Acquiring Web Based Businesses

Acquiring a web based business:
From Term sheet to Closed deal (Part One)

One of the most important aspects of any acquisition is understanding the assets that you wish to acquire. This obvious concept is often overlooked.   Two important assets in an Internet based acquisition tend to be email addresses and web based content.   Ultimately, the goal of this exercise will be to determine value. If these assets are not clearly documented and understood, their value and the value of the acquisition could be shifted downward. In addition, without understanding the potential issues raised by these types of assets, the acquiring party could be in for a pandoras box of problems and liabilities.

Email addresses. One might recall the difficulty that Toysmart http://www.thestandard.com/article/display/0,1151,16718,00.html had in selling its assets when several states Attorneys General enjoined the sale due to a violation of their privacy policy. Notwithstanding that experience, most privacy policies still say the same thing Toysmart said about personal information:   We do not sell, rent, loan or transfer any personal information regarding our customers or their kids to any unrelated third parties. It was this exact language that caused the problem. In addition, state Attorneys General were concerned that Toysmart would sell confidential financial information about its users without their consent. Many companies have ran into this problem for all kinds of reasons you should/could avoid: http://www.cnn.com/2000/TECH/computing/10/27/online.privacy.idg

Get consent. Although solutions often depend on state law and on the other terms in your privacy policy, one major step forward is an explicit consent in your privacy policy to allow the sale of information provided by a user in the event of a sale.

Ex) http://privacy.yahoo.com/privacy/us/ysearch
We transfer information about you if Yahoo! is acquired by or merged with another company. In this event, Yahoo! will notify you before information about you is transferred and becomes subject to a different privacy policy.

An acquiring entity should have the consent of each individual whose email address to be acquired prior to taking title. Often, users are asked to consent to the terms of the new privacy policy sent as part of their normal email correspondence with users. Of course, check to make sure that the current terms allow for modification.

Web based content. Images, text, sound, video assets on the Internet are really no different because they were created on the web. For every online asset , make sure the target company or entity has the right to sell that asset. In a recent Gamer related acquisition we did, the target company hired a consultant to develop a web site specific to a particular on-line game. In turn the consultant hosted the site and asked users to contribute mods (e.g. modifications) to the games in the form of images, sound and code scripts. Without a written agreement between the consultant and the target, the target company cannot own the rights necessary to sell the web site to an acquirer. Without an agreement between users of the site and either the consultant (if he owns the site) or the target, the target company will not own the rights to the contributions from the users. You may hear lawyers talk about chain of title to describe this issue. Make sure that for each asset you seek to acquire, you can document the chain of title from the creator to the party selling the asset. Otherwise, you are apt to buy the Brooklyn Bridge.

UCC searches. For about $120, you can order a search of liens on the assets which you seek to acquire. Companies like CSC.com can run the search in a day or so. Not only is it important to understand that the targeted assets are free and clear but UCC searches and searches of litigation help you to know as much about the target company. Spend your resources wisely.