If you are considering buying or selling an online business, there are many unique legal and practical issues to consider. Generally, buying or selling a business involves several steps. Often, the first step is the signing of a letter of intent that sketches the major contours of the deal. Then, a purchase agreement is drafted that expands the letter of intent. After the parties have negotiated the purchase agreement, there is a period of due diligence during which the buyer confirms various aspects of the deal. For example, during due diligence, the buyer and its attorneys must review all of the relevant contracts, leases, deeds, titles and financial documents. This ensures that the target online business has legal possession of the assets that are being sold and that such are unencumbered by loans and other financing and that the assets can actually be transferred. Likewise, the buyer must confirm sales, revenues, client lists and the other aspects of the business model.
If you are considering buying or selling an online business, you will want to retain an experienced business and internet attorney, like those at Revision Legal, to help you through the process. Here are a few of the most important issues that are unique to buying or selling an online business:
Are Physical Assets Being Purchased?
Buying an online business can present legal and practical challenges since, often, there are no physical assets owned by the business. The target business may not have a physical store or office or warehouse. Indeed, the target business may not even have valuable computer equipment or servers. Even if the target business has physical assets such as inventory, those assets might be a negligible part of the value that is being purchased. Further, physical assets such as inventory might carry various financial risks, such as the possibility that some portion of the goods are counterfeit or are otherwise non-saleable. For these and many other reasons, the parties may wish to carve out the physical assets and exclude them from the purchase/sale. Either way, the purchase contract should clearly specify what is being purchased and how ownership is to be transferred.
Careful attention to proof of ownership and methods of transfer are also important with respect to intellectual property and other non-physical assets. Physical assets are generally easy to transfer. Sometimes that is true for intellectual property too. For example, a trademark can be transferred via a two-step process — an assignment is drafted and signed and then forms are completed and sent to the US Patent and Trademark Office.
Transferring other types of intellectual property can be more complex. For example, a domain name transfer requires several steps and the involvement of at least one domain host provider, the registrar. If the buyer wants to use its own domain registrar, then another party must be involved. The process involves the disabling of transfer locks, use of various authorization codes, provision of new information and codes and the exchange of verification emails. Timing is important too, since the seller will resist giving over control unless and until the purchase price has been paid and received.
Other types of intellectual property cannot be transferred at all. For example, under current rules, ownership of an Amazon seller account/store cannot be transferred. If the ownership of a business changes, the new owner must establish a new seller account. However, an existing owner can allow and authorize new users. Obviously, this creates legal and practical issues for any purchase if a key asset is a seller account that cannot be transferred. A possible solution here is to have key employees remain in place after the purchase/sale has been consummated. Again, these issues should be fully explored and negotiated.
A similar set of issues exist with social media accounts (like a twitter handle), with copyrights, payment accounts, etc. The parties must take great care in negotiating the methods by which these various assets are to be transferred. Buyers, in particular, should be careful to ensure that the seller actually has ownership of these assets and that the transfers have been done correctly. Website content, for example, should be verified as belonging exclusively to the seller and should be transferred via copyright assignments. Indemnifications and hold harmless provisions against infringements should be included in the final purchase agreement to protect the buyer from those sorts of claims.
Trade Secrets and Consumer Privacy Issues
A number of additional legal issues arise with respect to trade secrets, particularly trade secrets involving customer data and personal information. Trade secrets are confidential and valuable information that gives the online business its market edge. This information might include customer lists, suppliers and vendors, shipping arrangements, business methods and a host of other data.
Most of these trade secrets can be transferred without difficulty. However, now that the California Consumer Privacy Act (“CCPA”) has become effective, the transfer of personally identifiable consumer data must be handled with care. The CCPA mandates that all business and not-for-profits that collect and sell/transfer consumer data must obtain consents from consumers at the point of collection. The needed consent applies to the collection and transfer/sale of the data. For now, the CCPA may not fully apply when a business is sold, but once the buyer takes possession of the data, thereafter, the CCPA will control. Further, new laws are being introduced in other States and a federal law is being considered. For these reasons, due diligence must focus on what personally-identifiable data has been collected by the target online business, where is it stored, with whom has it been shared, what procedures have been and are now in place to secure the data from exfiltration and more.
These sorts of data privacy issues will become more and more important in the coming years and may have significant impacts on the buying and selling of online businesses.
As can be seen, there are many unique legal and practical complexities involved when buying or selling an online business. If you have questions, contact the business lawyers at Revision Legal at 231-714-0100.