Legal Due Diligence - need your thoughts

[midascode]

I may be loosing my touch, but on three separate occasions recently -- I almost bought a site (was in serious discussions with seller)

For various reasons, I did not proceed - we could not agree terms

Anyway, on all three occasions I subsequently discover that there are legal issues with the sites being sold

One was because the site was being sold without the consent of a Former partner but the one that got me most was a 25k site that it turns out had legal action taken against it less than a month after the owner was trying to sell the site

It was a forum and some tread or the other had upset another party and they where now taking out a 500K action against him. (I only discovered because I joined the forum and he did a mass email to all forum members -- his angle being that this was an 'attact of free speach')

Maybe it is -- but I dont fancy fighting anyone's legal battles because of some Forum Tread that got out of hand.

I suppose a good reason to be extra diligent when buying a forum.

I have been involved in some big transactions and good sales agreements will cover you should there any legal issues from previous actions post-sale, but if it a smaller transaction and the seller is of less substantial means, how do you protect yourself post-sale against issues like this?

Your thoughts on legal due diligence would be appreciated -- how do you protect yourself?

Any clever, simple strategies you use?

[Clinton]

I avoid buying forums, "social" sites, UGCs and even blogs. When I do buy a site that has one of those, I usually close the forum/blog down before developing the site further. I remove even "contributed content" such as articles (as that's often a grey area). Not only does it raise duplicate content issues but I'm not comfortable owning a site where a large part of the content is not completely owned by me.

Don't ask me how I manage to ever buy any sites!

Or why I now own a forum!

But if you are willing to be ruthless, dump thousands of pages of forum threads and indexed articles, then the legal issues largely disappear.

[midascode]

Well Clinton -- I always know I can rely on you for a radical, alternative viewpoint ;-)

Thank you

As a small aside, I usually don't buy as an individual, but via my company (limited liability) -- but clearly I don't want to get it wrong and buy a site with legal issues

[SitePurchaser]

It depends on what you are buying: Are you buying the website as an asset from a company or are you buying the shares of the company that holds the website?

When you buy just the asset, most historical kind of claims/liabilities do not follow it to the new owner. If however, you are buying the shares of the company, then all liabilities follow through to the new owner.

The best way to protect yourself is to set up the most advantageous deal structure (asset vs share etc) for yourself. When you agree on the deal structure with the seller, then you start adapting the final agreement .

More interesting info can be found here:
http://smallbusiness.findlaw.com/sta...set-stock.html

My preference is to go for an asset sale. If the seller is of less substantial means, I see that as an advantage for you to adopt the sales agreement to how you like it. Even for small transactions, it's always good to have some kind of 3 page contract stating the basic facts and including essential indemnifications.

Please note though that there are different kinds of tax implications depending on the deal structure, but from a purely legal dd, I would say going for an asset sale is the best way to protect yourself and then fine-tune the (basic and inexpensive) sales agreement.

[SitePurchaser]

One more thing,

For the above example, first of all you should put a disclaimer on the forum stating that the owner is not responsible for the content written there.

And then you have the seller sign off, on paper, stating that there are no legal claims being made against the site etc. If there are legal claims being made, you put in the agreement that the seller will compensate you for the losses you suffer. It should only take one paragraph in your sales agreement for a small transaction.