EFP 136: How We Lost $25K To Russian Scammers Part 2
Credit card fraudsters stole $25K worth of websites from us.
How to Avoid Scams – One on One Talk with Our Lawyer
This is Part 2 where we sit down with Eric from RevisionLegal.com to discuss our response and look at ways to avoid problems like this in the future.
We end up getting into quite a bit more, though – it’s a long episode, but I think you’ll like it.
Check Out This Week’s Episode:
Direct Download – Right Click, Save As
Topics Discussed This Week:
- Preparing for and reacting against scammers in business
- Staying legal in the “wild west” of online business
- Common practices scammers use to steal portfolios (and how to protect against it)
- Our investor program and the upcoming JOBS Act
- Protecting against liability with website portfolios
- When is it worth it to bring in an attorney? (And what can they do for you)
- Empire Flippers Podcast Episode 135
- Listing # 40217 – URL is elasticbondco.com in eCommerce
- Eric Misterovich of Revision Legal
- How Russian Syndicate Scammed Us For $25K
- Digital Point
- Eric Misterovich @ Twitter
- Tyler Basu Chatting With Champions
- Erlend @ HardcoreMBA podcast
Spread the Love:
“Scammers scam us and we all lose.” – Justin – Tweet This!
“Local investment through crowd funding has amazing possibilities.” – Eric – Tweet This!
So – what did you take away from this episode? Have you ever dealt with credit card fraud? Let us know in the comments!
Justin: Welcome to the Empire Podcast, Episode 136. We got scammed for $25,000 by a small Russian syndicate. In the second part of this two part episode, we sit down with our attorney to discuss our reaction to the theft, ways to protect ourselves moving forward, and navigating legal issues when it comes to buying and selling websites. You can find the show notes and all links discussing this episode at empireflippers.com/revisionlegal. All right, let’s do this.
Speaker 2: Sick of listening to entrepreneurial advice from guys with day jobs. Want to hear about the real successes and failures that come with building an online Empire. You are not alone. From San Diego to Tokyo, New York to Bangkok, join thousands of entrepreneurs and investors who are prioritizing wealth and personal freedom over the oppression of an office cubicle. Check out the Empire Podcast and now your host, Justin and Joe.
Justin: Nobody likes to deal with blood sucking lawyers until you need one right, Joe?
Joe: Oh my God. When I was doing the research for finding these guys that was in the back of my head, these guys are going to milk me dry. I can’t believe I have to deal with lawyers. Oh my God.
Justin: Were you expecting the ambulance chaser. “Come here. Save yourself $10,000.” Like one of those things.
Justin: Oh my God. Yeah, so you were digging around, we finally found a lawyer that we thought would meet our needs. Talked to him, seemed like a legit dude. Actually the first one you talked to forwarded us to this guide American lawyer in the US that deals with issues like this.
It was great talking him, we covered quite a few topics. Just to give a little background on it, if anyone wants to check this out, it’s actually in episode 135, but we had a small Russian syndicate scam us for basically $25,000. They had purchased a site with stolen credit cards. We had transferred the sites, we had paid out the sellers, the deal was done, and then the chargebacks came from the real people. So, these guys were just thieves basically, and we were trying to fight to see how we could get these sites back.
Joe: Yeah, it’s a great story. I really encourage you to check it out because it ended up … Well it’s not completely done yet, I guess but-
Justin: There’s a nice little twist at the end that worked out for us.
Joe: There is.
Justin: So we’ll link to the blog post and the show that we did, and you can take a listen to that, take a look at that. Just to kind of give you some idea of what we’re going to be talking about today, and we talked about things like preparing for and reacting against scammers and business and this is whether you run an e- commerce site or an online business overall. How to stay legal in the wild west of online businesses.
I actually discussed with them, our investor program a little bit in the upcoming JOBS Act and how that’s going to affect businesses that are looking for crowdfunding for investments. We also talked about liability when it comes to a website portfolios and how our buyers and sellers can protect themselves through LLC’s and corporations in terms of like holding companies that can hold these assets. I think that’d be really interesting for our listeners as well.
Joe: Yeah, the corporate protection stuff I think that’s the probably one of the most interesting parts.
Justin: All right, man before we do that, let’s get into the feature listening of the week. What you got for us buddy?
Joe: We’re talking about listing number 40217. We’re giving away the URL on this one. It’s called elasticbandco.com. It’s an e-commerce business that creates those little elastic bands with custom printing on them. If you’re a member of the DC, you might get them on when you go to DCBKK kind of thing. Well this company actually produces them in mass amounts. So, it’s very cool, the site’s netting about $60, $70, $100 a month right now.
We do have it listed for a little bit of a higher multiple than normal, so it’s listed at $167,000, but I think considering the email lists, considering the amount of time that the site’s been around, business has been around for several years. I think that this is the kind of thing that someone who really wants to be a lifestyle buyer it’s a good purchase.
Justin: Yeah, this is job replacement right here. I mean, the site was built just about two and a half years ago. It’s making nearly $7,000 a month in net profit. This is the type of e-commerce store that can absolutely replace your income and give you the opportunity to travel and do some of the things that the lifestyle there’s like to do. All right man, let’s dig into the heart of this week’s episode.
Speaker 2: Now for the heart of this week’s episode.
Justin: So I’m really excited to have our first attorney on the program. I’ve got, Eric here from Revision Legal. He’s actually the guy we reached out to you to deal with this craziness, this Russian syndicate scammer deal that we had going on. Eric, I’m appreciative for you coming on the show and discussing this with us, man.
Eric: It’s a pleasure to be here. Thanks for asking me.
Justin: Cool, so we just went over all the details regarding our case, and our problems, and how we found out, and the struggles that we had. You know obviously our background and how we got into this. What was the first thing we should have done when we found out and we realized what was happening with these scammers?
Eric: Well, I think it’s pretty much what you did, was to go back, look at the timeline, try to find out if there was any more instances where these people were involved in sales and then try to find an attorney and see if there’s anything you can do. The hard thing in this situation is that when you realize there is a scam going on, you’re reacting. When you’re reacting, you’re kind of playing from behind.
I know we’ve talked and you guys are going to set up processes to be a little bit more proactive to kind of try to prevent this from happening in the future. But, the first thing that you guys did, which I think was right was investigate exactly what happened, contact an attorney, and see what can be done.
Justin: That was really scary when we were going through this and we realized we’re going on like, “How many of these deals are there? Like, how deep in the hole is this going to go?” Joe was fighting the first one because he’s like, “No, you can’t charge back like this is the real deal. I’ve got all of our ducks in a row you know they’re going to lose,” and then we realize the poor person with the real credit card on the other end like gets a legitimate chargeback for them. They got scammed too. God, man, so miserable.
What we did, and in terms of our process of dealing with it, you think that was effective. I mean, Joe was deep diving on this, he was pissed.He starts digging into all of their nitty gritty stuff, and we actually have a blog post. I’m going to link to it in the show notes here, but we kind of go through it step by step, and we’re just letting the cat out the bag here with everything that happened.
One of the first things we did is we shut down credit cards for website payments. I mean, that’s a clear way to avoid this. What other ways are there to kind of protect ourselves from this type of thing happening in the future do you think?
Eric: Well, it’s not an easy answer, and the reason why is because it really depends on your business and how you want to treat your customers. There’s minor changes that you could make and there’s really extreme changes you could make. The ideas is where are you shifting the burden. Right now you have all the burden. If these credit card payments were fraud, it’s all on you, and so how do you shift that burden away from you, but at the same time treat the customers the way you want to treat them.
When working with you guys it was so clear that yeah you want to recover these domains, and you’d like to be made whole but the most important factor was we are going to treat our customers right, and not even your customers like you just said, innocent third parties who had their credit card stolen. You’re not trying to go after them because that’s not the way you guys choose to do business.
Justin: Well, God how pissed would you be if you got guys scamming your credit card, then you got some other company going after you for the money, hell no. That’s not cool.
Eric: Totally totally. Yeah, and from the credit cards perspective they don’t care about you, they care about their customers and so it leaves the merchant hanging out there with all the liability exposed and so how do you shift that burden not accepting credit cards is a really good way of doing it. That certainly takes out a lot of the unknown and the chargeback issues that could arise. You could require the money to stay essentially on deposit with you for a certain amount of time, even if it is a credit card and those are somewhat minor burden shifting events that you can take some of that risk away from you.
On the totally opposite end is you can make sellers sign a contract that indemnified you. That says, “If there’s credit card fraud, you’re paying us back.”
Eric: That’s the extreme part of it, and I don’t think that’s anything you guys are interested in doing, but that’s kind of what the idea is. It’s how do we shift this risk away from us and someone’s going to assume it, it’s not going to totally go away.
Justin: Yeah, I’ve seen and we looked up and we saw … We have buddies in the e-commerce space that deal with this problem, too and so they’re very careful in shipping to addresses that don’t match and these types of things, even for $300, $500 purchases and stuff. So, they’re looking at ways to avoid it.
There are some like insurance companies you can pay, like, if it goes through them, they vet the deal and then they take a small piece and then they ensure you against credit card fraud, but it seems whenever you’re dealing with insurance companies, I think they’re gambling on it and like you always loose, right? They’re going to make more money on those deals, than you’re going to be paying into it, right?
Justin: I mean, they’re not going to pay you more. Yeah.
Eric: No, and you never feel like you come out on top when you’re dealing with an insurance company.
Justin: Yeah, so that’s one of the things we looked at and we realized that probably just having people pay deposits by credit card, refunding those deposits, then having them pay by wire will keep us in the clear, and our margins are pretty low on this, we’re getting 15% of the deal. So we have to eat credit card fraud on 100% of the deal. That’s pretty painful.
Eric: It really is, you guys were really in a tough spot, and this specific fact pattern made it difficult because the value of the domains they were roughly 25,000. That’s a lot of money, but when you talk about litigating a stolen domain name case. Well, it becomes a question of are attorney fees going to cost more than the litigation and that put this case into a really tough spot for you guys as to what’s the right investment and what’s the right thing to do for our business. You had a lot of risk, but litigation is comes with risk too, and there’s a lot for you guys to think about.
Justin: Let’s talk about this a little bit. We were introduced to you via, Zach in Canada. He said look if you’re willing to talk to an American attorney, and we ended up getting on with you, and you gave, Joe a rundown on what our options were. So, we paid retainers, 2500 bucks, and what were the steps that you took to go through this and see what we can do, see what our options were? What were like the step one, step two, step three things you did?
Eric: The first step was to fire off letters to GoDaddy and explain what happened and request that they lock the domains from further transfer. Anytime we deal with a stolen domain, that’s always the first step is lock it from further transfer. Because when we know where it’s at, and if it’s with a registrar located in the US then great, and we want to act quickly to keep it there. That was our first goal, is can we lock these domains?
The problem is GoDaddy and eNom and most registrar’s, they won’t act unless there’s a court order in place or proof that a complaint has been filed. So they’ll want a court stamped complaint, a copy of it to say, “Okay, there is ongoing litigation.”
Eric: They really don’t want to get involved with a third party dispute unless they’re required to and they came to say, “Well, we’re not required to unless we have proof of litigation.” You know, I wanted to argue, “Listen, this fraud is so clear that it violates your own registration agreement.” I don’t know why GoDaddy would want to continue to allow these thieves to get away with it. We all know what happened here, and your registration agreement says your websites won’t be used to violate the law and that’s what’s happening.
Eric: It was a long shot. They don’t have, they don’t care right. They need to comply with I can requirements and that’s saying show us proof of litigation and we’ll gladly lock it.
Justin: GoDaddy wants to pass the buck, right. They’re like, hands off I’m washing my hands on this. So, our first option was and easiest option was off the table. What was the next step you took?
Eric: Well, the next step was to evaluate. I wanted to talk about the UDRP process, the domain dispute process. This is an administrative proceeding instead of federal court litigation, where we can ask a national arbitration forum to say, “Hey, this domain is being used improperly, and let’s transfer back to the right owners.” The problem is the domain dispute process is really for trademark issues. When someone is using a domain that is confusingly similar to a trademark.
Justin: Coca Cola or Nike or something.
Eric: Yeah, yeah. They’re misspelling the domain by one letter or anything like that, to try to attract traffic to their own site or a competitor registering a dot net of a competing business. That process basically I said listen we can try it, it might not work, do you guys want to invest the money in it? We talked about that a little bit and it was decided that doesn’t really seem like the right vehicle, so I’m not sure that’s the next right step.
After we kind of crossed out UDRP, we contacted the Russians themselves, we sent them an email saying, “This is what you did, this is conversion, this is theft, we can hold you responsible for it,” and we threatened them with a very large amount of damages and fees that they would be liable for.
Eric: Of course, enforcing United States judgment in Russia.
Justin: Good luck.
Eric: Is going to be next to impossible. We also kicked around the idea of issuing DMCA notices. This was a last resort because if we issue these we aren’t trying to recover the domains anymore. We’re simply trying to crush.
Eric: Yeah, we’re trying to punish and they should be punished, they stole property. That was always kind of the last resort. Fighting the charge backs was another issue, and this one, I really kept pushing, Joe to say, “Let’s fight it. Let’s just go at them.” Because it seems so fundamentally wrong that you are on the hook for 100% of the loss here.
Justin: Yeah, they really take the merchants to task. Credit cards are not very friendly to the merchants. At the same time, I just you know, like and I could argue. I can actually make the argument in my mind, in my head that they should have been more careful with their credit cards. They shouldn’t have let some Russian Hacker get their credit card. How dare they? It’s on them, but it just doesn’t stick if I think about it for a longer than 30 seconds.
Eric: Yeah, and I agree. When I looked at it, it just seems so fundamentally unfair that you have all the risk here, but then when you look at the big picture of it, what is this consumer going to do when a Russian thief steals their credit card numbers, and they’re out $10,000, $12,000 and they had no idea anything happened.
That’s unfair too and we eventually decided, “Listen fighting the charge backs is probably going to be a waste of time.” The rules are pretty clear that in cases of fraud, the merchant’s essentially out of lack.
Eric: That kind of tied our hands a bit. We tried some other things, we tried contacting VeriSign directly and saying this is an issue, is there anything we can do about it? If not, you guys should be aware that this is an issue and that this is happening. They weren’t to responsive either.
This was a really difficult one to work on because the wrong was so clear and correcting it was so complicated that you were almost destined to not to have a great result unless you went to court and that’s the problem is the time and expense and how long it’s going to take. It’s unknown and it’s another risk and itself.
Justin: Did you feel bad for us? I can hear it a little in your voice right now, like I feel bad for these guys, I can’t help them, they got screwed. It just sucks all the way around.
Eric: I did especially because I was, I think Joe did some research into us and found a common contact that we both have actually a friend in Michigan and so he reached out to the other guy in Michigan and asked about us and so I really felt like I would want to come through for these guys. This other guy vouched for me, I really want to do everything in my power to come through for these guys, but without the court process involved the registrar’s just won’t act and that’s the roadblock we ran into.
Justin: All right, so we’re at the point now where we’re just not getting the sites back. Did they ever get back to you, the scammers. Did they ever say anything or just completely go dark?
Eric: No, they never responded.
Justin: Yeah, we got some messages from them trying to do, because of the links that we use on our site even after we removed the ability to buy sites through our platform, they just used the formula. The format we were using for links found that the link was still up there and bought another site after the fact. They actually went back and bought another site, a link that wasn’t even publicly available. We refunded that card right away and sent them packing. Yeah, man, really frustrating. Yeah, we’re just kind of stuck now.
I mean, basically, we’re in a position where, I don’t know if you knew this, but we’re on the back end we were seeing and try to sell on places like Flipper, they try to sell on Digital Point, they were trying to sell on other forums and stuff and Joe found them and let Flipper know and they were completely cool with this. They said, ” Yeah, no problem. That’s not going to happen.”
I think other people in our space, you know, are helpful toward each other, because it’s like, I don’t want that to happen to me, so if it happened to you I want to help you out too much.
Eric: Yeah, that’s great to hear.
Eric: That’s great to hear. Because, it’s just not a problem that the law is quickly set up to solve, and so it takes people using common sense to address it. It’s nice to see that people were cooperative.
Justin: You deal with this internet law. Doesn’t it feel like we’re in the wild west with a lot of these things we’re doing online? I mean, it is, right?
Eric: It is, yeah and especially with domain theft issues. I mean, this is I would essentially equate this with the domain theft case. We have contacts where people wake up one morning, login to the registrar account and 250 domain names are gone and they have no idea where they are, who took them, how, when anything. They call us rightfully panicked because a lot of times, these are very valuable portfolios and the steps to litigate it.
Not only is it difficult for us who we do this every day to figure out the right procedure, and the right court to file in, and how to get jurisdiction, and how to serve people in Russia, or China or anything, then you have to deal with the courts. The courts are totally unprepared to hear the cases where we’re filing on behalf of citizens in China who have had 250 domain names stolen. To them, they look at this and they scratch their heads.
Justin: They think all of you are crazy.
Eric: They really do, and they give us a hard time and kind of fact checking or pressing us to prove that what’s happening really happened, and it’s relatively easy to prove.
Justin: Especially if you’re at all familiar with the internet. God, that must be frustrating. You’re dealing with courts that may or may not be familiar with Gmail, right?
Justin: They may or may not be up on technology and trying to explain to them how clear something may be. I could see that being a painful process for you.
Eric: Yeah, yeah, our briefs start from scratch and explaining IP addresses and what they are and to try to get the court comfortable with, listen, this happened, this is a problem, and these domains are worth a lot of money and we need them now. We’ve had great success in doing it, though I would say in the last probably last 14 months or so we’ve recovered about three and a half million dollars worth of domain names, that had been stolen. Some of these cases are still not closed out, but usually we can file the complaint, get the domains locked, and get the domains back into our clients possession while a lawsuit works its way through the court.
Justin: Do they screw the sites in that process? Like, do they just completely ruin them? Is it like someone that steals your car and then burns it out when they’re done joy riding, or is it more like you generally get it back, and they haven’t done much with it?
Eric: From what we’ve heard the clients that have gotten those sites back and have started making money again. They seem to come back okay from what we’ve heard.
Justin: Okay, tell me about, so you have me, and our listeners freaked out right now. I’ll let you know, Eric. They’re thinking 250 domains in their portfolio, let’s say a $1.6 million portfolio gone overnight. What are some of the ways that the scammers have been able to do this? What are the common ways that we could protect ourselves from this happening?
Eric: One way they get in is they just hack, they’ll find a who is record, they’ll find people don’t use privacy protection, they find your email, they hack into your email, then they either can find your passwords in there or use your email to crack your registrar password. So they can go in and say, “Yeah, I forgot my password,” and they get sent right to them.
The main factor, privacy protection and who is records is a no brainer, very cheap, no reason not to do it. I’ve seen people with one or two domains that are six digits in value, and they’re using their own contact information and who is records, and it’s just exposing them for really no reason.
The second thing to do is to use registrar’s that use two factor authentication for any changes to the account. We see every time the story is these domains were transferred out of my account, my registrar account password was changed, and I never got an email about it. So, finding those registrar’s and sometimes the GoDaddy or eNom they maybe even offer it for a higher price and they offer more protection. I don’t know the specifics of what everyone offers, but finding registrar’s that put a focus on two factor authentication is a huge step.
Justin: Okay, so that saves me I’ll get an email thing. Are you sure you want to make this change whatever, then I verify it.
Eric: Yeah, and the last one is to be aware of phishing scams where the new, relatively new who is verification schemes that send out that email saying, “Hey, we’ve transferred this domain, those are ripe for hackers to go out and send false emails and obtain your information.” None of this I groundbreaking. None of this is, a lot of this is common sense, and I think most people understand these important steps with privacy protection and, the importance of keeping people out of your email and registrar accounts. Really, that’s probably your first line of defense.
The next thing to do is if it happens you got to contact an attorney immediately. Because if those domains are with a United States registrar, we can get them locked and probably back into your possession in a relatively short amount of time. We’ve had a case where someone called us at like 12:30, and they had a former employee steal the company’s domain name. We had a back in that clients possession by 5:30 that day, so about five hours. We got the complaint filed, stamped, send it to GoDaddy, and the domain transferred back into our client’s possession.
Justin: Those IT guys man, you got to watch them. I’m sure some IT guy of the company goes, ” You know what, I’m done with these bastards? I’m taking it.”
Eric: Well, yeah companies need to have an eye out for how are these things registered? I’ll tell you what, when you go back and look, a lot of times it’s messy. Sometimes personal credit cards reused and maybe the wrong registered email was a personal email address instead of company address. This may seem like minor things at the time, but you look back and you’re trying to tell a court who owns what, they become really important.
Justin: Eric, is there a scenario you can give me where I might have a better chance of success? Is there anything that we could have done differently or just if the scammer was in the US, or if we had more details about the scam? Would that have been helpful in our case, or like what things can help the case along you think?
Eric: Well, if you are going to litigate, right, that’s the best way to recover these domains. We can try to put pressure on GoDaddy or any other registrar to say, listen, lock these domains that are so clearly stolen, but if they’re not going to do it without court action, the first step is really getting an attorney involved. What do you want to be able to tell your attorney, a pretty clear timeline of what happened. So, take a breath, write down the timeline of events, when’s the last time I logged into my account? When’s the last time I know my domains were there? When did I realized they were gone? Where are they now, proof of ownership, your initial registration of the domains is really important to show the court that, yes, I own these. Then after that, it’s get it to an attorney and get that attorney to start working immediately.
Because time is it’s running fast, and if those domains are in the US, you want to keep them in the US. It’s really taking a look at what happened and trying to get a clear picture for your attorney so they can start working immediately.
Justin: This is one of those situations to where you just have to kind of weigh the value, and the cost of the attorney, and the costs of and the time, and the hassle that you’re going to have to go through to figure it out. For us it was $25,000 scammed which is if you’re small company, it’s painful. $2500 is huge kind of figure out and see if we can get them back and see if we can make some sense of it, made sense but then I think we talked about it and you were talking maybe $15,000 for litigation and that ultimately for 25,000 value maybe when we get them back, it doesn’t make any sense. Whereas it might if it were $300,000, right?
Eric: Yeah. Yeah, the cost of litigation is hard to predict. Because a lot of times we’re at the court’s mercy to the timelines. I would say an average domain theft case, 15 grand is probably low, it probably can get up to 25 to 30 on average, although some can happen. If the domains are really, really valuable, you might get more assistance from the registrar’s because, if you got a million dollar domain name, which we’ve litigated cases where domains are approaching that number. We can certainly put some pressure on the registrar to say, what the hell happened here, and do you guys know what you’re doing? Because a million dollar asset was just stolen from you.
When you can put that kind of leverage on a registrar, they may be more apt to help you resolve the situation quickly.
Justin: Because it’s a bigger deal, like it’s just because they understand that it’s worth more and more sensitive?
Eric: Well, we may be coming after them for liability.
Eric: That would be the hook is, this is what happened. These are the facts of how this was stolen from what you control, and we think it was done improperly, we think you were negligent, and we may be coming after you too, and that usually gets people’s attention.
Justin: It’s like a leverage thing. If you’ve got more value to go after you can use that leverage against the registrar to make sure they’re getting their ass in gear and helping out with it instead of just washing their hands, okay.
Eric: Yeah, sometimes that is very effective. The cost of litigation, it’s just a reality that it takes time, and it takes time to litigate. If you don’t know who the person is that stole the domain, we have to do rounds of subpoenas where we take the information that we have, we send a subpoena out, we get more information, we send out more subpoenas, we distill all that until we can find someone and then we have to try to serve them.
We’ve had people personally served actually in Vietnam and Malaysia and that service is there’s all kinds of rules that go into service. The procedure of these lawsuits is very, very complex. The cause of action is really simple, it’s just you stole this, it’s usually a conversion claim, and there’s some other options you can do under federal law, but we’ve tried these cases in state law and they work so far.
Cost is a huge issue and they need to be worth the investment, but the important thing is, a lot of times we can get the domains back into the clients hands where they can start making money while the lawsuits still going on. So, even though the lawsuit may take six, eight, 12 months, hopefully those domains are back in your possession within the first two months, and you’re seeing that revenue come back.
Justin: Got you. Okay, so we’re at the point now where we’ve exhausted kind of the basic options, we could take it further but it’s just not viable. So, we’re ready, we’re hitting the nuclear button. I mean, we’ve taken the dab. No one wins in this deal. It’s just sad man. Scammers scam us and we all lose, but that’s how it rolls man. Let’s, I’m going to cut in really quick and I’m probably going to take a break real quick and talk about what you said for the show, but I want to talk to you a little bit about our investor program and I don’t know I can give you like three minutes synopsis so you kind of understand how this works.
Eric: Yeah, I heard it on one of your podcast, but a refresher would be nice.
Justin: Okay, great. There are a lot of people out there that, well there are some people out there that are used to owning portfolios of sites and running and managing sites either they’re a partnership or they’ve got some kind of consortium, maybe they have virtual assistants or employees that are running these sites and they’re familiar, they’re in the business. We do business with them and they’re great.
There’s a whole bunch of people that don’t know what WordPress is and they don’t want to be ordering content from a site like Text Broker or whatever. They don’t know backlinks, they have nothing to do with that but they want to get involved in online businesses. They see the value, they see that it’s an emerging industry, and they’re interested. They just don’t know how.
So there are places they can go and learn, or there are places where they can just put their money. And, so there are no real asset classes for online websites like this. There are like a real estate investment trust offline, we’re thinking about putting together packages or portfolios of sites that people can invest in. So we just started it. It’s really like we’re beta testing, and we have no idea how it’s going to work, but we got our first investor, and we were going to send them a package like a diversified portfolio of sites, say, four to five sites, and then have them buy them. They own them technically, so they’re going to own them, we manage them. It’s almost like a property management deal.
We try to do that, but the site sell too fast out of the package before we can get the investor to buy them. What we did and it says, we ask an investor, ” Hey, you know, let’s do this. I know it sounds weird, but can you just wire the money and then we’ll buy the sites to become available and build out your portfolio?” The guy said, “Yeah,” so actually, today we just got the money in our account, and he sends 125 grand and we’re going to start putting together a portfolio for them.
So, that’s the deal, he gets 70% of net, we get 30% of net as we go along, there’s that withdrawal fee. There’s a in the first year and it goes down a little bit, year one, year two, and then it’s open after that. We get a piece of the sale and we get a piece of the work ongoing and then we get a piece of the sale if and when we sell it again.
Eric: Is he buying entire sites? He’s not buying a little bit of four or five sites, he’s buying four or five complete sites?
Justin: Four or five complete sites. That’s how it works today. The plan is there might be one site and maybe four or five sites but he is buying them straight up, and he owns them completely. We do all the management so it will be under just for ease and value of scale it’s going to be under our Amazon account or Adsense account. But, we have to account for all of that money, it’s all his and we just passed through us. It’s a property management thing. It’s one to one with investors.
Eventually, we’d like to do it where we have much larger portfolios. It’s a bit risky if we do these smaller portfolios, I think it’s easier for doing, $1, $1.5 million portfolios and a have let’s say, five or six investors in on that. Because we can buy larger sites that are generally more viable and diversify but better against monetization and traffic sources and that kind of thing.
Today, it’s just one investor owns the sites directly, but the plan is to make this bigger, almost like a fund, right?
Justin: Where people can buy in and buy out. I think like we’ve talked to so many people about this that would love to do it, are totally understood in this, and we know that we’re heading into kind of weird territory with it. It’s a financial model, we’re not finance guys, neither Joe or I are and we know that we’re might be running into issues at least at some point with securities, right?
Justin: We don’t know. We figure our plan right now is to test through this with on a limited basis with some investors and if it works, and we get to build a track record, we’re going to be like throwing away money, we’re going to be like shutting it down so we can … Because it’s a management operational piece on our end right?
Justin: We’ll close the gates and then we figured when we open it back up again, if people are going to be throwing money at us, and then okay, now we’ll go back and set up like the way it should be set up and that kind of thing. I don’t know, that’s probably not an advice you would give, but how does that sound? That sound reasonable?
Eric: Yeah, I mean yeah, there’s going to be some equity, and some security issues that you probably want to iron out before you do it on a large scale securities offerings and things like these are pretty complex. The types of disclosures you have to make or exemptions you have from making certain disclosures are super fact dependent on what’s all going on. It’s certainly possible I know last time I listened to you guys talk about this, you were talking about the difference between accredited investors and non accredited investors I think. Yeah, that’s certainly one of the huge factors that comes into play. If you want to make the … The other thing is are the buyers United States citizens, are you technically?
Justin: I’m a citizen. We have a US Court California based Corporation escarp. The buyers are generally Americans. The investors some of them will be Australian, some of them will be Israeli, some of them whatever but it’s probably 70%, 80% are going to be Americans who that’s kind of our buying audience right now anyway. Yeah, that’s the deal. I was thinking too that is this securities that they own the site, aren’t we just actually managing it?
Eric: Yeah, I mean securities are basically one of your questions you asked are should we be setting up LLC’s and the sale of an interest in an LLC or a corporation I think is what you would traditionally think of as the security. If the LLC decides to sell the domain and then the LLC is basically served its purpose and it’s going to dissolve then people would be entitled to whatever portion of the value of the business they own.
If you’re selling you know like in Michigan right now we have a law that does allow intrastate crowdfunding, so if it’s all Michigan people you can all invest, and you don’t have to be accredited. There’s bunch of rules in place.
Justin: That’s interesting.
Eric: It’s a problem though, because it only is designed for even if your business is conducted in Michigan. It’s not really designed for even a manufacturing company that ships outside of Michigan. It’s more for like a restaurant, or a bar, or pizza place that everything happens in Michigan. All the employees are in Michigan, all the sales happen in Michigan, everything’s in Michigan. In those scenarios, you can sell equity. You can say, “I’m offering, my company is worth this much, I’m offering shares at this amount for you know, and you can buy this many shares. That’s what you would think of in terms of shares selling a security.
The way you guys set up is a little different. Where it’s basically you’re soliciting people to partner with you to buy websites.
Eric: Not necessarily to sell equity.
Justin: These are all it’s all asset. Yeah, it’s not I mean, at this point we’re not setting up LLC. There is no corporation, there is no business aside from just common agreement, and you’re going to laugh at us or hate us or whatever, but we don’t even have a written agreement with these guys. Literally, it’s over the phone, let’s do this, and they’re like, “Okay, let’s try it.”
We’ve got good trust in our industry, which, honestly, it’s shocking to me that they’re just sending us money and willing to risk it.
Justin: We kind of weeded them out and said, “Look, we don’t want your kids college fund, but you have to be able to do it this time, and then another three, six months, do another few hundred thousand, another six months do another 400,000 or 500,000,” assuming everything’s working. We want it to be … And you’ve got to be good. Because I don’t want your kids money.
Eric: Right, yeah. The red flags that pop up right now, for me are just the solicitation process of it I think could potentially implicate some kind of disclosure rules.
Justin: Let’s get into this. I’m going to start off with the JOBS Act and then we’ll kind of get into our investor program. I know you’ve got a grasp on it then we’ll just kind of cover it and we’ll talk about this because I think it’s interesting.
Justin: I think our listeners will too. All right, so let’s get into kind of the investment side of the buying and selling websites thing that we’re involved in, and our listeners are involved in. There’s a recent thing with the JOBS Act. Now we’ve been looking at this I know a lot of online people will look at this pretty closely. Where basically it means that companies can raise crowdfunding for investments. A lot of these crowdfunding sites in the physical real estate space are getting involved like realty shares and fund rise. These other companies are doing some interesting stuff in real estate and allowing some of these smaller investors in that are not accredited.
I listened to a great podcast discussing this. I think it was either a reply all or a startup podcast by Alex Bloomberg and they were talking to the JOBS Act, and is that really okay? On the one hand, do you want the government saying that, “Hey, you know, you don’t know enough about what to do with your money, we’re going to kind of control what you’re able to invest in?” On the other hand, do you want people out there being able to sell people that just don’t have enough money? So what are your thoughts on the JOBS Act in terms of like crowdfunding and investments? Is that good? Is it bad? How is that going?
Eric: Yeah, I want to think it’s good. I think it’s good. I think democratizing the ability to raise money is a game changer, and I think it could have huge, huge impacts on not the next huge tech startup, but the family restaurant down the road. I mean, I think it could apply equally to community staples or the next Twitter.
I think in general, I think it’s great idea. I think the problem is executing it and right now the federal government doesn’t even know what to do because the rules for equity crowdfunding to non accredited investors aren’t done yet. We don’t know what they’re supposed to be done probably almost two years ago now, I think.
Eric: I think that succeed, directors changed since that time and they’re really stalling it. I’m not sure they know how to strike that proper balance because they don’t want people wasting away their retirement or their savings and investment that goes bad.
Justin: Highly risky, yeah.
Eric: A lot of them will go bad. The problem is, how do you put safeguards in place that don’t cost a ton of money? I can’t remember the numbers now, but I know there’s a study out there that analyzes how much it cost for someone to even go through the crowdfunding process and meet these due diligence disclosures and have certified accounting plans done. It’s very, very expensive.
Justin: Yeah, is it even worth it for them at that point to raise the money, with the amount of money and time they have to put in to giving them money. I mean, you look at like companies like Kickstarter though, and because of Kickstarter so much value has been able to be created. People are creating these new amazing products and like things that we just wouldn’t have otherwise. We’re getting out there things like the maker boxes, and the 3D printing stuff is going to be for everyone.
Kickstarter allows those things to happen. I mean, I wonder if crowdfunding with an equity piece will allow many more companies create new value in the world and really put new cool stuff out there?
Eric: I think so. I think it gives people a tremendous opportunity to raise money and when other avenues aren’t open to them. The problem is that those other avenues like banks or venture capital, those come with a ton of requirements and obligations and you got to prove yourself to those people before you get money, and maybe that’s a good thing, right? Maybe you should have to prove that you’re capable of doing something before you get money.
Where in crowdfunding those obligations and requirements may be a lot less and so yeah it could open up avenues for people that can’t get traditional funding but maybe those pressures, and obligations, and checking all these boxes of having a documented, just a business plan or forecasting and how you’re actually going to make money, maybe those are good things.
Justin: Maybe those are helpful. I don’t know. It’s interesting because you do see there are some Kickstarter that have come out and just failed miserably. Someone ran with the cash or problems have definitely happened but there are plenty of other Kickstarter that did work. I wonder if we’re dealing with this kind of crowdfunding for equity if you think it would be more problems or less problems than a Kickstarter and Indiegogo right now have?
Eric: Yeah, I think it’d be more problems because there’s a big difference between supporting something you think looks cool. The coolest was one of the most real popular one’s recently on Kickstarter. That looks great, like who wouldn’t want to take that to the beach, but when you’re the owner of a company, that’s a different feeling. You may have questions about how the owners of the business are operating.
If you’re an owner of the business, you may have the option to file suit against the business in a derivative sense that the owners are not living up to their fiduciary duties to make you money. So, when you invite the world to be owners in your business, this is a brand new thing, and there’s going to be a lot of fights about it.
Justin: Yeah, you have new people to answer to, and so I’ve got to answer this person that owns 0.03% of the company and he’s emailing me asking me questions and yeah, I could see that-
Eric: Yeah, yeah, there’s ways to protect against that. You could sell that in voting shares, there’s a million things you could do to protect against it, but it is a new reality and that does create a problem. But then, what’s the flip side of it is Michigan has a law called My All it’s the Michigan invest locally exemption I think it’s basically intrastate crowdfunding in Michigan and some breweries have used it. Michigan’s a huge craft beer state and some breweries have used it.
When you think about the customer loyalty aspect of it, if you go to the pizza place and they have the brewery that you just invested in, their beers is on top, you’re probably going to buy it and you’re probably going to encourage your friends to buy it you know because you’re going to say, “Hey, I own that. I’m part owner of that business.”
Justin: I love that. I love the Michigan has this this interstate crowdfunding is approved and for the breweries particularly because it’s a very local feel like you can get, raise money for what you’re working on, or your business you’re working on locally, and it gives kind of the community a way to vote and say yes, we want your business or yes, we’re supporting it in terms of we think you have a chance of success, and we think you’ll be around. Yeah, that’s really interesting.
Eric: It’s almost the ultimate customer loyalty program. Because, if you’re a popular restaurant and you want to expand, and you need 100 grand to expand and double the size of your commercial kitchen, you could probably go to a bank and you could probably get the money, no problem. If you went your customers, they already know they’re going to go to your restaurant a couple times a month, they love it there, they go there all the time, and they can maybe profit from going there.
Maybe it will be a long way down the road, and maybe it won’t be a huge profit, but that kind of local investment through crowdfunding I think has huge, huge possibilities. Because right now, I can invest in Apple or next IPO, but I can’t invest in the brewery down the street and that being able to keep money local, through crowdfunding, I think is maybe gets lost in the mix of JOBS Act and the size and scope of what’s possible that real community change is just as important.
Justin: So honey, where are we going to lunch? We’re going to the same deli, we go to all the time, because we own a piece of it.
Eric: Yeah. I mean, it might be a little tiring, but-
Justin: We talked to you a little bit, you know a bit about like our investor program that we’re planning on rolling out, and how we’re figuring this out and getting it started this year. One of the things we do is that these are all assets, right? It’s not a stock sale, it’s always an asset sale, and the investor owns 100% of site and we act as a property management piece of the portfolio or the websites that they’re purchasing.
I know that how we’re doing this right now, we’re probably going to have to fix or change as we go along, as we prove the model and it works out. I mean, I can’t see us having this massive portfolios and bring on all these investors without cleaning this up with attorneys and making sure that we’re on point. Is there anything we should be doing, like do we need to set up separate LLC’s for each portfolio investor, or do you think we’re okay of now? What can we do in the future to make sure that this is tighter than it is today?
Eric: Yeah, and we talked about it briefly. I don’t know all the details of it, but what is the purpose of an LLC? That’s a pretty fair question. To me, the purpose is really in its name, it’s limiting liability. The idea is, creditors could only come after the assets of that LLC, if anything ever happened.
For example, if you own a restaurant, you may have an LLC that owns the building and an LLC that technically owns the business. If something happened internally in the business where someone’s suing you, the value that’s in the real estate is can’t be attack, it can’t be reached by creditors, and so you’re trying to segment assets and limit the liability of the overall company.
When you have these kinds of deals that you’re talking about to me in LLC, I would almost always say an LLC makes sense for any kind of business purpose because they’re really, really easy to set up, they’re really flexible, there’s not a lot of requirements and when it means that your personal assets aren’t at stake, to me, that’s a huge benefit that’s worth the relatively small legal work that’s required to set it up.
Justin: It’s a way for us and the buyers or investors to kind of segment their responsibility and ultimately their liability into that particular LLC. Let’s say that we had a problem on one investor in one portfolio that wouldn’t necessarily bleed over to the other if we have them separate, is that makes sense, is that right?
Eric: Exactly, yeah that’s exactly right. Yeah, you’re limiting, if a creditor, if worst case scenario ever happened, what assets are people going to come after? If you own 30, 50, 100 other websites, they’re going to come after them. When, the reality is in litigation sometimes it comes down to how much money are we really talking here?
Eric: Because litigation from the plaintiff side is very expensive to pursue claims, and if there’s not a lot of money on the other side, then it’s going to be difficult for an attorney to take that case. If you can limit what people can potentially attack 10 steps down the road, you’re positioning yourself to basically just be more secure and safer.
Justin: Got you, so in the long term if we’re splitting it up at least investor by investor I mean it doesn’t have to be big enough to make sense to do it, but it’s not too much to set up an LLC it’s relatively straightforward, so we set up separate LLC, which each investor that’s pretty straightforward I can see that. I thought about this a bit in talking to you that, we have buyers that own let’s say larger portfolios and then they buy and they’re buying from us, so they’re selling with us, selling a piece of their portfolio and a lot of them do it under their own name.
That’s probably not so bad if you’re just doing a lead gen side, I’m not sure how much liability there is or like an AdSense site or something, but if you’re selling a physical product or even if you’re drop shipping. I mean, there is some liability there that it just makes sense to put it all into the LLC rather than doing it yourself. I mean, if you’re putting yourself at risk with whatever kind of product, you’re shipping to the end customer, and there’s a problem, a kid swallows it or something and dies, chokes on it. I guess that could be sad, it’s potentially problematic for you personally.
Eric: Yeah, and attorneys are always risk adverse and so we’re always going to give conservative answers and say, “Yeah, an LLC should always be in place,” but the reality is it caught, most people I’m sure your listeners that would have no problem creating their own LLC. It’s not very difficult. Every State’s website probably explains exactly how you do it. The costs are minor. It’s relatively easy to do. You don’t need an attorney to do it and the protection it gives you-
Justin: Today it’s like ordering pizza.
Eric: It’s very simple, and you certainly don’t need an attorney to do it, but the protection it gives you it’s so great. I mean, even if your risks are next to nothing, it’s still your house. Your house is basically at risk, your savings, anything and why? Why would you do that? If you kept an LLC and kept the assets and that LLC is relatively low, you essentially become what’s called judgment proof where even if someone tried to sue you, there’s nothing to get.
Justin: Yeah, so for my drop shipping side of my e-commerce site, I definitely don’t want to have my house at risk personally, based on my brand new [inaudible 00:50:33] shipping site so I can see how it makes sense to set up an LLC.
Let me ask you this, Eric, I was talking to you a little bit about the show, and I’ve said this many times on our podcast that it gets funky when you have an American buyer buying a website from a German national living in Hong Kong. Because if there was a problem, or whatever, and we get the question from this potential buyers, like how would I follow up on that? What recourse do I have? With legal agreements like you can put legal agreements in place all day, but unless you’re actually willing to go after those legal agreements and hold them accountable and you’re willing to pay the money to do that, it just doesn’t matter.
Like it doesn’t matter because those legal agreements aren’t going to help across multiple countries, and it’s just insane. Unless it’s valuable enough for you to go after it. Does that make sense? Is that good advice?
Eric: Yeah, it is. I mean, it’s certainly realistic advice that it’s going to be pretty difficult to go against, if you’re in the United States, and you have a judgment in the US Court, enforcing that overseas is going to be difficult. The contracts in my opinion would still be important because you could set out provisions that would govern jurisdiction or service of process or venue. Basically you make the person oversees agree to be sued in the US and in this specific court that’s in your local area they agree to a certain kind of process, maybe they agree to a permanent injunction, if X, Y or Z happens. Then the website shall be taken down and transferred back into sellers possession, and they agree to that. Well, then you can take that contract to the court and to the registrar and say, “Listen, we’ve already contracted for this contingency, it happened, follow the contract now.”
There’s things that I think a contract would still be important for, the problem is money. If you want to obtain a judgment against someone in the US and then enforce that money judgment overseas, it’s possible but it can be very difficult and time consuming, so it is hard.
Justin: Yeah, I could see how the seller may want the site back if they didn’t get paid, certain amount of money where they can protect themselves that way, but the buyer has already sent the money to the sellers in Hong Kong or whatever, trying to get the money back would seem to be the more difficult route, you know what I mean? I can see how it gets really confusing and it makes a lot more sense if you’re buying a $5 million business to go after them, and put things in place that that can happen. Where for 40,000 it just makes it … You might be legally right and there’s still no way you can follow up with it right?
Eric: Yeah, oh yeah. I mean it all depends on who you’re dealing with. If you’re dealing with someone that has assets though, if you try hard enough you’ll probably be able to find them and one way is attacking their domain portfolios depending on where they’re housed. If they’re all with US registrar’s, you may be able to levy a judgment against those. To me having a con … Again, attorney, conservative contracts are necessary. They spell out exactly what everyone understands the deal to be and you can draft them to your advantage to include really important provisions that hopefully never come up, but if they do then you know what to do. I think jurisdictional issues and saying injunctions and would all be important issue is if you’re dealing with someone overseas.
Justin: Yeah, I’d say clarity is a pretty important point. That, when we run into trouble, by not having contracts in place, it’s based on clarity, and so that’s one of the things we’ve been able to counter things with is via email being very specific and making sure that everyone agrees to the terms. It’s not a contract per se, but at least I think, if you’re not going to use a contract, or even if you are using a contract, it has to be clear, you have to make sure both parties are very, very clear on what they’re getting, on what the terms are, on how it’s going to work and that seems to be like a real problem.
I’m guessing you see a lot of lawsuits that kick up because of misunderstandings and agreements. I mean, that’s a pretty common reason to sue.
Eric: Yeah, yeah, certainly. In Contract Law, it’s called a meeting of the minds and that’s what a contract is designed to deal with, everyone’s on the same page. But, contracts drafted five years ago, you look back at it and you try to figure out what this provision means. Sometimes it’s not very clear and so there can always be issues, but the contract to me is always an important first up to document like just like what you said, what every parties expected will happen as an outcome of this relationship and how to end it, if they need to end it. What happens when they end it. They’re all provisions that people should just know if something happened, you go to that contract, you look and that should tell you what to do.
Contractual language if it’s sloppy, it can lead to issues, and it’s just part of helping someone sell a website for quite a bit of money and very surprised at the buyers contract that they proposed was just very unsophisticated for the amount of money they were spending. Sometimes I think people think the domain sales for some reason don’t need to have all of the requirements that you would have for any other piece of property. I mean, to me as representing a seller, you’re really concerned with getting them paid, but representing a buyer there’s a lot of factors.
Justin: Protecting themselves.
Eric: Yeah, exactly what you’re getting and the rights to it and you know, any encumbrances on that.
Justin: You do this as an attorney or you can act as escrow as a licensed attorney? Can you do it for sites in any country? Are you worldwide in terms of acting as escrow for buyers and sellers?
Eric: Yeah, so all attorneys have trust accounts, and those accounts are not our money we hold those for our clients. Yeah, I don’t see any reason why we could not use that in the court.
I think to complete a sale I think the important thing for us is it has to be bonafide kind of client money and use, we’re doing it for the right reasons, we’re not storing someone’s money for a while. We’re holding on to a very specific purpose and we’re getting rid of it soon. We don’t like to keep money in our trust account for any longer than we have to.
Justin: Yeah, an aside, Eric, I’ll tell you that’s something that we looked at or I think we’re just too involved in the space for us to be escrow for other brokers and other people doing business, but there’s a real need for escrow for website sales, the high level [inaudible 00:56:58] website sales. I’ll tell you escrow.com they are not going to get us there. They’re not going to take our industry there.
They ultimately, if there’s any kind of dispute they send it off to arbitration, they are no longer involved. They don’t understand, the transferring of websites, and domains nearly as well as they should, because they don’t specialize or focus on that.
Justin: For a business idea, I don’t know, I’m sure you’re pretty busy, but I think there’s a lot of opportunity there. We’re just too involved on one side of the market to really pull it off but yeah, I mean I’d love to see someone get into a space that specifically knows domains and website sales because I think they can blow escrow.com out of the water because we don’t think they do a particularly amazing job.
Eric: Okay, that’s good to know.
Justin: Just so you know, but anyway, let’s move into to buying and selling websites, some of our buyers or sellers what they’re looking for. We talk a lot about due diligence on our show and what buyers need to do better protect themselves looking into site. We talked about some of the tactics and the real details in terms of website ownership. What can you look at in terms of due diligence from a legal perspective? What do you help let’s say a buying client look at when they’re looking to purchase, an offline business and we’re an online business?
Eric: Well, the first thing would be especially in domains would be trademarks. Are you buying, is this subject to a trademark registration? Is the dominant feature of the domain subject to any trademark rights from any third parties? You can do that by searching the United States Patent and Trademark Office records just by googling it, but you also want to include and make the seller guarantee that there are no pending claims and that they know of or they should know of with reasonable certainty because that’s a huge one. The other one is the content on the site itself you want to be clear that they have all rights to that content, that there’s no copyright claims out there, that someone’s saying, “Oh that pictures mine, or I wrote that post,” or anything like that and in the same kind of sense is, is the site encumbered, are they buying it free and clear. You don’t know what people did-
Justin: What loans are against it, or?
Eric: Yeah. I mean, people can do all kinds of things. So, at some point you’re taking people’s word for it, but what you do is you include a section in the contract that says, “The seller guarantees and warrants, A, B, and C.” Then if A, B and C turn out to be false, then you have an action against the seller. Those are three main issues that from a buyer that you want to look out for.
Obviously, you want to be clear about how is the payment being handled. Is it going through escrow? Is it going through an attorney? Is it going through a third party? When is it going to happen? When is the transfer going to happen? How is that going to be conveyed? Spelling all that out in pretty clear detail you know, should be done so there’s really no requirements about anything.
Justin: No confusion on a buyer, or a seller part. Yeah, that I think that’s really important and one of the things that we’re very clear on with our buyer side just because there’s so many potentials for problems and we’ve run into problems when we were starting off that we’re like, “Okay, check, we don’t do that, we going to fix that problem.”
Eric: Yeah, another thing is a lot of times there’s services that are required from the seller. Some kind of consulting agreement or training, things like that, where a lot of times people just want to say, “Oh, we’ll document that later, we’ll figure that out later.” Don’t do that, just figure it out all at once. Don’t have your contract refer to other contracts that are going to be executed.
Eric: Get all the terms out there because it’s just all about clarity and a meeting of the minds and there’s no reason to wait to figure out on the terms.
Justin: Yeah, one of the ways we protect against that I think is somewhat helpful depends on the deal. If there is some training or something like knowledge piece that comes with it, then we’ll do a whole back of for 60 days until that training is completed and spelled out. Then once that trend is completed, then the seller gets the additional 20% or 30% or whatever. Sometimes earn outs for example, buyers can require or pay us … Let’s say they pay 60% up front, and 40% over the next 12 months and that can either be they can get some upside or downside and share that with the seller by giving them profit share and like how successful the site is.
So they mitigate risk of those problems and the seller has upside obviously if it gets better or they can just do it a straight earn out X amount of dollars, over X amount of months and that can help with things like that. All of our deals are done via asset sale so it’s always an asset so we never do stock deals. Is there ever an advantage to the buyer in doing a stock sale straight up? I mean, it’s hard for me to see why that would be beneficial to a buyer.
Eric: Yeah, my Civil Procedure teacher said always avoid always, never say never. But, I would tend to agree with you that when you’re buying an asset, you can be really specific about what you’re getting, and that you’re not getting, you can warrant against any liabilities that are maybe coming with that asset. When you buy a business, you buy stock, you’re buying whatever that business did and there may be outstanding liabilities out there that could come back to haunt you. I would tend to agree with you, if I was a buyer I don’t want to buy a business, I’d rather buy the assets.
Justin: You were talking about liability. Let’s say that the seller had a bunch of pending lawsuits, buyer buys it and is now on the hook for those lawsuits. Does the liability for the seller over extend beyond the sale? So if I made some mistakes and screwed something up as a seller, someone buys it from me, can my liability be extended by the buyer? Am I in trouble for things that they do in the future?
Eric: No, I think not. I think the contract would be pretty clear that any actions of the business will be the responsibility of the buyer. The seller would be really free and clear of anything. You’d probably want it documented to expressly state that but no I think once you’re out of it, you should be out of it. Now there’s always weird circumstances, I don’t know how many people are going to buy a business with a bunch of ongoing lawsuits against it.
Justin: They’re mostly [dealer 01:02:59] so small that they’re not even big even enough for anyone to try or sue them.
Eric: If you do, or if you do know of a claim, then what you would probably do as the buyer is say, well we know there’s this risk we might get sued for this, if that happens then the sale price is adjusted as follows and the buyer gets a discount, or the seller has to pay for attorney fees up to a certain amount. It’s about planning ahead if you do know of claims to make sure everyone understands where who’s going to pay for it if it happens.
Justin: What are the smallest, you’ve been brought in on deals, acquisitions, websites or domains what’s the smallest deal you’ve been brought in? I’m trying to get a gauge for like how big of a deal that needs to be to bring you in.
Eric: We’ve done the sales you know, I guess the better question is how much do our services cost for these kinds of things?
Justin: I guess, yeah.
Eric: Because drafting a website contract or reviewing saleable website contract, I would say roughly $1,000, we can probably get most of the work done. It’s not a huge investment to make sure the buyer or seller is protected to take a look at the terms. If we have to rewrite it from scratch, then that’s a different issue. Most of the time, we either have contracts that we can use, or the sellers, the buyers proposing one and we can red line it and go through it and handle the negotiations, and it doesn’t take too much time. They vary, but I would say, roughly $1,000, I would say we can cover most website agreements or purchases or sales.
Justin: That’s website agreements. What if I needed you for due diligence? I mean, that’s a pretty deep rabbit hole, right? I’m sure you could probably reasonably justify $50,000 in due diligence, but I guess that’s going to scale to the size of the site. If it’s only 1% of my purchase price it makes sense, if it’s 15%, not so much.
Eric: Probably yeah. That would be I think a lot of the due diligence you could do in terms of like investigating trademark issues and things like that, it doesn’t take incredible amount of time. Then, you always make the seller represent and warrant that whatever they’re saying is true and that there are no lawsuits and anything like that, but you can obviously make this search in depth as you want and the cost can go on from there.
Yeah, I think it kind of makes sense to take a look at, “Okay, how much do I want to invest in attorney fees based on the sale price? Is that worth the investment into it?” You know, and I think everyone’s going to have a different reason rationale for what percent makes sense, it is hard to answer. I would say a lot of websites probably don’t require a ton of due diligence because you’re dealing with content copyright and trademark issues and those you should be able to clear up a lot of times through either documentation or having people make certain … I think the sellers guarantee is to what is true.
Justin: There’s a good service that we’ve used and some of our listeners have used called centurica.com and they help with, kind of the website stuff in terms of due diligence. They can help figure out back link profiles and see what the site’s have been up to a before. So, I think probably we’re looking at maybe low to mid six figure deals, it might make sense to have an attorney come in for something like due diligence, but below that, I’m not so sure.
Eric: Yeah, and it seems like out of the due diligence part of this, I mean, that’s kind of what you guys do in terms of the actual functioning of the websites, and they are what they are, and here are the revenues that the sites make. We come up and we’ll clean up technical aspects of what’s being transferred and conveyed, but that seemed.
Justin: Yeah, it’s pretty, like we do vetting right, but ultimately we’re representing the seller, right? I mean, like we’re bringing the seller to the table so it’s like you could take what we’re saying and take a look at it and it really just saves the buyer time from having to dig through all the crap.
We’re saying, “Look, we’ve vetted this,” but ultimately, that due diligence always falls in the buyer, because we’re representing the seller. Yeah, I think an accountant probably becomes more important at the 2, 3, 4 or $500,000 range, because you want to make sure that the number’s right and the deals get a little more financially complex at that point, too.
Eric: Yeah, and once you start peeling back the onion of representations, and looking at underlying data and seeing inconsistencies, that raises a red flag and whoever’s doing that, whether it’s an attorney or the buyer themselves, an accountant, that’s the kinds of things that you’re looking for that say, “Oh, I don’t know, maybe there’s a problem here. This needs to be cleared up.”
Justin: Eric, this has been really helpful is there … There’s always one of those situations where are you don’t want an attorney until you need one too, so I’m glad you were there to help us. Is there anything I should have asked you that you were kind of like waiting for me to go, “Oh, God, I hope he asked this so I can get into this?”
Eric: I think he really covered a lot of it. I mean, I think to me the trademark issues and cybersquatting issues that come up are really important. There’s probably enough to talk about there in a whole nother episode. The domain I’m glad that we got to touch on the domain theft issues. Because it is that sinking feeling in your stomach. You wake up and you look and you realize what happened and you’re just lost. It’s important to know that you can recover these, you can hopefully get them back in their possession relatively quickly, and it’s not the end of the world. Even though it seems like poof, things are gone, there’s things you can do to get them back.
It’s important for people to know that there are options out there because it’s, it can be very, very stressful, confusing, and you really end up feeling lost in the whole mix. I think you guys did a great job in attacking it quickly, and investigating what happened internally and solving the problem going forward.
Justin: Well, we felt miserable. I mean aside from the money loss or whatever, like figuring out how much it was, that was a concern. Like how deep in the hole are we here, like how much did they take, but then also just the fact that someone stole from you, it’s just painful, you know what I mean? It’s like getting your personal on the street or your wallet or wherever or someone snatches your cellphone. It just sucks, you feel violated.
Justin: We really appreciate you coming on our show man and kind of digging into this with us. If anyone wants to check you out obviously, Eric over at revisionlegal.com I’d be happy to hear from you. Is there anywhere else you hang out, are you on Twitter or anything like that?
Eric: Yeah, my name Eric Misterovich on Twitter. Revision Legal on Facebook and our website, we put up, try to be pretty active and blogging, writing about interesting issues with domain names and online businesses and things to look out for, post a lot stuff to our Facebook page that could be of interest to your audience. I really appreciate you having me on. This has been a blast.
Justin: Cool, Eric I really appreciate it. Thanks, man.
Speaker 2: You’ve been listening to the Empire podcasts. Now some news and updates.
Justin: Yeah, buddy I really appreciate, Eric coming on the show. I think he gave some great tips and really good advice. I know this is a longer episode than we typically do but I really appreciate him coming on the show. If you want to check out his site it’s at revisionlegal.com.
Joe: Eric, thank you for everything you’ve done for us. I mean leading us through the process. I think it was so cool, and we continue doing some work with you.
Justin: [inaudible 01:10:24] some more work for you actually we were talking about this, this last couple of days.
Joe: We might, we enjoyed the business relationship.
Justin: All right, buddy let’s do some news and updates. First off, we spent a week in Manila. We took a week off the show, it’s been a week in Manila. Now, we’re here in Davao for five weeks with the team. So, we’ve got a small team seven people here in Davao city and so we’re going to be taking them out. We’re doing island hopping on Friday, we’ve already had a pool party meetup and got a little bit of work done, a little bit of pool party, but we’re going to get more training with them. I think I’m really excited about it.
Joe: I am too. I think it’s going to be great to work side by side. The team had some training sessions, some really in depth kind of thing. The team knows us really well. They’ve worked with us for several years, and having these one on one sessions with them is always good.
Justin: We really caravaned it down here too. I mean, we were in Saigon, it was me, you my girlfriend, Mike, the marketplace manager, and Andrew who’s running customer service, the account manager, and all of us came down to the Philippines, came down to Davao, and we’re all here now. In a future episode, we’re actually planning on having Mike and Andrew on to kind of talk about their positions and their roles in our business a little bit. I think that’ll be interesting, and we can have our listeners get to know them a little bit better.
Joe: Yeah, I think it’s time to get those boys on the podcast and get them interjected into what we’re saying here.
Justin: Yeah, buddy last thing I want to mention for news and updates, we’ve got new videos up for all seller interviews, I put a bit more time effort and money into these. They are much higher quality and I think they explained the information a little bit better. So, if you’ve seen any of those, you know the old videos we have, I love to hear your feedback. Do you think it’s nice? Do you think it’s worth it? Did you prefer the old videos? Do you like the new videos? Let us know in the comments, we’d love to hear your thoughts.
Joe: Yeah we spent some money there so please hit us up.
Justin: All right man, let’s do some listener shouts also known as the indulgent ego boosting social proof segment. First up, we’ve got two brand new iTunes reviews by-
Joe: Hit me up man.
Justin: All right man first one is from Super Duper 1000 gave us a five star iTunes review. I find the Empire Flippers podcast to be brutally honest and real. They share the real life stories of their business without sugarcoating anything. I find that refreshing and a world of propaganda and savvy marketing techniques, keep up the great work guys. He really likes our brutally honest business podcast. I appreciate that man.
Joe: Thank you. Super Duper.
Justin: Next up it says informative and interesting five stars from improv studios. This show takes topics and most people normally fall asleep to and make it interesting with their talks about their company and how they’re implementing their suggestions. It’s helped me grow as a web developer and really made me aware of the market and how many people know of. Keep up the great work guys, really appreciate that.
What I think is interesting is that not a lot of people do know about this industry. It’s easy for us to get kind of pop in our heads or other people are listening to this show that do buying and selling websites on regular basis just seems like kind of normal business, but we’re a niche and a niche man. This is small niche we’re dealing with here.
Joe: It’s amazing to me even technical people, even computer people, IT people, programmers, designers don’t know about this side of the industry. I think yeah the fact that we have people listening in and we can change their kind of outlook on the way virtual real estate is coming around and online investments please keep listening.
Justin: Yeah, one of the reasons we have this show the way we have it is because we get sick of podcasts where they’re talking theory and they don’t actually have a business. They’re like, “This is how it would be if you want to be the best,” but they have nothing to speak of. We’re like, “Well, we have a real business, why don’t we talk about some of the real issues we have in our real business.” That might be a little more interesting than just theory. I’m really glad that some of our listeners appreciate that and give us an iTunes reviews to support it.
Next up buddy we’ve got Twitter. We’ve got Jonathan Mead said anyone who has any experience selling on Flipper and we got some love on this one man. He was just getting hit up by people. So Kindred Kennison gave us some love. He said check out Empire Flippers, solid guys. Jeff Porcaro a buddy of ours says chumming in Jonathan to say, Justin is a straight shooter and a friend, really cool, thanks, guys. Yeah, if you want to know anything, Jonathan, we’d be happy to discuss it with you. I know you’ve got a quality business yourself.
Joe: Yeah, absolutely. Would love to lead you through the ins and outs.
Justin: Mike Bradford asked a question. So that weight loss affiliate site making $17,000 a month and only ranking on the second or third pages of Google? Really? Yeah, man, really, these niches are, some of them are hits. There’s a lot of dads, but when you get a hit, it is absolutely explosive, and the revenue and profit in those niches is crazy.
If you’re talking penis pills, if you’re talking weight loss, you’re talking any of these things. It is it can be ridiculously profitable.
Joe: Yeah, if you look at some of the search volume there, Mike definitely even ranking on the second page would get you a significant amount of traffic such that you would absolutely be able to monetize it quite easily.
Justin: We have a buddy doing five figures a month in that space and another guy I know doing six figures a month in the weight loss supplement space. Yeah, tons of money there. Dark spirit on Twitter, asked Justin a simple question. I hope you can shed some light on, if site flipping was a great investment, why doesn’t everyone do it? Well, it’s a good question. One of these, we mentioned earlier, is that it’s a very, very small niche so not a lot of people know about it.
I mean, I just don’t think people view it as an asset class. I think that it got caught up in the kind of I am, by a website for a couple hundred dollars space and it’s not really viewed, I think, as like an asset class and we’re looking at change this. I think there’s a lot of opportunity there to view it differently.
Especially when I talked to investors, potential investors, and friends of investors, they’re like, “Wow, hold on, let me do the math really quick.” Like these returns are potentially insane. That’s kind of when we go into, well there’s a ton of risks too. So there’s a lot of risks which makes those insane returns but also it’s an amateur market and those returns are going to go away. They’re going to get eaten up by brokers like us. They’re going to be eaten up by other people that are going to suck that margin out.
Justin: I mean, get in while you can I guess before it goes mainstream. I’m not sure that it would ever would go mainstream, but I think that right now there is a lot of opportunity.
Joe: I’ll add on that there’s a lot of doubting Thomases out there too. I mean, he, Dark Spirit here was alluding to it a little bit. If it’s such a great investment-
Justin: Why shouldn’t everyone do it?
Joe: Right, so immediately coming in with doubt, right?
Joe: I think a lot of people approach it that way.
Justin: Well, because there’s a lot of crap dude.
Joe: There is and I get that but-
Justin: There’s crappy sites, that are bad. They’re bad investment.
Joe: And, there are crappy stocks and there are crappy bonds and crappy companies to invest in, in general, and people lose their money all the time and that kind of stuff, too. I just think if you approach it with an amount of skepticism, but also practicality. It definitely can be worth your while.
Justin: I also think that not everyone has the technical ability to run these sites, right? That’s a problem we’ve run into, is there a lot of people that have plenty of money, that are looking for alternative asset classes they can put their money into, but they don’t want to be ordering content from text broker.
They don’t know how to set their domain instead of WordPress and silly, but like, they’re these are busy people, they own multiple businesses. They’re not going to be sitting down to order content from our content provider. So there needs to be an answer that, we’re looking to provide an answer to that.
Joe: Yeah, I mean, you think about, they can call up Charles Schwab. They can open an account for, you know, a couple of bucks and they can already start trading stock and I think it’s easier for them to wrap their head around that than it is to buy an online asset that earns.
Justin: Yeah, man last thing I did a couple of podcasts and [inaudible 01:17:40] want to check out one of them with Tyler over at Chatting With Champions, had a great talk with him. There was another one with my buddy, Erland The Hardcore MBA podcast. We’ll put links to both of those in the show notes. Erland in particular, maybe you’re new to this whole buying and selling websites thing, you want to hear what it’s all about. That’s pretty good kind of intro to kind of what we do and what the industry is all about. So I would encourage you to have a listen.
That’s it for Episode 136 of The Empire podcast. Thanks for sticking with us. We’re back next week with another show. You can find the show notes for this episode and more at empireflippers.com/revisionlegal. Make sure to follow us on Twitter at Empire Flippers. See you next week.
Joe: Bye-bye everybody.
Speaker 2: Hope you enjoyed this episode of the Empire podcast with Justin and Joe. Hit up empireflippers.com for more. That’s empireflippers.com. Thanks for listening.