Selling business (website) considerations

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jks1985
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Selling business (website) considerations

Post by jks1985 » Mon Mar 12, 2018 8:03 pm

I have an online business that a company has made an offer for. Their offer is low 7 figures. They said they will pay in cash.

I've sold smaller websites in the past. The most was probably for $100k. In those cases I just sent the domain to them in escrow and gave them the passwords and let them transfer the site over to their servers.

Since this is for a significant amount more, I was wondering what else I should do? I assume I will need to hire a lawyer to look over the sale agreement.

As for the tax hit, I assume I will have to pay capital gains tax on the sale? I built the site up from scratch about 7 years ago. I don't even know where to begin how to calculate all my expenses throughout the site's lifetime (for deductions).

I should obviously have the money transferred from escrow to my business bank account (as opposed to my personal bank account)?

If there is any other advice anyone has for me, I'd be happy to hear it!

inbox788
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Re: Selling business (website) considerations

Post by inbox788 » Mon Mar 12, 2018 8:18 pm

Who's writing up the sales agreement? Be careful if they are. There are various aspects to your business that should be addressed in the agreement. There is the business entity and name, any associated domains, the actual website contents that include programs/apps as well as data, and more. Are you retaining any rights or information? Sometimes it's helpful if you do, like customer or user lists if you need to continue to provide some level of support. On the other hand, they may want total ownership. It depends on how personally you're involved or can simply transfer the whole business including liabilities over. Sometimes, that isn't possible. Also, is there a non-compete clause and period? Not that you'd be able to clone your site with a new name and startup a competing business tomorrow, but they might include language to avoid that that might be quite burdensome.

Anyways, congratulations and great job with developing a profitable venture. Now in hindsight, don't you wish you had signed up for a business credit card and charged all the costs to it? Pretty much you can estimate some costs, but anything and everything you can document for costs will be useful towards deducting from the cost basis. Electric bills and internet bills might be fair game. Hosting/server fees should be fairly straightforward. What are your top 3 easily documented expenses and the top 3 hard to document? Will you be able to write off more than 10 or 20%? I'd be surprised if you could.

jks1985
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Re: Selling business (website) considerations

Post by jks1985 » Mon Mar 12, 2018 8:25 pm

Thanks for the quick reply. They will write up the sales agreement. I will obviously look it over carefully with a lawyer. I am fine with giving up 100% of the data, content, social media accounts, etc. That's no problem.

I'm hoping they do not go for a non-compete clause. I have multiple sites that are similar in niche and obviously won't be able to do that.

As for the business credit card, yeah, obviously I wish I kept better records. When I started this site I was just doing it as a hobby and never expected to make a living off it, let alone sell it for 7 figures. Lesson learned!

rguina
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Re: Selling business (website) considerations

Post by rguina » Tue Mar 13, 2018 10:37 am

jks1985 wrote:
Mon Mar 12, 2018 8:25 pm
Thanks for the quick reply. They will write up the sales agreement. I will obviously look it over carefully with a lawyer. I am fine with giving up 100% of the data, content, social media accounts, etc. That's no problem.

I'm hoping they do not go for a non-compete clause. I have multiple sites that are similar in niche and obviously won't be able to do that.

As for the business credit card, yeah, obviously I wish I kept better records. When I started this site I was just doing it as a hobby and never expected to make a living off it, let alone sell it for 7 figures. Lesson learned!
I have an online business as well and I know quite a few people who have sold websites for seven figure deals. Non-compete clauses are rare for smaller sales, especially in the five-figure to low six-figure range.

But most buyers insist on a non-compete clause when you reach a seven-figure sale price. The specifics and duration of the clause are often negotiable, but I don’t know anyone who has sold a website for seven-figures and has been able to successfully avoid a non-compete clause altogether. Most of the non-compete clauses are 1-2 years in duration from the time of the sale, or from the time the seller stops working on the site (either as an employee or consultant). Obviously the shorter the better for your situation.

I can't speak for every situation, only those I've seen first hand.

That said, I'm sure there are many variables, including your niche, who the buyer is, how much competition there is, whether or not you are the "face" of the website you are selling or if it more general in nature, and other factors. The less attached you are to the operations, the more likely you will be able to avoid a non-compete clause. For example, if you have a blog or website where you are the primary author and the "face" of the site, the more likely the buyer will insist upon a non-compete clause. They don't want the original owner to take their special sauce with them when they sell the site.

If your site is more general in nature and you aren't the face of the site, then you may be able to avoid the non-compete clause or write in clauses that will allow you to continue running the sites you currently own, provided you don't work for the buyer's primary competitor(s), don't start or buy new sites in the same niche for a certain amount of time, etc.

At the end of the day, almost everything in a sale is negotiable.

Do they already know about your other sites? If so, and they haven't brought up a non-compete clause, then they may not be concerned about it. But if they don't know about your other sites, it may be worth mentioning it to them and asking if it will be a problem. The last thing you want to happen is have this derail your sale at the last minute. Being up front may help smooth this along.

Feel free to send a PM if you want to ask more specific questions.

mac808
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Re: Selling business (website) considerations

Post by mac808 » Tue Mar 13, 2018 10:58 am

Try to find a lawyer who has experience negotiating small m&a deals from soup to nuts as it's a pretty specific type of experience. Non compete, reps and warranties, clawbacks, indemnities and similar issues are all just personal negotiations between you and the buyer. For small deals less than 8 figures there's far fewer standard rules. I'm sure they will work with you to exempt the other adjacent sites you mentioned (or maybe they will increase their offer to buy them all as well). The better you know the decision maker on the buy side, and the more rational they are (i.e. can you have common sense conversations with him or her), the faster you can sort out issues like this before they become problematic. I worked on a bunch of these smaller deals earlier in my career (not as a lawyer) so also happy to answer more specific questions if you PM.

jks1985
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Re: Selling business (website) considerations

Post by jks1985 » Tue Mar 13, 2018 11:25 am

Thanks to both of you for the tips!

JoeRetire
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Re: Selling business (website) considerations

Post by JoeRetire » Tue Mar 13, 2018 11:31 am

jks1985 wrote:
Mon Mar 12, 2018 8:03 pm
Their offer is low 7 figures. They said they will pay in cash.
As in cash money? That's a lot of cash! Expect to receive some attention from the IRS and possibly CIA.
You might want to have your CPA and Lawyer propose something other than a cash transaction.

MotoTrojan
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Re: Selling business (website) considerations

Post by MotoTrojan » Tue Mar 13, 2018 11:37 am

JoeRetire wrote:
Tue Mar 13, 2018 11:31 am
jks1985 wrote:
Mon Mar 12, 2018 8:03 pm
Their offer is low 7 figures. They said they will pay in cash.
As in cash money? That's a lot of cash! Expect to receive some attention from the IRS and possibly CIA.
You might want to have your CPA and Lawyer propose something other than a cash transaction.
I assume tongue-in-cheek, but OP mentioned a business bank account. I would think on Bogleheads using the phrase cash is often used enough for things many don't consider cash (treasury bills) that this wouldn't cause confusion with paper-money :). Some deals are often done in equity, so I understand the OP mentioning cash (which would be better than illiquid equity).

Congrats to the OP!!!

Murgatroyd
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Re: Selling business (website) considerations

Post by Murgatroyd » Tue Mar 13, 2018 11:56 am

OP, I’ve been in your shoes. Do not “find a lawyer”, find a kick @$$ lawyer. Ask around your local network who they’ve used. If possible, a lawyer with some litigation experience. He/she will be better acquainted with more of the things that can go wrong and ways buyers cheat. Do not go cheap. This person will have all the right solutions for your questions and many others you cannot imagine.

Then you will also have the right future representation.

Best of luck. Congratulations!

surfer949
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Re: Selling business (website) considerations

Post by surfer949 » Tue Mar 13, 2018 12:39 pm

Without giving us specific details can you tell us what type of web site it is and how you came about to have it successfully purchased? I'm curious about web site businesses, thx.

rick2427
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Re: Selling business (website) considerations

Post by rick2427 » Tue Mar 13, 2018 1:00 pm

Congratulations OP!
Getting a good lawyer experienced in M&A is very important.
Do share your experience going forward.

Good Luck. :)
Rick

jks1985
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Re: Selling business (website) considerations

Post by jks1985 » Tue Mar 13, 2018 10:48 pm

Thanks again for the latest replies guys!

My only issue now is finding a good lawyer that specializes in this type of thing (PM me if you have any suggestions).

FlamingoTime
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Re: Selling business (website) considerations

Post by FlamingoTime » Tue Mar 13, 2018 11:42 pm

You need an attorney that specializes in transactional law - one who has handled the sale of businesses. I sold my business and there are sometimes ways to structure to your advantage tax-wise and liability-wise. Stock sale versus Asset sale. Definitely get a knowledgeable attorney.

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White Coat Investor
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Re: Selling business (website) considerations

Post by White Coat Investor » Tue Mar 13, 2018 11:54 pm

I don't think you get capital gains rates.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

IowaFarmBoy
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Re: Selling business (website) considerations

Post by IowaFarmBoy » Wed Mar 14, 2018 5:27 am

If the expenses have been written off over the years, either as operating expenses or depreciation, I don't think they will count toward your basis for the purpose of capital gains.

Iliketoridemybike
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Re: Selling business (website) considerations

Post by Iliketoridemybike » Wed Mar 14, 2018 7:48 am

White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.

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White Coat Investor
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Re: Selling business (website) considerations

Post by White Coat Investor » Wed Mar 14, 2018 1:43 pm

Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am
White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

NextMil
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Re: Selling business (website) considerations

Post by NextMil » Wed Mar 14, 2018 1:49 pm

Nothing of substance to add, but just to say nice work. That is awesome.

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PhysicianOnFIRE
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Re: Selling business (website) considerations

Post by PhysicianOnFIRE » Wed Mar 14, 2018 3:12 pm

The White Coat Investor and I attended a lecture at FinCon last year by Dan Green, current CEO of Growella, who sold his blog for 7-figures. The talk was about how to go about it. One of the things we learned, as WCI points out above, is that you're going to have a hard time counting the proceeds as LTCG.

I'm sure he'd have further insight-- wouldn't hurt to reach out to him. He might be willing to share some insights or his slides from the talk. You can also purchase the video with slides for all of FinCon for $199, which is steep if you only want one talk, but there was at least one more talk on selling a site for 7-figures.

And no, I'm not selling my site.

:beer
-PoF

Iliketoridemybike
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Re: Selling business (website) considerations

Post by Iliketoridemybike » Wed Mar 14, 2018 3:40 pm

White Coat Investor wrote:
Wed Mar 14, 2018 1:43 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am
White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
C corp.
Last edited by Iliketoridemybike on Wed Mar 14, 2018 4:33 pm, edited 1 time in total.

Biglaw Investor
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Re: Selling business (website) considerations

Post by Biglaw Investor » Wed Mar 14, 2018 3:55 pm

White Coat Investor wrote:
Wed Mar 14, 2018 1:43 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am
White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
I'm definitely no tax expert (we have a whole department for that), but if you and your wife each own 50 shares of WhiteCoatInvestor Empire, Inc., a Delaware corporation, and you sell all of the outstanding shares to Buyer, I would think that's pretty clearly a capital gain taxable event for you.

Partnerships are different though because the character of any income earned at the partnership level is allocated among the partners using the same treatment. This gets complicated quickly, particularly with respect to hot assets, but I don't think that applies to WCI.

Have you engaged a professional? I'd wager that there's definitely a way to structure a sale so that it gets capital gains tax treatment. That structure may not be favorable to the Buyer but would certainly be part of the negotiation.

Iliketoridemybike
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Re: Selling business (website) considerations

Post by Iliketoridemybike » Wed Mar 14, 2018 4:32 pm

Biglaw Investor wrote:
Wed Mar 14, 2018 3:55 pm
White Coat Investor wrote:
Wed Mar 14, 2018 1:43 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am
White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
I'm definitely no tax expert (we have a whole department for that), but if you and your wife each own 50 shares of WhiteCoatInvestor Empire, Inc., a Delaware corporation, and you sell all of the outstanding shares to Buyer, I would think that's pretty clearly a capital gain taxable event for you.

Partnerships are different though because the character of any income earned at the partnership level is allocated among the partners using the same treatment. This gets complicated quickly, particularly with respect to hot assets, but I don't think that applies to WCI.

Have you engaged a professional? I'd wager that there's definitely a way to structure a sale so that it gets capital gains tax treatment. That structure may not be favorable to the Buyer but would certainly be part of the negotiation.
The way you explained it in your first paragraph is correct. If it is a C corp. with shares issues, than those shares have a basis and a gain or loss at the time of sale. That is how I did with my company. If the shares are qualified small business shares, see this article, http://www.cpa-services.com/special_qua.shtml the cap gains are reduced.

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White Coat Investor
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Re: Selling business (website) considerations

Post by White Coat Investor » Wed Mar 14, 2018 10:05 pm

Iliketoridemybike wrote:
Wed Mar 14, 2018 4:32 pm
Biglaw Investor wrote:
Wed Mar 14, 2018 3:55 pm
White Coat Investor wrote:
Wed Mar 14, 2018 1:43 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am
White Coat Investor wrote:
Tue Mar 13, 2018 11:54 pm
I don't think you get capital gains rates.
Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
I'm definitely no tax expert (we have a whole department for that), but if you and your wife each own 50 shares of WhiteCoatInvestor Empire, Inc., a Delaware corporation, and you sell all of the outstanding shares to Buyer, I would think that's pretty clearly a capital gain taxable event for you.

Partnerships are different though because the character of any income earned at the partnership level is allocated among the partners using the same treatment. This gets complicated quickly, particularly with respect to hot assets, but I don't think that applies to WCI.

Have you engaged a professional? I'd wager that there's definitely a way to structure a sale so that it gets capital gains tax treatment. That structure may not be favorable to the Buyer but would certainly be part of the negotiation.
The way you explained it in your first paragraph is correct. If it is a C corp. with shares issues, than those shares have a basis and a gain or loss at the time of sale. That is how I did with my company. If the shares are qualified small business shares, see this article, http://www.cpa-services.com/special_qua.shtml the cap gains are reduced.
Talk to me like I'm 6 years old. Take me from an LLC filing as an S Corp to paying capital gains rates on a potential sale.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

aude
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Re: Selling business (website) considerations

Post by aude » Thu Mar 15, 2018 12:34 am

Suggestion to reach out to Dan Green is excellent. I’m a deal lawyer and know him well. Can’t say more than that on a public website!

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Noobvestor
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Re: Selling business (website) considerations

Post by Noobvestor » Thu Mar 15, 2018 2:11 am

Cap gains: in most cases in my experience (not a lawyer, ask a lawyer, standard caveats, etc.), the majority of a web business sale is going to be categorized as 'goodwill'. That is an intangible asset and will be taxed at cap gains rates at the federal level (state level may vary).

Non-compete: again, in my experience, it's not hard to carve that out for an existing business - i.e. you should be able to explain the situation and (hopefully) get them to make a specific, well-defined exception for other companies/websites you want to continue to run.

Lawyers: get the best you can find. The low-five-figure sum you pay them to go over everything with a fine-toothed comb and make sure everything is fair and on-the-level is worth the sleep factor and hedging of low-probability, high-risk fallout if something is amiss.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Iliketoridemybike
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Re: Selling business (website) considerations

Post by Iliketoridemybike » Thu Mar 15, 2018 6:27 am

White Coat Investor wrote:
Wed Mar 14, 2018 10:05 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 4:32 pm
Biglaw Investor wrote:
Wed Mar 14, 2018 3:55 pm
White Coat Investor wrote:
Wed Mar 14, 2018 1:43 pm
Iliketoridemybike wrote:
Wed Mar 14, 2018 7:48 am


Depends how the business was set up.
Tell me how to set it up so you get capital gains rates.
I'm definitely no tax expert (we have a whole department for that), but if you and your wife each own 50 shares of WhiteCoatInvestor Empire, Inc., a Delaware corporation, and you sell all of the outstanding shares to Buyer, I would think that's pretty clearly a capital gain taxable event for you.

Partnerships are different though because the character of any income earned at the partnership level is allocated among the partners using the same treatment. This gets complicated quickly, particularly with respect to hot assets, but I don't think that applies to WCI.

Have you engaged a professional? I'd wager that there's definitely a way to structure a sale so that it gets capital gains tax treatment. That structure may not be favorable to the Buyer but would certainly be part of the negotiation.
The way you explained it in your first paragraph is correct. If it is a C corp. with shares issues, than those shares have a basis and a gain or loss at the time of sale. That is how I did with my company. If the shares are qualified small business shares, see this article, http://www.cpa-services.com/special_qua.shtml the cap gains are reduced.
Talk to me like I'm 6 years old. Take me from an LLC filing as an S Corp to paying capital gains rates on a potential sale.
That’s above my pay grade. I had a lawyer set it up when I did it, but it really helped on taxes when I sold.

jks1985
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Re: Selling business (website) considerations

Post by jks1985 » Sun Apr 08, 2018 1:37 pm

In my case, I just have a single member LLC. No s-corp or c-crop. All my blogs/websites are under that LLC. I wonder how the taxes will work out in that situation. Hmmm....

BusterMcTaco
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Re: Selling business (website) considerations

Post by BusterMcTaco » Sun Apr 08, 2018 2:23 pm

I'm thinking that unless you do some restructuring it would be regular income in that case, but I'm far from certain about that.

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