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Escrow Agreement needed when providing Software via a Website?

December 9, 2011 By Leave a Comment

As a website operator you may want to consider offering escrow agreements to your customers, particularly if you run SaaS (software as a service) applications via your website, which are critical to your customer’s business.

What is Escrow

Escrow refers to a third party holding a copy of the software source code on behalf of the customer and the supplier.


What is an Escrow Agent

An escrow agent is a third party who stores a copy of the software source code. The escrow agent will release a copy of the source code to the customer if any of the events set out in the escrow agreement occur.

Why use Escrow

This is usually a customer driven requirement resulting from the fact that the source code for the SaaS software, the expertise to implement it and rights to the software are only licensed to, and not owned by, the customer for the term of the SaaS agreement.

Customers are concerned that the supplier may:

  • fail to maintain the software;
  • transfer ownership of intellectual property rights in the software;
  • become insolvent;
  • or become unable to carry on supporting and maintaining the software for some other reason.

By having an escrow agreement in place the customer has the right to continue to use the software, if the supplier is in default of its obligations under the SaaS agreement i.e. it no longer operates the website.

Advantages of an Escrow Agreement

Having an escrow agreement in place protects all parties involved in the development, supply and use of business critical SaaS applications. It provides customers with peace of mind for securing long-term availability of a critical software application by enabling customers to update software and fix any bugs even if the supplier is no longer able to support them.

Disadvantages of an Escrow Agreement

Having the right to use the software under an escrow agreement is in reality of little use if the customer does not have the know-how and resources to actually use, maintain and support the source code itself.

Also, the costs of setting up an escrow agreement and maintaining it are relatively expensive. Escrow costs are usually paid for by the customer.

Filed Under: Internet Business, Internet Law, SaaS

How do I buy an online business?

December 6, 2011 By 1 Comment

How do I buy an online business?

If you are thinking of buying an internet or online based business for the first time, here are a few pointers which I hope you find useful. They are just a few of the things I have picked up over the years from my own experience however whilst I think there are certain factors that need to be considered in almost all purchase transactions ….no two deals will ever be exactly the same  – so always be aware of the “special wrinkles” that might affect your own particular circumstances.


I have in mind especially small and medium sized situations and although many of the same principles would apply to much larger deal sizes… these larger deals will usually attract a small army of professional advisers to keep you on track!

The smaller, less formal, deals are also the ones where I believe buyers can be at the mercy of unscrupulous sellers if they don’t at least follow some basic good practice and “common sense” steps.

Tips for buying a website or web business

“Look before you leap” is not a bad maxim here. Start your research early and you will be able to act quickly – and with more certainty – when a good opportunity presents itself.

 My Top Tips for buying a web business:

  • Identify relevant research tools and spend some time understanding your market…not just a quick snapshot … but over a period of time e.g.
    • similar sites and businesses on markets like Flippa
    • identify closest competitors and spend time studying their websites, social media and even mobile sites. Look for reviews about them, customer feedback…what are they good at? Where are they weak?
    • Is there really a market for your idea …what size could it be? (Despite what a lot of people would have you believe there are not many genuinely unique concepts out there… there is usually an equivalent or something close to it out there already) Don’t make the mistake of thinking your idea has to be unique or “the first”… after all, every successful business needs to satisfy a customer demand… and if there is a demand is it not likely that other people are already trying to meet it? … Markets that are already established (and you can service smarter) or are young and growing are often the best place to be
    • Sites that claim to be able to value a website business based just on you entering a URL – if you find an accurate one – let me know!
  • If you are buying a web based business that is already trading – demand their analytics*! I have seen many instances of sellers being less than forthcoming about supplying full access to analytics. If the seller is honest then why wouldn’t they “pull back the curtain” and let you have a look. Google analytics (and similar) enable you to check on traffic levels , source of traffic (paid for, organic search, referral etc) and very importantly key words and phrases that have brought the traffic to relevant landing pages. (*assuming of course the buyer is serious and if necessary signs non disclosures etc)
  • Legality and originality
    • Most genuine and successful web businesses nowadays will have at their core original, useful and legal content – relate the content back to the information gathered on top keywords and landing page content – is this all consistent?
    • Ensure that content is original by sampling key text (tools like copyscape.com) can help
    • Remember to include seller guarantees in your deal paperwork to protect you on issues such as original content, copyright (images and text), ownership of database lists and any restrictions on use for marketing purposes (e.g. has data been collected legally in all operating geographies and were privacy statements and terms and conditions displayed etc?)
  • Backlinks, relevance and site authority – These are fundamental building blocks to a strong search engine ranking performance
    • Imagine buying a trading website…e.g. selling sports clothing – you buy the business, take control of the high traffic sales focussed website, purchase the sellers stock, relocate it all to your own premises….And wait for the orders to pour in at the same rate as the seller enjoyed!….But there seems to be a problem…Within weeks the site traffic is down 40%!… If only you had identified in advance that a huge slice of the traffic to the site was referred by another site…(that the seller also owns!) and is now being redirected somewhere else! (a bit of an extreme case but you get the message?)
  • Social sites – check them out…what is being said and what is the activity and sentiment?
  • In my pre-internet days I had experience of buying and selling businesses with stock in trade part of the deal. Slow moving, damaged, obsolete, missing and overly expensive stock is the same…whether internet or not. Always ensure your contract allows for a full and fair valuation of stock, plant and equipment.
  • Reasons for the sale – This is an interesting one – Personally I wish sellers would be a bit more honest and say things like “This is too much like hard work, I have found it difficult to make much money from it and the thought of a cash lump sum is appealing…” The reasons given are at times quite funny, other times would bring a tear to your eye… but the bottom line is you are looking for potential, try to understand why they are struggling and you can do better.
  • Technical – This is the area which perhaps makes buying and selling web businesses a little but special. Technical considerations are of course “played down” by the seller. Technical could mean everything from hosting to stock control systems and digital marketing. Almost every web business of any size requires a mix of technical and marketing skills to support it – and to make it worse, these are skills which need to be constantly updated.
    • Don’t just accept seller statements like “minimal maintenance required” – ask a few pertinent questions
    • What are the softwares and platforms? Are they owned or under licence?. How easy will this be to maintain and develop? Be aware of bespoke software or even heavily adapted versions of common or opensource platforms
    • Usually sellers will say things like “free support and help for the first x months”…Maybe that is true… Maybe they will disappear after receiving your money! (keeping a retainer % of the price for a period of time might help here)
    • If you are not technical yourself then take advice. Site maintenance often takes up more time and money than even the seller realises.
    • There will be a load of passwords for servers, email, social sites, commercial accounts etc etc…grab them all

The list above is certainly not comprehensive and as I started writing it I realised just how long it could be!

I realise that some of the list above might seem a bit off-putting however the opposite is my intention. You need to balance the personal attitude to risk with the potential reward. I guess many people start small to learn and then (with the benefit of a few scars!) progress to greater things however most of the above points can be taken on board by you quickly and for minimal cost. The better prepared you are the more likely you are to feel confident about what you are buying and the price you should pay.

Legal contracts and Escrow

Remember that taking good advice and professional help should always be considered – it could be false economy not to.

I am a big fan of having some kind of contract in place and the use of a financial escrow arrangement (e.g. escrow.com) can help hugely to build mutual trust (especially since many of these smaller transactions will be completed at distance and without comprehensive legal representation) 

I have seen some very fair contracts (fair to both buyers and sellers) available as part of an escrow service on auction sites. You don’t need to be a lawyer to understand them. Sometimes there is a temptation to save a few dollars on fees for this sort of thing at the end of the process – but I would say “buyer beware!”

Final Word…

Buying and selling websites can be as much about fun as commercial interest. Even the research can become a bit addictive! I hope you found the list useful but we would very much welcome your own thoughts and experiences.

 

Filed Under: Buying an online business, Internet Business

How do I sell my website business?

October 9, 2011 By Leave a Comment

Preparation Tips for Selling a Web Business

There are definately techniques you can use to give yourself the best chance of finding  the right buyer for your business. A slice of good luck is always welcome however we all know that the better you prepare the luckier you are likely to get!

I’ve had direct experience of both selling and buying businesses (internet and physical) over a number of years. Although there are certainly some special technical and legal considerations for Web businesses I hoped (for those of you thinking of selling soon) you might find it useful to consider again some best practice basics.

 Preparing ahead of a potential sale is important and can take a long time… even years – you can’t start this too early….

Obviously the overall aim is to build potential site value: traffic + $ value of traffic + segmented list building etc., however here is a simple best practice preparation checklist.

Planning to Successfully Sell a Website Business

– some of the timescales, value additions and key milestones to consider:-

 Early in the process:

  • Ensure all analytic tracking codes are in place and building a full history of the site(s)
  • Continue to try ; measure ; adjust commercial aspects of the site(s)
  • Ensure all content being added is legal to use (e.g. copyright free)
  • Ensure all necessary use of data and privacy laws are being followed (and consider your operating geographies)
  • Where possible, content should be unique (for legal and SEO ranking purposes)
  • Organise systems and train staff and suppliers to ensure the site is as easy to operate as possible – Although the buyer (and you) might wish your involvement post sale this is fairly unusual (beyond a simple handover) Ideally there should be no necessity or technical reason for founders to be involved post sale!
  • All content management systems and other technologies must be owned and legal, or if not owned then full disclosure of any ongoing financial committment or legal obstacles.

  Mid process:

  •  Regularly research the internet ( sites such as flippa.com ; trade sites; “businesses for sale” sites ) to get a feel for similar site values
  •  Start to prepare a list of potential acquirers e.g.:- Larger operators of similar sites
    • Businesses of scale where your business could offer a complementary fit
    • Those actively acquiring in the market
    • Identify who has ability to pay cash and/or offer a share deal
    • Who in your wider business network could help identify acquirers?

 Later in the process:

  • Prepare a key facts doc. Explaining the business; selling potential benefits to acquirers; demonstrating value growth etc. ( will probably have more than one version depending on target audience)
  • Make a decision to either front/negotiate the sale yourself or engage an agent ( obviously this carries a cost however there can be significant benefits especially if the site owners have no prior experience of selling businesses.) Benefits of engaging an agent can include the ability to remain confidential ( i.e. you probably don’t want it known you are selling your business) , effective use of management time, access to expertise, connections, access to other networks and access to potential acquirer database etc.
  • Consider appropriate “business for sale” and internet sale/auction sites however for sizeable sales it is probably more likely that a direct approach to a potential acquirer will be required.
  • PR – consider using digital PR ahead of sale to ensure a high internet profile
  • Ideally, create choice : i.e. aim to have more than one exit option

What is the value of my web business?

This is of course is the big and exciting question and one which I will attempt to address in another post soon. We all know there will never be a mathematical way of calculating this however I remember some pieces of advice that I believe apply every bit as much to internet based business sales as they do to “bricks and mortar” business.

Sell, Regret, Grow Rich….

Web businesses have typically been carefully nurtured since birth by their loving owners, there has been pain and sacrifice along the road, and now they are about to leave your life…. ok you get the analogy!   Just remember in those final deal stages why you started the sales process. Don’t lose your nerve.

Leave Something for the other guy….

It’s a big world out there and yet I like the phrase “what goes round comes around…” . If you care about your business reputation and like to see the businesses you sell succeed, don’t screw your buyer into the deck for every last cent….

Every Seller needs a Buyer

I believe that the secret to maximsing your business value is to follow the kind of steps I outlined above. Make your business EASY TO BUY – that’s the secret. You can achieve this without telling lies or failing to disclose important facts. Serious buyers with the deepest pockets appreciate honesty and professionalism.

Understand your buyer’s motivation

If your potential buyer didn’t see value in your business they would’t be talking to you however if you want to maximise the opportunity….

- Try to see the deal through your buyer’s eyes… put yourself in their position… is there more you could do to make it easy for them to buy?

- Understand your buyer’s business model … where does the value lie for them?

- Buyers often have ego’s and think they can do better in future than you have done in the past… That’s human nature – don’t get upset!

Good luck!

Remember the difference between gambling luck and and business luck …. The harder you work in business and the better prepared you are… the luckier you get!

Filed Under: Internet Business, Selling an online business Tagged With: , , ,