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How To Protect Your Money When Buying An Online Business

By Quiet Light
| Reading Time: 6 minutes

When negotiating the sale of an online business, you eventually have to stop talking and pay the seller for their business. Of course, sending hundreds of thousands of dollars (if not millions) to someone isn’t all that easy. In fact, it can be downright scary.

Whenever big money shows itself, extreme risk is always a possibility. By the time you get to the transition phase, you’ll have done your research, made and negotiated an offer, verified information in due diligence, negotiated a purchase agreement, and planned for a transition and post-transition training.

The transfer itself, however, is where all that preparation becomes real. It’s where the ownership of the business changes hands – and the funds too. It is understandable to feel anxious about the whole thing. Naturally, a buyer and a seller will want to protect their assets as much as possible. But what are the best ways to protect your assets?

Use An Escrow Service

Use EscrowUsing an escrow service is the most obvious solution, but it’s also the best option. Although though I’d love to fill this article with unique tips that no one else has ever published, no article like this would be complete without mentioning it. There really is no better way to protect your money than to use an escrow service.

The first most obvious benefit is that the buyer hands the closing funds over in their entirety to the escrow service who “lock” the funds. This simple step of funding escrow gives the seller a final verification that the buyer has all of the funds necessary to close the deal. Plus, since the funds are “locked”, neither side can access the funds until the transition phase has been completed. The locked funds motivates the seller to get a move on and get things finalized so they can get paid.

The second benefit is that escrow gives you a pre-defined way to resolve any significant dispute. While it is best to do your best due diligence to remove any possible disputes, you should still have a plan in case a dispute arises. With the funds locked up by escrow, both you and the seller will be motivated to get the most pragmatic resolution in place as quickly as possible. Most escrow agreements will stipulate mediation or arbitration to resolve disputes if you are not able to work out a resolution with the seller.

The third and final benefit is that if you are in a state with lots of regulations, rules, and procedures (e.g. California), then an escrow service in that state will help you navigate all the bureaucratic minefields.

There is, however, a significant drawback – escrow services are not free. While the fee may not be terrible, this is a cost that may make your offer look just a little less sweet to the seller, and which you may not want to pay yourself.

Forget The Escrow Service & Use An Attorney Instead

Attorney as Escrow
Attorneys can act as an escrow agent

Few people know that attorneys are, by virtue of their law license, able to act as escrow agents. While they may ask for some fee for this service, it is often much cheaper than using an escrow service.

Plus the attorney is probably already handling the sale/purchase of the business, so combining their regular contract and advisory services with an escrow deal may make sense. Often an attorney will just wrap holding the funds into their regular services without charging an extra fee (which could save you a significant amount of money).

Don’t worry if the seller wants their attorney to hold the funds either. As long as the escrow agreement is solid, there shouldn’t be any problems.

What About Exchanging Funds Face to Face?

Face to face transfers have been effective.
Face to face transfers have been effective.

While escrow services are the most frequent option of buyers and sellers, some buyers and sellers opt to exchange funds and assets in person. This option is not without its merits, although I would hesitate to make this a recommended option.

If you choose to exchange funds and assets face to face, be sure to clear a few days off your schedule. You and the seller are going to be spending a lot of time together transitioning everything over. This is a good thing because your high contact interaction with one another, which will help you pick up on a lot of little things that are hard to communicate over email or phone.

But There ARE Risks

Back in 2009, one of Quiet Light Brokerage’s first deals was for a business-for-sale directory (like BizBuySell). The buyer borrowed $45,000 from his brother to buy the business, and all went well until the transfer. The seller received the funds, who then transferred over a minimum of assets to the buyer. After three days, he was gone leaving the buyer with a bunch of random usernames and passwords to accounts, some of which worked, and some which didn’t work.

The buyer ended up losing his shirt on that one. A very painful lesson for everyone involved, especially the buyer who had a $45,000 loan to repay, and nothing to show for it.

Get the escrow agent. They’re not cheap, but the peace of mind is worth it. You can still work face-to-face, but you’ll have the added benefit of inspecting the assets before the deal closes.

Make a Highly Detailed Transfer List Of Things To Remember

Nobody’s memories are perfect, and the transition phase is where you need to remember everything that has to be done, and every piece of information you need. So make a list of all the things that must be in your control before you wire your closing funds. Have the seller help develop this list. This will not only give you a more thorough list, but it’ll also help the seller know what is expected of them to release those escrow funds.

A theoretical list would include the following:

  • Domain names, which must be completely transferred to the buyer’s name (list each domain individually).
  • Usernames and passwords for the following services. List each relevant service, and make sure everything is completely transferred over to your name. Also make sure that no outstanding arrears are owed, by the seller.
    • Web hosting.
    • Telephone service.
    • Email.
    • Google Adwords account.
    • Google Analytics.
    • Any other important online services needed for the business.
  • A merchant account,which must be installed and confirmed active.
  • Affiliate referral codes fully switched out throughout all of the site(s).
  • All original contracts, of customers, vendors, and other suppliers (list all contracts).
  • All original bank statements (specify the date range, assuming you don’t have these already).
  • All original merchant statements (specify the date range, assuming you don’t have these already).

This is only a basic list, so merely use it as a template for the business you are buying. Add and expand where required.

Hold Back Some Funds

Hold Back
Holdback 10-20% of the funds

When the funds are being wired to the seller, hold back 10% – 20% of the total deal’s consideration for 30 days, after the business transition has been completed. Just as long as the funds are in escrow at closing, and the holdback is agreed to in advance, very few sellers will object. If they start loudly complaining, then you may want to recheck your agreement.

Why hold back 10%? The most common use for a holdback is to motivate a seller to fulfil their obligation to train you in their business. But holdback funds are also commonly used absorb any post-transition incidental charges that should have been the seller’s responsibility. And although it’s not much if the seller did manage to run off without proper training, that 10% can act as compensation for any damage they did by not training you in the business.

Again, holdback funds are typically held by the escrow company fro the moment of closing until their release date, so there would be full transparency if any of the money had to be used. You wouldn’t have to worry later about being accused of keeping some of that 10% back for yourself.

Plan Well, Protect Your Money, & Proceed Carefully

Protecting your money during the transition is mostly about good planning and methodical execution. Of course, no one can protect themselves 100% against an experienced fraudster, but taking a few simple precautions will eliminate most threats and help you feel more comfortable about the transaction.

Are there any tips that we missed? Add your thoughts below.

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