Maintaining online business value in bankruptcies

This article was published April 24, 2019 in the Journal of Insolvency Law.

Author: Sander Scholten
Co-author: Richard Beverwijk.

The Netherlands now has about 80,000 online businesses[1]. That amounts to 1 online business for every 214 Dutch people. Based on this comparison, it seems economically unfeasible that all of these online businesses have a right to exist, and this is evident in practice: roughly a third of these online businesses have never made a profit[2].

On the other hand, these online businesses operate in that part of the retail segment that still achieves strong annual growth rates. For example, recent research by Statistics Netherlands[3] shows that year on year sales are shifting from traditional high-street retail (the "bricks") to online (the "clicks"). In line with this trend, the total volume of online retail increased 19%[4] again in 2018 compared to the previous year.

But growing is not the same as making a profit. Online stores often run on (too) tight margins, and 2018 also saw the necessary bankruptcies. Among others, well-known online retailers from the Netherlands Lil.nl and Atheleteshop.nl fell off their pedestals with bankruptcy filings. Also in 2019, the first bankruptcy (Create2fit of Tom Coronel) is already a fact. Both Lil, Athleteshop and Create2fit were online businesses with more than 10 million euros in turnover, and their bankruptcy has therefore been widely reported in the media. But in addition to these eye-catching online businesses, smaller online retailers have also gone bankrupt. These were partly 'pure players'[5] and partly the online businesses that were involved as one of the sales channels of a bankrupt 'bricks' retailer.

As a result of these bankruptcies, a curator has been appointed and has become responsible for the sale of the assets. There are an increasing number of curators who are fully versed in e-commerce, but for a number, e-commerce will be an industry that one encounters less frequently. Given the growth in online spending and the growth in the number of online stores, combined with the changing market conditions, the number of bankruptcies of online stores is expected to increase. Administrators will therefore encounter online businesses more often in the bankruptcy estate. This article will formulate an approach aimed at preserving the value of online activities after bankruptcy. It will indicate where the market usually sees the value of an online store and then what approach best preserves this value so that the trustee can realize the highest proceeds.

Online business value

Online businesses are usually valued on the basis of future profits. A bankruptcy is obviously a negative indication of this and the attention of the receiver will therefore in that case mainly focus on the liquidation value of the assets present.

In the case of an online business, in practice this will mainly involve the foreclosure sale of stocks and inventory. But part of a value is also represented in the online business itself, and this cannot always be read from the balance sheet (the goodwill). If the trustee succeeds in selling the online business in its entirety, then in addition to a price for the assets, he may also be able to realize compensation for the goodwill.

This article focuses on the intangible part of the value of a bankrupt online business (the goodwill) and how a trustee can best monetize this value after bankruptcy.

First, the main elements of online business value will be elaborated. Following this, an approach to preserve online business value will be formulated and will conclude with important points of interest.

Online business value - Visitors

An online business has several ways to attract visitors. These can be divided into paid and unpaid.

Paid

Of the paid ways, Google ads (Adwords) and Facebook ads are the most important methods. These will usually have already been deactivated at the time of a bankruptcy, as no payment will have been made. By the way, there is certainly value in well-designed Adwords campaigns, but given the poor performance of the online business, it is assumed for now that these expenses were not optimized, so the value of the bankrupt business's campaigns is therefore limited.

Unpaid ('organic')

For online businesses it is important to find the right balance between paid and unpaid visitor flows. Starting online business often only have access to paid visitor flows and as they exist longer, the free visitor flows grow. That is also the time when margins start to increase (or emerge). These free visitors are also referred to as "organic" visitors.

If it is assumed that 100 visitors on average generate 3 orders in an optimized online business (this is called 'conversion'), then it is clear that when these 100 visitors have to be purchased from Google or Facebook (at, for example, 30 cents per click) the margin gives a totally different picture than when these 100 visitors enter the online business unpaid.

Of the unpaid visitors, there are three sources that are most important:

• Direct traffic - These are visitors who directly type the domain name of the online business into their browser and therefore visit the online business in a "direct" way. This can also be defined as the brand value of the online business.
• Newsletter traffic - These are visitors who are in the online business's newsletter database and then return to the online business after receiving a newsletter and clicking on an interesting article or offer. So the value here is mainly in the database of email addresses that the online business has built up.
• Organic traffic - Visitors who come from the (free) Google search results to the online business are called organic visitors.

These three sources of visitors and their value will be discussed in more detail below.

Online business value - Domain name

For years, the question of whether a domain name is a property right and whether or not this right is transferable has been debated in the legal literature.[6] Most authors assume that the domain name holder has a contractual claim, or right of action, against SIDN[7], which right is transferable. It can be seen from a 2015 Supreme Court ruling[8] that the Supreme Court agreed with the opinion of these authors. Indeed, in this judgment, the Supreme Court explicitly considered that a domain name can be protected on contractual grounds. In 2016, the North Holland District Court[9] ruled even more clearly in this direction: the claim to a domain name is a named claim and also a property right within the meaning of Article 3:6 of the Civil Code.

In day-to-day practice, there is little more discussion about the fact that the registration with SIDN can be sold and transferred by the liquidator. The fact that there is a right of action against SIDN does mean that the registration with SIDN will be decisive in determining who is the party entitled to that claim.

A receiver can therefore monetize the domain name. But beware: a domain name has value especially if the online business that went bankrupt is linked to this name. So do not sell a domain name too quickly, because especially the combination of an online business and the related domain has value.

With respect to the domain name, a trustee should take the following actions as soon as possible immediately after the declaration of bankruptcy:

1. Check whether the domain name is (still) registered by the person or company that went bankrupt. The .nl domain names are registered by SIDN and it is very easy to find out in whose name a domain name is registered via the SIDN website. It can happen that a domain name is not in the name of the bankrupt company, but in the name of the "registrar"[10] or the website builder. It also happens that the domain name is consciously or unconsciously in the name of another BV of the same group, which is not part of the bankruptcy. Of course, the trustee will have to check that the domain name was not accidentally transferred to another BV or person shortly before the bankruptcy.
2. Make a request to SIDN not to cancel the registration of the domain name.  SIDN has the right to cancel a domain name if the registrant is declared bankrupt, ends up in a moratorium or falls under the Wsnp[11]. In the case of bankruptcy, the administrator can ask SIDN not to cancel the domain name, but rather to keep it for some time. This is often very important in case of a restart. It means that, by virtue of its contractual relationship with SIDN, the registrar must temporarily continue to provide the services, even if the fee for the domain name is not paid by the trustee[12]. Since the fee is usually paid annually in advance by the registrant to the registrar, this risk will be small. In practice, SIDN requires the registrar to maximize the domain name in such a case.

Online business value - organic visitors

The value of an online business is largely determined by the positions built up over the years in the search engines (especially Google). Online businesses with good positions (spot 1, 2 or 3) often have a long history, lots of unique content and a high-quality link profile:

History

Google values the history of an online business. An online business that has been active for 15 years will have better positions in the search engine results than a comparable online business that has only been active for 1.5 years.

Content

One of the most important elements that determines the positions of an online shop is the content. This must be unique, i.e. self-written in the case of text, and not already published elsewhere on the Internet in exactly the same terms. In addition to the text, visual material is also important: photos and videos. Thus, this unique content represents value.

Please note that online businesses are not always careful about arranging copyright/portrait rights on photo and video material. Thus, the content may infringe on third-party intellectual property rights. When selling the online business, the trustee must clearly record that the buyer of the online business is not indemnified from possible claims by third parties in connection with unlawful use of the content.

Link profile

Well-performing online businesses almost always have a high-quality link profile. In other words, the online business is linked to from many places. With a good link profile, these links come from relevant websites that themselves have a high authority[13] and they must not be purchased[14]. The latter is difficult to prove, but if Google suspects that a link profile has not been obtained organically[15], measures may follow.

Online business offline?

Suppose an online business is taken offline so that customers can no longer order. This may seem like a decent decision at first, but it has a significant impact on the value of the online business. Google quickly sees that an online business is offline. If this takes too long, the positions in the search results will be lost and with that a part of the accumulated value in Google, which represents the value that online businesses can still have in this phase.

Non-performing online businesses are often taken over for their positions in Google. Especially for competitors this is a great opportunity to increase the flow of unpaid visitors: suppose a competing online business has many top-3 positions on important keywords and with the acquisition it can cover 2 spots in this top-3 on these keywords. This will increase the flow of visitors, thus improving the ratio of unpaid to paid visitor flow and thus the profitability of the operation (this will obviously be related to the price paid, but the rationale will be clear).

It is therefore important for the online business value that the business remains online. For the trustee, in addition to preserving the online business value, this can provide an additional benefit, namely the sale of remaining stock. The receiver will only do this if the sales proceeds outweigh the costs of shipping. Otherwise, the receiver will have to ensure that the online business remains online, with no orders left to be placed.

Online business value - Sales accounts

What is often overlooked is that online businesses today have multiple sales channels. Their own website is usually only one of them. Most entrepreneurs also use Bol.com, Amazon.com and eBay.com. On these platforms they have a sales account, which includes the assortment of the online business. These orders are sometimes handled by Bol.com and sometimes forwarded to the online business itself, but in both cases they can constitute a substantial part of the total sales. These sales accounts are often rated again by customers of Bol.com, Amazon.com and eBay.com and are ranked by the platforms on performance. In other words, sales accounts with good reviews have increased visibility and therefore more customers. These accounts are in demand and therefore have value. Moreover, they are easily transferable[16] and thus sell well. Thus, the trustee does well to ensure that these accounts are retained for the estate after the bankruptcy[17].

Online business value - Technology

A company may have invested a lot of money in the technology behind an online store. However, these investments are often quite specific to a company and its owner. The value attributed to this by buyers, i.e. apart from the domain and the accumulated positions in the search engines, is often limited.

Online business value - Rights

There are online businesses that have their own products and their own brands. This can be interesting for a potential buyer. Own products and own brands support the margin, because merchants with this offer are less likely to end up in the negative spiral of price comparison sites. A potential buyer will of course want to verify that the online business is the rightful owner of the trademark rights on the products. Trademarks are registered for the Benelux by the Benelux Office for Intellectual Property. (BOIP). On the BOIP website it is easy to look up whether a trademark of an online business has been validly registered in the Benelux[18].

Furthermore, especially online stores with a longer history have quite often built up rights with their suppliers. These may include distribution rights, for example, or the right to make adjustments to the product range for the local market. The transferability of these will be a point of discussion because these contracts often contain clauses that allow the supplier or manufacturer to sever the relationship in the event of bankruptcy. But in practice, these suppliers benefit from maintaining their sales and are often open to discussions about a buyer of the online business taking over distribution rights.

Approach to maintaining online business value

The most important thing is to keep the online business in question on the air. Of course it is important to inform (potential) customers who visit the online business about the bankruptcy and its consequences, so that no orders are placed that can no longer be delivered. This is easy to set up by means of a so-called pop-up banner on the homepage. Visitors must click this to use the online business and the bankruptcy can be mentioned in this banner. It is also wise to include a link to a special page (e.g. onlinebusiness.com/bankruptcy) where further information is included, including a clear contact point.

The online business will continue to be kept intact. The payment module is almost always deactivated, unless the trustee deems it profitable to continue placing orders. As a result, the online business can still be accessed and used, but customers can (usually) no longer place orders with the bankrupt company. Because nothing else about the online business changes, the value is kept intact as much as possible

Next, it is important to take control of all related accounts as soon as possible. A non-exhaustive list:

• Content Management System (the management environment) of the online business
• Account of the provider where the domain names are
• Hosting account where the online business is running
• Google Analytics, Google Adwords and Google Search Console (many buyers will want to analyze the data from the online business before they make a bid and this data is largely retrieved from these accounts)
• Email provider (this is where the mailable email addresses are located)
• Fulfillment partner account[19] (this is often where the most accurate list of inventory is also found)
• Sales accounts on Bol.com, Amazon.com, eBay.com

By keeping the online business online, the Google positions and thus the value are kept intact as much as possible. By offering the online business in this way to potential buyers, including a complete overview of all accounts present with the login data, the expected return on sale will be the highest.

In conclusion, here are a few points to keep in mind:

Reputation management

Reputation is essential for an online business. What distinguishes online businesses from other SMEs is the growing number of review opportunities. Almost every online business works with one or more providers of reviews and even Google now offers the possibility to leave reviews.

In the event of bankruptcy, negative reviews are bound to be left behind. These usually cannot be removed, even after the online business is sold to an entrepreneur who wants to make a fresh start. Too many negative reviews, to which no response has been given by the entrepreneur or the trustee, will have a depressing effect on the value. So try to get ahead of the reviews with good and clear communication to customers and respond as much as possible to negative reviews written about the online store. The review options offered to customers by the online store itself can be deactivated by the trustee. However, reviews can also be left in other places, such as the shop's Google business page.

Sales

There are several intermediary platforms that can provide a large reach for businesses for sale. These parties have a large reach among potential buyers. If a quick turnaround is needed, they are well able to offer the bankrupt online business, privately or otherwise, to different categories of buyers, for example a competitor, a strategic buyer or parties that have specialized in turnarounds of online businesses with the aim of reselling the online business quickly.

Top 5 points of interest:

• Keep the online business online
• Don't sell the domain name separately and ensure retention and continuity of registration  
• Inventory the sales accounts (Bol.com, Amazon) and keep them for the online business
• Map distribution rights and product and brand rights
• Obtain access to Google Analytics and Adwords

Questions? Please contact us via contact@businessforsale.eu.