Whether buying or selling a business, it is important to understand the role of the business broker you are working with, who they represent, what their obligations are, and where their duties lie.
The Seller’s Agent
Let’s say you have a business you want to sell, and you find a business broker to sell your business. You will sign a contract with that business broker, which—among other things—outlines the business broker’s role and obligations. In this case, the business broker is acting as the seller’s agent, also referred to as the listing agent.
As a seller’s agent, the business broker is obligated to make a deal that is in the best interest of the seller. They are obligated to share with the seller information from and about prospective buyers, and they are obligated to try to get a deal that meets the seller’s goals.
A seller’s agent may keep certain seller or business information from prospective buyers, in an attempt to get the best deal for their client. This means that a seller can confidently share all the details with their broker without fear that the information will be passed on to prospective buyers. However, there is an obligation to not misrepresent the business to potential buyers.
In most business sales, a potential buyer contacts the seller, or listing, agent directly. The buyer may be helped by the selling agent, such as to find an attorney, accountant, or lender. But, the primary obligation of the selling broker is to the seller.
The Buyer’s Agent
The buyer’s agent, on the other hand, is obligated to act in the best interest of the buyer. The buyer’s agent will look for a business that meets the buyer’s criteria. They should advise the buyer if a business seems overpriced, and they should share any details they might learn about the seller or the business. They will walk the buyer through the negotiation process, and assist them with getting the deal closed.
A business broker who is acting as a buyer’s agent can be compensated by receiving a percentage of the commission, just like the typical practice in residential real estate sales. In order to do so, normally, the buyer’s agent must contact the seller’s agent on the buyer’s behalf. Many seller’s agents will not share a commission with a buyer’s agent who is brought in after the buyer has already contacted the seller’s agent directly. Also, there are business brokers who will not co-broke. In this situation, the buyer may need to compensate his business broker directly.
A buyer’s broker can conduct an active search for a business to buy for a buyer. In this situation, the buyer’s broker is contacting business owners whose businesses are not on the market to see if they are interested in selling their business. The buyer typically pays a flat fee or monthly fee and also pays a success fee when a purchase is completed. It may be possible to add the success fee to the purchase price so that it is included in a loan to buy the business. Although the buyer is paying a fee, they may be saving that amount or more by buying a business at a lower price than if it was on the market.
The Dual Agent
It is possible that a business brokerage firm acts as a dual agent. A business broker lists the business for sale and is therefore a seller’s agent. Another business broker in the same firm represents the buyer. Each agent needs to treat their client’s information with confidentiality, even to the other broker in the same firm. They should maintain a wall between them in their dealings with each other. The dual agency should be disclosed to the buyer and seller involved in the transaction.
A business broker can act as a facilitator. The role of the facilitator is to assist both parties in completing a sale of the business, but the business broker does not represent either party. This usually happens when a business is sold to an employee or a relative where the parties already have some type of relationship.
Aside from the different roles that business brokers play, buyers and sellers should remember that another person’s interests may also factor into the deal—the agent’s. Because a business broker is almost always paid on a commission basis, they get a percentage of the sale, which may be shared between a seller’s broker and a buyer’s broker.
To some extent, the brokers are also looking after their own interests. Although they are required to work in the interest of their client, a higher sales price means a higher commission. A broker should be selected carefully after reviewing their track record or references to ensure that they will properly represent your interests.