Business Sales – what to watch out for

Business sales are part of most succession plans, and getting it right can make the world of difference. Most small business owners engage the services of a licensed real estate agent or licensed business broker.

This is usually the first and only dealing with a business broker or agent. Key issues that you should consider when dealing with a business broker / agent:

Term of Appointment

All contracts with business brokers and agents will have a minimum period of appointment, with an additional period called a continuing period after this time. You should consider appointing an agent for a set period with no additional or continuing period, this will make your agent work harder and will help you avoid being locked into a relationship which isn’t working.

Commissions

Business brokers and agents almost always charge their commission on a variable basis, for example 5% of the sale price, but often charge additional fees / charges. You should be clear to find out, before signing an agreement, whether this is the total of the agent or business broker’s fee, or whether there are additional advertising and retainer fees payable. If you don’t ask this question, it can be a costly mistake.

Remember, you can negotiate, you may offer a lower commission with an incentive payment where the broker/agent achieves target sale price – it pays to shop around. It’s not always about the commission, do your research, to make sure the agent you pick is selling.

Contracts

Finally when you find a buyer and the deal is ready to be done, you need to sign a contract of sale of business (and in some cases a share sale agreement). Many business brokers and agents use a standard form document, while these documents are generally suitable for a very small number of businesses, they can’t always address the complexities of each individual sale. You should never rely on a business broker or agent to prepare a contract for you, lawyers commonly see a number of mistakes that business brokers and agents make, for example:

1. changes to the standard form contracts, which can lead to unintended consequences;

2. in most cases special conditions need to be drafted, business brokers and agents are not lawyers, they do not understand the legal complexities of contracts and are not qualified to draft special conditions – lawyers have seen many examples of poorly drafted clauses which have the reverse legal effect to what was intended;

3. clients can suffer severe tax consequences as a consequence of contracts that do not properly consider tax and corporate planning issues.

Before you sell your business you should always speak to your lawyers and accountants to obtain the right advice – and before you appoint and broker/agent do your homework.