Should brokers and agents 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 broker or agent? 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.
The challenge comes when a listing broker, refuses to be a dual agent, even when I tell him he is acting like one. I just saw an agency disclosure form- that is required by law to explain the three different kinds of agency relationships; clearly explain that the agent is not a dual agent. The buyer did not have a clue that this was the case, even though he signed receipt of the form.
Now let us just forget the legal issue and talk plain talk. Why would a broker not be willing to be a dual agent? The commission is totally going to the listing agent, and it is very likely that the listing agent has refused to split his commission with an agent who wants to represent the buyer. Quite often the broker's response is that the buyer can pay the buyer's agent fee, if he wants representation.
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 or agent 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 law suit.
Buying a business is a major investment; it is one of the two biggest investments you will ever enter into. The big boys have a team of attorneys, CPAs, and brokers working for them. Even the small time sellers have professional advisors, and the buyers should have the same. When buying a business, you will quickly find that there are many people who have put their own interests ahead of your interests. You need at least one experienced professional on your side.
An attorney, CPA, Due diligence expert or a buyer's agent. It is preferable, of course, if you have two or more people watching your back, but take what you can get and afford.
It has been said, "A man who represents himself, has a fool as a client." and "It is very hard to watch your own back when you are looking forward."
About The Author: Willard Michlin, CPA (106752) offers business buyers Due Diligence Services (Second Opinion, Offer Assistance, Final Due Diligence) when they are thinking of making an offer on a business or in the process of investigating a business purchase. He has written numerous articles on the due diligence process and can be reached direct at 800-864-0420 for more information and an appointment.
Categories: Deal And Escrow Issues, How To Buy A Business, Legal Topics
Comments Regarding This Blog Post
Dual agency is a constant issue when selling and buying business, because of the way that businesses are marketed (i.e., confidentiality, NDAs, non-cooperating brokers, etc.) If a client wants to have their paperwork or lease reviewed by an attorney, I'm fine with that, many brokers do know that once an attorney gets involved then the chances of the deal going sideways goes up, because attorneys job is to minimize risk for their client, and owning a business involves risk. I've acted as dual agent, but think of my job as merely facilitating the transaction, because ultimately, the buyer makes the decision how much they are willing to pay for a business, and the seller decides how much they are willing to sell it for and on what terms. During the due diligence period I make a note not to make it appear that I'm putting my thumb on the scale and just facilitate the process between buyer and seller.