Purchasing any business, whether online or physical, is a big step. As such, there are some key legal and commercial considerations involved. The legal stages of purchasing an online business are similar to purchasing a physical business. Much like any business purchase, it is important to conduct legal and financial due diligence. Doing so will help ensure you are purchasing a business that is suitable for you.
In this article, we explain the key considerations for purchasing an online business.
Sale of Business Process
The key differences between purchasing online and physical businesses are:
it is unlikely that online businesses will have a shopfront or office space with a lease; and
there are less physical assets involved in an online business.
negotiating, finalising and signing the sale of business contract; and
finally, settling the purchase of the business.
What Assets Are Included in the Sale?
Intellectual Property (IP)
The IP is crucial to the business and it can be made up of:
the business name;
the domain name;
trade marks; and
the content on the website.
You will need to clarify who owns the IP in the business and if the seller can rightfully transfer these assets to you.
For example, you will want to find out who owns the content on the website. If there are photos on the website, you should ask the seller if a photographer took them as they could own the IP rights to the images. The same goes for the website content. You should ask the seller if they had engaged a website developer who may own the IP and has assigned the rights to the seller.
Ultimately, you want to ensure that you obtain:
ownership of that IP by requiring the owner to assign it to you; or
a licence to use it. Whether you are assigned or licensed the IP will depend on the nature of that IP, who created it and who has ownership of it.
The IP of the online business is often the most important asset that needs to be transferred in the sale.
Most online stores will not manufacture their own stock. Rather, they obtain stock from a supplier. When purchasing an e-commerce business, you will want to ensure that your sale contract includes the stock of the business as an asset that will be transferred to you.
To ensure the quantity and quality of the stock are suitable for you, it is best to undertake a stocktake prior to the settlement date. This is particularly important if the seller requires you to pay for the stock in addition to the purchase price.
The sale contract should also require the supply agreements the seller has in regards to their stock to be transferred to you as part of the sale. Depending on the terms of the supply agreements, you will likely need to obtain the consent of the supplier to do so.
If the seller does not have these ready, you should consider having them prepared before you begin operating the business.
Software businesses revolve around the software and apps that developers create. Many software businesses rely entirely on code created by the owners of the business or by third-party developers. Important considerations here are the:
use of IP licences; and
ownership of the code and IP.
If you are purchasing a software business, you will need to check:
who owns the IP of the software; and
how it can be assigned.
In some instances, the business will have a licence agreement in place with developers to use their code in the software systems, but will not have ownership of that code. It is vital to conduct thorough due diligence of the software and any agreements the seller has in place with developers. You will need to ensure you either:
obtain the ownership of the IP in that software as part of the sale; or
have the seller’s agreements with their developers assigned to you.
Retaining existing customers is important for any business. Therefore, if the online or e-commerce business that you are purchasing has a customer list or database, this should be included as part of the sale.
A small business that is transferring its customer database will need to comply with the Australian Privacy Principles (APP). There are specific requirements that apply to the transfer of personal information during a business sale. As such, you should ensure that you are complying with these during the sale.
Generally speaking, the seller will not always need to seek consent from the customers of the business to transfer their personal information if you:
are an APP entity (or about to become one as a result of the purchase); and
plan to use the information in the same way and for the same purpose as the seller.
However, in some instances, the seller may have to obtain customer consent, especially where the information may be used by you differently after the sale.
Revenue of the Business
When conducting your due diligence, you will also want to know how the seller receives payment from its clients. In doing so, you will need to consider whether the seller:
has subscription agreements with its customers for the use of a software system; and
engages any third party payment providers such as PayPal.
You will need to consider if you are comfortable continuing the same payment arrangements as the seller had with its customers, or if you intend to put in place new payment terms. It is best to set out your terms with the customers of the business in your terms and conditions.
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Legally, purchasing an online business is similar to purchasing a physical business. The primary difference is that most of the transferrable assets are made up of the IP of the business, which can include:
social media; and
When purchasing an online business, consider:
what assets are included in the sale?;
who owns the IP of the business?;
how can the customer information be transferred (e.g. with or without the customer’s consent)? Are you and the seller required to comply with the APPs in transferring that information?; and
how does the business make money and receive payment from customers?