What is a Seller Broker Agreement?
A seller broker agreement is a written contract between a real estate agent or broker and a property owner. When properly drafted, the agreement will satisfy the listing agent’s duty of fair disclosure for commission compensation and other specific terms.
While there may be some variations in seller broker agreements among real estate brokers to suit business practices, the basic components will most often include provisions naming the principal parties to the agreement, identifying the real estate property subject to the listing, the purpose of the listing, term of the listing, commission and payment terms, access to the property , and the parties’ initials for having reviewed the standard terms and conditions incorporated by reference.
A seller broker agreement is used to give the broker rights of access to the property being listed for sale or lease so that the broker can market it to an existing and target audience. A good seller broker agreement will set forth listing terms that will help the broker obtain a fair return for his or her services.
Listing agreements are generally straightforward, and issues that arise from them are most commonly related to the market price of the property being listed. Issues related to the listing agreement itself may arise when a broker is not timely paid a commission due pursuant to the agreement. To protect both the broker and the seller, a seller broker agreement is essential.
Key Components of a Seller Broker Agreement
When engaging a business broker to sell your business, there are a variety of terms and topics that should be addressed. This article is a guide to some of the most important terms in seller broker agreements. All section references are to the IBBA Standard Broker Service Agreement.
A business broker typically receives a commission for his or her services in selling a business. Section 4-A provides that the seller will pay the broker "the sum equal to the product of: (i) the gross consideration [on the sale of the business], times (ii) X% [the commission rate] of that part of such consideration that does not exceed $50,000, (ii) Y% [the commission rate] of that part of such consideration that exceeds $50,000 but is less than $200,000, (iii) Z% [the commission rate] of that part of such consideration that exceeds $200,000 but is less than $300,000, (iv) A% [the commission rate] of that part of such consideration that exceeds $300,000 but is less than $400,000, (v) B% [the commission rate] of that part of such consideration that exceeds $400,000 but is less than $500,000, (vi) C% [the commission rate] of that part of such consideration that exceeds $500,000 (discounting the percentages above)." The seller will want to negotiate the commission percentages. However, try not to make the mistake of thinking that your commission percentages should be inversely related to the sale’s value. Be sure to have a good discussion with the broker about commission rates; this is an important topic.
Section 2-D of the agreement specifies the duration of the agreement. The seller will want to limit the duration to a short term if possible.
Section 3-D of the agreement defines the conditions under which the agreement will be terminated. It also provides that the agreement will be automatically renewed for successive terms, unless a party provides written notice of its intent not to renew the agreement at least twenty (20) days prior to the expiration date of the term.
Advantages of a Seller Broker Agreement
When a seller enters into an agreement with a broker to sell the seller’s property, the seller benefits from the guarantees made by the broker in that agreement. A broker is a person licensed by the state to represent the interests of a buyer or a seller in a real estate transaction.
One guarantee made by the listing broker to the seller is that the broker will spend a certain amount of money in marketing the property. Another guarantee made by the broker is that the broker will take reasonable actions in an effort to obtain an offer on the property. When the broker fails to meet these guarantees, such as completing the marketing plan, a seller can sue the broker for breach of contract.
A seller who enters into the listing agreement with a broker also benefits from the fact that the broker is agreeing to put his or her financial resources behind the sale of the property and to try to sell the property in a reasonable period of time. If the market is stagnant, a seller may have no better shot at obtaining a sale than a broker does, but it is reasonable to expect a broker to take reasonable steps to sell a property when the listing contract requires that.
Relatedly, the listing contract requires that a broker "take reasonable steps" to obtain an offer. A seller cannot sue a broker because it took too long to sell the house. The seller can sue if the broker does not take reasonable steps to obtain an offer.
The seller of a commercial property engaged an Alabama broker to sell her historic downtown building. The broker didn’t factor the cost of advertising in the cost of the sale. If would be reasonable to expect that advertisement of a property that has a minimum $1,000,000 sales value would include ads in papers such as the Wall Street Journal, the New York Review of Books, Architectural Digest, and art and design publications. If the same broker advertised the property in a free online listing service, such as Craigslist, the seller would have a basis to sue the broker for breach of the listing agreement.
Common Mistakes to Avoid
Many business owners will be familiar with the daunting task of negotiating and reviewing a seller broker agreement, yet may not be aware of the most common pitfalls that should be avoided in the process. Buyers also may not always realize that there are pitfalls that can be avoided.
From a seller’s perspective, perhaps the most important factor is maintaining as much control as possible over the sale process. Any experienced M&A broker knows that while their services are without question valuable to the seller, the seller is still the customer; and any successful broker should always have this fact at the forefront when dealing with a seller.
Ownership of Brokers’ rights, documents, etc.: Most brokers will have a listing agreement that conveys to them certain intellectual property rights, including, for instance, the right to the client database, opinions on what is being sold, or advice regarding how to sell what is owned. However, sellers should pay attention to these sorts of provisions – as sellers may find that from time to time they are being asked to, for example, pay a finder’s fee to the third party (the broker) if the seller decides to do business with the third party. While contractual performance can be legally required, this sort of contractual term may have the effect of binding the seller to the broker, and requiring that the seller pay a found fee when it might not otherwise want to.
Exclusivity Periods: Exclusivity periods result in the seller being contractually obliged to use the same broker for a contractually stipulated period of time. This may in some cases be a necessary and even desirable step in the selling process, however caution should be used. In agreeing to a long exclusivity period the seller may be handcuffing itself to a broker that may not be working in the best interests of the seller. The seller should seek to retain the option to substitute other brokers after a certain period of time, or to allow the seller to sell to an acquaintance without paying a finder’s fee if the exclusivity period expires without a satisfactory result.
Compensation: Many brokers ask for right to share information with third parties, not just ones directly involved in the transaction. Wherever possible, the seller should seek to eliminate these clauses altogether, or at least to restrict them to brokers or agents only.
Termination rights: The agreement and all of its terms should be subject to termination by the seller at any time upon written notice.
Consulting with Your Broker
Now let’s talk about negotiating terms that will give you the biggest bang for your buck and make you feel like the bargaining chips are going in your favor.
Don’t be a martyr. Just remember, the broker is going to do everything he can to protect his interests as well as yours. The one thing you should be firm on are any fees that are to be paid by you. For example, if you are representing yourself, you want to be clear on what the full amount of the fee will be and when you need to pay it. The worst thing that can happen is that you are asked during the process of the deal, while you’re trying to negotiate price, some amount of money that you had not expected to pay and then you have to decide whether or not to pay it or walk away from the deal.
A competent broker will set his expectations and your expectations at the first meeting. The reason you want to go into the first meeting and understand exactly what you are agreeing to is because there will never be another opportunity for you to question his motives or intention. You meet with your broker, you have an understanding, you agree to move forward with the transaction, and you move forward . When it gets down to negotiating the interested party, it is much more difficult to say "Well, wait a minute. Back when we started the process you said this was true, but now the offer does not reflect that." Unfortunately some brokers will use all sorts of negotiating tactics to get what they want, and in a sense that’s their job. But the one thing your broker should be doing is protecting your interests.
Keep in mind the definition of fiduciary; the word literally means "a person who has the legal and ethical obligation to act in another’s best interest." That way if you ever have to question your broker’s integrity you can refer back to the definition of fiduciary.
I once had an acquisition specialist who, after speaking with a potential buyer about the asset, told me that he thought our price was too high. I responded, "Who cares if it’s too high. As long as we can get what we’re asking, if it’s too high for the buyer, that’s the buyer’s problem." If your broker doesn’t believe your price, then that’s his problem. He is supposed to protect your interests, and the way he does that is through negotiation.
Legal Considerations and Compliance
Seller broker agreements must adhere to all local real estate laws and regulations specific to their jurisdiction. These regulations are enforced by regulatory bodies that oversee the sale of real estate in each state or locality. The licensed or registered real estate broker must ensure that the seller broker agreement is drafted in compliance with applicable local rules, including all disclosures required by law. Any omissions could potentially result in penalties for violating these rules, and possibly for unauthorized practice of law.
In many states, a real estate brokerage is generally required to be registered and may only be engaged by a buyer or seller if a license is issued to the designated broker of record. When a broker is the entity and not just an individual, the brokerage’s officers may not be subject to licensure. In other cases, the brokerage officers must also individually be licensed. Cases have arisen where, among other things, exclusive seller broker agreements have required clients to pay a penalty amount equal to the commission owed to the selling agent if the contract was terminated within a specific timeframe. These arrangements are generally prohibited by law, although they are sometimes painted in a different light, such as by calling it a "marketing fee." Qualifying language may be included to release the client from any owed fee if a sale is made during the contract timeframe with an agent that was never presented to the client. These types of tactics are designed to dissuade clients from dealing with a full-time broker, but they may expose the company and its officers to liability for violating their legal duties as fiduciaries.
Selecting the Right Broker
The right Business Broker is a key player in the sale of your business. This is especially true for a business that is unique or one of a kind. Advertising a listing correctly will go a long way to maximizing purchase price whereas advertising a listing in the wrong way can devalue a business. Factors to consider when choosing a Broker: Experienced Brokers When selling a business, an experienced broker will:
A professional brokerage firm has the resources , contacts and industry savvy to position your business for the most exposure to the widest net of potential purchasers. Specialization Business Brokers often focus on specific types of businesses. If the Broker you are considering has a focus outside the industry you are in, keep looking. An experienced broker in your industry will be able to reach out to a network of potential buyers from their pool of active buyers, as well as potential users of the business that they already have relationships with.