Are you interested in buying an online business? Before making the final decision to purchase an Internet venture, knowing as much as possible about the company to be acquired can help set you up for success after the papers are signed.
Here are seven important factors to consider as part of your pre-acquisition due diligence…
1. Internet Businesses Are Not Just About The Website
Buying an online business means looking deeply into the metrics and data provided by the seller to tell you more about how the company operates and its current sources of revenue.
As the prospective purchaser, the seller must be prepared to ask your difficult questions regarding sources of site traffic, revenues, expenses, vendor relationships, labor relations (employees and independent contractors), etc.
2. The Importance Of Non-Competition Agreements
Although the seller of a business often wants to move on to retirement or an unrelated venture, don’t assume this is the case.
Instead, you’ll want to use non-competition agreements to ensure the seller(s) and key employees don’t walk away and use their insider knowledge to directly or indirectly compete against the company you’re buying.
3. Verify Guarantees And Potential Liabilities
Products and services offered in the past by the seller should be carefully reviewed when thinking about buying an online business. As part of this due diligence, check out old versions of the company’s website(s) from the owner (e.g. Wayback Machine).
Why is this important? Because the seller may have made commitments that you could be on the hook for if you buy the company.
For example, the seller might have offered lifetime guarantees on a product or service. Customer claims could come back to haunt you as the new owner. There are ways that an experienced Internet business attorney can eliminate or limit your potential liability exposure for such hidden liabilities.
4. Beware Of Access Issues
Although you’ll want to make certain every password is changed when you’re buying an online business, there’s more than that involved for internal security and website legal protection.
For example, you’ll want to limit internal access to essential personnel. And if there’s been custom coding, you’ll want to make sure that the developers didn’t leave any hidden back doors to access the company’s site(s) post-purchase.
5. Check Out Merchant Bank Requirements
If you already have a business (online or offline), you may already have a merchant bank that processes credit cards. You should see what additional requirements (if any) need to be met to use the same processor for the acquired venture. However, if you’re planning to use the same merchant bank as the seller, you should see what you’ll need to do to make that happen. Will the bank require personal guarantees? What about transaction fees? These costs can be important, particularly when profit margins on products/services are small.
6. Decide If You Need A Business Valuation Expert
For many acquisitions of Internet ventures, a business valuation expert isn’t retained. There are common methods of valuing such a company without paying for an expert to do it. You can discuss these with your Internet attorney and/or CPA. And, let’s face it, the market value at time of purchase is what a buyer is willing to pay.
However, it may make sense in some instances to hire a business valuation expert, particularly if you’re paying seven or eight figures for the company. The data supplied by the expert can be used for negotiating a better deal.
7. Check Out The Seller’s Email Marketing
If email marketing is integral to the online business, you will want to know how and when the seller acquired the names and email addresses on the company’s lists. This will help you avoid legal liability for unsolicited commercial email (spam) and determine monetary value of such lists based on a variety of factors (e.g. prospect v. customer, freshness, open rates, etc.).
In addition, you’ll need to determine the portability of the lists to you as the purchaser. For example, in some asset purchases, a third party autoresponder service will not transfer the lists to a new owner. On the other hand, if the selling entity’s equity is acquired (instead of the business assets), then the autoresponder service will likely let you continue to market to the lists because the entity purchased still owns the lists.
Do You Need Legal Help Buying An Online Business?
If you are serious about purchasing an Internet venture, it’s probably time to speak with an experienced online business attorney. You can schedule a phone consultation with Internet Lawyer Mike Young using our online booking system or by calling 214-546-4247.
