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Purchasing a business is a significant decision. When done right, it can be an excellent investment and the start of an exciting new chapter. However, you need to be confident that you understand the business you are purchasing, the purchase process itself and have well-drafted legal documents in place to make sure you are adequately protected. When purchasing an online business, there are additional considerations to be aware of, particularly around the technology underpinning the business. This article will provide a brief overview of the key things to keep in mind if you consider purchasing an online business.

Business Sale or Share Sale?

The first thing to consider when purchasing a business is what type of purchase it will be. Are you buying the business or the shares in a company

Business Sale

If you are purchasing the business, you typically buy all of the business’s assets and goodwill from the current owner. This may be an individual person, a company, or the trustee of a trust. The business owner will change, and therefore, you will not normally inherit any of the business’ pre-existing liabilities. Most of the company’s existing contracts and agreements with third parties will not automatically carry over and may need to renegotiate these contracts. The renegotiation and continuation of these contracts will be a part of the purchase process.

Share Sale

If you are purchasing the shares in a company, you effectively take over the entity that owns and operates the business. In this situation, the business owner is not technically changing, as the same company remains the business owner. Therefore, you will be inheriting any proverbial skeletons in the closet – making the due diligence process (discussed below) all the more critical. 

The upside is that you may not need to renegotiate the business’ contracts. This is because the company that is the party agreements will continue to operate the business (albeit with new shareholders). However, this may not be the case if any contracts include a ‘change of control’ clause that allows the other party to terminate if the company’s owners change.

How Will Your Ownership Be Structured?

Regardless of whether you are purchasing the business itself or the shares in a company, what entity will you use to make the purchase? Will you personally own the business in your own name, or will you be operating through a company structure? If you will be operating through a company, will you own your shares directly or through a family trust? 

The way you structure your future business has significant tax and liability implications. These implications are beyond this article’s scope, though you can read more on this topic here.

Due Diligence

Due diligence is the process of thoroughly investigating a business you plan to purchase. Before purchasing an online business you must ensure you fully understand the:

  • business;
  • its products;
  • its consumers; and
  • online marketplace.

The formal due diligence process typically begins after you accept an offer. The following is a non-exhaustive list of steps you should take as part of the due diligence process:

  • find out how the business is structured (sole trader, partnership, company, etc.)
  • conduct searches to confirm who owns and runs the business, if there is any impending litigation and whether it has outstanding liabilities (such as loans).
  • consider what intellectual property (IP) the business owns. Will the business’ previous owners assign the IP to you as part of the purchase?
  • investigate the business’ key commercial contracts with third parties such as suppliers, developers and clients. Examples of contracts relevant to online businesses include website terms of use, privacy policies and software as a service (SaaS) agreements. 
  • find out who are the business’s current employees and contractors, and if they will they continue to work for the business after the purchase. There are essential rules around employee treatment in a business sale that you can read more about in our article here.

An essential part of the due diligence process will also be engaging an accountant to go over the business’ books to ascertain its financial performance and itemising the assets included in the purchase and their value.

Technical Considerations for Online Businesses

An online business’s value is fundamentally linked to the software, systems, and technology underpinning the business. Therefore, beyond the usual legal and commercial considerations for all business types (such as those mentioned above), it is critical to investigate the technology itself when examining an online business. The following is a non-exhaustive list of some of the things that may be relevant:

  • source control processes;
  • deployment processes;
  • backups and failsafes;
  • check bug/issue reporting platform (assuming they have one) for volume and nature of issues;
  • tech debt;
  • security processes;
  • compliance with current laws and regulations (e.g. GDPR);
  • all licences are up to date;
  • copyright ownership;
  • non-compete clauses are in place;
  • handover process;
  • user onboarding process;
  • app store details (e.g. keys);
  • credentials handover (e.g. systems); and
  • hardware warranty status.

The Contract

From a legal perspective, the most critical part of the entire sale process is the contract. If you are purchasing the business, the contract will be referred to as a business sale and purchase agreement. If you are purchasing the shares in a company, the relevant document will be a share sale agreement.

Usually, the seller will have a sale contract drafted by their lawyers to provide to you (although this does not have to be the case). Regardless, you must have a suitably qualified lawyer either draft or review your contract for you. 

As the purchaser, some key terms and conditions to protect you include:

  • restraint of trade – this prevents the seller from opening a competing business within a defined geographic area and timeframe; 
  • vendor warranties and guarantees – these are promises that the vendor makes to you about claims they have made and information they have provided regarding the business;
  • indemnities – these are obligations by the vendor to reimburse you for certain liabilities that you may incur post-completion; and
  • handover period – this is a period after settlement where the vendor must make themselves available to teach you how to operate the business and answer any questions you may have.

Key Takeaways

Purchasing an online business can be a complex and technical process that has enormous consequences for you as a buyer. Therefore, it is essential you have a suitably qualified commercial lawyer to help you through the process. If you are considering buying an online business, contact LegalVision’s New Zealand business purchase lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a business sale?

A business sale is when you purchase the whole business, including all of the business’s assets and goodwill from the current owner. The business owner will change. Also, you may need to renegotiate contracts with third parties.

What is a share sale?

A share sale is when you purchase shares in a company. In doing this, you take over the entity that owns and operates the business. By purchasing shares, the business owner is not technically changing, as the same company remains the business owner.

What due diligence is required when buying an online business?

Before purchasing an online business, ensure you fully understand the business and its products, consumers and the online marketplace. You should also consider what intellectual property the business owns and whether this will be assigned to you as part of the sale.

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