Some Brokers Make Money by NOT Selling Anything: A Nightmare Tale…

By Hoke - Last updated: Wednesday, November 19, 2014 - Save & Share - Leave a Comment

I all starts very innocently with wording in the broker’s Representation Agreement “in the event of an escrow default by buyer, the escrow proceeds are split equally between broker and seller”. This is how the nightmare begins…

Think about this. Now the broker now makes five times more money (50%) in the event of an escrow default than if they sell the business (10%).

The next step of the nightmare are the Purchase Agreements requiring the buyer to deposit 10% into escrow or worse…the Broker’s Trust Account before they can see a Profit and Loss Statement, Tax Return, anything more than a one or two page report. The broker tells the seller a serious buyer will deposit the money. Sounds good…until many of the more careful and savvy buyers go away because they do not want to risk their money with an escrow and purchase agreement that can readily trap the unsuspecting buyer into a default. Now mostly the seller get the “fool” buyers or those well armed with attorney close by. Great…

Then the default! That darn fool buyer didn’t pay attention to the Due Diligence deadlines. Of course the broker did not remind the buyer. Oh well… broker and seller split the deposit. A ten percent (10%) deposit on a $1Million business would net $50,000 each for broker and seller. Nice. Money for nothing! Except now the buyer is really angry and runs to their attorney. While the escrow is in dispute no funds are released to anyone until the matter is resolved. Ultimately the buyer will lose because he signed and agreed to the egregious Purchase Agreement. The upshot is now the business cannot be sold until the dispute is settled since two escrows cannot be opened for the same business. This process can take months or even years. After a few months, the seller realizes the reason they originally listed the business is to sell it, not sit in a courtroom. So he asks the broker to drop the matter, give the money back to the buyer so they can terminate the escrow and get the “big money” from selling the business, not 50% of a deposit.

The broker kindly tells the seller that if the seller will pay his 50% of the settlement he will drop the matter. Otherwise, he wants the money that is due him and will fight for in court it if necessary.

Yikes! The seller realizes he signed a 12 month exclusive agreement and is now struck with a broker who is trying to make money by NOT selling the business. Unfortunately, this nightmare for buyer and seller is real and awaiting the unsuspecting.

At Select Business Sales, we believe it is our job to sell the business in transaction that is a win-win for all parties. To this end, we do not receive a fee in the event of an escrow default by either party. We find no pride in and do not encourage escrow defaults.

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Posted in Beware Sellers!, Buyers Beware!, Due Diligence, Preparing the Business for Sale • • Top Of Page