Wednesday, April 17, 2013

How to Review a Domain Name Brokerage Contract

I am often consulted by domain name owners who are about to enter into a domain name brokerage contract with a domain name broker, and ask me to review the draft agreement.

When dealing with an established and reputable domain name broker, the draft brokerage contracts are usually fairly standard. Nevertheless, there are several keys areas that deserve special attention and consideration.

1. Is this an exclusive brokerage arrangement?

Domain Name brokers will usually insist that the contract be "exclusive". That means that you cannot retain any other broker at the same time. It also usually means that even if you sell the domain name yourself during the term of the exclusive domain name brokerage agreement, that the broker gets paid its commission. Accordingly, you should be aware of this provision if it has been inserted into the draft agreement, as you wil need to be prepared to pay your broker regardless of whether the broker is the one that brought you the deal.

2. How long is the Term?

Terms can be of any length. Brokers prefer longer terms, as it gives them more opportunity to sell your domain name and/or to receive a commission. Domain owners may want however, to have a shorter term, as if the broker doesn't produce good results, the domain name owner will want to try with another broker or try by him or herself. Accordingly, a term of no more than 6 months is often desirable  whereas a broker may want a term of much longer, sometimes a year or more.

3. Is there a "Holdover Clause"

A "holdover clause" is used by a domain name broker to secure his or her commission, even when the sale takes place after the Term has expired. The broker often wants to get paid if a sale materializes after the Term is over, but if the sale was the result of an introduction that the broker made during the Term. This can be fair if the deal happens the day after the Term is over, but becomes less fair as time goes on. A domain name owner will usually want to limit the holdover provisions, so that the broker will only get paid a commission if the broker introduced a new potential purchaser during the term, and if the ultimate sale materialized within a reasonable amount of time, such as 3 months after the expiry of the Term.

4. Is there a "Reserve Price" or "Minimum Price" set out?

Brokers will often want to know that a seller has reasonable sale price expectations, so that the broker does not waste his or her time trying to sell a domain name when the seller is asking for the moon. Accordingly, often a domain name broker will ask that a "Reserve Price" or "Minimum Price" be specified in the domain name brokerage agreement. It may be fair to give the broker an idea of what the seller would be prepared to accept, but caution must be exercised when specifically agreeing to a certain minimum price that the broker has authorization to sell the domain name for, without further permission from the seller. The reason is that you would not want the broker to either disclose to a potential buyer, the minimum price that you would accept for the domain name. Even if the broker agrees not to do this, there is still a risk. But the more important consideration perhaps, is that you do not want the broker to easily give up on trying for a higher price just because the broker knows what you will 'really take' for the domain name.

5. Can the broker "Flip" your Domain Name for a profit?

When engaging a domain name broker, one must bear in mind that this is an unregulated industry without licensing rules and rules of professional conduct. So knowing and trusting your broker based upon his reputation is key. Nevertheless, one must always guard against an unscrupulous broker buying your domain name for a price that you are satisfied with, or arranging for a buyer who the broker has an arrangement with, only to "flip" the domain name for a much higher price, and pocket the difference. Accordingly, it is always a good idea to consider investigating the prospective purchaser prior to agreeing on any sale price, to ensure that the buyer is truly an arm's length third party, and not a shill.

Written by Zak Muscovitch

No comments: