Contracts and Escrow: What You Need to Know

If you have had an offer for a business accepted and proceeded through due diligence successfully then the final stages of closing the deal are on the horizon. By this point, finalizing the transaction is a matter of signing the contract and swapping funds for the assets.

Typically after due diligence has completed, the broker representing the transaction will prepare an Asset Purchase Agreement (APA) for the deal. This is the legal document underpinning the transaction and the contractual agreement between buyer and seller.

Contracts: Asset Purchase Agreement

For the most part, APAs are quite standard in form, but they contain a number of clauses that vary with each deal and that both parties should pay close attention in the drafting of:

Consideration The size, structure, timing and form of the consideration for the assets is clearly of high import when drafting the APA. If there is an earn-out or seller financing the terms and timing of each payment should be made explicit in this section. Likewise, holdback consideration should have very clear conditions attached to it that are ideally objective and verifiable in the case of conflict.

Non-compete Most online business sales involve a non-compete agreement between the buyer and seller providing the size of the asset and its business activities merit it. Both parties should pay close attention to the exact wording of the “Restricted Business” definition which encapsulates what the seller is prohibited from doing post-sale. A good broker will strike a middle ground between protecting the buyer from competition and the seller from being able to pursue other non-competing business in the future.

Assets for transfer Both the buyer and seller should be very clear upfront on the assets for transfer. With larger website sales there can be a significant amount of content and additional assets to transfer so it pays to be thorough with the documentation of these in the APA. Normally a website transfer will include (but by no means be limited to):

  • Domain(s)
  • Website source code, content and related files
  • Graphics, images, logos etc
  • Social media accounts; and
  • Client database (email lists)

Transition assistance – Agreeing the level of post-sale support given by the seller is something that should be done upfront and made explicit within the contract. The number of hours per week/month, response time and nature of communication should all be recorded. It is also wise to build in an agreement to make all relevant introductions to partners of the business.

Naturally both buyer and seller should be comfortable with what is finally drafted for the purposes of the transaction. It is very important though to seek professional legal counsel before putting pen to paper.

Escrow and Transfer

With the APA signed it is time to transfer the funds and assets for the transaction. A reputable broker will typically direct the buyer and seller to a third party service such as to protect both parties through the transfer. Escrow is effectively an independent service that collects, holds and releases funds online, according to the transaction terms agreed upon by the buyer and seller. The process typically moves in the following steps:

  • Escrow transaction terms agreed by Buyer and Seller
  • Buyer transfers funds securely into Escrow (funds are secured but not released)
  • Seller transfers assets to Buyer
  • Buyer acknowledges receipt of assets and initiates the inspection period
  • Inspection period used to confirm correct representation of assets
  • Buyer confirms satisfaction with assets and releases funds to Seller

escrowThe Escrow service provides strong protection for the buyer by allowing inspection of the assets for a pre-agreed period (the inspection period) before releasing the funds. In the unlikely event there has been misrepresentation, the buyer’s funds are protected and the assets can be returned to the seller. Either party can seek remediation for a grievance through Escrow’s arbitration service.

From experience of several hundred successful transactions, buyers and sellers through FE International have found Escrow to be an invaluable service for the smooth transition of funds and assets. The service usually charges a fee of ~1% of transaction value on deals over $25,000. You can calculate exactly how much it will be using Escrow’s fee calculator. The fee is typically split between buyer and seller.

If you have any questions on the legal and transfer issues associated with online business sales please contact your dedicated broker at FE International or the wider brokerage team.