The top 3 legal issues when buying and selling domain names

The top 3 legal issues when buying and selling domain names

In this day and age we have local council’s using Google Earth to find illegal structures in people’s backyards. In Queensland, Australia, for example, if you put in an aboveground swimming pool in your garden, you end up with someone knocking on your door, handing you a fine and demanding you drag the kids out of it and destroy it – all because you didn’t comply with the pool fencing regulations! Ok, rant over and I hear you asking, what on earth has pool fencing got to do with domain names?

Well, I was thinking of presenting you with the a-z of regulations for domain names (local registrar = local council) and explaining why every one of them is a possible road-block to your dreams. But in the end I thought that would not only be boring, and potentially stop you from chasing the fun of a great deal, but ultimately unnecessary because in the end it really is quite simple.

What it comes down to is:

  1. Does the person selling the domain name actually have the legal right to sell it?
  2. Does the person selling the domain name actually have the present ability to transfer the domain name upon sale?
  3. Who else out there is likely to want to fight you for the domain name?

And in reality, just like local councils, unless something is out of the ordinary it gets channelled through the automatic processes with very little consideration and comes out the other end transferred, or not transferred. All the regulations only become an issue once there is a problem, and a high percentage of the time there simply isn’t a problem.

So how do you best ensure your transaction is one of the majority that don’t have a problem?

Does the person selling the domain have the legal right to sell?

Remember that domain names are like post-boxes. You only have access to it for as long as you pay the annual fees and the annual fees give you a licence (key) to use the domain name.

In the days before WordPress, lots of development companies registered their client’s domain names. Often this was simply because the client didn’t know the difference. Even today, there are plenty of companies out there that retain a domain name when their clients want to build a site. All those ‘free website’ building packages do exactly that. So the right to transfer a domain name is not necessarily straightforward.

Naturally the first thing to do is check ‘Whois’ to discover who is listed as the named registrant. Only the registrant has authority to transfer the domain name. As a buyer or seller, you don’t want to get a message like this:

This transfer was cancelled as the whois information provided does not match current registrant. When submitting a fax transfer, the registrant information you input when initiating the request must match the current whois information (registrant/admin contacts and address/phone – email does not have to match) from the current registrar. If this information does not match, the transfer will be rejected.

Don’t assume that just because you get the billing information and other updates from the registrar that you are the named registrant. You might just be the listed tech, admin or accounts contact. I’ve seen people go for years thinking they were the registrant because they got all the information, only to discover at the crucial moment that they are not.

If the registrant was a long lost developer we at least have the benefit of LinkedIn and Facebook to find people, something much harder even seven years ago. Issues you need to be prepared for before contacting a long lost developer:

  • Does your registrar charge fees for changing the registrant? Some do.
  • Who is going to pay a transfer fee? Hint: That would be you.
  • What if the developer wants a fee before transfer? The cost of dispute resolution under uniform domain name dispute resolution policies starts at around $2,000, so be prepared.
  • What process do you have to go through and how much can you do yourself without the cooperation of the developer?

Tips about negotiating:

  • Don’t make demands, ask questions and be helpful.
  • Prepare before any conversation and don’t get angry. Most people can’t tone their language down enough to take the anger out of a conversation whether it is via email, skype, phone or text message. Breathe and stay calm. The easy solution is to be persuasive, not combative.
  • Know your bottom line and what it means to you if you don’t get it. Be prepared to walk away.

If you can’t correct the registrant details, you can still change the admin, tech and billing details. It is a higher risk, but some people are prepared to take that risk.

If you are the seller, you may have to talk the buyer through this and be prepared to take a cut in your ideal selling price. Know the history and be able to reassure the buyer that the registrant has done nothing in the last 5 years, so you don’t expect that to change.

If you are the buyer in that situation, consider the risk and whether or not it is worthwhile to you. If you’re building something small you can move quickly where the branding doesn’t necessarily match the domain name, is that domain name worth the risk? Maybe. If its big money or brand-centric, the answer is probably ‘No’. Not unless you want to take the legal action to regain control. Always seek the strongest rights possible to control what you are investing in.

Does the person selling the domain have the present ability to transfer the domain upon sale?

This is more of a techy issue than anything else. There are loads of enthusiastic amateurs who don’t actually know what needs to be done to transfer a domain name fully and promptly.

If you are the seller, be prepared to do all the hard work to get the domain transferred. Even if you put in your Flippa add that the buyer has to sort it out, once you take payment for the domain name you are legally obliged to do everything reasonably possible to get that domain name transferred to the buyer. If the buyer is not sophisticated, what is considered reasonable can be a lot more than you expect. Be prepared!

If you are the buyer, don’t expect the domain name to magically appear in your account overnight. Find out who the current registrar is and what is involved in moving a domain name to either a new account, or a different registrar. If you are using a different registrar, look up the rules and processes that your registrar has before the sale is due to complete. Again, be prepared! The more proactive you can be in the process, the quicker you get your domain name. Once the transfer is through, double check all the tech, admin, billing and registrant details to make sure they match what you wanted, and tell the registrar about corrections immediately.

Any delays in a domain name transfer can increase the risk of registration lapsing and you losing your rights.

Who else out there is likely to want to fight you for the domain?

We’re delving into the area of business names and trademarks here. Some examples of cases I’ve been involved in over the years are:

  • A person with the same name as the domain name (eg. BarbaraSmith.com).
  • A foreign company wanting to move into a new market, whether or not they have any existing presence in that market.
  • For generic names, every other business of that type! (eg. Cheapsheds.com.au).
  • The supplier of a product or service who has distributors adding the trademark to their domain name without permission (eg. every MYOB site out there).
  • Anyone else with a registered trademark of a different class.

Trademarks deserve a little more attention. There are 45 classes of trademark and you can register the same name in different classes without infringing on the first trademark. A great example was when Internet access provider RoadRunner Computer Systems ended up with control of the domain name Roadrunner.com. Not surprisingly, Warner Brothers complained, but had little basis to do so. RoadRunner CS had just as legitimate an interest in the name. The dispute was settled, however, and Time Warner now has control of the domain name.

Look around. Do some online searching and at least check your country’s trademark register before you get too excited about a domain name. It might be alright to own it, but if you have a battle looming as soon as you start to use it, what is the point?

If you are the seller, do your homework and be able to show the buyer how you have mitigated the risk. I’ve recently worked with a client who was excited about buying a niche website just right for them only to discover that someone else had the registered trademark (unused) in the same class and the same country. The cost of a trademark dispute can be anywhere from $5,000 to $25,000. We had to look at the site income, their strategy, risks and prospects. You’ll understand that what they were prepared to pay was immediately reduced.

Different countries have different rules. In some places, it is ‘buyer beware’ and in other places, the seller has to provide full disclosure of all the risks or be liable after the sale. Know the rules that apply to you and be prepared. If there is a risk that there will be an argument over a domain name, whether you are the buyer or the seller, you need to know where you stand and what strategies you are going to use to get the best deal.

How to protect yourself legally when selling an online business

How to protect yourself legally when selling an online business

Have you ever tried selling an online business before? If you have, you know that selling a web business is very different from selling a widget through Craigslist or eBay. It’s not something you can just ‘have a go’ at without potentially exposing yourself to legal problems. Your web business is the whole package of the website and all the systems, procedures, staff and office space behind it that make the whole thing profitable and of interest to a prospective buyer, rather than just the website.

In short, agreeing to sell an online business is no small thing and needs to be carefully considered.

1. Do you really want to sell?

That might sound like a silly comment but many people experience ‘seller’s remorse’ after the point of no return. Once a contract is made, it is very difficult to back out without BAD THINGS happening. ‘Bad Things’ include having to pay money to the proposed purchaser and even a legally enforceable requirement to hand over the business.

2. What are you selling?

Do you really understand all the components that make your web business profitable, how they work and more importantly, how to hand over control to the new owner? Are you clear about whether or not it is the business entity, or just the assets that you are selling?

You might have an established web business in a corporate entity and expect the buyer to take the company off your hands as part of the business purchase. This will involve share transfers and may include unexpected complications where the buyer and seller are in different countries. Most countries have specific rules around foreign ownership of companies; like the requirement to have one local director. What will you do if all the buyer wants is the assets?

Worked Example – website for sale [beastbox.com.au]

“We will transfer ownership (shares) and directorship of the company into your name and complete any transfer of ownership necessary such as web registrar. Stock will be couriered to an address of your choosing. Training and guidance negotiable.”

A completely different set of problems arise if you have setup the web business over time and inadvertently had different entities owning or controlling different aspects of the business. For example, you might have purchased images for the website in your own name, software in a company name and then had content for the website contracted through the business. If you are selling an online business that looks like this then you need to know that you are legally able to transfer everything you say you are selling as part of the transaction.

**WARNING**

Don’t try and be too helpful as a seller just because your prospective purchaser is overseas. I saw a seller on Flippa make the following comments:

“You need an ABN (Australian Business Number) but you can use mine if you can’t get one” and then “You won’t be able to own the domain, but I am happy to leave it in my name (I have done this before with another site) and simply transfer the domain into your registrar.”

High Risk! If you keep the domain name and business number in your name, but let someone else use it for revenue, you could be found personally liable for tax on income. Don’t just assume you won’t be caught or that your explanation (I sold the site) will be accepted when all other evidence points to the contrary.

3. Preparation for selling an online business

When you are selling the components of the business rather than the entity, have a clear list of all the content and intellectual property to be transferred, the software licences, the agreements with suppliers, advertisers and affiliates, the registration and hosting and any social media accounts. Make sure there are not going to be any issues with transferring anything across to the buyer.

When it comes to business names and trademarks understand or outsource the transfer processes. Where you are transferring copyright, you need to be able to demonstrate that you have the right to transfer (eg. receipts from a stock photo site) and include a paragraph in your contract of sale identifying and transferring all necessary copyright.

Think about the sales process behind your website business. How easy is it going to complete the change-over to the new owner and will they need any new accounts? Be clear on how you are going to transfer any post-sale sales income to the buyer if the systems transfer doesn’t go as cleanly as you hope.

4. What could be a deal breaker?

If your web business has to be operated in your country of origin and can’t be moved, make that clear in your advertisement. You don’t want unnecessary arguments and a lost sale due to a misunderstanding that can be easily corrected.

This applies equally if you operate in a regulated industry. Industries such as health, finance, law, gambling, weapons, tobacco, sex and drugs are all industries accessible online, but regulated in different countries. If you want the sale, don’t assume the buyer will know there are potential compliance issues with your web business. You want an easy hand over, not an argument.

If you are selling because your being prosecuted for non-compliance, be prepared to disclose that reason, otherwise there is a risk the sale could be reversed for misrepresentation.

5. The sales contract

You know the saying “Whoever has the gold makes the rules”? Well, whoever writes the sales contract makes the rules. If you don’t think it’s a big deal, consider this: most standard business sale contracts require the seller to give warranties about the business for a period of time after the sale is complete. Non-compliance with warranties usually results in some form of payment by the seller to the buyer. So you might think the sale is done and dusted, then months later get a demand from the buyer that you are contractually obliged to meet.

If you’re selling a low value web business then both you and the buyer might be happy to stick with informal contractual terms [link to previous article] agreed over email or private message, or consider whether the standard Flippa terms will work for you.

If your web business is worth more than you can afford to lose, then invest in a formal contract. Do not copy and paste a collection of agreements from the internet. I know how tempting it is to use the ‘free’ option, but if you don’t understand the way different clauses in an agreement interact, and what is actually enforceable in your jurisdiction, you can be creating a document that is full of contradictions and ambiguities that take away your rights.

6. Be realistic

Be realistic on price expectation. Have you watched Dragon’s Den or Shark Tank? Many people are disappointed because they don’t really understand the market. Also think about timing; seasonal changes can impact the appeal of your web business. Have a look at the Flippa seller’s guide for practical steps you can take in getting ready for sale.

On the other hand, if you have a clear idea of what you should be able to expect from the market and don’t want to sell for less than a fixed amount, set a reserve. If you don’t set a reserve you agree to sell at the highest offer, like it or not.

7. Consider your sale from a risk versus return perspective.

High risk needs attention, low risk needs a decision from you whether or not the cost of fixing the problem will add value or create a return roughly even with or better than your investment. Reducing high risks may not show an immediate return on the bottom line, but it does make your business more attractive. Have clear answers for all the questions that a buyer might ask and that might give you a ‘no, no longer interested’ instead of a ‘Yes, lets deal’.

Hopefully, with these tips in mind, you can more easily navigate the legal waters of selling an online business.

Have other tips? Let us know in the comments below.

Contract Basics: Everything you need to know about buying a website, domain, or app

Contract Basics: Everything you need to know about buying a website, domain, or app

Have you seen The Hobbit: An Unexpected Journey? Before setting off for the Lonely Mountain, Bilbo is handed a great long parchment with various addendums sewn onto the edges of his contract with the Dwarves. (Note that he does actually take the time to read it and question some of the terms before signing it and joining the quest.)

So what do Hobbits have to do with buying websites, domains, or apps? – A reminder that you don’t actually need a formal document and a signature to create a binding contract.

You can form a contract through an exchange of emails or private messages, through a telephone call or a combination of those activities. In the case of contracts, actions can speak louder than words.  The beauty of having something in writing is that you have a permanent record of what was agreed, whether a formal contract or exchange of written messages.  Something in writing can be useful even a few days after you have concluded the deal because most people have imperfect memories.

The basic elements of forming a contract are:

  • Offer
  • Acceptance
  • Consideration through payment of money or taking an action
  • Intention to create legal relations

Whenever people want to dispute terms there is an opportunity for technical legal arguments, but in most cases, the fundamentals will apply.  Gain confidence in the understanding these elements and you won’t be unpleasantly surprised with your purchase.

1. What’s the offer?

Any seller posting a listing on Flippa is offering to sell you what they have described in their listing before it ends, either at no reserve, a buy-it-now price or with a reserve.

As a buyer, this means you need to understand the listing and ask questions of the seller before you make a bid. If you place a bid, or buy it at the BIN price without asking any questions then you are accepting what the seller has offered.

Worked Example – website:

At the time of writing there is a listing on Flippa for a website selling ‘licenced’ themed apparel – think cartoon characters.  It’s a fairly straight forward listing without a lot of detail. The seller’s notes say that the auction includes the website and the domain, and that the contact information for the service that drop-ships the clothing will be provided.  Although a low value site, as a buyer I’d be checking the following:

  • Social media accounts and whether or not they are included (the website lists Twitter, Facebook and Pinterest accounts)
  • Whether the list of registered users will be handed over and in what format
  • The website includes an invitation to subscribe to a newsletter, so I’d be looking for that list too, as well as any newsletter content
  • Licences for background images (stock images) used on the site
  • Licence terms for sale of themed products, I wouldn’t want responsibility for a breach
  • That the clothing supplier was happy to do business with me as the potential new owner of the website and whether there were any possible complications; like continued permission to use their images and how easy it is to change product listings.

If you had hit the BIN price without asking these questions, the only thing the seller would be obliged to transfer to you for the BIN price would be the domain and website, nothing else, regardless of your expectations!

 2. What is acceptance?

Acceptance is pretty obvious really. As soon as you place a bid, you are notifying the seller that you are accepting their offer at your bid price. If you place a maximum bid price so that you don’t have to stress about being out-bid, then your acceptance of the seller’s offer occurs each time you are the highest bidder.

What you are accepting is what the seller has described for sale and any additional items or content that you have asked about and the seller has agreed to include.

Worked Example – app:

On a Flippa ‘just sold’ app listing, a person public messaging the seller asked for details about the source files for the app so that changes could be made. The seller responded and confirmed that all of the source files including source code and original design files would be transferred as part of the sale. So after 57 bids, regardless of who asked the question, the app purchase included those source files.

3. How much consideration is enough?

Consideration is the taking of an action in support of an agreement reached between the seller and the buyer. The action does not have to be significant, it can be as simple as sending an email to the seller thanking them for the opportunity to purchase the website. Full consideration is payment of the purchase price, but partial consideration, like the payment of a deposit or putting money into escrow can support an argument for enforcement of your contract for purchase. This is only likely to be a problem where you have a seller who wants more than the price you have agreed to pay.

4. Did you really intend to reach agreement?

Disputes over contracts sometimes arise when people are at odds as to whether or not all the key terms were agreed or not.  If you want special terms that aren’t included in the Flippa terms, or a formal document in writing before reaching agreement, you need to state that at the outset.  If you don’t spell out that you want a specific term, your agreement will be the sum of the standard Flippa terms and your email or private message exchanges up to the date the purchase price is agreed.

Worked Example – domain:

On a ‘reserve met’ listing, the seller has made it clear that there are two domain names included in the offer and they expect payment to be made via Flippa escrow. No ambiguity there.

So what else should you look out for?

From a legal perspective some extra things I’d be looking for are:

  • Check out the seller, who they are, where they are and that they can actually sell you what they are offering
  • Know what you are buying, don’t assume everything is included – if you think it should be included, confirm with the seller
  • If there are agreements in place with writers, affiliates, drop-shippers etc, make sure those agreements can be transferred to you as part of the sale
  • Check that the seller has authority to transfer copyright, trademarks and other intellectual property for your purchase and will do so
  • Check whether or not there will be additional duties or taxes payable at the time of purchase – they are usually the responsibility of the buyer.

And lastly, remember balance! Whether you are buying a website, domain or an app the detail you put into your purchase should match the risk or reward of your purchase.  There is a difference between $50, $5000 and $50,000. Be realistic. Your due diligence and attention to detail will be greater for a $50,000 purchase, but a $50 purchase is a great place to practice and learn from your experience.