For many ecommerce storeowners, the purpose of building their business is to eventually sell it. Other times, after creating a successful ecommerce venture, an entrepreneur may decide to move on to a new project because a successful, stable business no longer provides the same challenge or sense of discovery and excitement that the startup once did.
Over the last few years, my firm has represented not only successful ecommerce storeowners, but also a platform through which ecommerce owners regularly sell their businesses. This has given us significant experience and insight into the most common problems that arise when selling or buying an ecommerce business.
Here are a few things to watch out for.
Get It in Writing
The terms of every website sale must be in writing. This cannot be stressed enough. Though lots of businesspeople believe that “a handshake is as good as a contract,” it’s not. There are numerous legal reasons why a sales contract of this magnitude must be in writing, including that a contract not in writing may not be enforceable under a state’s statute of frauds and that intellectual property assignments must be in writing to be enforceable.
The terms of every website sale must be in writing. This cannot be stressed enough.
If a sale contract is not in writing, it can result in expensive and time-consuming litigation, the cost of which can often exceed the value of the property being sold.
Conduct Due Diligence
Identify what you are buying by doing your due diligence. When courting a buyer or a seller, it is important to know exactly what’s being bought or sold. The initial due diligence phase of a purchase and sale transaction should be evidenced by a letter expressing the parties’ intention to review financial statements and business processes.
This ensures that the buyer is buying the business that she believes she is getting, and that the seller is selling the business to a buyer who has enough funding to purchase it. This letter of intent should also contain nondisclosure and noncompete provisions, which will protect the seller against competition and disclosure of trade secrets during the due diligence phase. An inadvertent disclosure could harm the seller’s marketplace position if the sale is not completed, so these provisions are crucial to include in the letter of intent.
During this phase, it is important to confirm that the seller’s representations are true. A buyer should review the standard indicators of the success of an ecommerce business, including its profit and loss statement, balance sheet, Google Analytics account, Amazon Marketplace account, and Google AdWords account.
Use Warranties and Representations
Make a seller or buyer stand by his word through warranties and representations. Once due diligence is completed and the parties have begun negotiating the terms of the sale, the parties should create a list of warranties and representations that will be incorporated into the final agreement.
The seller should warrant that it has full legal authority to enter into an agreement with the buyer; that it has all rights and title to its website and website content, including intellectual property rights; that it is not subject to any known lawsuit or administrative action that would encumber its assets; that its financial statements are true and accurate; and that it has paid all of its taxes.
The buyer should warrant that it has adequate funds to purchase the business and that it has the expertise to realize its full value in the seller’s absence.
Get Paid (Safely)
The next step is to make sure payment is structured in a manner that makes sense for both parties. Many buyers and sellers prefer to use a third party escrow service to ensure that payment is made safely. These services can be expensive, however. Often an attorney’s trust account can serve as an equally reliable escrow.
A buyer may also request that partial payments be made when certain benchmarks are met. For example, a buyer may request that payments be released to the seller based on the continued successful performance of the ecommerce store. These so-called “earn-out payments” must be properly structured to ensure that the releases of the funds are conditioned upon objective criteria.
The last thing a seller wants to hear after selling her ecommerce store is that the buyer isn’t satisfied because he was unable to continue the seller’s success.
Prevent Future Competition
A final area of consideration, but certainly not the least important, is that the agreement between the parties should include a specified period during which the seller cannot create a competing website. A seller who has particular knowledge of and expertise in of the business being sold is in a very strong position to compete with the buyer after the sale.
The agreement should therefore contain a clause prohibiting the seller from opening, working for, consulting for, or owning an interest in a competing business for a period of time afterwards. State law defines this length of time, so it’s important to hire an attorney who can make sure that the agreement is enforceable.
Though this is by no means an exhaustive list of the considerations that go into the sale of an ecommerce store, hopefully it provides some context on what attorneys look for when handling these transactions. As always, consult with an attorney to determine your specific legal needs.