Some days it seems that everyone in the placement business is looking for ways to leave it. When you’re one of them, you’ll need to know about that mysterious person called a “business broker.” He or she can really help.
Here are the eight questions we’re most asked about business brokers, and the answers we give:
1. What is a business broker?
The obvious answer is that it’s someone who introduces a prospective buyer of a business to a seller, and arranges a sale of the business for a fee. However, the real answers are:
- A licensed, highly-trained, knowledgeable, indispensable professional whose services are worth the disclosed fee.
- An unlicensed, unregulated, unnecessary, unscrupulous deal-maker who does anything to claim a fee from anyone.
- Everything in-between.
Each state has different laws (or none at all) concerning this narrow occupation. Therefore, you should always check with your state’s appropriate licensing authority before:
- “Listing” your business for sale.
- Reviewing a list of “possible buyers.”
- Signing anything the broker presents to you.
- Revealing anything that could jeopardize your business (including your interest in selling), or
- Disclosing the names of any people who might be interested in buying (including your employees).
2. Am I protected if the broker is licensed?
The extent of protection varies depending on the state. Some states just include business brokers in regulated fields like real estate and securities, without requiring any experience or even knowledge of business. Others don’t regulate business brokerage at all. Fidelity bond requirements, evidence of liability insurance, and fee restrictions all vary widely.
Even rigid state regulation is severely limited if the broker is operating in multiple states. This is because, as an interstate transaction, horrendous jurisdictional issues arise. If you try to enforce your rights through the Federal Trade Commission, Interstate Commerce Commission, or U.S. Postal Service, you’ll probably be referred back to the state where the broker operates. That rigid state regulation is only as good as its enforcement. The agency’s highest priority is protecting the state’s residents. Unfortunately, you’re not one of them.
3. Do brokers use standard form contracts?
Yes. Only there’s no “standard form.” That’s because there’s no standard. However, you’ll probably be given a pre-printed “Listing Agreement” with the blanks typed in. Beware — this is a closing device, designed to make you think the terms aren’t negotiable.
Most listing agreements include:
- A 10% (or higher) commission on the “gross sales price.”
- Ambiguous wording about “locating a ready, willing and able buyer” for an undetermined time.
- An “exclusive” right to a commission on any sale (even if you locate the buyer).
- The right to a lien (formal claim) for the commission on the proceeds of any sale, assets sold, etc.
- Nothing about the broker keeping your identity, financial records, employee data, or placement files confidential.
- Nothing about disclosing any conflict of interest (like being on the payroll of a competitor).
- Nothing about “cooperating” (splitting the commission) with other brokers.
- Nothing about your right to cancel.
When to Worry
How do you respond? The only way is, “I’d like to review this with my lawyer.” If you hear “Don’t worry, this is just our standard form,” worry. Keep worrying and you’ll probably hear, “I have someone with cash who’s really interested in buying your business.” Worry a little longer, and you’ll hear something like, “What concerns you about the agreement?” Then you can read it carefully. She’ll let you make changes.
It’s perfectly legal to cross out, add in handwriting, and even attach an extra page (called an addendum). Just be sure you and the broker date and sign (or initial) the changes. These legally modify the “boilerplate.” The law presumes that the parties intended to supersede the printed or typed words.
Then, if you’re still not satisfied, follow the advice of attorney Frederick Steingold in The Legal Master Guide for Small Business:
You may want to take the initiative and have your own lawyer prepare the contract. The [broker] may feel relieved at avoiding this expense and may willingly sign what looks like an official document. Whatever psychological resistance there may be to tampering with a crisply-typed document will now be in your favor!
In seeking to change the protective language that your lawyer has included, the [broker] is put in the uncomfortable position of having to justify the removal of clauses that appear fair and reasonable.
Your lawyer shouldn’t charge much or take long. After all, he’s basically retyping the broker’s agreement.
But his computer works much better than yours to get it signed.
4. Where do business brokers get buyers?
Everywhere! Word of mouth, newspaper ads, cold calls, business networks, supermarket bulletin boards, and trade shows are typical sources.
Business executives are the best (and best qualified) buyers. Albert Lowry told why in How to Become Financially Successful by Owning Your Own Business:
[T]housands of highly-paid executives in big corporations are wondering today whether they’ve really achieved success.
For many, the answer is clearly ‘No.’ For some, happiness will come when they quit the corporate rat race and switch to owning a small business. At any given moment, hundreds of them are quietly searching for some enterprise they can buy and run at a decent profit.
. . . There is another group of would-be buyers of businesses; the people who suddenly find themselves unemployed.
This can happen at any age. But the older you are, the more vulnerable you become to the axe, especially in a big company.
Going permanent and temporary placement businesses tend to attract mature, business-oriented buyers. As former executives, many see the need for assisting businesses with hiring the best possible employees. They know how widely recruiters and temp services vary in their ability to deliver, and think they can use their prior contacts or knowledge of certain industries to be successful.
They’re comfortable dealing with business brokers.
5. Do business brokers qualify the buyers?
Not necessarily. Since business brokers are compensated on a commission basis, they often fail to check buyers out. Lowry’s advice to them is the best advice we can offer you:
An ethical business broker never assumes that [people] who have risen to the upper tax brackets are necessarily good judges of business opportunities. They may rely on their own judgment, overlooking the obvious facts in evidence. They may be even more in need of a broker’s counsel than less exalted personages.
So while “ready and willing” buyers are everywhere, able ones aren’t. Able to pay the purchase price is far different from able to run the business. You may think you don’t care, but you will if:
- You remain as a consultant to the business for a continuing fee.
- You agreed to an LBO (leveraged buy-out) based upon the future income of the business.
- You consented to installment payments without sufficient security in the event of a default.
- You are accused of breach of contract, negligent misrepresentation or fraud in connection with the information you provided.
- Unpaid creditors provided goods and services, relying on their relationship with you.
- Employers or candidates you dealt with are injured after you leave.
- You value the good reputation you built in the business.
- You need to retake possession of the business.
6. What services should I require from the broker?
A broker’s fee is more than a finder’s fee.
Initially, you should receive assistance in evaluating a realistic sales price. You should thoroughly review Chapter 65 in Placement Management entitled “Placing A Value On Your Company.” Then go through the formula with the broker. He must fully agree with the sales price — not just agree to get the listing. If he doesn’t fully agree, he won’t believe he can sell the business. Like an unrealistic job order, the unrealistic listing won’t get “worked.”
If you truly want to sell your business, don’t defy human nature. Instead, follow the advice of that famous MIT Professor Douglas McGregor in his classic The Human Side of Enterprise:
Man will exercise self-direction in the service of objectives to which he is committed. . . Commitment to objectives is a function of the rewards associated with the achievement of those objectives.
Unlike in the placement field, bringing the buyer and seller together is only the beginning. Even a 10% commission is well worth the money if the broker keeps you away from the buyer, and does all the dealing for you. Avoid the temptation to go around him, since:
- You built the business, so will be defensive about criticism.
- The broker has already established good rapport with the buyer. He might not like you, though.
Broker’s fees in transactions can be very worthwhile to both parties (just like placement fees). When properly structured and professionally earned, they’re the motivation for a mutually beneficial sale.
Lawyer Jerome Rice concurred in Making the Law Work for You:
[I]nsist that your broker provide real services throughout the transaction, not just at the introductory stage. There are certain difficult points in a negotiation which a broker, as a third party, can assist in resolving. . . Make him earn his commission. This includes the process of drafting and closing as well.
Inevitably, closings of significant transactions produce difficulties in the last few days. . . Little things that people have left until the end have a way of coming up at that point because they are painful or uncomfortable, or were simply overlooked.
7. How do I know whether the broker has errors and omissions insurance?
You ask — and you must. Don’t accept anything less than a copy of the face sheet of the policy. Then call the insurance company (not an agent) and verify the coverage. You’re selling your livelihood.
Claims for those “terrors and commissions” we discussed in Item 5 can often be alleged as errors and omissions of the broker. That’s because you can usually assert that the broker:
- Knew or should have known about the buyer’s probable conduct.
- Should have disclosed the buyer’s probable conduct to you, and
- Should have protected you in the buy-sell agreement even if he didn’t know about the buyer’s probable conduct.
Buyers don’t have the cash to pay claims, and brokers certainly don’t. But insurance companies for brokers do. And if the buyer sues, you’ll want the broker’s insurance company there, too.
Attorney James Henry pointed out in The Manager’s Guide to Resolving Legal Disputes:
Plaintiff’s lawyers have learned to sue not just one company, but all that could conceivably be made to pay. . . All too often in the past, co-defendants have wasted scarce dollars, time, and energy in fighting among themselves.
However it is done . . . joint defense will prove not merely useful, but vital.
Even licensing statutes requiring coverage won’t protect you because the limits of liability are usually too low, and coverage can lapse without the agency’s knowledge.
This is more than a theoretical concern. In the Common Sense Guide to Successful Real Estate Negotiation, Peter Miller observed:
When a . . . deal goes wrong, it is frequently the broker who is blamed by both the seller and buyer (about 75% of all lawsuits are initiated by purchasers).
The potential problem here is a future claim that the broker in some way acted in a manner where the “customer” [buyer] not the “client” [seller] believed he was represented by the broker. This claim is best defeated by making the sale contingent on a review satisfactory to the buyer’s attorney.
But wait, how does this help the seller?
The answer is that with a contract review by an attorney of his choosing, a buyer cannot later say in a credible fashion that he thought the broker was “negotiating” on his behalf.
Eyeball that face sheet and verify it. We’re not talking about placing a candidate. We’re talking about your livelihood.
8. Where do I find a reputable business broker?
Your accountant, attorney, banker or insurance agent might be able to recommend a few. The local chamber of commerce and Better Business Bureau are also sources. Maybe they’ll even recommend the same ones — a good sign.
Then meet with the brokers at your office (after hours). As you do, you’ll not only find the ones best suited to help you, but you’ll learn a lot more about the marketability of the business. A dose of reality may even convince you to keep your space on Placement Place. For this reason, don’t introduce her to your employees or reveal your trade secrets.
Do ask her about her background, insurance and references. Check all three very carefully.
That’s how to sell your placement business through a broker.
Sorry to lose you. But if you must leave, now you can do it right!