Domain Name Holding in Website Purchases
In a website sale which involves seller financing, the seller/lender needs some form of collateral as security against the loan. Most website business sales never involve collateral beyond the assets of the business for sale.
In website transactions, the most common form of collateral is the domain name. The domain name is held by a third-party escrow company for the term of the loan. This is commonly referred to as domain holding.
Having an independent third-party hold the domain name makes both buyer and seller feel more comfortable. The buyer wouldn’t want the seller to hold and control the domain after he has bought it. The seller wouldn’t want the buyer to hold it. The buyer may default on the loan and refuse to return the domain to the seller. So an independent escrow company holds the domain in its domain registrant account in accordance with the terms of a domain holding agreement.
The escrow company receives a fee for its domain holding services. Generally, holding fees average about $500 per year. Most seller-financed deals involve website deals over $100,000. The website cash-flow can comfortably cover the annual holding fee. The fee can be paid by the buyer or seller as in any standard escrow transaction.
The buyer can make debt payments directly to the seller or through the escrow company. Both parties simply have to agree to how payments will be made. There will be small additional bank charges incurred when a buyer transfers funds to an escrow company which, in turn, transfers these funds to the seller.
It is not required that all debt payments go through the escrow company. But one strong reason for making debt payments through an escrow company is transparency.
In case of any disagreement between the buyer and seller regarding payments, the escrow company has financial records of all payments. This unbiased third-party’s records will state how many payments have been made and when each payment was made. These records can quickly settle any disputes.
In some cases, buyers and sellers opt to use an attorney to hold the domain name. Attorneys charge much higher fees for escrow services than do traditional escrow companies. It’s best to use a law firm for higher-priced deals over $500,000.
One benefit of using a law firm for domain holding is attorneys can provide a more customized escrow agreement. Most traditional escrow companies use a standard agreement and process for all their clients’ transactions. If a buyer and seller need a complex domain holding agreement tailored specifically for their unique transaction, a lawyer may be a better choice. A lawyer may be worth the extra cost.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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