Summary: When you purchase a business and you use a broker to represent you, the broker is your agent, a legal relationship which obligates the broker to place your interests above his own. This is called FIDUCIARY DUTY. If the seller of the business is also represented by the same broker, then the relationship is DUAL AGENCY. Brokers should disclose this relationship and ask that you agree to this dual agency relationship in advance of making any offer to purchase the business. Under dual agency the agent can not inform the buyer or seller if either states that he will pay more or accept less than what is stated in the offer or counteroffer.
When a buyer works with a broker, the relationship is defined as an agency in which the buyer or seller is the principal and the broker is the agent. The agent’s responsibilities are defined by the California Business and Professions Code, a body of law administered by the California Department of Real Estate. The California Department of Real Estate licenses and regulates business brokerage activities. The agent has a fiduciary duty to the principal, which obliges the agent to look out for the best interests of the principal, putting the principal’s interest above his own. The agent has the obligation of fair dealing and full disclosure.
Each business broker and agent is required to have a California Real Estate Salesperson or Broker license. At most business brokerages the owner holds the broker license and each agent working for that broker is acting as his subagent.
As a buyer, your agency relationship is with the broker even though an agent holding a Salesperson or Broker license is working directly with you. When you purchase a business using a business broker as your agent, and that business is also represented by the same brokerage, a dual agency exists. This is a special situation in agency in which the agent has the same obligation to look out for the best interests of both principals including fair dealing and full disclosure. This requires that the agent behave in a different way from a single agency situation with regard to advocacy, as the agent’s actions taken to improve the position of one principal can not diminish the position of the other principal or it would be a breach of the agency’s fiduciary duty. Nevertheless, it is generally agreed in the business brokerage industry that at least 80% of brokered business sales are done using dual agency.
If the seller verbally informs the agent that he will take less than the amount stated in the listing or counteroffer, or if the buyer verbally informs the agent that he will pay more than the amount stated in his offer, the principals agree that the agent shall not so inform the other party. Agreement with this policy is a condition of representation by brokers.
As a buyer you have the right to choose any agent or broker as your representative, however, there may be some challenges in attempting to choose a different broker to represent you.
First, it is the industry convention that if you sign a confidentiality agreement and receive information about a business available for purchase from the listing (seller’s) broker, then that broker expects you to use him to represent you if you decide to purchase that business. If you subsequently ask a different broker to represent you, the listing broker may not agree to share commissions with your broker based on the fact that you signed a confidentiality agreement and received confidential information from the listing broker. If you want to choose your own broker to represent you, it is better for you to ask your broker to get information about the business from the listing broker and sign a confidentiality agreement provided by your own broker.
Second, cooperation between brokers is not universal in business brokerage. Especially in a seller’s market where brokers work very hard to find any good business to list, listing brokers may choose not to cooperate by sharing information and commissions with other brokers. If you want to have your own broker and avoid dual agency you may have to compensate your broker in addition to paying the purchase price. Even if you are willing to do this, some listing brokers still will not cooperate with other brokers because they want more control over the process. Sometimes the only way you can purchase a particular business is to deal with the listing agent.
Even if you are dealing with the listing broker, you can choose not to have an agency relationship with him. Buyers occasionally choose to work directly with the listing broker without having a broker, using attorneys and accountants to advise them. If you are a sophisticated buyer with experience buying and selling businesses, you may choose this alternative. First-time buyers are well-advised to use the services of an experienced business broker as it is easy to make costly mistakes in this complex and sometimes adversarial process. As a practical matter, most brokers acting dual agents really do work for the benefit of both buyer and seller, since the broker’s primary duties are to facilitate the exchange of information and negotiate an agreement between the parties. Brokers generally provide valuable advice and information to enable the parties to make informed decisions. Also, brokers are expected to contact buyer and seller frequently, something the buyer and seller are reluctant to do since it would make them appear anxious and erode their bargaining positions. The broker is just doing his job when he calls every day to facilitate the process. Deals get done using brokers, who ultimately facilitate the process. |
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Greg Carpenter, Business Brokerage Services In The SF Bay Area
Greg Carpenter has been a business broker since 1985 and has completed the sale of more than 350 businesses including manufacturing, distribution, transportation, staffing, education, restaurant, catering, automotive services and retail. Appraisal of businesses for litigation support including appraisal reports conforming to USPAP, AICPA and RR59-60 standards; expert witness testimony for business valuation and standard of care in business brokerage. Provides a higher level of brokerage service including Confidential Business Reviews with greater detail than the small business standard plus color photos and target marketing. Greg can be reached at 408-898-0393 or 408-385-0399.
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