Business brokers work with the client and other professionals. They can be a valuable resource for those looking to buy or sell a business. Great care should be taken to avoid the impact of common conflicts of interest associated with business brokers, including hiring an experienced business attorney.
The primary benefit of a business broker is finding a buyer for your business or a business to buy. Good business brokers are salespeople with an extensive network of business and professional contacts. For larger businesses, these business brokers can be investment bankers, and they can assist with financing too. If you do not already have a potential buyer for your business or you are seeking a business to purchase, a business broker can be helpful.
Usually, business brokers are paid a percentage of the purchase price of the business. Their commissions are generally around 10-15%, and sometimes there are listing fees on the front end as well. So on the sale of a one million dollar business, the commission could be well over $100,000. Most of the time, the fees for the business attorney putting the deal together and closing it are only a small fraction of that amount.
There are times when the interest of the business broker can be contrary to the interest of the client, however. For example, a conflict of interest arose in a transaction where I was representing the buyer of a small online specialty retail business.
My client had found the business through a business broker. Obviously, my job was to help my client get a good deal on the business while protecting my client from possible risks associated with the purchase of the business. After reviewing the financial statements of the seller and talking with my client during the due diligence period, we discovered that the business was not worth what the Seller wanted for the business. The purported valuation just was not there.
I then proceeded to negotiate the purchase price down on behalf of my client, and was successful in doing so, saving my client tens of thousands of dollars. When the business broker found out the new purchase price, he was livid. His goal was to keep the sales price as high as possible so his commission would be higher.
My client was happy to get a better deal on the business and save on the broker’s commission. I talked with my client years later, and my client was still thanking me, telling me that the savings he got with my help more than paid for my services.
There are many important factors that go into the purchase of a business other than price, and they should be addressed with an experienced business attorney so they are not overlooked. Here are just some examples: consultation period and any related income during that period, structure of the transaction, purchase price allocation for tax purposes, retention of key employees, non-compete provisions, and other restrictive covenants that can protect your business.
In a business sale I handled for a client, I was able to negotiate a lucrative employment arrangement to follow the sale with substantial employment benefits. This was something the business broker involved did not care about because it did not affect her commission. My client was ecstatic, however.
Business brokers sometimes offer to allow you to use their forms to close the sale. Just keep in mind that they are not attorneys, they may not have your best interests in mind, and that each business transaction is different and comes with its own risks and challenges. Regardless of whether you use a business broker, it is best to have an experienced business attorney representing you and your best interests.
J. Brian King is an experienced business attorney with offices in both Augusta and Atlanta. He can be reached at businessattorneylaw.com.