Typical Terms in a Business Broker Contract

If you aren’t familiar with what a business broker does, they act as an intermediary between buyers and sellers of a privately owned business. Essentially, their job is to quarterback the entire deal from pinpointing your business's worth, marketing strategies to sell, vetting buyers, smoothing out negotiation bumps, and making sure that all the players (buyers, sellers, and advisors) get to the closing table successfully. They can be an invaluable “make-or-break” guide to your transaction.

Before you sign a listing agreement with a broker, you'll want to understand specifically how they will help you navigate the stressful journey of selling your business. Brokerage agreements tend to have their own unique terms. This article (by no means an exhaustive list or intended to give legal advice) covers some of the more typical terms you might expect to see.

Typical Terms and Conditions

Engagement Period: This refers to the duration for which the broker is hired to sell the business. It typically ranges from 6 to 12 months but can vary depending on the broker and the complexity of the business and the market. The average time to sell a business is around 9 months, so a 12-month agreement is common.

Exclusivity: Brokers often require an exclusivity clause. This is where the seller agrees not to hire other brokers during the engagement period. Most brokers work on a 'no sale, no fee' basis and want to ensure they won’t get sidelined by another broker after spending time, money, and energy trying to sell your business. It also means that if you source a buyer, you should send that buyer’s contact information directly to the broker.

Commission or Success Fee: This refers to the monies paid to the broker upon the successful sale of the business. The contract should specify the commission rate (usually a percentage of the sale price) and who is responsible for paying it (usually the seller). There is also generally a minimum fee to protect the broker in case the purchase price becomes lower than expected, which can also be used for calculating damages if there is a disagreement.

Expenses: Selling a business will incur costs. Many brokers absorb those costs. The contract should clearly state who foots the bill for certain expenses and whether they will be charged as they occur or deducted from the sale proceeds.

Termination Clause: This clause outlines all the conditions under which either party can terminate the contract before the end of the engagement period and how they will deal with any financial settlements due to breaking up early.

Trailer Clause: There is usually a trailer period after the engagement ends that protects the broker from buyers and sellers trying to cut them out of the deal. It covers any buyers the broker sourced or that became aware of the opportunity through the broker’s marketing efforts.

Seller Indemnification: Here, the seller promises that all the information provided about the business is true to the best of their knowledge. They also agree to hold the broker harmless when representing the business based on the information provided by the seller.

Seller Obligations: In a nutshell, a broker is asking a seller to be a team player in the selling process by being responsive to requests and pointing all buyer inquiries back to the broker.

Dispute Resolution: Should a dispute arise, this section outlines how to resolve it, usually through arbitration or mediation in the broker’s geographic location.

Broker Lien: This clause provides the broker the right to place an appropriate lien and encumbrance on the seller’s business should things go south during the deal. This allows them to collect any fees that would be due to them.

Selling your business is no small feat. It's a journey filled with significant decisions that can leave a lasting impact on your future. Who you choose to guide you through this process can make all the difference. Take your time, understand every term of the contract, and ensure you're teaming up with a broker who's ethical and as committed to your goals as you are. This partnership is about more than just a sale; it's about ensuring a successful transition of your business so that you can move forward with confidence and clarity toward your next adventure.

If you are contemplating selling your business someday and want to start a confidential conversation about how to prepare, call us at 573-335-1885.