It's no secret that selling merchandise on eBay, Amazon, Etsy and other online e-commerce platforms is big business.
According to Quora, the number of people worldwide earning a full- or part-time income on eBay was estimated between 8 and 12 million in 2015.
In 2016, more than 100,000 third-party sellers on Amazon made more than $100,000 in gross sales on the site last year.
In 2013, roughly 18 percent of Etsy's 1 million sellers (that's 180,000 people, folks) considered themselves full-time sellers. It's likely to be much higher all these years later.
That's a lot of small businesses that are growing very fast.
What happens when a small business grows and becomes successful? Why, the owners want to sell, of course! And that's just as true of web-based businesses as any others.
There's just one problem.
Under the rules sellers must follow on each of these sites, eBay, Amazon and Etsy accounts — let's call them "E-A-E" accounts for simplicity's sake — cannot be sold without the site's consent. And almost always, as a condition to getting that consent, the seller's feedback rating will be reset to zero, as if the seller had never existed. The person who buys the business will have to rebuild the business' reputation and credibility on the site from scratch.
In theory, this makes sense: Just because one seller consistently gives his buyers great experiences doesn't mean his successor will. But since virtually all of the goodwill of an E-A-E selling business lies in its positive feedback, denying that information to a buyer renders the business essentially worthless.
"If Amazon, especially, learns that you have bought an existing seller's account, or if you ask them for permission to transfer the account, you will lose that seller's reviews, rankings and 'buy box' status virtually overnight," says C.J. Rosenbaum, a lawyer in New York who represents online sellers when their accounts are suspended (Visit his website at www.amazonsellerslawyer.com).
As a result, buyers of web-based companies that depend on E-A-E accounts for their revenue often rely on a very tricky maneuver.
First, the seller (if he hasn't already done so) sets up a corporation or a limited liability company for the business.
Then, the buyer buys the "stock" of the seller's corporation or the membership interests in the seller's LLC.
The buyer then adds his name as an additional signatory on each of the seller's bank accounts that are tied to the E-A-E accounts and any related PayPal accounts.
After a decent interval of time has passed, the seller withdraws his name as a signatory on the bank accounts (making these changes all at once, says Rosenbaum, can be a red flag to E-A-E that an unpermitted transfer has occurred).
While the same company owns the E-A-E account both before and after the sale, Rosenbaum says that even this maneuver probably violates E-A-E rules in most cases. Even if it successfully avoids a suspension or termination of the E-A-E account, this way of buying a business has many other drawbacks.
First, the seller and buyer have to cooperate: Since both the seller's and buyer's names will appear on the business bank accounts for a while, the seller may be tempted to make withdrawals without the buyer's knowledge. Rosenbaum says: "A lot of sellers also are uncomfortable having their name tied to the account, because they're afraid of what the buyer will do, but they also want to sell. If the bank account is in the name of a seller's relative rather than him personally, that relative will absolutely want their name off the account as soon as is humanly possible."
Second, according to Rosenbaum, buying the stock of a corporation or LLC means that you will have to clean up all of the seller's mistakes, problems and liabilities, such as:
—A sale made by the seller that is rejected by the customer after the buyer takes over or leads to a customer complaint.
—A sale put on a customer's credit card that the customer later charges back after the buyer takes over.
—A sale of counterfeit goods, prohibited brands or goods otherwise violating E-A-E rules that took place when the seller was in charge.
Lastly, many E-A-E sellers have multiple accounts, which in itself can violate E-A-E rules. "If a seller has multiple accounts and sells only one to a buyer, and Amazon finds out about the multiple accounts, Amazon will shut down all accounts including the one the buyer bought," says Rosenbaum.
While it's commonplace in business sales for the seller and buyer to indemnify each other for these problems, the indemnity is only as good as the credit behind it. "If something bad happens you will have to sue the other buyer, often in a faraway jurisdiction, for a relatively small amount of money," says Rosenbaum. "It just won't happen."
Unless eBay, Amazon, Etsy and the rest change the rules to allow continuation of a seller's feedback when the business is sold (perhaps with appropriate disclosure to customers for a year or two after the sale), this will be a major problem that may severely inhibit the growth of online commerce.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.