Earlier today, I wrote an article sharing some thoughts about Zalmi Duchman’s Forbes article. In my opinion, the biggest takeaway was Duchman’s advice about being creative to find a deal that works for both parties. Creativity can go a long way in making a mutually beneficial deal happen.
I want to discuss a type of deal that could benefit a startup that needs a particular domain name and a domain name owner: a lease with a purchase option. Essentially this allows a company to pay a monthly fee to use a domain name, and at any point in time, they could purchase the domain name for an agreed upon price. I want to share some advantages of this type of deal for both parties:
Domain owner advantages:
- Guaranteed monthly income for as long as the lease is in effect
- Opportunity to sell a domain name for a fair price
- More money for a domain name over a period of time
- Company building some value on your domain name
- Lower upfront cost to secure the best domain name
- Ability to purchase a domain name for a set price prior to building value
- If business fails, there isn’t a sunk domain name cost
- Can sell the option to buy the domain name to someone else if desired
For this type of deal, the lease costs are not refundable in the event of a default. If the buyer doesn’t pay the purchase price and stops paying the lease fee, the owner will get the domain name back and keep all payments.
In order for this to be fair, the price of the domain name should be more than if the buyer is paying up front. There is an opportunity cost to the domain owner if the venture fails and damages the goodwill of the domain name. Further, the monthly lease cost should be enough to overcome the opportunity cost, but it shouldn’t be unaffordable. After all, it is a lease and not a lease to own type of deal where payments go to the purchase price.
With every domain name transaction, there is some risk. I would advise that a deal like this should go through Escrow.com or a third party attorney to administer. If the domain owner dies, goes bankrupt, has the domain name stolen, or something else happens, the domain name should be secure. This will protect both parties.
I have done this type of deal before, although I ended up getting the domain name back. I can’t complain because of how much income I earned during the lease term, but it was a bummer when the purchase price wouldn’t be realized and the monthly income stopped.
I invite you to share your thoughts on this type of creative deal.
So I’m guessing this can be done in a variety of ways? Split the payment over 12 months equally, or perhaps make payments for 12 months and then have a balloon payment?
For all intents and purposes, this could go on in perpetuity. The monthly fee should be set up in a way that would incentivize the buyer to purchase the domain name, but there would not be a time limit. I don’t think any business would do a deal like this if they need to renegotiate a deal in the future. I would add an annual rate increase to compensate for inflation.
Keep in mind that this is different from a lease to own option. As such, the monthly payments would probably be lower than that type of deal.
We should start asking to Escrow.com and others escrow companies to raise the standard number of years for their Domain Name Holding service, from the current 6 years to at least 10 years, 120 months (20 years would be even better). 6 years only lead to monthly fees still too much high.
Maybe they could improve their site with a more easy simulator for all the various options: financing, lease to own with a final high payment, simple renting etc.
We will always consider unique opportunities to help our customers.
I think it’s a great idea for all the reasons you mention. What do you think about a situation that does not involve third party holding the domain, i.e., the domain owner keeps the domain but points the name server NS records to the entrepreneurs web servers. This gives entrepreneur total control over the DNS records and subdomains during the lease while basically eliminating risk for the owner to lose the domain. Owner has to guarantee he won’t change the NS records during the lease, though, otherwise the entrepreneurs service could be interrupted.
There is risk for the lessor / buyer if any of these things happen:
– Domain owner’s bankruptcy or company insolvency
– Death of domain owner leading to non-renewal of domain name or estate issues
– Domain name stolen from owner’s account
– Owner decides to sell the domain name to someone else or changes DNS for some reason
Even if there is a solid contract, it could take considerable time and legal fees to enforce it.
If the domain name is in escrow, it would be far less risky. Frankly, I don’t know any serious buyer that would trust a domain owner. Even the most honest person/company can have problems that are out of his control (like death).
I wouldn’t do a deal like this unless it was in escrow – either at Escrow.com or a trusted third party attorney.
These creative deals can be the best for both parties. Domain owner gets the price their looking for and the end user gets to use the domain to build develop at a much lower initial cost.
Most end users will lwant an option to buy or will agree on a price for the name and the “lease” agreement basically becomes a payment plan.
I’ve done different versions on this myself on a few leases. On one name – I did a lease with right to buy for a 3 year period on a nice high 5 figure deal. I also structured payments at a lower $ amount the first few months & scaled things up to larger monthly payments. After receiving payments for a little over a 1 year – they were unable to make payment due to some webmaster issues (claims of money owed). So I took the name back. A couple years later – I did a similar deal on the same name at a much larger amount (On both of these deals, I had payments count towards the purchase price). After a couple years – they paid it off in full ahead of time. Note – I also had a lower purchase price on the name if they paid off the total amount with in 1 year of time though this was past that time.
I had a learning lesson on the 2nd deal which luckily occurred “after the fact”. The domain was ranking #1-#2 constantly on the main keyword in Google (category killer). About a year after the purchase I saw them disappear off the front page which I believe was due to a “bad linking strategy”. They even don’t have a site up there any longer now. Interestingly this company also had bought a multi-million dollar name that they haven’t done that mistake on. This caused me to add the following to the “Termination” section in a recent lease I did back in February.
“The Renter acknowledges and agrees that Owner may terminate this Agreement at any time, immediately following the issuance of written notice to the Renter, if the use of the Domain Name or any web pages served thereunder, violates any law or is not used for purposes involving __________ (product niche) related services unless agreed to do by the owner. The Renter agrees not to utilize any backlink Search Engine Optimization strategy which may permanently damage search engine rankings.”
On this latest deal I did the deal with payments set up on a percentage-rate of the monthly business net proceeds with monthly dollar amount minimums that increased after 6, 12 & 18 months. I also gave the renter the option to purchase ownership of 1/2 of the name at any time for a strong 6-figure amount (again a category killer name) which also means they would receive 1/2 of lease payments they were making. They had delays getting things launched so once again I had to cancel the lease last month.
Anyway – there are variety of ways you can do a lease but make sure that your domain isn’t damaged in the process. In all deals I have done so far I maintained control of the domain & just changed the nameserver records.
This may sound patently obvious. However, no matter the type of agreement you do, must be written as a real win/win contract.
Nice clean, understandable terms and no small print will be unusual to have problems.
I personally have no problems with five of them, so far.