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WES S01E15: Legal Considerations When Buying & Selling Online Businesses

Justin Cooke November 17, 2015

Subscribe to our VIP LISTAce and I have talked quite a bit about both the buy and sell side of a deal, but wanted to take an episode to discuss the legal ramifications of buying and selling websites and online businesses.

In today’s episode, Ace sits down with David Rubenstein from Creditshout.com to discuss some of the legal concerns on both sides of the deal.

“What due diligence issues or gotchas should I watch out for?”

“What can I do to negotiate a better deal?”

“Do contracts really protect buyers and sellers?”

If you’ve been wondering how to protect yourself legally and want to hear an attorney’s thoughts, this is the episode for you.

Digging the Web Equity Show? Please leave us a review on iTunes. We’d really appreciate it!

Listen To The Full Interview:

What You’ll Learn From This Episode:

  • Due Diligence from an attorney’s perspective
  • Negotiating from a buyer and seller’s point of view
  • Importance of contracts when making a deal
  • Closing the deal from a legal perspective

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 Featured On The Show:

 

Male:                    You’re better off buying what you think is a good business at a fair price.

Female:                Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show, where thousands of successful entrepreneurs go to learn about buying, growing, and selling online businesses. Your hosts, Justin Cooke and Ace Chapman share their real-life advice, examples, and expert interviews, to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin:                   Welcome to Web Equity Show. This is our 15th episode. I’m your host Justin Cooke. I’m here with my co-host Ace Chapman. What’s going on, buddy?

Ace:                       What is up, Sir? Another great episode coming.

Justin:                   Yeah, man. We’re talking legal considerations when buying and selling online businesses. Just a quick question, Ace. Do we have to do the whole, “I’m not a lawyer” thing here? I mean, you hear this on podcasts, you hear people say that all the time, “I’m not a lawyer, and I don’t play one on TV.” Is that what to throw in here, buddy?

Ace:                       I think so, man. You know, anytime I get the legal questions I’m quick to remind people that I’m not an attorney. I do deals, and if you want legal advice, you should go to an attorney.

Justin:                   I want to hear a podcast where an attorney just goes, “Nope, the buck stops here. I am a lawyer and this is absolutely legal advice.” I’d love to hear that. If anyone knows of a podcast where there’s a lawyer saying that, I got to have a listen to that one, man.

                                As you said, we do deals, right, on both sides of buying and selling real online businesses and offline businesses, but there are legal situations that we just haven’t dealt with. We haven’t done that type of deal, and so talking to an attorney what could be, is interesting. Talking with the attorney about different oddball deals they’ve run up against, can help you prepare against those and help you avoid those types of pitfalls and problems.

Ace:                       Yeah. Especially as we’re starting to do larger deals. I remember back in the day, you get into a deal, you have some issues, and it’s a tiny deal. A lot of times people were willing just to say, “You know what, I’ve made a mistake. Shouldn’t have dealt with that guy. I’m moving on.”

                                When you get into larger deals, I feel like a lot of times people just aren’t going to walk away from those situations. If something wasn’t done correctly, they’re going to pursue it. And so, now it’s becoming even more crucial that everything be done the right way and we understand the legal ramifications to how we do deals, how we structure them, what entities they’re going into. And that’s something we’re going to get into on this episode.

Justin:                   Yeah. Having a path to resolution is helpful and avoiding some of those pitfalls in the first place. You know, I talk about CPAs and attorneys being deal killers. That’s kind of their job though, right? They’re supposed to kill deals that shouldn’t be done, and for deals that are getting done, they can help structure them in a way to help you avoid problems down the road.

                                Lawyers man, I don’t know. Not a huge fan of lawyers, but they’re needed, right? And I think, the best lawyers are those that will warn you about the risks, right? They tell you, “Okay. Here’s where you’re exposed. Here’s what your risk is.” But they’re not all judgy about it, and they ultimately leave it to you to make the business decision. Those are lawyers I like working with.

                                When they start to get judgy, “Oh, you can’t do this,” or “You shouldn’t do that.” That’s when I tune out, man, because there are business needs and a business plan that’s outside of your attorney. So, I like when they stay in their lane and advise you on what your risks are, and then allow you to make the decision. Those are the better attorneys to work with.

Ace:                       Well, and that’s exactly the reason that I asked David to come on and be the attorney that we did this interview with, is because you need an attorney who has an entrepreneurial side. I don’t expect to go out to some random attorney that has never heard of Internet business buying and have them understand or get what you’re up to. Their goal is to protect you. So, they’re going to say, “That sounds absolutely crazy and risky, and here are all the reasons in the world why you absolutely should not do that.”

                                And so, you have to have somebody that has some kind of entrepreneurial balance or some understanding of this stuff, because we are still dealing in a little bit of the wild, wild west. This isn’t going to fit into some cookie-cutter case law about buying and selling businesses, because all this stuff is fairly new. So, I’m excited to have David on, because he’s actually gone through our program, he’s bought a deal, he was an M&A attorney and still does a lot of that stuff. So, it provides a little bit of that balance. And at the core, I can tell … We were talking, and I got to do this one in person with him, and we’re talking about some of the issues and I could tell, he’s like, “Ah, you know.” He’s still an attorney at heart, right?

Justin:                   Yeah. It’s crazy. There’s just so much gray area. You’re talking about the wild west, and same thing happened with the CPA last week when we were talking. too, right? There’s just no case law – “Yeah, we don’t really know.” You get this answer a lot from attorneys and CPAs, because the laws are just behind this very fast-moving and fast-burgeoning industry. So, they’re like, “We think it will work this way, and this seems to be the best path to take.” So, it’s really interesting.

                                It’s great that he went through your program, so he’s very familiar with the industry. I actually haven’t listened to this interview, so I’ll be interested to listen to it myself. Before we do that, buddy, let’s do a listener question. We got an email from Jordan Swientek. He said, “I just want to say, I’m a huge fan of the podcast. For someone starting out, it has been my go-to resource to learn the business of buying websites.” Appreciate that, Jordan.

                                He said, “As a Canadian buyer, is there anything different in the transfer process when buying a U.S.-based business? Will the revenue change to Canadian currency when I take possession, or do most purchase under an American LLC? I know you’re not an accountant, you don’t play one on the Internet, but I’m sure you’re worked with a few Canadian buyers. Just curious if there’s anything I should keep in mind beforehand. Thanks. Can’t wait for the next podcast.”

                                Thanks for the email, Jordan. So, if you’re a Canadian and you’re looking to buy, let’s say a U.S.-based business, or a U.K.-based business, all of these deals generally almost always are asset purchases. So, it’s good to house them under a company. It can be a Canadian company. It can be a U.S. company. It can be a U.K.-based company. But how they’re getting paid, it just depends. So, if it’s in the U.S., they’re most likely … Now, let’s say it’s doing U.S. customer and it’s making U.S. dollars, it’s going to be in U.S. dollars. If you want to convert that money to your own bank account or whatever, you’re going to have to do that conversion. You’re going to lose just a bit on the conversion to Canadian dollars anytime you’re doing some kind of exchange.

                                If you’re doing a lot of exchanges, you can look to things like Bit Coin. And I don’t mean holding your money in Bit Coin. That sounds scary as shit. But you can use Bit Coin to transfer money, and a lot of times you can save a bit on the currency fluctuations and trying to get the money out of one country and into another. That’s especially true when you’re working in countries like Pakistan, or countries that are not as amazing … India … not as amazing to get the money out, Bit Coin can be really helpful.

                                What do got, Ace? What do you think about this one?

Ace:                       Yeah. I agree with everything you just said. The only thing I would add is, he was wondering if most people do purchase under American LLC, and the truth is, we see all kinds of entities from all over the world. I’ve had clients use entities from Israel, to Cape Town, to Hong Kong. So, it’s not necessary that you buy with an American LLC. There’s no legal reason to do that. The only thing might be, doing exchange, or having American accounts. So, that’s what you want to take into consideration. But it’s not that everybody is using an American LLC to do these deals.

Justin:                   Yeah, I think it’s a good idea though to house it under some company, and that’s like the kid licking the paint problem, right? You don’t want to say you’re selling e-commerce kids toys, or something, and some kid licks the paint, dies, and they want to sue you. You want to make sure that you’re limiting your liability, limiting your personal assets and problems with that. If they sue, they sue that company and not you personally. So, there’s some definite benefit there.

                                Alright, man. Let’s see what David has to say about it. Looking forward to this one, buddy.

Ace:                       Welcome guys, to another episode of the Web Equity Show. I’m excited to be here with attorney David Rubenstein. We actually worked together earlier this year, helping him to get his very first deal done. And, so it’s exciting to have him here from that perspective, but also, he’s an attorney that is in this space. He’s actually doing deals and it’s going to fun to talk to somebody that can speak from that perspective.

                                So, today we’re going to talk a little bit about his background, what in the world made him consider getting into this wild and crazy, what most people right now refer to as the wild, wild west of buying and selling Internet businesses. And a little bit about his plans and, from the perspective of an attorney, some of the things that were interesting to him coming into this space.

                                So, we’ll talk about some of the issues that people bring up. But before we do that, I want to give David a chance to introduce himself, and talk a little bit about his background before jumping into his very first Internet deal.

David:                   Thanks, Ace, and it’s great to hang out with you again. Just quickly. I practiced law for about 15 years. I was a transactional attorney with some big law firms, doing everything from real estate deals, to M&A deals, to working with start-up companies and venture-capital firms. After grinding away at that for quite some time, I’d also gotten involved in some real-estate development and management work on the side. And that went pretty well for a number of years, until the big crash in 2008 and 2009.

                                About 2010 I’d gotten fed up with practicing law, and the hours, and the grind, and I decided to start a business with a friend of mine. And we did that for a number of years. That was hard work, too. I mean, you can have the right idea, you could have the right people executing it, you could have some good capital, you could work really hard, and at the end of the day, you could find what we did, where we basically ended up selling it and breaking even for several years worth of effort.

                                So, after we closed that up, I was looking for what I was going to do next. And this is when I was actually starting to get into consumer marketing, which I had started to appreciate in my side deals in the real estate space. And I heard you do a podcast, and to be honest, it was speaking to me, “Go out, find an existing business, one that you know that you can maintain the cash flow or maybe even you see a way to cut costs or increase revenue and make it more profitable.” And that seemed like a great idea.

                                And you talked about how you can invest both, online and offline, and I liked the idea of an online business. Minimal employees, working a lot with contractors, so you could easily change out who you’re working with, find the best professionals in the space who are going to do the work you need, hopefully at the best price also. And we started working together and it didn’t take very long. We found a cool business in the financial blogging space that I was very into, and I bought that.

                                We closed at the beginning of April, so it’s been about six month now, and it’s been a good experience. It’s a lot of hard work, I’ve learned a lot along the way, but I definitely see this one as being a successful venture.

Ace:                       So, I know when we initially started talking, you were considering an offline business. We started talking a little bit about Internet businesses, and that’s one of the big debates in the space. I’ve been on shows where we’ve debated the pros and cons. Obviously, at the end of the day, I believe in both. I own offline businesses. There are a lot of opportunities that exist there. Baby Boomers are needing to get rid of those businesses. But there are a lot of deals that are also great on the Internet side.

                                So, I’m curious, from your perspective, what was it that made you decide to do that first deal as an Internet as opposed to offline?

David:                   I think for me, a lot of it came down to time management. In the offline space, your ventures are one way or another going to involve managing employees, or you consistently putting in the time and the effort. In the online space, you can take a little time off, or spend only a couple of hours on a weekend. You’re still getting your traffic, because this is an existing business.

                                But, when you’re going online, you got to do your due diligence. So, this is something we talked about. The sites going to have to have a history, it’s going to have to be around, and you’re going to have to believe those traffic numbers, that spammy or scammy techniques weren’t used to generate those numbers, so at the next Google refresh they fall of the face of the earth. So, this was a critical thing that we talked about.

                                And I think my years also of practicing law and doing due diligence on deals, made me comfortable with the idea that I could spend time, figure out what it was that we needed to know about the traffic sources and how to evaluate it, and do that due diligence to properly evaluate any acquisition. Not just from a cash-flow perspective, but will it be around next year and three years, to pay off the money we’re investing.

                                And these were critical issues, and I think, at the end of the day, we found a seller who really was a great guy, who had a great site. He was selling just because he had found changes in his life circumstances, preventing him from having the time to keep his site up-to-date and fresh. And just going in and updating the old content, and making it fresh again, resulted in a nice bump in traffic that is not going to go away.

                                So, that was a good opportunity. Now, it didn’t come at a discounted price, but it came at a fair price based upon his prior 12-month cash flow. So, we’re looking just to improve upon that by freshening things up.

Ace:                       That’s something that I think a lot of people are surprise by, because I get people all the time that say, “Why would somebody be motivated to sell a really great business?” And it’s like, people have life circumstances. Just like they’re motivated to sell a really great two-seater and buy a minivan, because their family is growing. So, people have life circumstances that come up, and you can find a really great business that somebody really does need to sell. And in some cases, they’re desperate to sell, and then you end up getting a great deal.

                                So, I’m curious about a couple of things. Number one, being somebody that has had a background in M&A, doing some due diligence, I’m curious what made you join our program? And then, I’m also curious, coming into the Internet space, were there things that you were surprised by? I’d love to hear you talk about. There are some brokers that don’t believe in having contracts. They do everything on an escrow basis. You see the deal, and there’s no contracts to sign. I’ve done a lot of those deals. It works well. We know there are other folks that do contracts, and the deal that we did with you, that had a contract between you and the seller. So, I’d love to hear you talk a little bit about both of those things.

David:                   Alright. First, why I signed up with you. Well, I mean, that’s an easy question. I heard you on a podcast, and I thought you were speaking exactly to me. You were doing what I wanted to be doing at that time, and you had a great perspective. We spoke on the phone a couple of times. I even drove up to Chattanooga. Now, I only live 90 minutes away, so it’s not a killer drive, but I drove up. We met in person, and I really thought that you were going to be a great coach and mentor to help me look at the process and evaluate businesses and develop my own steps and processes to successfully evaluate what we’re looking at. Which I really actually felt, you exceeded my expectations, which were high. So, good job!

                                I would really actually like to spend a minute talking about contracts. I know some of the online businesses that people buy are for very small sums, and they’re very small businesses. In that case, I’m not uncomfortable with doing just a – put the money in escrow, do your diligence, and close. You’re going to have to take some risk. And even if you have a contract, try going and enforcing it. What if your seller is overseas, or the amount involved is so small, is it going to become worthwhile?

                                But, to be honest, if there are things that you want to happen after closing, you definitely want a contract. You want people to know what the expectations are. And I would say number two, you want some sort of holdback or pricing mechanism for some of the revenue that the seller is getting, so that if the seller isn’t meeting the expectations laid out in the contract, you have a way of punishing them, which is, calling back your holdback, or reducing the portion of the purchase price that happens after closing in some way. And this way, everybody knows what they’re supposed to be doing, and you know that the other party is going to perform.

                                The worst things is, going and actually suing on a contract and trying to see what happens. I mean, it could take a lot of time, and a lot of effort to make the attorney’s … line the attorney’s pockets and at the end of the day, you might not ever get what you want. You just had the satisfaction of some level of revenge. And to me, that’s not the way I want to live my life.

                                And I have to be honest, I read something the other day. Warren Buffett says, he doesn’t even do due diligence when he does his acquisitions. He just looks at the numbers and looks into the sellers eyes, and that’s how he knows that the performance is going to happen after closing. So, I don’t know that I can read in somebody’s eyes as well as Warren Buffett, but give me time.

Ace:                       That is one of the things that a lot of people take for granted, as well, I think. I talk to people all the time that think that, “Oh man. Ace is a hard core negotiator.” I’ve been on the phone with people when we’re getting a deal done, and they say, “Oh well, we know you’re getting over on us in some way. We just want you to know that we know, even though we have no idea what it is.” We can say, no. When we do deals, it has to be win-win with the seller. You need both people to want the deal to work. And so, that’s what we spend a lot of time doing.

                                So, that is a tip for anybody who’s looking at these deals. When it comes to doing a deal with the seller, as much as possible, you want to create that win-win scenario, where you’re helping the seller get what they want, and they’re helping you get what you want.

                                Anything you would add to that, David?

David:                   No, I just totally agree with the idea that you’re better off buying what you think is a good business at a fair price. After you close, there’s stuff you’re going to want the seller to help you with, so you’re not going to want them to feel [inaudible 00:18:33] or cheated in some way, as they’re helping you figure out the site or even an online offline [inaudible 00:18:39] how it’s run and how to make it hum. You’re going to want them help, if it’s a business of any size. So, I agree with the approach.

Ace:                       So, as you looked at the contract that you signed for your deal, was there anything that surprised you or that was weird coming into this space and starting to negotiate. I know sometimes you can get into these things and it’s like, “Oh my goodness. This is wrong and that’s wrong.” Because you guys know how things are supposed to work and, like we said, this is a little bit of the wild, wild west.

David:                   I guess this goes to my comfort level with contract. So, I actually thought the contract was very straight forward. It covered really what we needed to cover, and it was not over-lawyered. But that goes to my comfort level. I would say, somebody wanting to look at these deals and get a contract in place, definitely find yourself a lawyer who’s run business deals, so they can look at it and know what’s going, but also, what might not be included that you should think about adding to the contract.

                                People want to say that lawyers are just making money by pushing papers around, but I think one of the great experiences about being a lawyer is, it’s the best way to get a [inaudible 00:19:50] over and over again. When you’re working on all these transactions, you see what the business people are thinking of and you can see what other [inaudible 00:19:56] lawyers are thinking about, and you really start to learn to think, like what’s essential to making this deal happen and what’s essential to protecting my downside if things go badly. And, you want to make sure, that type of content is included in the contract.

                                [inaudible 00:20:11], but fact of the matter is, you only get one chance to sign that contract. After it’s signed and things don’t go the way you want, there’s no redoes, unfortunately. So, that’s where I say, it’s worth a little investment of time and money up front, to make sure you know what the expectations are, both, when things go well, and when they go badly.

Ace:                       A lot of people don’t understand this, but I have seen deals that go bad, because the seller sees that the buyer starts to explode the business, and then, all of a sudden they have something to negotiate, they start trying to change things, or weird things happen, and that can be a huge issue for the buyer.

                                So, you bought this business, you’ve been in it a few months, tell me a little bit about your plans for the future.

David:                   So, I’ve actually been spending this time learning about the online world and learning how to improve, both our traffic, how to improve our conversation rates, how to bet people to buy. And it boils down to just providing solid advice. So, if you provide solid advice [inaudible 00:21:13], people are clicking and going through. That’s what it boils down to for me, and I want to take what I’ve gained here, how to organize a business, finding people who could help me out with marketing and the search [inaudible 00:21:24], and even the backend technical stuff, and see if I can build a team.

                                I would love to go out and find other online businesses and be able to grow my monthly capital by getting involved in more businesses that I can exploit the advantages I have of this first business, with is, knowing good professionals who can work with help me make it better. So, that’s where I see myself heading down the road. Will it be six months [inaudible 00:21:49]? Well, we’ll have to find out exactly how long it takes, but I’m working hard at it.

Ace:                       Well, I will say, in the past few months, you’ve been able to grow the traffic of your first deal 30%, which is a pretty huge feat of in itself. So, I’d say, it’s probably going to happen quicker than you might even expect.

                                Well, David. Thank you so much for jumping on the show. I think people are going to get a lot of value, just knowing that all kinds of people from different backgrounds are in this space and doing these deals. I talk to people all the time, and they think, “Well, I’m a dentist. Is this something I can do?” or “I’ve never done anything online,” even business owners here in Atlanta. And I’ve spent some time with a guy who owns some car washes, who was part of the program last night. And he has a ton of offline businesses, but never done anything online. And it can be a little bit intimidating, I think, on both sides.

                                It’s intimidating for Internet guys to look at offline business and vice versa, but it’s neat to see people with varied backgrounds are coming into this space and are doing business just like everybody else. So, I appreciate you taking some time. I’m excited to see the future of this deal and the others that you do in the future, and glad that we got to work together.

Female:                Thanks for listening to the Web Equity Show. Now is your chance to be a part of the action. Go to www.webequityshow.com/gift and send us your business acquisition or exit question, and have it answered on the show.

 

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