Introduction
Let’s say you have decided to sell your business. One of your first few steps will be to decide whether you want to use a Broker to assist you during the sale process. While you’re shopping around for a broker that’s right for your business, it’s crucial for business owners to thoroughly analyze any broker agreement (sometimes referred to as a listing agreement or client engagement agreement) prior to officially engaging the broker. The Broker Agreement, or a listing agreement, is a contract between the broker and seller that governs the relationship between the parties. There are numerous provisions in a broker agreement that could be highly consequential to the business and business owner and therefore, should be carefully reviewed and negotiated. In this post we outline the main elements of a typical Broker Agreement and explain the consequential nature of such elements that should be carefully evaluated by an experienced lawyer prior to entering into the agreement so as to avoid any ambiguity within the agreement. At Rafelson Law, our attorneys have reviewed and revised hundreds of broker agreements and can help you negotiate market terms within your Broker Agreement in addition to addressing any ambiguity that could be detrimental to you down the line.
Term, Termination, and Exclusivity
The Broker Agreement should explicitly state the duration of the contract, how it can be terminated, and what the rights and obligations of the parties are during such term. Do both parties have the right to terminate the agreement at will? Is it only terminable upon mutual agreement? Does the agreement automatically expire after 1 year? Does the term automatically extend if a sale has not materialized after a certain period of time? Almost all Broker Agreements include an Exclusivity Clause which allows the Broker the exclusive right to list the business for a certain period of time. The length of the Exclusivity Period can vary, but is typically between 1-3 months. It’s important to note that the Exclusivity Period may not be the same as the “term” of the Broker Agreement as a whole. In other words, the Broker Agreement may have a duration of 1 year but also have a 3-month Exclusivity Period where the Business Owner agrees to not work with any other broker or third party to sell the business during such period. It’s important that the Broker Agreement explicitly addresses the rights of each party during the entire Term of the agreement and during the Exclusivity Period to avoid any confusion or dispute between the parties. For example, the agreement should be clear about when the Broker is entitled to a commission fee or payment of any kind. If the Broker “introduces” a Buyer to the Seller during the term of the broker agreement, but the sale of the business isn’t consummated (or completed) until after the term of the agreement, is the Broker still entitled to its Commission Fee? Is it entitled to a lesser fee? When does the term of the agreement or when does the Exclusivity Provision technically “begin”? Does it begin when the Broker Agreement is signed or once the listing for the business is posted or otherwise made viewable to potential buyers or investors? All of these questions should be carefully reviewed and addressed by a lawyer to ensure that (i) there is no ambiguity within the agreement and (ii) that the agreement addresses all of the possible outcomes. Ambiguity and unaddressed outcomes can result in confusion and conflict between the parties which can be costly and time consuming to resolve. Save yourself the headache and extra expenses and hire an experienced lawyer to review your broker agreement prior to signing.
Broker Commission & Broker Compensation
Another crucial element of the Broker Agreement that should be carefully drafted and negotiated is how the Broker will be compensated for the services it provides.
Typically, brokers take a certain percentage of the sale price of the Business as their commission fee. Other times, the Broker might receive a flat fee or be paid a monthly fee or a combination of those compensation structures. But how is the sale price (or purchase price) defined? In a typical sale of an eCommerce Business, the purchase price may be divided into numerous parts. For example, the Purchase Price might be comprised a combination of any of the following: a promissory note, inventory payment, earnout payment, or a cash payment. An Earnout Payment (or a Stability Payment) is an example of a delayed payment and is not guaranteed. An Earnout Payment is based on the performance of the Business after the Closing of the transaction. So, if the Business doesn’t hit certain metrics after the Closing, the Seller may not be entitled to such payment. Similarly, if the Purchase Price contains a promissory note or some other form of Seller financing, it’s difficult to guarantee that the Seller will receive all payments under the note (e.g., the business could fail and the Buyer may not be able to make payments on the note, or, maybe the Buyer personally guaranteed the note but has strong asset protection mechanisms in place preventing the Seller from enforcing the guarantee). Should the Buyer be entitled to a percentage of the total Purchase Price if the Purchase Price includes an Earnout Payment or a Promissory Note wherein the Seller isn’t guaranteed to receive such payment? Should the Broker be entitled to a percentage of the Inventory Payment? These are all questions that need to be carefully negotiated and articulated in the broker agreement to avoid any disputes later on.
Another aspect of the Broker’s compensation that needs to be considered is when the Broker is entitled to receive such compensation. Is the Broker entitled to their full compensation fee immediately upon the closing of the deal? Or should the broker receive their percentage of the payment only after the Seller receives the payment? Once again, these questions need to be carefully reviewed to avoid any ambiguity (noticing a theme here?).
“Introductions” to Potential Buyers
What constitutes an “introduction” for purposes of the Broker Agreement? Does it count as an “introduction” if the Broker simply blasts out an email with the information about the Business to a list of 100 potential Buyers? Or should a potential Buyer need to reach out to the Broker or Seller in writing and express interest in the listing? If the Broker Agreement doesn’t explicitly define or state what constitutes an “introduction”, the parties may disagree on whether the broker introduced the business owner to a potential buyer which therefore causes conflict that could’ve been easily avoided.
Broker Services to Be Provided
This may seem self-explanatory, but it’s important that the Broker Agreement clearly states what the roles and obligations of each party are during the term of the agreement. Is the Broker merely providing a platform for potential Buyer’s to view the Seller’s business listing? Or is the Broker going to be heavily involved in the valuation and negotiation of the transaction? Some brokers are involved in every aspect of the transaction, including during due diligence, during the drafting of the purchase agreement and are hands on in negotiating the various terms of the purchase agreement. Others merely advise the Seller/Business Owner on what information to include on their listing but do not get involved with the negotiation of the transaction as a whole. It’s important to clarify the obligations and expectations of each party before entering into the Broker Agreement.
Conclusion
The Broker Agreement can have consequences to the Business Owner if it is not carefully drafted in a way to avoid ambiguity and ensure that all factors of the broker relationship are considered and addressed prior to entering into any broker engagement. You can save yourself from unnecessary ambiguity and expenses by hiring an experienced lawyer to review and help negotiate the Broker Agreement prior to signing it. With over 100 deals within the last 3 years (and close to $500million realized closing cash), our attorneys have the experience and expertise to help you negotiate a Broker Agreement that minimizes unnecessary risk and expenses and is drafted with your best interest in mind.
