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Should You Buy The Equity Or Assets Of An Online Business?

By Business Contracts, Business Lawyer, Internet Lawyer, Website Lawyer
how to buy an online business course

When you’re considering an online business acquisition one of the key issues to decide is whether to buy its assets or the equity of the entity (e.g. corporate shares) that owns it.

It’s been my experience that 90%+ of the time an asset purchase makes more sense than buying equity.

Why?

With an asset purchase you can limit liability exposure better for the seller’s acts and omissions prior to closing on the deal. For example, you can reduce the risk you’re getting hit with a lawsuit or back taxes owed from pre-closing activities while the seller ran the business.

However, there are important exceptions to the general rule that an asset purchase is the better way to proceed.

For instance, there may be nonassignable contracts in place with the seller’s entity (e.g., ad network agreements) that are essential to running the venture profitably.

Another common reason for an equity purchase is where the primary source of revenue from the online business is marketing to its email lists. Where there’s an inability to sell those lists as assets because of spam and privacy laws, an equity purchase may be the only legal option available.

If you haven’t bought an ecommerce venture before, you might want to pick up a copy of my course “How To Buy A Successful Online Business.

And if you need legal help with buying an online business (e.g., purchase agreement and related documents), let’s talk by phone.

3 Ways To Succeed In Online Business

By Angel Investing, Startup Lawyer, Startups

online business ownership conceptThere are three primary methods for succeeding as an e-commerce business owner. Of course, there are pros and cons to each. And, depending upon the assets you have, risk tolerance, and other personal factors, perhaps one or two of these options aren’t the right path for you.

1. Startup Founder

The most popular method is to found or co-found an online venture. To succeed, it requires years of dedication and lots of sweat equity. The money available in the early years will come out of your own pocket or through the small amount of revenue the company generates as you ramp up.

Because your labor is the primary driving force behind the startup, it takes less money to get it up and going. However, bootstrapping as a founder has a high failure rate too.

2. Acquisition

If you have some money saved up or can get access to it from other sources, you may decide to buy an online business that’s already profitable and continue to grow it as the new owner. This is a proven method. And I’ve created a course that shows U.S. entrepreneurs how to buy an online business that’s already successful. This is a popular option for those who leave a white collar job and want to own a business instead of becoming an employee again.

Of course, a downside to this option is that it does require money to invest on the front end to make the purchase — your assets and/or other people’s money (OPM). If you’re broke and don’t have friends/family willing to invest in the acquisition, it’s probably better to stick to the first method and found your own business and grow it by bootstrapping.

3. Angel Investing

If you qualify as an accredited investor, you may want to consider the third option of becoming part owner of one or more startups as an angel investor. With this method, you’re essentially placing calculated bets on founders/co-founders and their ventures with the expectation that there will be a profitable payoff down the road when the startup gets acquired or goes public in an initial public offering (IPO).

As an angel investor, it’s unlikely that you’ll have control of the company’s direction. In fact, it may be a strictly passive investment or one where you provide advice when asked for by a founder.

You may invest directly as an angel. However, many newbies choose to invest as a limited partner in an angel syndicate where a more experienced investor is the syndicate lead. A good place to learn more about these types of investments is AngelList.

Although the payoff can be huge if you’re lucky enough to invest in an online startup that becomes a decacorn ($10 billion+ valuation), understand that’s not the normal outcome. For this reason, many angel investors spread their money across multiple startups with the expectation that out of every 10 startups selected, 6-7 will fail within 3 years, 2-3 will break even, and 1 might generate a return on investment (ROI) that exceeds the losses from others by being acquired or going public.

Buy Someone Else’s Sweat Equity

By Business Contracts, Business Lawyer, Internet Lawyer

Instead of starting your own online business from scratch, it often makes more sense to buy an existing e-commerce venture.

Let someone else spend the first years getting the business up and running. They invest their sweat equity in the startup and you can profit from that by purchasing their venture at the right price.

When you purchase an existing e-commerce business, you’re buying a proven concept that (should be) profitable and buying years of time you’ll save that the founder(s) spent building it up.

What if you’ve got an existing online company? Often it makes sense to grow it by acquisition of competitors or buying complementary businesses.

Now an experienced Internet business lawyer can help you structure a deal that makes sense for both you and the seller.

If you want Attorney Mike Young’s help with buying an online business, the first thing you’ll want to do is schedule a phone consultation with him.

6 Secrets To Buying An Internet Business

By Internet Lawyer, Website Lawyer, Website Legal Documents

buying an internet businessAre you considering buying an Internet business?

You’re not alone! According to Nasdaq, it’s estimated that 95% of purchases will be through eCommerce by 2040. That means individual investors are seriously looking at internet businesses to jump into the eCommerce boom.

Like all investments, purchasing a website carries certain risks. Not all deals are as good as they may seem. It’s unwise to jump into the eCommerce market without performing due diligence. The following contains detailed steps you should take to maximize your investment and protect yourself from lawsuits.

1. It’s practical to use a broker to meet sellers, but don’t use their forms!

Using an internet business broker is a great way to find motivated sellers and potential opportunities when buying an Internet business. Some of these brokers will even offer in-house legal forms to help you during the purchase of a website.

Buyer beware! Because most of these business contracts are not written by lawyers, and even worse, they are not written with your best interests in mind. There is no way to ensure you are adequately protected when you use broker-provided forms — unless you have an experienced business and technology attorney review the contracts for you.

2. Don’t makes the same mistakes as Microsoft and Alibaba investors

Even tech giants make mistakes. When Microsoft purchased LinkedIn, they purchased an online business with a disastrous financial model. Ultimately, they paid 7x Linkedin’s annual revenues (not profits!) to close the deal. While they may have had a legitimate interest in Linkedin’s data and platform, their valuation did not make good business sense and they took a huge loss on the purchase. Microsoft may have had the funds to bail out an unprofitable venture, but as a solopreneur you probably won’t have as much financial wiggle-room.

Another huge eCommerce investment blunder was the Alibaba.com initial public offering. While the company’s founder, the Chinese government, and Wall Street underwriters benefited from the IPO, unsuspecting investors set themselves up for failure.

Because the Chinese government restricts foreign ownership in technology companies, investors were only able to purchase equity in an offshore shell corporation that exists only on paper. The problem with this is that Alibaba is under no obligation to actually disclose or transfer profits to the shell corporation. Even worse, the shareholder contracts are only enforceable as long as the Chinese government agrees that they are. Basically, shareholders have no way of ensuring that they ever see any profits; they spent $93/share on a virtually worthless piece of paper.

As discussed below, it’s on you as a potential buyer to perform your due diligence before signing any contracts.

3. Perform a legal diagnostic on the website before purchasing

An experienced Internet attorney can help you perform a legal diagnostic of any website you’re considering purchasing to identify legal risks that may exist on a seller’s website. You don’t want to take ownership of a website only to find out the previous owner infringed on another’s intellectual property. You are looking for an investment when buying an online business, not a lawsuit!

4. Prepare a non-binding letter of intent before entering any contracts

When you first start negotiations with a website seller, you will want to protect yourself legally before you ever enter a legally enforceable contract. With a well-written non-binding letter of intent, you can maintain your ability to walk away if you discover any information that makes the potential deal unattractive.

5. Ensure your legal documents address dispute resolution

Sometimes deals go sour. The best way to protect yourself is to outline what you will do if a dispute occurs long before the dispute arises. Internet Business Attorney Mike Young suggests including alternative dispute provisions like mediation and arbitration that will help you work out the dispute without the need to go to court (saving you time and money). However, you will want to create an exception for intellectual property infringement and non-compete disputes so you can head straight to court if either of these issues arise.

6. Know what you’re actually purchasing

Last, but not least, make sure you know what you’re purchasing. Make sure you will have ownership over all intellectual property and ensure the previous owner legally owned all images and content. The last thing you want to find out is that the website you’ve purchased has stolen content or that the seller retains ownership over the content they created.

Do You Need Help Buying An Internet Business?

If you’d like legal help buying an Internet business, schedule a phone consultation with Attorney Mike Young today.

Buy An Internet Business But Avoid Microsoft’s LinkedIn Mistake

By Internet Lawyer
microsoft-linkedin-acquisition

Did Microsoft overpay to buy an Internet business?

As an Internet Lawyer who represents ecommerce companies, I know there are deals to be had, particularly when you decided to buy an Internet business that is privately owned.

However, large publicly traded companies like Microsoft (MSFT) can rarely take advantage of these types of profitable acquisitions because the dollar amounts involved aren’t enough to create public relations buzz that boosts stock prices. Instead, these large tech companies are generally limited to buying other large businesses that generate media headlines and related changes to stock value (at least short-term) that make investors happy.

The Microsoft Mistake

That being said, Microsoft made a mistake that any existing or prospective small business owner can easily avoid when buying an online business.

What was the error?

Microsoft is purchasing a company that isn’t profitable. LinkedIn generates revenues but doesn’t really have a profitable business model because of international expansion costs and declining ad revenues. Corporate recruiting as a source of additional revenues is a dicey proposition given the ongoing slowdown of the global economy.

Some cheerleaders of the announced acquisition claim there will be “synergy” between the two companies and that this constitutes a “win” for Microsoft because of the access to LinkedIn’s data for its business users.

Yet if LinkedIn can’t turn a substantial profit on the roughly one-quarter of its 400 million accounts that are active, what’s the likelihood Microsoft is going to do so? Nil and none.

Companies this size change direction at the speed of a loaded oil tanker in choppy seas, not fast like a startup.

Even assuming Microsoft has an unlikely sound game plan to successfully monetize LinkedIn data in order to recoup the $26+ billion to be paid, the purchase price is simply ridiculous by any valuation standards.

Paying about 7 times annual revenues (not profits) is reminiscent of the Dot Com 1.0 bust circa 1999/2000. Frankly, this deal reeks like the Alibaba IPO and the AOL/Time Warner merger.

The conventional wisdom is that other large tech companies like Alphabet Inc.’s Google have to step up their game and make similar acquisitions.

Why?

When your competitor does something stupid, there’s simply no reason to follow like a lemming over the cliff just because some English lit major working as a tech pundit says you must do so.

As a practical matter, my clients often look at several potential Internet businesses to buy before even making an offer to purchase one. If the fundamental financials don’t make sense, there’s no reason to bail out a seller by acquiring an unprofitable venture. And it certainly doesn’t make sense to pay a premium to a seller for a business that might turn profitable in your hands but isn’t making money right now.

When You’re Ready to Buy an Internet Business

When you decide the time is right to buy an Internet company, before submitting a nonbinding letter of intent (LOI), be sure to discuss your possible acquisition with a qualified Internet business lawyer. The legal advice you’ll get can save you a lot of time and money.

Disclaimer – Stock imagery used for editorial purposes.
Neither Attorney Young nor his law firm makes any claim to
the intellectual property respectively owned by Microsoft and LinkedIn.