When an Internet business is sold, the closing process in many cases is not managed effectively; it is not facilitated in a way that minimizes both the seller’s and buyer’s risk.
When a business owner makes the decision to sell a business their ultimate objective is to transfer ownership of that business to a new owner and to receive from that new owner the agreed to amount of consideration or dollars. It’s simple, on a specific date the closing takes place and at that closing documents are signed, information is communicated, and money changes hands. The seller’s objective is to insure payment of the purchase price resulting from the execution of the closing documents and the buyer’s objective is to insure transfer of the ownership as a result of the payment of the purchase price. This is especially of a concern when an Internet business is sold given the need to transfer ownership of intellectual property: for example domain names, shopping engine accounts, hosting services contracts, telephone numbers, etc.
The seller’s mindset is usually “I want my money before I transfer ownership”. The buyer’s mindset is usually “I want the ownership transferred before I transfer the money”. This is a catch 22 situation. In the vast majority of situations the seller and buyer are both honest, professional individuals and what comes first is of little consequence. As we all know there are exceptions, there are individuals with character flows that we all need to protect ourselves from. Will the seller receive funds and not transfer the ownership? Will the buyer receive ownership of the business and not pay the owner? Probably neither of these situations will take place but why take the chance when the solution is pretty simple. Use an independent escrow agent to facilitate the close. The cost for using these services is usually pretty inexpensive; usually less than $1,000 and the cost is usually split between the seller and buyer.
The independent escrow agent’s role is to facilitate the close via a written process that is documented in an escrow agreement that is agreed to and executed by both the seller and buyer. In that the agreement the following major activities are usually included and these activities are implemented by the seller, buyer, or independent escrow agent either before or during the day of the close:
1. Execution of Bill of Sale by Seller and Buyer
2. Execution of a Promissory Note by Buyer if a Seller take back is part of the transaction
3. Transfer of ownership of the following:
- Domain Names
- Shopping Engine Accounts such as Amazon and eBay
- Hosting Services Contracts
- Request for transfer of telephone numbers
4. Final accounting for inventory if an ecommerce business is purchased
5. Communication of all account IDs and Passwords from Seller to Buyer; this is especially of importance for the transfer of an Internet business given that a high percent of the value of an ecommerce or information based Internet business is the technology that drives the operations of that business. Without access to that technology the new owner has little control over the operation of their new business.
A few days prior to the close the Buyer will transfer to the independent escrow agent the total required funds needed to close on the business. Upon completion of the agreed to activities included in the escrow agreement, the escrow agent is legally required to transfer payment to the Seller. We all know the name of the game in business is to minimize risk; the use of an independent escrow agent substantially minimizes both the seller’s and buyer’s risk resulting from the closing process.
During the seven years that Acquisitions Direct has exclusively focused on the sale of ecommerce and information based Internet businesses we more times than not hear the Seller and Buyer requesting to use their respective attorneys as the third party responsible for executing the close. It’s true either the Seller’s or Buyer’s attorney can assume the role of an escrow agent but they do potentially have a conflict of interest, the Seller’s attorney works for the Seller and the Buyer’s attorney works for the Buyer. A independent third party escrow agent works for both the Seller and the Buyer and as such is in a position to be impartial. We all know the cost of litigation; everything should be done to avoid a serious legal issue. When real estate is transferred generally a third party escrow agent is used to facilitate the close, do the same when you sell or buy an Internet business. The small cost of employing an independent escrow agent is a well worth the cost!
