Business Broker Confidentiality Agreement Question

[BrownPaperBag]

Hello All,

I have recently started to look around to perhaps buy a small business for my family and I, and am new to the game to I have a question.

I saw a listing online of a business that I want to get more information about, so I entered my information on the online form to request more info. and the broker sent me an agreement to sign via email. Essentially, the agreement stated that If I do not purchase the business through this specific broker, I am not allowed to use the services of any other broker for a period of 2 years to purchase the business in question. Nor can I contact the seller directly or engage in any sort of negotiations with any other party other than said broker.

Is this typical of brokers?
I want to inquire about this before I sign the agreement and make a dumb decision to limit my options. I wonder if the business could be listed somewhere else as well.

[Harold Mansfield]

Hello All,

I have recently started to look around to perhaps buy a small business for my family and I, and am new to the game to I have a question.

I saw a listing online of a business that I want to get more information about, so I entered my information on the online form to request more info. and the broker sent me an agreement to sign via email. Essentially, the agreement stated that If I do not purchase the business through this specific broker, I am not allowed to use the services of any other broker for a period of 2 years to purchase the business in question. Nor can I contact the seller directly or engage in any sort of negotiations with any other party other than said broker.

Is this typical of brokers?
I want to inquire about this before I sign the agreement and make a dumb decision to limit my options. I wonder if the business could be listed somewhere else as well.

Not sure if it's typical of other brokers but I wouldn't sign that, and I wouldn't deal with that broker for anything else. Furthermore, no one can stop you from inquiring of the owner of a business. If they say "Please contact my broker" then you have your answer. If not, the broker has no quarrel with you unless you discovered this business through some exclusive service of listings that can't be found anywhere else.

I could be wrong here as I'm no legal expert, but this:
"I am not allowed to use the services of any other broker for a period of 2 years to purchase the business in question. Nor can I contact the seller directly or engage in any sort of negotiations with any other party other than said broker.".
Sounds shady.

[Fulcrum]

It's a standard non circumvention form though the 2 year restriction sounds a little excessive. 6 - 12 months is more of a reasonable time frame. I'm curious as to what this broker's closing rate is as well as the time frames involved.

One clause to look for that some brokers will try to put in is that you cannot purchase any business, or homes for residential brokers, without their service. I've seen this pop up a few times and refuse to sign.

Maybe one of our other members can clarify this a little more.

[Business Attorney]

It is pretty common for brokers on the the buy side. There is a similar but different provision that is in the agreement the seller signs with his broker.

The reason for both provisions is that once the introduction is made, it is often tempting for the parties to try to strike a deal and cut out the rather significant success fees that the brokers are paid. He is trying to protect his commission

From the brief description you gave, it sounds like the broker who is listing the business online may have culled the listing from another source and may not be the actual listing broker for the business. Normally, once the broker has an exclusive agreement with the seller, he does't need one with buyer. If that is the case, you may be able to identify the business through other sources and may not need the one you contacted at all.

I agree that 2 years is on the long side.

[kimoonyx]

Respond and ask the broker to lower the circumvention down to a reasonable time frame like 6 mo or lower. Also Using a broker can be good but only after exausting a search of your own. There are many good business ops out there to be revealed with a little research of your own.

[turboguy]

The only business I have ever bought was purchased directly from the owner with no agent so I don't have any experience working with agents but it does sound excessive to me. I would hesitate to sign. I would say if you look at other business for sale through different brokers and they ask for the same thing then it would probably be pretty standard but it doesn't sound too appealing.

I agree that it sounds shady and I also agree with the comment that he is possibly not the actual listing agent. I would tell him no unless he wants to drop the time to 6 months.

[Business Attorney]

Yes, you can find and buy a business without using a broker.

In the last 8 months I have been involved with 10 business acquisitions for clients, 4 on the buy side and 6 on the sell side. The transactions ranged up to $10 million. In every case but one, the buyer was a strategic buyer (someone in the same or similar industry), not a financial buyer.

Of the 10 deals, the buyer only used a broker in one transaction. In 3 deals, the seller had a broker, but in 2 of those deals the buyer was already familiar with the seller and could have been brought to the party without the need for paying a broker a selling commission. In 7 of the deals, there was no broker or other intermediary involved at all.

In the one deal where the buyer used a broker, he had used the same person to assist in a successful transaction a couple of years ago. His role was not to find the deal in this case but to assist in the negotiation, due diligence and closing of the transaction.

In these cases, the buyers were already in the same space and didn't need someone to help find the business they were acquiring. In your case, you can also dig up sellers on your own but since you don't indicate that you know where the potential sellers might be, a broker might help fill the gap. If they do, they have the right to expect that you will not use the information and then cut them out.

[FLC]

I have been looking to buy a business for a little over a year now. The verbiage you describe is, for better or worse, fairly typical of what I've seen. While I agree that the two-year clause is a bit excessive, it isn't uncommon, and it hasn't deterred me. After all, I'm going to decide that this is a business I want to pursue or not in fairly short order, and if it's not one that I'm interested in pursuing then it likely won't be a year from now either.

The broker that listed the business for sale has an agreement with the seller - if the broker brings the owner the buyer who eventually purchases the business, then the owner owes the broker a success fee (typically 8-10% of the total purchase price - not cheap!). While you as the buyer do not pay this fee directly, it is of course factored into the seller's asking price and is a consideration in his/her negotiations. That being said, I would (if all else is reasonable) sign the agreement. First of all, I doubt you'll find this business listed elsewhere by a different broker. The seller typically hires only one broker to market the business (some franchise resales do hire multiple brokers - in that case look around for other listings), and you won't find it anywhere else. Second, while the broker works for the seller, he/she doesn't get paid unless there is a sale. This can be used to your advantage during the offer/negotiation stage - the broker can help to convince that seller that your (reasonable) offer is a good deal.

Just my thoughts based on a year + of signing these types of agreements while looking for a business for myself.... Good luck!

FLC

[BrownPaperBag]

It is pretty common for brokers on the the buy side. There is a similar but different provision that is in the agreement the seller signs with his broker.

The reason for both provisions is that once the introduction is made, it is often tempting for the parties to try to strike a deal and cut out the rather significant success fees that the brokers are paid. He is trying to protect his commission

From the brief description you gave, it sounds like the broker who is listing the business online may have culled the listing from another source and may not be the actual listing broker for the business. Normally, once the broker has an exclusive agreement with the seller, he does't need one with buyer. If that is the case, you may be able to identify the business through other sources and may not need the one you contacted at all.

I agree that 2 years is on the long side.

Interesting. So it may be possible to lookup this listing from other sources.
Would I be out of line If I as the broker this question?
In other words, ask the broker if they are the original and/or sole broker source for this business?

[BrownPaperBag]

Respond and ask the broker to lower the circumvention down to a reasonable time frame like 6 mo or lower. Also Using a broker can be good but only after exausting a search of your own. There are many good business ops out there to be revealed with a little research of your own.

Kimoonyx,

I suppose a Google search would reveal some business listings that are For Sale By Owner, with no Broker involved.
Any recommended sites?

[BrownPaperBag]

I have been looking to buy a business for a little over a year now. The verbiage you describe is, for better or worse, fairly typical of what I've seen. While I agree that the two-year clause is a bit excessive, it isn't uncommon, and it hasn't deterred me. After all, I'm going to decide that this is a business I want to pursue or not in fairly short order, and if it's not one that I'm interested in pursuing then it likely won't be a year from now either.

The broker that listed the business for sale has an agreement with the seller - if the broker brings the owner the buyer who eventually purchases the business, then the owner owes the broker a success fee (typically 8-10% of the total purchase price - not cheap!). While you as the buyer do not pay this fee directly, it is of course factored into the seller's asking price and is a consideration in his/her negotiations. That being said, I would (if all else is reasonable) sign the agreement. First of all, I doubt you'll find this business listed elsewhere by a different broker. The seller typically hires only one broker to market the business (some franchise resales do hire multiple brokers - in that case look around for other listings), and you won't find it anywhere else. Second, while the broker works for the seller, he/she doesn't get paid unless there is a sale. This can be used to your advantage during the offer/negotiation stage - the broker can help to convince that seller that your (reasonable) offer is a good deal.

Just my thoughts based on a year + of signing these types of agreements while looking for a business for myself.... Good luck!

FLC

FLC,

Thanks for the advice!

[Fulcrum]

Interesting. So it may be possible to lookup this listing from other sources.
Would I be out of line If I as the broker this question?
In other words, ask the broker if they are the original and/or sole broker source for this business?

Always ask this question. Some agents may get offended but you do not want to waste your time in a daisy chain.

[kimoonyx]

for sure...but i'm not sure if its considered spamming to post links so, out of respect to the forum... just call me up direct and i'll point you to some good ones... my contact info is on my site which is linked in my signature..

[kimoonyx]

Sure hit me up directly via my signature...I can give you some info.

[BrownPaperBag]

So in avoiding a Business Broker and going straight to the owner who is selling the business, what are we, as the buyer, gaining here?
Is it simply just avoiding the broker fees that are embedded in the sales price?
Are there any disadvantages in not going through a Business Broker and conducting business only with the Owner directly?

Thanks

[Fulcrum]

So in avoiding a Business Broker and going straight to the owner who is selling the business, what are we, as the buyer, gaining here?
Is it simply just avoiding the broker fees that are embedded in the sales price?

One of the biggest benefits is that you can contact the seller directly in addition to a seller being a little more flexible on price. You will also have the benefit of being able to sit down with a seller and hammer out an agreement easier than with a broker or two at the table.


Are there any disadvantages in not going through a Business Broker and conducting business only with the Owner directly?

Keeping organized and on time. Good brokers can also assist in gathering, and reading, due diligence reports.

I bought and financed my business privately. There were no brokers and no lawyers (effectively a handshake deal). I don't recommend going this route unless you know and trust a seller, the dollar amount isn't too large, and there are no hard liabilities (debt, A/R, environmental, legal, etc).

[Business Attorney]

One disadvantage of not having a broker involved is that some owners have a unrealistic idea of the value of their business. In those cases, a broker can help educate the owner.