Retweet.com sold for $250k on Flippa

A website (or at least one normally worth buying at all) is a going business and not a mere item of tangible property.

When you buy an item of tangible property (say, a car), you have expectations that the item will be delivered to you as described. You will be concerned that it will be in the condition represented and that it will be the make, model, and year advertised. For the most part, that is it.

The issues are far more complex when it comes to selling a going business, including one that takes the form of a website.

Here are just a few of the issues that might arise:

1. All sorts of people might have rights to the IP underlying the website and its development, and to the business concepts underlying it. In a bona fide sale of such an asset, the buyer will want to conduct due diligence to ensure that all such rights belong to the selling company and are properly transferred to the buyer in the sale. An auction sale of this type affords no opportunity to do such due diligence.

2. The IP rights connected with a website also can create liabilities. For example, suppose a company doing a SAAS business has been accused of violating some IP rights of another company, whether patent, trademark, copyright, or trade secrets (for example, if someone claims that a renegade ex-employee stole code and used it to start an illegitimate site - this, for example, is what a former doctor and clinician at the Mayo Clinic is accused of trying to do with respect to software that helps with insurance billing and disease tracking, see http://www.law.com/jsp/article.jsp?id=1202445949066&Mayo...). This type of issue is handled in a bona fide sale by having the selling entity (and the seller's principals) give warranties and representations attesting that no such claims exist and that they have no reason to believe that any problems of this type exist, and this is coupled again with due diligence to examine the records of the selling entity to ensure that this is so. Again, with an auction of this type, a buyer has no chance to protect itself on such points.

3. If a selling entity is swamped with liabilities that far exceed its assets, and fails to pay its payroll taxes, sales taxes, etc., a buyer who acquires the assets of such an entity as a going concern will often have what the law calls "successor liability" - meaning that, you might think you are buying a mere website but you might wake up to find that you also "bought" potentially hundreds of thousands of dollars of unpaid tax liabilities formerly owed by the seller alone but now owed by both seller and buyer.

4. One of the critical factors in any bona fide sale is for a buyer to examine and approve the financial statements of the seller. A website business will have associated financials reflecting a track record of some kind. In less conventional situations, such as retweet.com, the seller may admit not to have monetized its website but, even then, there will always be something of value that needs to be verified to ensure that what the buyer is buying is what the buyer thinks it is buying. Is it the volume of daily traffic? Is it some other metric of value in the social networking world? In such cases, in a bona fide deal, the buyer goes through the records to verify what is or is not the case and, further, requires the seller (and its principals) to warrant that their claims in writing.

5. Even if there are no hidden liabilities, the parties to a bona fide sale will always negotiate such things as whether a buyer is expressly assuming certain liabilities or not, and these are spelled out in advance prior to a closing. Not all liabilities are bad in this sense. Maybe there is a long-term arrangement for data storage with a third-party vendor. This would naturally be assumed to be transferred to the buyer in connection with a purchase. But what if a website has many such items and the parties are not clear on what liability is or is not to be assumed by the buyer. If the deal is silent on the point, as it would be in the case of an online auction, then the liabilities likely would remain with the seller if a buyer refused to assume them.

6. In a bona fide sale, if a seller sells a business based on fraudulent misrepresentations, the seller is potentially liable for the damages stemming from the fraud or may be forced to give back the buyer's money if a judgment of rescission is entered against that seller owing to the fraud. In the real world, however, this remedy is meaningless if the seller is itself a mere shell with no assets. That is why, in a bona fide sale, a buyer will want in all such cases to make sure that the principals behind that shell are individually on the hook for any fraudulent misrepresentations, and every asset sale worth its salt will therefore have significant deal terms connected with who makes what warranties and how much this exposes them to potential liability. With an online auction, on the other hand, the "seller" might be some worthless entity that will be judgment-proof when it comes time for a defrauded buyer to attempt to gets its money back.

7. Almost all bona fide sales will have "conditions to closing," meaning that the deal will be set to close, and will close, once everything has been properly positioned and not otherwise. For example, if the seller has key contracts that are not transferable without a third party's consent, the sales agreement will typically specify that the deal will close if and only if the needed consent is obtained. If it can't be obtained, and if it is critical, then the parties can walk away from the deal. With the online auction, the format does not even take such basic items into account.

8. This is not even to mention the major strategic factors that go into an acquisition, i.e., whether it is best structured as a stock sale, an asset sale, or a merger and whether it should be done tax-free or otherwise. None of these factors are even remotely considered in an online auction.

I could go on and on, but I'm sure this is already much too long as it is.

The essential point is this: to me, the flippa.com approach to buying websites appears to be trying to simplify a sales process that is inherently too complex to be simplified in this manner. Maybe I am missing something, but the terms of use at the Flippa site seemed to provide, in highly simplistic terms, e.g., that a seller commits to sell and a buyer commits to buy but without specifying more about the structure and terms of any given deal. I think this misses the mark for the sale of any even remotely sophisticated website unless a buyer is willing to fly blind in making the purchase.

All of which raises a broader question - what does this type of online auction site aim to achieve? Is it a place for desperate sellers to sell to naive buyers? Is it aimed to facilitate honest deals but only very simple ones? Is it aimed to provide a "finder" function by which companies can let it be known that they are available for sale even though the true sale would only occur by a more conventional means following the auction itself?

Looking at flippa.com, it is hard for me to see what makes sense as a business model for this type of auction format given the legal issues involved.

If the sale price is $250k, and they already have a verified phone number, the legal fees to sue for breach of contract (and recover damages) might be worth it.

http://flippa.com/auctions/85167/Retweet-com

Also, Flippa verified that the seller had access to the site. Now, you might argue that the bidder will fail to pay up, but I don't think this is "fake".

Do you mean that you believe the seller colluded with the buyer in some way? Some other shady situation?

I own a couple domains, well, online businesses, that generate some fairly significant revenue - not affiliate marketing, not buy-my-ebook stuff, but real freemium subscription businesses that are content oriented and have highly specific demographics. No, no porn either :)