What is a Business Broker Agreement?
A business broker agreement is typically between the registered business broker, sometimes called a business agent, and a business owner. The purpose of the agreement is to set out the terms upon which the business broker will act as agent for the business owner in relation to the selling or leasing of the business. The agreement will set out fees payable in terms of commission and what services business broker will provide to the business owner.
Under a typical business broker agreement the business owner will provide the business broker with details of the business to be sold which may include information as to the business’s assets and liabilities. The business owner will also provide information to the broker about his or her expectations as to the purchase price or lease terms with respect to the business.
The business broker will then provide the business owner with an estimate of the broker’s services including the estimated value of the business and price the broker is prepared to market the business at. This proposal will include what commission will be payable if the business is sold or leased and will set out what the costs are for marketing the business. Unless it is agreed otherwise between the parties it is usual for the business owner to pay the advertising costs.
Various business brokers have different commission rates. It is necessary to be cautious as the business broker may attempt to negotiate an outcome by simply providing a valuation of the business but then attempting to say that anything in excess of their original figure was satisfactory. The vendor needs to ensure that the agent upfront provides a range of expected prices for the business and also a range they consider unrealistic.
In addition to compliance with legislation, an important aspect of any business broker agreement is the ability for the business owner to provide prospective purchasers with a disclosure statement.
A business broker will usually obtain a form from the vendor such as an expression of interest or a confidentiality agreement before discussing the relevant business with any prospective purchaser . Having these documents in place assists the business broker in protecting the interests not only of the vendor but also the purchaser.
The role of a business broker is one of negotiation. They should be seeking to obtain the best price for the business so that it can be sold or leased and at the same time be dealing with any issues which may be restricting any aspects of putting a successful transaction together. How much the business broker can or should be involved with the negotiation is generally a matter between the vendor and the business broker. However if the business broker is acting for both the purchaser and the vendor care should be taken so as not to mislead either party.
While the term business broker is a commonly used term for a person representing an owner in the sale or lease of a business the essential point to keep in mind is that whether or not the term business broker is used the essential terms of the contract remain the same. That is, the agreement will generally be a joint venture where the consideration for the agent’s work will be a commission on the sale or lease of the business. While other points may be relevant and considered it is the intention and the ability of brokering the deal which is important.
A business broker can be a very valuable part of the business sales team and should be chosen with care. There are some differences for a business broker as opposed to a real estate agent. Generally the business broker should have more knowledge about the financial performance of the business as opposed to simply showing around the premises. Care needs to be taken not just with the business broker but in particular the contract for the services of the business broker so that the terms are clearly spelled out. Being mindful of the appropriate stages of the transaction will ensure that service fee arrangements and the property arrangements are structured in an appropriate way so as to conclude the business transaction.
Essential Parts of a Business Broker Agreement
The main components of a typical business broker agreement are set out below:
Scope of Services – the agreement should specify the scope of the proposed services to be provided by the broker. This is generally a broad ranging clause to encompass all aspects of the proposed work. The broker will act on their behalf to market the business (nationally or locally), negotiate the sale of the business and to identify and evaluate suitable offers, up to the point of making a recommendation to the vendor on which offer to accept. The broker should also be instructed to take all reasonable steps to secure the best price for the business and to ensure a speedy transaction.
Duration – an agreement will usually be for an initial term of 6 months only. Following this period, either party will be entitled to terminate the agreement on notice. The sole exception will be where the employer terminates the appointment due to serious misconduct on the part of the broker (e.g. embezzlement). In addition, there is no guarantee under the agreement that a transaction will be completed within the relevant term, however early completion of a satisfactory contract will be the subject of a fee.
Commission and Fees – the broker will be entitled to commission and/or various fees, such as advertising. It is particularly important that the amount of commission due is clearly set out in the agreement. In addition, the agreement should confirm whether the broker is entitled to a percentage of the sale price of the business, or to a fixed amount, and whether the broker’s expenses are included in the figure. For example, the broker will usually be entitled to commission in the range of 5-7% of the sale price of the business, including VAT where appropriate together with out-of-pocket expenses. If the broker is to receive a percentage of the price other than the sale price (e.g. if the vendor provides financing to the purchaser), this should also be made clear in the agreement. In certain instances, the Vendor may wish to include a sliding scale of commission as a "reward" for a high sale price or a fast completion. Where the Vendor is not receiving those benefits, the Vendor may wish to have a fixed fee for exiting engagement with a broker.
Confidentiality – typically, the vendor will enter into a Non-Disclosure Agreement ("NDA") with the broker. The NDA is intended to protect the privacy of the vendor from having key information such as the identity of the vendor and details of the business disclosed to any person, other than advisers retained by the purchaser. The NDA should also contain a clause making it clear that if the purchaser or an adviser retained by the purchaser contacts the vendor directly, the vendor should decline to provide any further information without the broker’s consent.
Confidentiality obligations are not limited solely to protecting the identity of the vendor and the business but also to protecting sensitive information such as trade secrets and confidential client information. Businesses are often valued on the basis of future earnings and/or cash flow. The broker takes possession of a significant volume of confidential company information in order to effectively market the company and to manage the sale process. The broker should make every effort to keep the business brokered, its employees and its customers confidential (in the sense that customers do not know of the intention to sell). It is not unusual for potential buyers to come with their own NDAs to review financial and operational information, including the inclusion of non-circumvention provisions (which is a warranty that a buyer will not attempt to solicit the employees of the target or existing customers for the purpose of starting a competing business). It is worth noting that a business broker should be extremely careful to properly mark all written information in its possession as confidential and to take reasonable measures to avoid discussing the sale with anyone who is not actually involved in the negotiation (or to ensure that such discussion is done discreetly away from others who may overhear the conversation).
Legal Aspects of a Business Broker Agreement
One of the primary laws that governs the sale of a business is anti-fraud under the common law and state statutory provisions. This requires that a seller of a business clearly disclose any material information that may affect the value or desirability of the business. A broker for the seller has obligations to comply with the ant-fraud rules and laws that govern the selling of a business.
Legal requirements for the sale of a business vary by state. Where the business is being sold can affect the legality of the agreement. For example, South Carolina does not require a real estate license for business brokers. A representative of the American Business Brokers Association requires a real estate license to act as a broker for a business.
Regardless of whether licensures and permits are required for a broker to be legally recognized, it is important to be represented by a licensed attorney experienced in business broker agreements. The title of the individual does not determine whether or not they are being truthful and fair in their business dealings. A broker should be fully-disclosed when representing the business. Without an attorney, the business owner is subjecting him or herself to legal and financial liability. While a non-lawyer can prepare a business broker agreement, they are not being held with the same level of responsibility as a lawyer. There are also rules in each state that determine what businesses can be brokered, which are enforced by the security departments or finance.
Breach of fiduciary duties, fraud, conversion and negligence are legal issues that the broker needs to be mindful of when preparing the business broker agreement. Failing to disclose material issues or omitting information on the agreement are potential legal pitfalls. Whether representing the buyer or seller, a broker should have both liability insurance and Errors and Omissions insurance. Both parties should seek lawyer representation by an experienced business broker attorney to ensure that they are legally protected from financial loss and exposure to legal risk.
Advantages of a Well Written Business Broker Agreement
Having a well-documented and comprehensive business broker agreement in place is essential for both the business broker and the seller. A well-structured agreement acts as a safeguard for both parties by clearly outlining the scope of services to be performed. A carefully drafted agreement also prevents disputes by setting forth the duties, responsibilities, and standards of conduct for the business broker, and establishes sufficient remedies in the event that the business broker fails to follow the terms of the agreement.
A professionally drafted business broker agreement helps to manage the expectations of the parties and results in an overall smoother transaction. As such, it is generally advisable to seek the advice of counsel prior to signing a business broker agreement. A skilled attorney will ensure that the business broker agreement is tailored specifically to the parties and the intended transaction by ensuring that the terms of the agreement are specific enough to allow the parties to understand their respective obligations.
Negotiating a Business Broker Agreement
It is crucial to do your homework for what is a significant business contract. Read any contract you consider signing. We have worked with sellers who have signed an Exclusive Business Brokerage Agreement allowing for twice (or even more) "Full Commissions" on the sale of a business! We could have negotiated a much better deal for our client to the pride of our broker community had we known what was in the contract.
Here are some suggestions to avoid too much of an up-front commission so that the sales proceeds will be maximized.
Do not let a business broker tell you how much a business like yours is worth. Do your own research so that you have a basis to counter what the broker tells you. It is likely that you should talk to someone who has experience selling businesses similar to yours. There may be dozens of "Business Appraisers" and "Business Brokers" in your geographical area. Many of them do not sell businesses, and most do not have business experience in the industry you are in. The author is a former business owner and former business manager. Most experienced business brokers have similar experience. The author encourages you to keep this in mind when hiring someone to offer advice regarding the value of your business. Ask the broker about their experience in terms of industry knowledge and expertise in dealing with similar businesses. Ask about specific deals of a similar nature. If they refuse to answer any of these questions , look for another broker.
After having business appraisers and business brokers appraise your business, reach the same conclusion they reach. If two different brokers give you different values for your business, take the highest and offer it as the price. Remember this, the seller is the boss and the seller’s perspective is the most important thing taken into consideration. Economics and money can be a very powerful force in obtaining the highest price for a business. Be aware that all of the brokers you talk to wish to receive the highest possible commission from the sale of your business. Unless you list with 2 or more brokers, and use an Exclusive Business Listing, it is unlikely that multiple brokers will have a serious buyer for your business. Zero commissions encourage brokers to offer you the highest possible price.
For example: you are offered $800,000 for your business. Without an Exclusive Listing, you may be offered by the multiple brokers the same price if it is satisfactory. With an Exclusive Listing, one broker may take a very hard line on the agreement and resist any resistance to accepting the $800,000 price. Another broker may be more amenable.
Frequently Made Errors
Choosing to enter into a business broker agreement is an important step when selling a business. However, mistakes can be made. Below are common pitfalls to avoid when entering into this type of agreement.
Vague Terms
Broad, ambiguous terms can leave much to interpretation. For instance, the tasks a broker is expected to perform should be clearly defined. Broad terms such as simply saying "advise" or "assist" in the selling process may cause confusion later on. Create as detailed a plan as possible for how the sale should be executed. This will help clarify expectations on both ends and leave you with a clear-cut recourse should the broker fail to deliver.
Skipping Legal Advice
Business broker agreements are contracts that require legal review. Many business owners will think they know more than someone who is dedicated to handling business sales and purchases for a living. However, overlooking the importance of consulting an attorney can be a critical oversight.
An attorney can help protect you in several ways. They can ensure the agreement is written in your best interest. What may look fair to you as the business owner may not be in your best interest at all and it can put you at risk. Your attorney can also help you understand the entire process and answer questions you may have about how the sale will be executed and finalized.
Failing to Do The Proper Research
All business brokers are not the same. Those with varying levels of experience and specialties could cost or benefit you. Take time to explore the different broker options available for your type of business. If you have a niche business, like distribution or fabrication, you may want to work with a broker who has expertise in that industry. If you wait until you are ready to sell, it will be too late to properly shop around for a broker.
In addition, business brokers often have varying fee structures. Some charge commissions based on the price of the business, while others have a flat fee. Others charge nothing until the business is sold, while others require fees regardless of the outcome. Understand all the various costs associated with using a broker before signing on.
Signing and Enforcing the Agreement
To finalize the business broker agreement, the parties must sign it. It is advisable that the seller or business owner provides the selected broker with a check for the agreed commission (or retainer) or a written authorization to charge the seller’s credit card for the pre-paid commission. It is recommended that the broker discloses to the seller a good faith estimate representing the amount of commission that the broker expects to earn upon closing of the transaction. Any commissions that are paid in advance should be considered as "earned" by the broker within a fixed period of time, such as three (3) months after receipt. The seller or business owner may want to provide written authorization to the broker to charge the seller’s credit card for the pre-paid commission should the broker fail to provide estimated commission, and allow the seller or business owner a reasonable opportunity to pay the commission before the transaction closes.
The parties will always have questions about the terms of the broker agreement and the manner in which a deal is going to be structured. If the parties do not understand how the deal will be structured , its terms, and their respective rights and obligations, then the broker agreement may be unwittingly breached.
When the broker’s fee is contingent upon the closing of a specific deal, the parties should agree upon what constitutes a closing. Most brokers agree that no commission is earned until the deal closes, unless the property is leased instead of sold. When the deal is for the sale of stock in a corporation, the closing has not occurred until the subject transfer has been filed with the secretary of state. Therefore, the deal may never actually close; it will simply fall through, and the broker will not be entitled to his or her commission. If the broker is paid an exclusive broker commission, the broker may be entitled to the entire fee, regardless of whether the total transaction falls through (i.e., some brokers may provide a "partial commission" in such instances).