By Brian Madigan LL.B.
A business broker is regulated in Ontario under the same legislation that applies to real estate agents, namely the Real Estate and Business Brokers Act, 2002.
In fact, under the Act a business is considered to be “real estate”.
There is considerably more negotiating when it comes to buying and selling a business than an ordinary real estate transaction, and it requires specialized expertise.
For a business broker to undertake the task of representing either the buyer or the seller, there are some additional considerations that are over and above the routine real estate deal:
Knowledge of employment laws (Employment Standards Act)
Knowledge of the common law of wrongful dismissal
Key employee agreements
Knowledge of collective agreements
Consulting and Supervisory agreements
~Business Asset Contracts
Equipment and machinery leases
Equipment and machinery pledge agreements
Pledges of assets
Pledges of receivables
Fixed and floating charges
Income tax implications (deferred and unpaid taxes)
The lease, (if rented premises) the right to remain, renewal options
Chattels and fixtures that are part of the business
Termination rights, and obligations (need to dismantle before departure)
Intellectual property, both assets and liabilities
Client and customer contracts
General liability insurance
Environmental liability insurance
Business Interruption insurance
Buy-Sell agreement insurance
opportunities to reduce and eliminate risks
The above list is far from exhaustive. It is simply to illustrate that there are a number of new issues and considerations when a business is being bought or sold beyond the usual deal.
A business broker must know what is truly for sale. What is the inherent value of the business? Is that value transferable? Will the employees stay with the company? Who should pay them during the transition period? Are there any guarantees on the equipment? Can it be sold? If it is to be sold, can the financing be assumed?
A business broker must understand and appreciate the financial statements concerning the operation. What if the profits fall short? What happens if a key employee or large customer leaves?
And, don’t forget about the taxes? The purchaser doesn’t want to assume the vendor’s tax liability. Should an asset purchase or share purchase be used? This varies from deal to deal. There is no standard rule of thumb.
Some businesses are successful because they have good employees, others are successful because they have good systems, good technology, or a strong customer base. The business broker should determine whether the whole is worth more than the sum of the parts. If not, maybe the business can be broken down and sold piece by piece?
Unless these solid assets of the business are transferred, the business will not likely be successful in the hands of a new owner. The business broker, first needs to determine the true value of the transferable business. Then, negotiations must take place with key employees, landlords, financial institutions and customers to ensure that they will be onside with the proposed transaction. It is only then, that an appropriate value might be established. The business broker unlike the ordinary real estate agent should be creating value at this point in the relationship.
Another interesting variation is the role of a business broker in a transaction. Usually, there is just one broker. Frequently, both parties will have the same agent. This occurs much more frequently in the sale of businesses than in ordinary real estate transactions. In part, this arises since there are so few real estate agents who have taken up selling and buying businesses, as part of their own business.
So, what is the role? The Real Estate and Business Brokers Act, 2002 sets out two separate and distinct roles. The buyer or seller can either be a customer or a client of the broker. The broker owes the common law duties of “fair and honest dealing to customers”. For clients, the broker owes certain special duties including the common law fiduciary duties and the statutory duties set forth in the Act.
The broker must act in the best interest of the client. That’s fine as long as only one party is a client. But, if both are clients, it’s impossible to place both of them first on every issue. There is an inherent conflict of interest that cannot be resolved! And, no amount of disclosure can solve it.
The solution adopted in some jurisdictions in the United States is transactional brokerage. It is a concept that is permitted, but not well-known in Ontario. Here, the broker is truly a broker in the common law sense of the term. The broker is not an agent but rather an “intermediary”. This reduces the potential liability for the broker. The broker works the deal, and attempts to negotiate a successful resolution. Both parties have their own independent legal, accounting and financial advice, so they are not alone, but they are not relying upon the broker. The role might also be compared with that of an arbitrator or mediator in union-management collective bargaining negotiations. Frequently, there is a far more successful outcome with someone in this type of role.
So, next time you want to buy or sell a business, consider an experienced and qualified business broker. And, maybe you want an “intermediary” rather than an “agent”.
Brian Madigan, LL.B., Broker