A lesson in how NOT to buy websites!

[hawthorn2008]

David S: Thank-you so much for providing the details of your experience on Flippa. Post reading the details, I guess I will reduce the severity of my self-imposed punishment. Instead of being banished to the gallows, I shall reduce the penalty to more discipline when noticing the 'red-flags'.

Further to your last sentence, I am wondering what suggestions you or others may have to deal with this issue? This is the perennial question in my mind. The first thing that comes into my mind is some form of leverage. e.g. Use escrow dot com or a lawyer's (client account or escrow) and have an agreed period so you can check: traffic, earnings etc.?

hawthorn2008, before you punish yourself too much for your mistakes, I will tell you that the very nature of a site like Flippa makes it hard to do due diligence. Not impossible, just hard.

I am an attorney and have handled some very substantial purchases and sales of internet-based companies for clients. I bought a very small website on Flippa that I thought my 23 year old son would like to take on (my first and probably biggest mistake) and could learn about internet business. The revenues were very low for the amount of claimed monthly visits, and were a clear warning signal. The seller was very cooperative both before and after the sale and gave me copies of the Awstats logs, which I studied intently. My own Awstats and Webalizer reports are generally higher than my Google Analytics reports, but not by a multiple of 20x or 30x. Because it was an auction and was closing, I had to make a decision and despite the red flags, I threw in a last bid that was a big percentage jump over what I had planned to pay, to beat another bidder by a few dollars.

To make a long story short, the revenues were just about what the seller had said but my plan to boost them based on the non-existent traffic obviously isn't panning out. At the current rate, it would take me 10 years to make my money back.

The good news is that it was a cheap lesson since it was a small site. My take-away from this is that the red flags are there and you have to not get so caught up in the process that you ignore them.

By the way, as a lawyer I agree with your comment about getting a good agreement, at least if the cost is great enough to justify it. The standard Flippa contract does not do a very good job of protecting the buyer. On the other hand, a great contract is not a real solution for a bad deal. The cost of litigation and the fact that the buyer and seller are often in different jurisdictions, if not different countries, means the contractual protections that you negotiate may be effectively unavailable.

[TrustButVerify]

The seller provided an Excel spreadsheet. Over USD10,000 in sales in a month!

Excel spreadsheets are what I call "unverified documentation" which is kind of any oxymoron but it is documentation of sorts, just not the only thing I would go on. I like to ask to do a screen share of the merchant account/paypal account and make sure the numbers match the spreadsheet for additional reassurance.

The product – after a lot of promotional efforts – is slowly starting to gain traction. At the current rate, it will be more like a 2 year ROI… so I will eventually get my dough back and turn a profit.

I don't consider that you did terribly. ROI in two years is still acceptable to me if the product is really good and long term.

All in all, it was probably a great learning experience that put you way ahead of the curve of the other people who are too afraid to take action... so I commend you!

[David S]

Further to your last sentence, I am wondering what suggestions you or others may have to deal with this issue? This is the perennial question in my mind. The first thing that comes into my mind is some form of leverage. e.g. Use escrow dot com or a lawyer's (client account or escrow) and have an agreed period so you can check: traffic, earnings etc.?

In significant deals this is handled in a number of ways, depending on a variety of factors:

1. In today's business world, many substantial deals require seller financing. Where the buyer still owes money to the seller, there is obviously leverage over the seller if the deal is not as promised. Typically, representing a buyer, I would specifically state that I had the right to offset any adjustments against the amounts the buyer is required to pay the seller.
2. Where there is no seller financing, we will generally attempt to require an escrow arrangement as part of the deal.
3. In some cases, the seller is clearly financially able to make good on any adjustments and is unwilling to agree to an escrow. In those cases we try to get the seller to consent to our local courts having jurisdiction over the seller in the event of a dispute. Any litigation can be costly, but it will be a lot cheaper to pursue a claim in the Illinois state courts (2 blocks from our office) or the Federal courts (1 block away) than having to hire local counsel in another jurisdiction.
4. With established, reputable companies, if there is an appearance of possible dishonesty on their part, the interest in avoiding litigation and the accompanying publicity can also be leverage for the buyer.

This list is not exclusive, but those are the key items that a buyer can rely on to get a fair deal in the "real world." In sales of websites, however, often the only reasonable solution is an escrow arrangement. The only other choice is to pay a price that is low enough that you are in essence being "paid" to accept the risk by getting a discount from the purchase price that would have been paid if there were a way to reduce the risk. That happens in the "real world" too, where the price is either reduced due to unquantifiable risks or there is an earn-out where the seller can receive more money if certain targets are really attained.

I hope this helps.

[hawthorn2008]

Cheers TrustButVerify. Your username says it all; it pretty much sums up the key learnings I took away. I agree with you on the ROI. Hopefully, I will speed that somewhat with some of the excellent advice received by fellow EP community members. Good judgement call on the cross referencing of excel numbers.

Excellent summary David S. Some astute lessons for everyone to share in. I especially like the last one (paying a price that is low enough that you are in essence being "paid" to accept the risk by getting a discount front the purchase price... Especially, when you have completed some 'quality' DD and feel good about the deal.

Cheers!

[Clinton]

This list is not exclusive, but those are the key items that a buyer can rely on to get a fair deal in the "real world." In sales of websites, however, often the only reasonable solution is an escrow arrangement.

David, there are a few cases where the seller has trusted me and transferred the site over with no payment and completely on trust. We're talking mid $xx,xxx figures. Of course this is more likely to happen if the public profile you have coincides with what the seller considers trustworthy. It's always been easier for me and that's even before I started this forum. But, someone in your position, a lawyer working for a registered legal firm, should be able to engender enough trust on some transactions to allow for transfer of site before receipt of payment. For non lawyers in the thread, perhaps conducting all the discussion in your capacity as CEO of a company rather than in your personal capacity would add some weight.

What I'm saying, I guess, is that when in doubt it might be worth using your personal reputation to extract some protection for yourself against fraud.