What Should I Consider When Purchasing an Online Business?
Purchasing a business can be exciting, but it is important to consider the legal and commercial issues.
Regardless of whether you are buying an online business or a traditional bricks and mortar business. Conducting a proper appraisal (or due diligence) will help you to determine whether the business you are buying is right for you. Although the considerations for a traditional bricks and mortar and an e-commerce business or online business share some overlap, there are some differences and matters unique to online businesses which need to be considered.
Stages of Purchasing an Online or e-commerce Business
There are typically three stages that need to be considered:
- Checking the sale of a business contract: During this stage, you review the contract and check what assets (both physical and non-physical) are being sold.
- Negotiating, finalising and signing the contract: Having reviewed the contract there may be some parts to renegotiate with the seller before you sign the contract. Once both the buyer and seller are happy with the terms of the sale, the contract can be finalised and signed.
- Transfer of business ownership to a new owner: Once the contract is signed and payment made, ownership of the business will transfer to the buyer.
Whilst physical businesses typically possess an office space or shopfront where the business is conducted, this is unlikely to be the case for online or e-commerce businesses. Furthermore, given that the transactions of online businesses largely occur over the internet, there are likely to be fewer physical assets (such as vehicles or machinery) involved.
Assets included in the Sale of the Online Business
During the first step of purchasing an online business, you should review what assets are being sold. You can ask the seller for clarification if there are uncertainties. Some of the key assets in the purchase of an online business are:
Intellectual Property (IP)
In the sale of an online business, IP is one of the most important assets which can be transferred. Some things constituting IP in online business include:
- Content on the website;
- Social media accounts and content;
- The name of the business;
- Website addresses (domain names); and
- Trademarks (including logos, designs, expressions etc.)
Check with the seller to see who owns the IP in the online business. Often IP is owned by the creator and the online business may only have a right to use the IP and possibly not a right to sell it.
For example, with the content on the website, you should clarify whether the seller has the IP rights to the words and images used. It is also useful to check whether the website has been created through a website developer if so, they may own the IP and have given the seller the right to use it.
Physical Stock of the Business
If the online business you are purchasing sells physical goods, check the sale of a business contract to ensure that you will receive the stock of the business as an asset that will be transferred to you.
For example, if the e-commerce business you are purchasing engages in selling shoes and clothing, the sale contract should outline that you will receive the stock and what the stock is worth. Depending on the business a detailed breakdown of the stock may be necessary. For example, before you make the payment, and legal ownership of the business is transferred to you it is a good idea to undertake an assessment of the amount of stock, or physical goods, that are held by the business. This will help you to determine whether the quality and quantity of stock are to your satisfaction, and suitable for your business needs.
In some cases, the seller may require you to pay for the business and the stock.
Given that most online businesses don’t manufacture their own goods, you will want to make sure that the sale of a business contract requires the seller to transfer any supply agreements to you or give full details of the supplier(s). You may also need to confirm this with the supplier.
Software and Apps
If the online business you are purchasing relates to software and applications (software business), it is important to consider:
- Who has created the codes for the software? Is it the owner of the business, or a third-party developer?
- Who owns the codes?
- What can be done with the IP rights?
If the business uses a third-party developer, it may the case that the business has a licence with the developer to sell the software, but not actual ownership of the software. Therefore, it is crucial to check will the seller the ownership rights to the software, and any existing agreements with third-party developers. As part of the sale, you must either receive:
- Ownership of the IP in software; or
- Assignment of the seller’s agreements with third-party developers.
You should ensure that as part of the sale of the online business, you receive a customer database/list (if one exists). This will enable you to continue to engage with existing clients who may have loyalty to the brand/company.
There are privacy requirements that must be complied with during the sale of a business, and these are given in the Australian Privacy Principles (APP). In most cases, the seller will not need to obtain the permission of the customers to transfer their personal information if the buyer:
- Is an APP entity or will become one due to the purchase of the business. An APP entity can be an individual, a body corporate, a partnership, a trust or any other entity that is not a corporation.
- Is purchasing the business without the business-facing bankruptcy in the foreseeable future; and
- Plans to use the information in the same way that the seller did.
If any of the above are not met or the information may be used in a different way by the buyer, the seller may need to receive customer consent.
As a practical matter, and to ensure that there is consistency following the sale of the online business, you should find out how the seller receives payments from customers. You should check if:
- Any third-party providers are involved in payments, such as Afterpay or PayPal;
- Software systems involve a subscription service with customers and how frequently payments are made.
- Completing your due diligence before purchasing the online business will allow you to determine whether the business is suitable for your needs.
- If you are unhappy or uncertain about any of the terms in the sale of a business contract, discuss these with the seller.
- Ensure you are aware of what assets you will receive as part of the sale.
Lord Commercial Lawyers is a commercial and business-focused law firm based in the Melbourne CBD. We work with businesses and individuals to help them achieve their legal and commercial goals