6 Secrets To Buying An Internet Business

By | Internet Lawyer, Website Lawyer, Website Legal Documents | No Comments

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 | No Comments
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.

How to Buy an Internet Business

By | Internet Lawyer, Website Lawyer, Website Legal Documents | No Comments
buy an internet business

Should you buy an Internet business?

When you buy an online business, as a general rule, you will probably want to purchase the company’s assets rather than the owners’ equity (corporate stock, LLC membership equity interests, etc.).

Why?

Assets you may want to buy include the domain name, website content, client lists, and software.

Why purchase an Internet business’ assets?

Although an equity purchase might be easier from a paperwork standpoint, you also assume many potential legal risks by stepping into the shoes of the seller(s). For example, you do not want to clean up a mess if the seller’s company hasn’t observed corporate formalities or engaged in shady behavior.

In contrast, buying the assets of an Internet business (and placing them in your own business entity) reduces these risks. Let the seller(s) worry about any problems with their business entity rather than selling those potential liabilities to you.

Of course, there may be different tax consequences to a hard asset purchase than an equity purchase.

For this reason, when you buy an Internet business, you’ll want to work with your Internet lawyer and your accountant to structure the deal to protect you both from legal risks and unnecessary tax liabilities.

Update – How to Buy an Internet Business: 12 Steps to Owning Your Own eCommerce Company

Since this article was first posted, I’ve written a book that reveals in 12 simple steps how you can buy an Internet business. It’s available in paperback and Kindle ebook formats at Amazon.com.