Business brokering carries greater risk of civil liability

“Be what you is, not what you is not. Folks what do this has the happiest lot.” Thus sayeth Mr. Wizzard to his cartoon companion, Tooter, a dullard turtle, at the conclusion of each episode in this Saturday morning cartoon that ran in 1960 and 1961 (by date alone, this allusion is lost to most of you). Tooter (with the help of Mr. Wizzard) would travel to a distant land or era where he would assume the job of his dreams: a dinosaur hunter, railroad engineer, quarterback, skydiver, bull fighter, and on and on. Each adventure ended in catastrophe and a shriek for help from Mr. Wizzard.

Many callers to the Hotline over the years have asked about the legality of taking a fee for brokering the sale of a business, separate from the fee earned for brokering the sale of the real estate. My answer has been invariably “Be what you is, not what you is not.”

It is not illegal in Pennsylvania to collect a fee for brokering the sale of a business though it is fraught with peril that includes civil suit and real estate license law violations. These perils exist not only for the individual real estate salesperson who might be involved in the deal, but also for the affiliated broker.

Pennsylvania does not require a license for those who hold themselves out as business brokers and there is no state agency that is dedicated to their oversight. The Commonwealth, however, has broad police powers and the Office of the Attorney General has the ability to investigate and prosecute those who engage in deceptive or other illegal practices. Further, if you hold a real estate license, then you are subject to disciplinary proceedings initiated by the Commonwealth’s Department of State for violations of the Real Estate Licensing and Registration Act and the Rules and Regulations of the Real Estate Commission. It is not difficult to envision how the sale of real estate and sale of the business associated with that real estate can lead to such charges.

If you choose to market the sale of a business, there are several basic concerns to consider. First, do you have the permission of your broker? Because of the increased risk of civil liability and disciplinary problems, your broker must be complicit with your plans. Whether the fee is shared with the broker needs to be determined. Also, expect your broker to seek indemnification for any civil liability or losses that are occasioned as a result of your engaging in the practice of a business broker. The broker may also ask you to provide your business clients with a written disclaimer advising that the business brokering aspect of the transaction is not related to the practice of the real estate brokerage and is being conducted by you individually and not as an employee or independent contractor of the broker. Brokers, engage legal counsel to assist you with the preparation of these documents.

Second, determine exactly what services you will be providing as a business broker. Not too long ago I was hired to defend a real estate licensee who facilitated the sale of a small commercial building and the bakery business that was operated within that building. The licensee drafted not only the agreement of sale for the real estate, but also the agreement of sale for the business. Payments were to be made periodically over a number of years until satisfied. Unfortunately, the licensee was wholly without knowledge about how to secure the seller. He failed to create security interests in the ovens, raw materials and other appurtenances that went along with the bakery business. A week after the sale the guts of the building were sold, the buyer defaulted on the purchase of the bakery and because the two agreements were not intertwined, the recourse available to the seller was limited.

Real estate licensees who are not also lawyers should have nothing to do with the preparation of the documents involved in the sale of a business. For that matter, even the real estate sales agreement should be reviewed by counsel who is engaged to draft and handle the business sale so that the two are coordinated. Limiting ones business as a business broker to the marketing and location of a suitable buyer is advisable. Let the lawyers take over from that point. Unless you have a background in mergers and acquisitions and a law degree, stay away from the details.