How To Protect Yourself Legally When Selling an Online Business

Have you ever tried selling an online business before? If you have, you know that selling a web business is very different from selling a widget through Craigslist or eBay. It’s not something you can just ‘have a go’ at without potentially exposing yourself to legal problems. Your web business is the whole package of the website and all the systems, procedures, staff and office space behind it that make the whole thing profitable and of interest to a prospective buyer, rather than just the website.

In short, agreeing to sell an online business is no small thing and needs to be carefully considered.

1. Do you really want to sell?

That might sound like a silly comment but many people experience ‘seller’s remorse’ after the point of no return. Once a contract is made, it is very difficult to back out without BAD THINGS happening. ‘Bad Things’ include having to pay money to the proposed purchaser and even a legally enforceable requirement to hand over the business.

2. What are you selling?

Do you really understand all the components that make your web business profitable, how they work and more importantly, how to hand over control to the new owner? Are you clear about whether or not it is the business entity, or just the assets that you are selling?

You might have an established web business in a corporate entity and expect the buyer to take the company off your hands as part of the business purchase. This will involve share transfers and may include unexpected complications where the buyer and seller are in different countries. Most countries have specific rules around foreign ownership of companies; like the requirement to have one local director. What will you do if all the buyer wants is the assets?

Worked Example – website for sale [beastbox.com.au]

“We will transfer ownership (shares) and directorship of the company into your name and complete any transfer of ownership necessary such as web registrar. Stock will be couriered to an address of your choosing. Training and guidance negotiable.”

A completely different set of problems arise if you have setup the web business over time and inadvertently had different entities owning or controlling different aspects of the business. For example, you might have purchased images for the website in your own name, software in a company name and then had content for the website contracted through the business. If you are selling an online business that looks like this then you need to know that you are legally able to transfer everything you say you are selling as part of the transaction.

**WARNING**

Don’t try and be too helpful as a seller just because your prospective purchaser is overseas. I saw a seller on Flippa make the following comments:

“You need an ABN (Australian Business Number) but you can use mine if you can’t get one” and then “You won’t be able to own the domain, but I am happy to leave it in my name (I have done this before with another site) and simply transfer the domain into your registrar.”

High Risk! If you keep the domain name and business number in your name, but let someone else use it for revenue, you could be found personally liable for tax on income. Don’t just assume you won’t be caught or that your explanation (I sold the site) will be accepted when all other evidence points to the contrary.

3. Preparation for selling an online business

When you are selling the components of the business rather than the entity, have a clear list of all the content and intellectual property to be transferred, the software licences, the agreements with suppliers, advertisers and affiliates, the registration and hosting and any social media accounts. Make sure there are not going to be any issues with transferring anything across to the buyer.

When it comes to business names and trademarks understand or outsource the transfer processes. Where you are transferring copyright, you need to be able to demonstrate that you have the right to transfer (eg. receipts from a stock photo site) and include a paragraph in your contract of sale identifying and transferring all necessary copyright.

Think about the sales process behind your website business. How easy is it going to complete the change-over to the new owner and will they need any new accounts? Be clear on how you are going to transfer any post-sale sales income to the buyer if the systems transfer doesn’t go as cleanly as you hope.

4. What could be a deal breaker?

If your web business has to be operated in your country of origin and can’t be moved, make that clear in your advertisement. You don’t want unnecessary arguments and a lost sale due to a misunderstanding that can be easily corrected.

This applies equally if you operate in a regulated industry. Industries such as health, finance, law, gambling, weapons, tobacco, sex and drugs are all industries accessible online, but regulated in different countries. If you want the sale, don’t assume the buyer will know there are potential compliance issues with your web business. You want an easy hand over, not an argument.

If you are selling because your being prosecuted for non-compliance, be prepared to disclose that reason, otherwise there is a risk the sale could be reversed for misrepresentation.

5. The sales contract

You know the saying “Whoever has the gold makes the rules”? Well, whoever writes the sales contract makes the rules. If you don’t think it’s a big deal, consider this: most standard business sale contracts require the seller to give warranties about the business for a period of time after the sale is complete. Non-compliance with warranties usually results in some form of payment by the seller to the buyer. So you might think the sale is done and dusted, then months later get a demand from the buyer that you are contractually obliged to meet.

If you’re selling a low value web business then both you and the buyer might be happy to stick with informal contractual terms [link to previous article] agreed over email or private message, or consider whether the standard Flippa terms will work for you.

If your web business is worth more than you can afford to lose, then invest in a formal contract. Do not copy and paste a collection of agreements from the internet. I know how tempting it is to use the ‘free’ option, but if you don’t understand the way different clauses in an agreement interact, and what is actually enforceable in your jurisdiction, you can be creating a document that is full of contradictions and ambiguities that take away your rights.

6. Be realistic

Be realistic on price expectation. Have you watched Dragon’s Den or Shark Tank? Many people are disappointed because they don’t really understand the market. Also think about timing; seasonal changes can impact the appeal of your web business. Have a look at the Flippa seller’s guide for practical steps you can take in getting ready for sale.

On the other hand, if you have a clear idea of what you should be able to expect from the market and don’t want to sell for less than a fixed amount, set a reserve. If you don’t set a reserve you agree to sell at the highest offer, like it or not.

7. Consider your sale from a risk versus return perspective.

High risk needs attention, low risk needs a decision from you whether or not the cost of fixing the problem will add value or create a return roughly even with or better than your investment. Reducing high risks may not show an immediate return on the bottom line, but it does make your business more attractive. Have clear answers for all the questions that a buyer might ask and that might give you a ‘no, no longer interested’ instead of a ‘Yes, lets deal’.

Hopefully, with these tips in mind, you can more easily navigate the legal waters of selling an online business.

Have other tips? Let us know in the comments below.