Buying an Online Business: Legal Due Diligence and Purchase Agreement Help

By Paul S. Rafelson, Founder, Rafelson Law PLLC

When should I hire a lawyer to buy an online business?

Call before you sign the letter of intent. Exclusivity, price adjustments and closing conditions get set there and carry into the purchase agreement. A lawyer can also review the draft purchase agreement and run legal diligence while the exclusivity clock is running.

You can use a lawyer for only part of the process, such as an LOI review or a diligence memo. Scope is agreed in writing in advance.

What does legal due diligence on an online business include?

Legal due diligence is the investigation of the business’s ownership, contracts, intellectual property, compliance and platform standing, done alongside the financial review. For most online businesses, these areas are common starting points.

How does diligence change with the type of online business?

The core review stays the same. What deserves the most attention depends on how the target makes money.

What regulatory and legal compliance should a buyer examine?

An online business can run well and still carry compliance exposure that passes to the buyer, because the business, its listings and its product lines come with their history. Account health and indemnity get the attention. Compliance with product, tax and marketing law gets less, and it travels with the products you buy. We scope the compliance review to the product line and the deal.

• Product rules. Whether the products meet the safety, labeling and registration rules that apply to their category and whether there are recalls, complaints or warning notices. See Prop 65 for online businesses.
• Marketing and listing claims. Whether the claims on listings, packaging and ads are supported and how reviews and endorsements were handled.
• Platform policies. Whether the business has followed marketplace rules, and whether past violations were resolved or only paused.
• Taxes. Sales tax registrations and collection in the states where the business has obligations, and any notices from tax authorities.
• Imports and suppliers. Customs and import compliance, and whether suppliers and factories meet the standards the products need.
• Privacy and customer data. What customer data the business holds, how it was collected and whether it can transfer to you.
• Licenses and standing. Business licenses, permits and the good standing of the selling entity.

What protects you after closing

Compliance exposure follows the product line, not the entity. If diligence finds it, the agreement needs to say who pays when it surfaces later. We match the protection to the risk found rather than relying on a general representation. Diligence reduces compliance risk. It does not remove it.

What will the seller’s NDA ask of you?

A well-advised seller will ask you to sign an NDA that restricts use as well as disclosure, limits use to evaluating the deal, bars soliciting the seller’s employees, contractors and suppliers and requires return or destruction if talks end. Expect it and read it closely. If you already operate in the same category, a broad non-use or non-solicit clause can restrict your existing business, so define what you already know and the relationships you already have before you receive anything. A residuals clause in your favor is a negotiated point, and many sellers will refuse it. See the seller’s view of the NDA.

How should a buyer test intellectual property ownership?

A brand’s value often rests on one mark. Diligence often shows the seller never registered marks for part of the catalog, uses images with no rights or holds licenses the other party must consent to assign. Each gap is a risk you price or the seller fixes. We test ownership before you commit and build the fix into the agreement.

See also the seller’s view of IP ownership.

Why the seller’s broker is not your advocate

In most deals the broker is engaged by the seller and paid at closing, often from the seller’s proceeds. The broker can be helpful and responsive to you, but the broker’s client is the seller and the broker’s incentive is getting the deal closed.

The broker is not the one exposed if the financials turn out to be wrong, the brand is not owned the way it was described or an account problem surfaces after closing. A lawyer the broker recommends may also rely on that broker for referrals, and raising issues that should be raised can feel like a risk to future business.

Your lawyer’s job is to tell you the risks, even when someone wants you to feel comfortable signing. Choose counsel whose only interest in the deal is you. See also why the broker’s lawyer may not be the seller’s best choice.

What should a buyer’s purchase agreement cover?

A buyer’s purchase agreement allocates risk between you and the seller. A buyer’s lawyer typically seeks the following, subject to what the market and the seller will accept:

• Clear asset list. Brand, listings, inventory, domains, code, content, IP, accounts and data, with what is excluded.
• Representations on financial statements, account standing, IP ownership, supplier relationships and compliance.
• Indemnification with a cap, basket and survival period sized to the risks found in diligence, backed by escrow or a holdback.
• Working capital peg and true-up with defined accounting treatment.
• Seller non-compete, non-solicit and transition services.
• Closing deliverables such as assignments, client or vendor consents, account transfer steps and platform access.

A draft from the broker or seller is the other side’s starting position. We mark it up for you.

How the accounts and the brand move to you at closing

Each platform has its own rules on a change of owner. Shopify stores, payment processors, ad accounts, affiliate programs and app marketplaces handle it differently, and some accounts cannot be transferred, so you open new ones and the agreement covers the gap. We list every account in the asset schedule and plan the handover.

For Amazon, the Business Solutions Agreement bars you from assigning the agreement without Amazon’s prior written consent (General Terms, Section 18). The agreement is not assigned. The account itself changes hands at closing, when the entity, bank, tax ID, login and two-step verification move to the buyer in one session. We handle the transfer and draft the representations around it. More on Amazon-specific deal issues.

What can go wrong when buying an online business?

• Financial summaries that do not match platform and bank data.
• IP defects: a trademark owned by an individual or a former partner, or an unregistered mark.
• Account problems that were not disclosed or that surface after closing.
• Supplier contracts that cannot be assigned or that carry exclusivity or minimum purchase terms.
• Compliance exposure tied to the products, such as warnings required in particular states.
• Client or customer contracts that end or require consent on a change of owner.
• Code, content or designs created by contractors who never signed an assignment.
• Seller financing: if part of the price is a note, who is liable and what secures it.

Careful legal diligence reduces these risks. It does not eliminate them. We do not guarantee that a business will perform or that diligence will find every issue.

How do I get started?

Contact us. Tell us about the target business, where you are in the deal and what you want reviewed, and we will tell you whether we can help.

How does the engagement work?

1. First conversation. We discuss the target, the structure, the timeline and your diligence priorities.
2. LOI review or drafting. We review or draft the LOI, including exclusivity, price adjustments and conditions.
3. Legal diligence. We review IP, contracts, account health and compliance and report what we find.
4. Purchase agreement negotiation. We draft or negotiate representations, indemnification, working capital, escrow and seller obligations.
5. Closing and transition. We coordinate closing deliverables and advise on post-closing issues.

Frequently asked questions

Related pages

Sources and notes

• Amazon Services Business Solutions Agreement (U.S.), the agreement Amazon provides to sellers in Seller Central. Assignment clause: General Terms, Section 18 (Miscellaneous).
• California Attorney General, Proposition 65 FAQ.