Who Represents Me (The Buyer) In A Business Sales Transaction? Does The Broker/Agent Represent Me Or The Seller - Or Both? What Is The Best Way To Get The Best Possible Representation For My Needs (Buyer)?
Some business buyers are confused by this issue, particularly when they are represented by a business sales professional who seems to advocate for their needs, rather than that of the seller, and yet will be collecting the commission from the seller, should there be a transaction.
But California real estate law is very clear on this point. A real estate or business opportunities broker or agent who finds a buyer for a listing is working for the seller. The authorization to expose the business comes from the seller, through the listing agreement with the listing broker. And the professional working with the buyer actually is empowered with that authorization by the listing broker. He or she is, effect, an agent of the listing broker.
What's confusing is when the agent or broker who is working with the buyer advocates strongly for the buyer’s position? Shouldn't that professional be arguing the side of the seller, for whom he or she legally is working? In practice, a seller often is benefitted by the broker working with (not for) the buyer if that broker is able to help the seller understand the needs and concerns of the buyer. This often is helpful in achieving a transaction. In that sense, the broker working with the buyer has actually assisted the seller in achieving his or her objective - to find a buyer ready, willing and able to pay a price and terms acceptable to the seller.
This is different from the situation in which a buyer hires a broker as a representative and agrees to pay a negotiated fee to the broker in the event the buyer is able to buy a business he or she wants, at acceptable terms. That broker clearly works for the buyer only, and has no responsibility to the seller except to follow the fair dealing provisions in California law.
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This is a great question, one that deserves some careful consideration. If you are contacting an agent/broker who has a business listed for sale, the agent will primarily be representing the seller. More about this later. In most business sales, the listing broker does both sides of the transaction, thus representing both seller and buyer. This type of representation happens more than 50% of the time. It is perfectly legal, ethical, and completely within the boundaries of standard business practices. Brokers and agents do indeed prefer this type of transaction. However, this does not mean that using the listing broker to represent you in purchasing his/her listing will be necessarily in your best interest. It might be, but there are a few things to consider.
While the listing broker is bound by professional standards to be completely truthful in answering any question that he or she has the facts with which to respond, the listing broker has his primary fiduciary duty to the seller. This means that you as a potential buyer, with no representation in the process except for the listing agent, will have to ask the right questions about the business that is for sale. You will have to know how to read the tax return. You will have to know what the weaknesses and strengths are from the answers you get from the listing broker. The listing broker is not as likely to probe for you, you will have to do the probing. The listing broker will present the facts about the business, but you will have to advocate for yourself if you are not represented by an independent buyer's agent. You will have to dig deep into the financials and all the available data you receive.
This is not to say that the listing broker will hide or misrepresent the facts to you. A good listing broker will want you as the buyer to be well qualified to succeed in the business being sold and will want you as a buyer to have all the facts necessary for you to make a decision that is well-informed and in your best interest. However, the upshot of this is that if you do not feel confident to decipher and interpret the facts available to you about the business you are interested in, you should consider seeking someone to assist you in the purchase. This could be a CPA, an attorney, or a buyer's agent who is familiar with business opportunity transactions. With any professional person, they should understand how the particular business operates, and not just offer advice on the raw numbers they are counting. For instance, a year-to-date profit and loss based on January-September will not be helpful for making a judgment on profitability if the greatest profits for a particular business are received in November and December.
The problem that can arise is that a listing broker may not offer cooperation with a buyer's agent. If you are convinced that you want to be represented by your own agent, you should make the case to the listing broker that this is your wish. If you are not successful in getting the listing broker's cooperation, you can hire and pay a buyer's agent yourself, offering a percentage of the purchase price or a flat fee to the agent that you chose. This fee will then be added on to the purchase price and paid through escrow.
A good agent will help you to identify a great opportunity, and avoid the bad ones, and help your through the whole process. I hope this answer helps.
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The licensed Broker/Agent who is working under a legal listing agreement is representing his client, and has a legal fiduciary responsibility (obligation to act for another’s benefit) to his client. He doesn’t have this agreement or such responsibility to the buyer. He does have a moral and legal responsibility to be honest and open with all information good or bad that he knows about the business being sold.
I sold businesses for 23 years and only two of the many I sold had a buyer broker/agent representing him, so it is not uncommon to only have one broker/agent in the selling process. Having a broker/agent representing the buyer also complicates the process as it adds one more link to go through in the selling process. If I had a question for a buyer with a buyer’s broker/agent involved I would have to talk to the buyer’s broker/agent, who then would talk to the buyer and get back to me. This prevented me from getting to know the buyer and aiding him in the sale process. If I went directly to the buyer I could better satisfy his needs for information and get a better understanding of his fit for the business.
As a buyer, I would suggest you get to know the seller and ask a lot of questions. If you don't feel comfortable with the seller’s broker/agent you can also use other knowledgeable professional to assist you in the purchase such as accountants and attorneys. You will also need these people to help you through your purchase contract and due diligence.
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Should business brokers be allowed to represent both the buyer and seller in a transaction? Isn’t this a conflict of interest? Doesn't California civil code require that when there is only one agent in a deal, that the agent is required to be a dual agent? These are the questions that I would like to address in this article. I do not want to get into a legal discussion of the points of law, since I am a CPA and a business broker, and not an attorney. I would, however, like to discuss the business consequences of a broker being the sole agent in the transaction.
Let's define in simple language the three types of agency relationships. An agency is when one person acts as an agent/fiduciary/middle man for another. They have limited authority, but they are there to assist the principal they represent in the business transactions. Real estate agents, stockbrokers, insurance agents, and business brokers are all agents for their clients.
Who are the clients of a business broker? Everyone agrees the brokers represent the seller of the business. If the buyer has a business broker working for him, everyone agrees he is the agent of the buyer. Each of the brokers works for the benefit of their client.
What about when there is only one agent/business broker? In a real estate transaction it is clearly defined that the one agent will represent both the buyer and seller. In the area of business selling and buying, I have had discussions with many attorneys that say that is not necessarily true. A business listing broker can say he is not a dual agent (representing both buyer and seller) or many try not to specify, in writing what their legal relationship is. The courts are a lot stronger on this point of law. The courts feel that if there is only one broker that he is a dual agent if the broker helped the buyer in any way other than give information and accept offers. This, of course, must be proven in court, it is not automatic.
What is the legal effect of being a dual agent rather than just representing the seller? The agent has a much higher duty to protect the buyer. An example would be the length allowed for due diligence. If a broker wrote the contract so the buyer only had two days, this might not be considered protecting the buyer. Another issue is disclosing information about the seller’s business that the broker knows or should have known is false. A dual agent must disclose any info related to the business, while a seller’s agent might not have to.
When the buyer hires an experienced business broker, due diligence expert or attorney, at least someone is watching the buyer’s back. When no such experienced help is hired, it is very likely that when the deal is completed, that he was been taken advantage of. After it is too late these unhappy buyers go to an attorney, only to find out it will cost thousands of dollars to sue and even then there is no guarantee of success. Even if you win a law suit, collecting the now hidden money the seller was paid, is also a big problem.
My recommendations are:
1. Hire an experienced CPA or business due diligence expert who has been involved with business brokering for years. They have looked at hundreds of leases, purchase contracts and financials.
2. Hire an attorney to review at least the purchase agreement and lease. They may or may not be able to help you with the financial and non-financial issues covered in due diligence.
3. Never do business with a broker that refuses to represent both the buyer and seller in a transaction where there is only one broker. What is he doing or what does he know that he is so afraid of being sued by the buyer? By the way, the purchase contract and many other escrow forms clearly say that you have been advised to hire an adviser. When you don’t you have lowering your chances of winning a lawsuit.
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In the typical business sale, the broker is representing and has a fiduciary agency relationship with the seller. Simply, "follow the money." They are being paid by the seller and are expected to act in the seller's best interests.
In California, to legally represent a business sale (or a "business opportunity", like a franchise), the business intermediary must be licensed, usually as a real estate professional. State law makes the broker’s role very clear: To the seller, the seller's agent owes "a fiduciary duty of utmost care, integrity, honesty, and loyalty. "
But, the broker also has obligations to the buyer. To both parties, the broker is expected to exercise reasonable skill and care, deal honestly and in good faith, and disclose all material facts known to the agent "affecting the value or desirability" of the business that are not known by (or readily discoverable by) the parties. The agent, however, is not obligated to disclose any confidential information from either party that does not conflict with these duties.
In short, the broker works for the seller, but must deal fairly and honestly with the buyer.
There are, though, people who will act as a "buyer's broker." This is most effective for "targeted acquisitions" by private equity groups or by existing businesses doing a "roll-up" of compatible companies, not for the typical individual buyer.
Buyers may also be in a "co-broker" situation, where a broker they contact brings them a business listed by another broker. The difficulty, again, is how they are paid. When there are two brokers involved, they still are being paid by the seller based on a percentage of the sale; and, even if they agree to be a "buyer’s agent", there is divided loyalty—the less the buyer pays, the less the broker earns.
So what is a buyer to do?
Buyers need to have their own "team." Both parties should consult with a lawyer and a CPA; but, this is most important for the buyer. And, I don’t mean “cousin Louie” who handles divorces or DUIs, or "my uncle the bookkeeper who prepares tax returns in the spring." I mean an attorney with experience negotiating, drafting, and reviewing business purchase contracts, and an accountant who can examine and audit the company’s books and understand the difference between the P&L and the tax return. They need to be "deal-makers", not "deal-breakers." If a buyer asks, most business brokers can refer them to competent, experienced, specialized professionals.
The buyer can rely upon the broker’s legal obligation for honesty and fair dealing, even though the broker works for the seller. It is always good to have a professional to filter through the myriad business listed for sale, to handle the voluminous paperwork, to manage and buffer the negotiations, and to orchestrate a successful closing.
Be sure they will "co-broker" - show you other brokers' listings, even though this means they will only receive only half the commission.
Define your business search parameters: type, locale, cost range, etc.; the more precise, the better they can find viable listings for your consideration. Present them with an accurate and complete financial statement; tell them precisely and honestly how much money you have to invest. Give them a brief biography of your skills, education, and experience. Ask them how you should conduct your search, and then ask them to check out the first two or three businesses you find on your own; if it takes more than a couple of days for them to get back to you, find someone else.
And, call at least weekly for updates—if you are not seriously engaged, the broker won't be either.
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Since most of the time a buyer contacts the listing business broker to get information about the business and then proceeds to investigate the opportunity, the broker will represent both Seller and Buyer (what is called a Dual Agency in real estate).
If you wish to have a separate broker represent you, you should speak with a few brokers and identify one that will work with you. Then you can have your broker contact the listing brokers for the opportunities that you are interested in. Unlike home sales, the Dual Agency is quite common in business sales since very few brokers specialize in working with Buyers only. Also different businesses have different characteristics and not all brokers may have dealt with the type of business in question. Hence the listing broker may be more knowledgeable about that type of business.
In over 90% of my deals, I was the only broker in the transaction and represented both Buyer and Seller. I try to provide the best advice I can to each Buyer & Seller within the context of how we can make a deal happen. When we encounter an issue, I would discuss the ramifications with each side and figure out whether or not it can be resolved or the deal should be terminated. Most times I have been able to work out a reasonable solution that is acceptable to both Buyer and Seller.
This tends to make it less confrontational and more of trying to find a workable and reasonable solution for the issue at hand. If it can’t be worked out then we terminate the deal. This would be true even if there are two different brokers representing buyer and seller but as most of my Buyers and Sellers would testify that my representing both sides actually helped make the transaction go much more smoothly.
So, I wouldn't be overly concerned about a broker representing both sides because the broker will still do his best to represent you. Regardless of whether you have a separate broker or one broker representing both sides, broker will not get involved in due diligence. You will need to get advice from your accountant and attorney as necessary to be satisfied. A quick comment about the terminology. Business Broker may have a Real Estate Broker's License or a Real Estate Agent’s License. But in the business brokerage, the term "broker" or "business broker" is loosely used to indicate the person representing buyer and/or seller.
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