When Making a Business Acquisition, Whom Can You Trust?

When a business broker tries to play both sides of the buying and selling process, it can mean trouble for the buyer, seller, or both. Don’t get had by a “dual agent” broker.

When Making a Business Acquisition, Whom Can You Trust?

There was a movie in the 1970s where the broadcaster was telling the listening audience “I am mad as hell and I am not going to take it anymore.” I am so tired of seeing buyers, sellers and sometimes the business brokers trying to rip each other off.

This morning I was reviewing the financials on an automotive business, for Sam (not his real name), a long time client. He apologized to me for signing the purchase contract without my reading the contract first. He knows how I feel about clients signing any agreements before I’ve made at least a preliminary review of the business. He explained that it had a 21-day due diligence period in which he could walk away. He also confessed that the broker brought the price down and wanted a buyer commission of $10,000, on top of the normal seller’s commission. The agent told Sam he would disclose it to the seller. Sam then explained he gave everything to his attorney who spent an hour looking it over. I do not know what the attorney looked over, but I would like to turn him into the bar association for incompetence or at least practicing law with a license. Attorneys are quick to tell accountants not to practice law without a license.

When Brokers and Sellers Bend the Truth

So what did I find in my half-hour review of the financials and the purchase agreement? The business claims that the profit is close to 50% of the gross income (gross sales). This is impossible in an automotive service business requiring trucks, rent, and auto mechanics. I did not see any labor on the financial records but did see some outside services. Maybe that is the staff labor, but it didn’t seem to be adding up.

• I read the signed purchase agreement. It looks OK to me. There were a few things that bothered me.
• It said “if the buyer did not complete the transaction after removal of all contingencies, the broker got to keep the deposit.”  This is in the Brokers interest not the buyer or the seller.
• Then I read a document that said “Release of Liability.” The first line says, “The buyer agrees he has completed due diligence…” This document is being signed at the time that the offer is being made not after due diligence is completed.
• On the second page there is a section heading, “Broker is not the Buyer’s Agent.”  By this time my blood is boiling and I put the document down and called Sam.

What to Do When Your Business Transaction Goes Bad

In my diplomatic manner I told Sam to:

1. Stop payment on the deposit check.
2. Write the broker that you are cancelling the contract.
3. Call the broker and tell him you are going to report him to Bureau of Real Estate (Dept. of Real Estate) for fraud and misrepresentation.

What did all this mean? By removing the due diligence, the deal was a go. If the buyer then backed out because of any reason the seller would keep the deposit check and give it to the broker. This is a nice way for a broker to make a commission even when the business does not sell. Since this involved fraud by the broker there might be a lawsuit; of course the legal fees would be well over $10,000, probably closer to $50,000.

The Broker and the Seller Colluded on This Transaction

The broker was trying to distance himself from the buyer by not being his agent. That is very hard to do especially when the buyer would be paying him a commission on top of what the seller was paying. The Broker in his mind thought he was a dual agent. Regardless of what the paperwork said, the agent was a dual agent. He negotiated the purchase agreement with the seller for the buyer. With the buyer signing that the broker was not the broker you again create a complicated legal issue, and if the money was big enough, litigation.

So why am I so mad, over an attempted rip off of Sam?

How to Spot a “Dual Agent” Broker

Two weeks prior, I had completed being an expert witness in a trial between an alleged buyer, the business seller and the dual agent broker. I will tell you a summary of what the case was all about, so that you never get yourself in a similar mess.

The business was listed with a business broker named Mr. Stupid (I will not give his name in the article, not to protect the guilty, but to protect myself from threats of libel and slander). He located a prospective buyer we shall call Mr. Neil. Mr. Neil spent six months negotiating a purchase deal, first with financing by the SBA and a $90,000 cash down payment. The SBA killed that deal. Six months later, Mr. Neil came back with another offer with $15,000 down, a private moneylender, and the seller becoming a 30% owner in the buyer corporation. Terms and conditions of the 30% ownership were never explicitly spelled out. The offer was written on the buyer’s contract form, which had many unclear clauses, which was one of the reasons we were in court. There was a clause that said the seller could sign the contract and then have it reviewed by his attorney, as long as it did not change the major part of the contract. Mr. Stupid told the seller he had 5 days to have it reviewed if he signed it. He did. The attorney cancelled the contract the next day. The buyer and broker said that the seller could not cancel the contract without being in violation of the agreement and damages were due to the broker and buyer. LAWSUIT. Mr. Neil sued the seller. Seller sued Mr. Stupid, who countersued the seller. Seller had an incompetent attorney that told him to settle with Mr. Neil, which he did. The seller then hired a very sharp attorney (I will give his name out on request) who in turn hired me as an expert witness.

The seller received a judgement against the brokerage firm, and the brokerage firm lost its countersuit against the seller. In this case the seller was honest but uneducated in legal matters. And even with legal counsel reviewing the purchase contracts, he was not able to properly protect himself. The broker never asked the buyer for proof of funds, verifiable information on the private lender, or even financial statements. This buyer had no money, or credit to make this purchase but he succeeding in getting a settlement from the seller with the help of the seller having the wrong attorney. The broker testified on the stand that he earned a commission when he found a buyer, and a contract was signed. Every broker knows that a deal is not done until the escrow closes and funds are distributed. Now that the seller has a judgement against the brokerage firm, we come to the next interesting step: collecting the judgement.

A Good, Competent Business Transaction Attorney

What is the take away from these two stories? Interview any legal counsel you are thinking of hiring. Make sure they have business transactional experience, and not just business law. Get referrals from people who know a good attorney from a bad one. Don’t ask attorneys to do accounting work; don’t ask accountants to review contracts, unless they do that on a daily bases. Most importantly, do not sign any contracts without having read them and fully understanding them. Have, besides yourself, someone read them, who actually knows how to read a purchase contact and actually cares about your needs. It only takes 30-60 minutes to read a contract, and in my experience 90% of them have at least one major issue I want corrected. Ignoring that one major issue can cost you from $10,000 to $500,000. Is that worth hiring an experience professional for one hour?