The Role of a Business Broker

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. 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:

Employees
Knowledge of employment laws (Employment Standards)
Knowledge of the common law of wrongful dismissal
Key employee agreements
Knowledge of collective agreements
Management agreements
Training agreements
Consulting and Supervisory agreements
Non-Competition agreements

Business Asset Contracts
Equipment and machinery leases
Equipment and machinery pledge agreements

Business Financing
Pledges of assets
Pledges of receivables
Fixed and floating charges

Taxes
Income tax implications (deferred and unpaid taxes)
GST implications
PST implications

Occupancy
The lease, (if premises rented) the right to remain
Chattels and fixtures that are part of the business
Termination rights

Key Contracts
Intellectual property
Maintenance agreements
Client and customer contracts

Insurance
General liability insurance
Environmental liability insurance
Property insurance
Vehicle insurance
Business Interruption insurance
Key-Man insurance
Buy-Sell agreement insurance

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. 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.

So, what is the role? The Real Estate and Business Brokers Act 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., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/

RECO ~ Multiple Offers and Real Estate Duties

By Brian Madigan LL.B.

This case is an interesting one. What is the duty of a real estate broker if the other sales representative thinks there is a competitive bid situation?What happens if the buyer thinks there is a competing offer, and there isn’t one?

If you are interested, have a look at the following decision made by RECO. The names have been changed, and there was an unsuccessful appeal, so from an educational perspective the relevant facts are set out by the Discipline Panel.I should point out that all the names are fictitious.

PANEL’S DECISION:

The Panel makes the following findings of fact:

1) to 6) intentionally omitted.

7.) Bill Holden was a potential purchaser who had established a relationship his own real estate representative Conrad Jones.

8.) In March of 2005, Conrad Jones showed Bill Holden a home located at 1-AB Street, City A, Ontario (the “Property”).

9.) The Property was listed for $449,000.00. Mr. Smith was the listing salesperson on the Property.

10.) On March 7, 2005, Bill Holden viewed the Property for a second time.

11.) That same day, Bill Holden decided that he wished to place an offer on the Property. Conrad Jones furnished Holden with comparable sales in the area before arriving at an offer price. Holden decided to make a conditional offer on the Property with a price in the low $400,000 range. The decision to offer less than the list price was based, in part, on the fact that the Property would need certain upgrades, and based on the fact that the property had been on the market for awhile.

12.) Subsequent to the preparation of the offer, Conrad Jones’ assistant received a call from Mr. Smith who advised that it was possible another offer would soon be received on the Property. This information was relayed to Jones by his assistant.

13.) There was a miscommunication between Mr. Smith and Jones’ assistant. Mr. Smith’s advice that there might be a competing offer forthcoming on the property was incorrectly relayed to Jones, and then to Holden, to the effect that there was to be a definite competing offer forthcoming.

14.) While Holden and Jones found the existence of a competing offer to be suspicious (given that the Property had been listed since September 2, 2004 without any other offers) Holden was very interested in the Property and did not want to lose it to a competing purchaser.

15.) Holden advised Jones that he was unable to meet to sign the documents until 8:00pm that evening. Accordingly, Jones’ colleague, Martha Williamson, contacted Mr. Smith to advise him that Holden would not be able to sign the Offer until approximately 8:00 pm that evening. Mr. Smith assured Williamson that he would wait for the Offer before presenting all offers to the sellers. At no time during Williamson’s conversation with Mr. Smith did he indicate to her that he was not in possession of a competing offer on the Property. At no time did Mr. Smith subsequently contact anyone on behalf of Holden to advise that there would be no competing offer.

16.) That evening, Holden met with Jones for the purposes of signing a significantly revised offer from the offer he had contemplated earlier that day.In light of the competing offer Holden decided to place an unconditional offer on the Property in the amount of $450,000.00.

17.) Jones met with Mr. Smith at the Property to give him the Offer. At the time Mr. Smith received the offer from Jones, Mr. Smith was aware that both Holden and Jones were under the mistaken belief that a competing offer was to be presented. Mr. Smith did nothing to dispel that belief.

18.) About forty-five minutes later, Mr. Smith emerged from the property, having presented the Offer to the vendors, and informed Jones that the Offer had been accepted.

19.) On March 13, 2004, Jones advised Holden that (based on a conversation that he recently had with Martha Williamson) no competing offer had been presented.

20.) Holden would not have tendered an unconditional increased offer on the property in the absence of an honest belief that a competing offer for the property was to be presented in competition with their Offer.

While the Panel is unable to conclude that Mr. Smith ever actually stated that there was another offer in existence, the Panel finds, as a fact, that prior to presenting Holden’s offer to the vendors, Mr. Smith knew that Jones (and therefore Holden) was acting under the mistaken belief that a competing offer was to be presented on the evening of the presentation.Indeed, for him not to know this could only have been as a result of wilful blindness on Mr. Smith’s part. Holden’s offer had all of the earmarks of an Offer designed to succeed in a competitive situation:The Offer contained:

1) a price in excess of the list price;

2) it met all of the vendor’s terms with the property inspection clause struckout – despite the fact that the property was clearly in need of cosmetic repair;

3) the property had been on the market 95 days in total, had been re-listed and reduced to compete in a hot market: and,

4) had been the subject of 25-30 showings with no offers.

These facts – coupled with the fact that Mr. Smith had earlier asked his assistant to contact Jones to advise him of a potential competing offer – were sufficient to put Mr. Smith – or any registrant exercising any reasonable judgment – on notice that a mistake had been made.

In addition, the Panel heard evidence of a personal enmity between Mr. Smith and Conrad Jones.Under the circumstances, and based on the foregoing facts, the Panel must conclude that Mr. Smith is in violation the following rules of the RECO Code of Ethics:

Rule 1 – Ethical Behaviour – A Member shall:(2) endeavour to protect the public from fraud, misrepresentation or unethical practice in connection with real estate Transactions(5) deal fairly, honestly and with integrity with the public, other Members and third parties;(The Panel found no evidence of deliberate fraud in Mr. Smith’s conduct. However, the Panel finds that the offer would not have been made if the actual situation had been clearly represented as a single offer presentation. Mr. Smith should never have allowed the offer presentation to proceed without clarifying the situation.)

Rule 2 – Primary Duty to Client – A Member shall endeavour to protect and promote the best interests of the Member’s Client. This primary obligation does not relieve the Member of the responsibility of dealing fairly, honestly and with integrity with others involved in each transaction;(The Panel wishes to clearly state that a registrant cannot avoid his obligations under the rubric of: “but I was just getting the best deal for my Seller”. The Code is not one sided and it demands diligence and fair dealing for all parties.)

Rule 10 – Misrepresentation or Falsification – A Member shall not make any statement or participate in the creation of any document or statement that the Member knows or ought to know is false or misleading;(Mr. Smith knew that the offer was being presented under a false understanding of the situation by the purchasers and their agent).

Rule 46 – Unprofessional Conduct – A Member shall not engage in an act or omission relevant to the practice of the profession that, having regard to all the circumstances, would reasonably be regarded by Members or the public as disgraceful, dishonorable orunprofessional;(We are of the view that Mr. Smith’s conduct resulted in the treatment of the public in a disgraceful and dishonorable manner).

In the result, the Panel concurs with RECO’s request for an administrative penalty against Mr. Smith in the amount of $10,000 to be paid within 60 days.

COMMENT

You might wonder what all this means. Mr. Smith did appeal but that was not successful and therefore does not really have an impact on the conclusions one would draw from this case.Smith had some positive duties at law. If he thought that he might have misled the buyer or his agent he had a duty to inform them.In fact, even if they were under the mistaken belief themselves, totally without his involvement in any way, he still had a positive duty to assist them. That is what this case really stands for: the positive duty to be observant and intervene if the opposing parties are acting under a mistake.

In fact, failure to do so, can result in a $10,000.00 fine.This is often quoted as a case involving phantom offers, but really it’s not. The result would have been much worse for Mr. Smith had that been the case. This is simply a multiple offer situation. RECO points out the positive duty upon Smith in the circumstances to correct any mistake or misapprehension of either the purchaser or his agent.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/