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Who does a Business Broker represent?

February 9, 2012

In the majority of cases, it is the Seller.  But it depends upon the agreements established between the Seller’s Broker and – if one exists – the Buyer’s Broker.

When a Seller uses a Broker to represent the sale of his/her business, a Listing Agreement is signed, providing for the terms of their relationship.  Legally, such an Agreement should include the Date the relationship was formed, the length of the time the relationship will last, the Duties of each Party owes the other and the amount of the Commission and any other Charges made or expected to be made by the Seller to his/her Broker.

The Commission is normally a percentage of the sale, but in some markets, with some Brokers, there are added Charges.  These may be for “Marketing” or “Administrative” charges, but all such Commissions and Charges are negotiable between the Seller and the Broker.  The Marketing or Administrative Charges are normally paid when the Listing Agreement is signed, and they may be in addition to the Commission, or ultimately deducted from the Commission at settlement.

The Listing Agreement also establishes Duties to be performed by the Seller, in terms of the provision of specifically required business records and a how to provide such information in an honest and timely fashion.  The Broker cannot create such documentation; he/she can simply take the information provided and act on that material in an equally honest and responsible manner.  The Broker does not normally have the professional credentials that would allow him/her to dissect that information in order to make specific assertions or projections that might be perceived as “promising” the Buyer some sort of guarantee of future earnings.  And even if that Broker does have that professional capability, he/she should probably not get too involved in interpreting such data.  The Broker’s job, in representing the Seller, is to provide the information to the Buyer in such a way that he/she – the Buyer – is provided with the quality and amount of documentation to allow him/her to make an informed and intelligent decision.

The Buyer must take this information and, working with his/her own professional Accounting counselors, make judgments for him/herself as to whether the business can be maintained, and to what degree profitability can be retained and grown.

In some instances, Buyers have come to us with questions that, as representatives of the Seller, we simply cannot answer.  Our Non-Disclosure Agreement, which every Buyer MUST sign before obtaining any detailed information on our listings, clearly states that we are acting as agents of the Seller.  If we are acting as representatives of the Buyer, there is a completely different form we have them sign, so that there is no confusion on that issue.

But frequently, Buyers who have approached us about one of our listings will simply assume that, because they contacted us, we must be representing them – the Buyers.  Please be very clear about this and ask the Broker who he/she represents.  This is key to understanding the kind of assistance you can expect from a Broker.

But also key to the situation, no Broker should hide or otherwise mislead a Buyer, regardless of who he/she represents.  If a Broker, representing the Seller in selling a Gas Station, is aware that the Station is being sold because a brand new, mammoth, cut rate Station is being built fifty yards away, he/she should not be telling the Buyer that the Station is being sold because of health reasons!

We were representing a Buyer in the purchase of a Motel, and were informed by the Listing Broker that the Seller was ridding himself of the Motel, in order to retire.  By going to the local Planning and Zoning authorities, we discovered that a new, modern Motel was being built ¼ of a mile away.  Not only that, but the Owner of the Motel for which we were negotiating was the person who was actually building the new Motel.  And he was applying for the same flag (brand) that the current Motel carried.  This meant that when the flag agreement was set to expire at the end of the year, the Buyer would not have the branding available to him that had provided for the historical Revenue stream, because the parent organization would never allow two such flags within a ¼-mile area.  If we had never asked why the Seller was selling, it might have been different; but when asked, to tell us something completely incorrect and false, is deplorable, if not fraudulent.

It does not matter who owes what fiduciary responsibility to whom:  If there a question is asked, an honest answer is expected, and rightfully so!  And Brokers should not hide behind a cloak of ignorance.  If you ask such a question and the Broker says he/she does not know, tell him/her to find out!  And if that Broker insists that he/she cannot find out, it would probably be best to drop that deal.

It is common in Residential Real Estate, for Brokers and Agents to share commissions, when one represents the Seller and the other represents the Buyer.  This is not the case with most Business Brokers – and that is a sad comment on the state of the business!  There are some markets where this is not the case, and those are frequently in states like Florida, where Business Brokers are licensed by the State under the same regulations as are Real Estate Licensees.

What that means is that you, as the Buyer need to ask a Broker not only whether he/she is representing you, but how they get paid.  Because it is common for a Broker who represents the Buyer, to be paid by the Buyer.  We frequently provide Buyer Representation with Corporate Buyers, who retain us to perform acquisition-oriented work.  But because of the cost factors involved, it is relatively rare for Private Buyers to do the same.

This is one of the major things that is wrong with Business Brokerage.

From a Seller’s perspective, many times they do not have a clue about what their Broker is doing, or how it can adversely affect their chance to sell their businesses, in the most advantageous ways.  It is absolutely, in the Sellers best interests to demand that his/her Broker “cooperate” with other Brokers, in every way.  We share all of our listings with bona fide, responsible Business Brokers; we see no reason why this should not be the norm, except that greed gets in the way.  The Real Estate market went through the same issue back in the 1970s, before cooperative commissions became the norm.  But the market has improved for all – Sellers, Buyers and even Brokers/Agents – since that was adopted.

If you are a Seller, you should demand this of your Broker; if you are a Buyer, be careful to understand your position, with respect to representation.  And everyone get everything in writing!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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