, a buy-it-now price or with a reserve.

As a buyer, this means you need to understand the listing and ask questions of the seller before you make a bid. If you place a bid, or buy it at the BIN price without asking any questions then you are accepting what the seller has offered.

Worked Example – website:

At the time of writing there is a listing on Flippa for a website selling ‘licenced’ themed apparel – think cartoon characters.  It’s a fairly straight forward listing without a lot of detail. The seller’s notes say that the auction includes the website and the domain, and that the contact information for the service that drop-ships the clothing will be provided.  Although a low value site, as a buyer I’d be checking the following:

  • Social media accounts and whether or not they are included (the website lists Twitter, Facebook and Pinterest accounts)
  • Whether the list of registered users will be handed over and in what format
  • The website includes an invitation to subscribe to a newsletter, so I’d be looking for that list too, as well as any newsletter content
  • Licences for background images (stock images) used on the site
  • Licence terms for sale of themed products, I wouldn’t want responsibility for a breach
  • That the clothing supplier was happy to do business with me as the potential new owner of the website and whether there were any possible complications; like continued permission to use their images and how easy it is to change product listings.

If you had hit the BIN price without asking these questions, the only thing the seller would be obliged to transfer to you for the BIN price would be the domain and website, nothing else, regardless of your expectations!

 2. What is acceptance?

Acceptance is pretty obvious really. As soon as you place a bid, you are notifying the seller that you are accepting their offer at your bid price. If you place a maximum bid price so that you don’t have to stress about being out-bid, then your acceptance of the seller’s offer occurs each time you are the highest bidder.

What you are accepting is what the seller has described for sale and any additional items or content that you have asked about and the seller has agreed to include.

Worked Example – app:

On a Flippa ‘just sold’ app listing, a person public messaging the seller asked for details about the source files for the app so that changes could be made. The seller responded and confirmed that all of the source files including source code and original design files would be transferred as part of the sale. So after 57 bids, regardless of who asked the question, the app purchase included those source files.

3. How much consideration is enough?

Consideration is the taking of an action in support of an agreement reached between the seller and the buyer. The action does not have to be significant, it can be as simple as sending an email to the seller thanking them for the opportunity to purchase the website. Full consideration is payment of the purchase price, but partial consideration, like the payment of a deposit or putting money into escrow can support an argument for enforcement of your contract for purchase. This is only likely to be a problem where you have a seller who wants more than the price you have agreed to pay.

4. Did you really intend to reach agreement?

Disputes over contracts sometimes arise when people are at odds as to whether or not all the key terms were agreed or not.  If you want special terms that aren’t included in the Flippa terms, or a formal document in writing before reaching agreement, you need to state that at the outset.  If you don’t spell out that you want a specific term, your agreement will be the sum of the standard Flippa terms and your email or private message exchanges up to the date the purchase price is agreed.

Worked Example – domain:

On a ‘reserve met’ listing, the seller has made it clear that there are two domain names included in the offer and they expect payment to be made via Flippa escrow. No ambiguity there.

So what else should you look out for?

From a legal perspective some extra things I’d be looking for are:

  • Check out the seller, who they are, where they are and that they can actually sell you what they are offering
  • Know what you are buying, don’t assume everything is included – if you think it should be included, confirm with the seller
  • If there are agreements in place with writers, affiliates, drop-shippers etc, make sure those agreements can be transferred to you as part of the sale
  • Check that the seller has authority to transfer copyright, trademarks and other intellectual property for your purchase and will do so
  • Check whether or not there will be additional duties or taxes payable at the time of purchase – they are usually the responsibility of the buyer.

And lastly, remember balance! Whether you are buying a website, domain or an app the detail you put into your purchase should match the risk or reward of your purchase.  There is a difference between $50, $5000 and $50,000. Be realistic. Your due diligence and attention to detail will be greater for a $50,000 purchase, but a $50 purchase is a great place to practice and learn from your experience.

    Jeanette Jifkins is the founder and Principal of Onyx Online Law, an Australian based law firm with the focus of supporting businesses with an online presence.

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