Free on Clips4Sale: Legal Zone Episode 10 with Corey D. Silverstein on AB 2389 Clip…
2013 was a busy year in the online adult industry; especially in terms of business purchases, sales and mergers. Online businesses were purchased at record prices in 2013 and I expect that 2014 will continue the trend.
This is the first of a series in which I will discuss some of the more important do’s and don’ts when purchasing an online adult business. This article is not meant to replace the services of an attorney nor is it meant to be an inclusive list of everything that a purchaser should do. Part 1 will focus on a purchase from a buyer’s perspective while Part 2 will focus on a purchase from a seller’s perspective. Keep watch for Part 2 in XBIZ World.
I am always amazed by how many purchasers contact my office in the course of purchasing an online business and have no idea what they are buying. The seller of an online business or any business for that matter is always going to present its business in the most favorable light in order to attract more potential buyers and obtain a better purchase price. As the saying goes “don’t buy a book by its cover;” do not purchase an online business solely based on a seller’s representations. Do take as much time as you need to make sure that you understand what you are buying do not be pressured or rushed by a seller. In fact, if you notice that a seller is putting extra pressure on you to move faster or complete the transaction, do slow down. Do not pay a deposit, until you have a complete understanding of what you are buying. Do have your accountant and lawyer review the financial statements and tax returns for the business that you want to buy (you are a fool if you miss this step). Do research the business that you are buying and the individual sellers. You should be researching everything from user reviews, to social media pages, to public records, in order to find out absolutely everything that you can about the reputation of the business you are purchasing and sellers that you are dealing with.
Asset Purchase vs. Stock Sale
Do not purchase any business until you understand the concept of an asset purchase vs. stock sale. An asset purchase is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the seller’s shares/units of an entity (corporation, LLC, B.V. etc.). Please keep in mind that there are substantial tax implications of an asset purchase or stock sale and you should always consult with an experienced accountant prior to choosing which way you want to go (this article does not discuss tax implications). In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, including but not limited to, equipment, licenses, trade names, email addresses, telephone numbers, stock, domain names, and content.
The benefit of an asset purchase to a buyer is that you can pick and choose which assets you want and which assets you want to leave behind. Do not offer to purchase assets that you do not want or need; do use this as a negotiation tool for the purchase price of the assets. Asset purchases also typically include accounts receivable, prepaid expenses, and accounts payable. Do carefully investigate the transferability of the assets that you intend on purchasing. Certain assets may be more difficult to transfer due to assignability restrictions, legal ownership and third-party consent. The perfect example that I can provide is adult content. If the seller is the unrestricted copyright holder of the content that you intend on purchasing then you should not have a problem, however, if the seller is nothing more than the licensee of the adult content then you Do need to verify that the seller has the legal and unobstructed right to transfer/assign the content to you. This process requires the review of all applicable content licenses and contacting the content licensors prior to consummating any purchase.
A stock sale on the other hand, is where the buyer purchases the selling shareholder’s stock directly, thereby obtaining ownership in the seller’s legal entity. In a stock sale transaction, the purchaser is purchasing all assets and liabilities of the company. Do understand that by completing a stock purchase instead of an asset purchase, the buyer may be accepting more liability including issues that the seller may not be aware of. Do ensure that if you choose to proceed with a stock purchase, you obtain a warranties and indemnification agreement to protect you from certain types of claims that may have accrued because of the actions of the shareholders. Do not proceed with a stock purchase if you have any concerns with regard to how the selling shareholders operated the company. If the entity that you are purchasing has a significant quantity of copyrights, trademarks or patents, a stock sale may be the better option because so long as the copyrights, trademarks or patents are registered to the company, the purchaser can reduce the chance of potential problems and costs with regard to transferability of those intellectual property rights. In the era where multi-state and international business sales are common, a purchaser needs to carefully analyze where the company is incorporated and assuming that the purchaser is not located in the same jurisdiction, the purchaser needs to understand whether he or she has the legal ability to proceed with the stock/unit transfer. It may be and will probably be necessary to have multiple attorneys if this is in fact the case, as the laws in one jurisdiction can vary greatly from the laws of another.
Get It in Writing – Contracts, Contracts, Contracts
No matter how many articles I have written and seminars that I speak at. The adult industry is still plagued by the handshake deal. I cannot count the number of horror stories and lawsuits that I have been involved in where adult businesses are sold with no formal contract of any kind. Do get your business purchase in writing. Don’t be cheap and stupid; hire an adult industry professional, experienced in business purchases. If you can’t afford an attorney to cover your ass then you can’t afford the litigation that is going to come your way when something goes wrong with the adult online business that you are purchasing.
Do take a big dose of reality, you are purchasing a business that involves pornography; whether its government regulation, intellectual property issues, record keeping requirements or general liability issues, you are purchasing a high risk business and if you don’t have an iron clad purchase agreement, you better start saving for the eventual litigation. If you think that you are somehow special, and the seller is your friend, family member or significant other and you don’t need a written contract, you are a fool. I have seen more conflict arise between former friends, ex’s, and family then total strangers. Do some research on the statute of frauds. In the simplest of descriptions, the statute of frauds is law that states that certain types of transactions must be in writing or they are unenforceable as a matter of law. You are dreaming (and have no business in the adult industry) if you somehow think that you can purchase a library of adult content with no documentation or licenses that support your ability to use this adult content. Do not purchase anything until you understand the requirements of 18 U.S.C. § 2257 and its related statutes. Do ensure that in your purchase agreement with the seller, the seller warranties the validity and accuracy of the records that are being transferred to you.
Can You Manage the Purchased Business? Key Employees and More
Businesses do not run themselves and while the internet seems to be filled with fairy tales about how easy it is to run an adult website and how easy it is to make millions of dollars in your sleep, the fact is that operating an adult business, especially an online business, is very hard and requires special skill sets. Before purchasing any online business Do make sure that you fully understand what skills and personnel will be necessary to keep the business running and profitable. Do not be delusional and think that an online business becomes successful without highly complicated, SEO, marketing, and traffic generation. If you don’t have the skills necessary to understand and run the business that you are purchasing, do not purchase the business without the ability to hire the businesses’ current personnel or until you do have a or a team of dependable (and reputable) adult industry professionals that will help you learn and operate the business. One of the best and most effective ways to ensure the smooth transition and continued operation of the business, is to include in the purchase agreement, a certain guaranteed time commitment from the seller(s) to assist you with the transition. Another way to go, is to enter into employment agreements or independent contractor agreements with key personnel prior to or contemporaneously with the purchase agreement. To reiterate, do not believe everything you read and make sure you understand what it’s going to take to operate the business you are purchasing. Pornography is high risk and I can assure you that you will find yourself in trouble if you don’t know what you are doing.
Know When to Walk Away – Keep Your Emotions Out of It
As mentioned above Do make sure that you obtain a purchase agreement in the process of purchasing an adult online business. During the process of due diligence, negotiations, investigations and fully auditing the business that you are purchasing (but before you sign any purchase agreement), don’t be afraid to walk away if you think that you are getting in over your head or if you uncover something that doesn’t seem right. A good salesman (in this case the seller) will always seem to have a good excuse for anything bad that you discover. Perhaps during your due diligence you uncover some unlicensed/stolen content, or perhaps you discover that the seller has been abusing customer credit cards; no matter what negatives you uncover, take the emotions out of it. Like buying a new car, a new home, or a new toy, something new is always exciting and human nature makes it very difficult to walk away from things that we believe are going to make us lots of money or make us feel great. Do not let a seller talk you into something you know isn’t right. Trust your instincts and intuition and put the excitement aside. Finally, always remember, if something seems too good to be true, it probably is.
This article does not constitute legal advice and is provided for your information only and should not be relied upon in lieu of consultation with legal advisors in your own jurisdiction.