When you’ve decided to purchase an existing e-commerce business, should you purchase the company’s equity (corporate shares, member equity interests, etc.)? As a general rule, it rarely makes sense to buy an online business’ equity when you’re acquiring it. Most deals are asset purchases instead of buying equity.
First, with the transfer of equity, you also get the company’s existing and potential liabilities. Even with due diligence prior to closing, you can still end up having bought a pig in a poke…lawsuits, tax judgments, etc.
Second, a seller will often want to retain their entity and some assets unrelated to the sale of the business you’re purchasing. For example, the seller may have an e-commerce venture that’s in a different niche but owned by the same entity…and that won’t be part of your deal. In fact, smart sellers often hide their unrelated online ventures so that buyers don’t even know about them.
Of course, there are rare exceptions to the general rule. For example, if the primary asset of the online venture is the seller’s email lists, it may make sense to buy the entity’s equity instead of the lists themselves. Why? Because email subscribers opted-in to receive messages from one entity…they didn’t give a second entity permission to email them.
Even if an email autoresponder service lets an asset purchaser assume control of the seller’s email lists, chances are the buyer’s sending of emails to the lists violates federal and/or state laws because there was no consent by the recipients. What was perfectly legal for the seller to send becomes unsolicited commercial email (spam) when sent by the buyer.
These are just a few of the issues you’ll want to discuss with your Internet business lawyer as you explore the best way to acquire an e-commerce business. Just don’t assume that you can buy an online business’ equity without there being some significant legal risks that should be minimized as part of structuring the deal.