Terms You Might See In a Contract with a Business Broker

If you’re a business owner who’s unfamiliar with the role of a business broker, they serve as a crucial intermediary between buyers and sellers of privately owned businesses. Essentially, they manage the entire transaction process: from determining your business’s value and creating marketing strategies, to vetting potential buyers, navigating negotiations, and ensuring all parties—buyers, sellers, and advisors—successfully reach the closing table. Their expertise can be a game-changer in the success of your transaction.

Before you commit to a listing agreement with a broker, it’s important to understand exactly how they will assist you in the often-stressful process of selling your business. Brokerage agreements come with specific terms that can vary. This article provides an overview of common terms you might encounter (note that this is not an exhaustive list nor legal advice).

Common Terms and Conditions in Broker Contracts

Engagement Period

The engagement period is the length of time the broker is contracted to sell your business, typically ranging from six to twelve months. The average sale takes about nine months, so a twelve-month agreement is not uncommon.

Exclusivity

Brokers usually require an exclusivity clause, meaning you agree not to engage other brokers during the engagement period. Most brokers work on a ‘no sale, no fee’ basis and want to avoid competing with other brokers. If you find a buyer, you should direct them to the broker.

Commission or Success Fee

This fee is 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 will pay it (typically the seller). There is often a minimum fee to cover the broker’s costs if the sale price is lower than anticipated.

Expenses

Selling a business involves costs, which many brokers absorb. The contract should clarify which expenses are your responsibility and whether they will be billed separately or deducted from the sale proceeds.

Termination Clause

This clause details the conditions under which either party can terminate the contract early and how any financial settlements will be handled.

Trailer Clause

A trailer period protects the broker from being excluded from deals involving buyers they introduced or who learned about the opportunity through their marketing efforts after the engagement ends.

Seller Indemnification

This clause ensures that the information you provide about your business is accurate to the best of your knowledge. It also protects the broker from liability related to the information provided.

Seller Obligations

You are expected to cooperate with the broker by being responsive to their requests and directing all buyer inquiries to them.

Dispute Resolution

This section outlines how disputes will be resolved, often through arbitration or mediation, typically in the broker’s location.

Broker Lien

A broker lien clause allows the broker to place a lien on the business to secure payment of their fees if the deal falls through.

Selling your business is a significant undertaking, and the right guidance can make a huge difference. Take your time to understand every term of the contract and choose a broker who is ethical and fully committed to your goals. This partnership is not just about making a sale; it’s about ensuring a smooth transition and setting you up for future success.