Beware of Your Client: Business Brokers

A business broker’s worst enemy is potentially their client.  From a seller’s viewpoint, that statement might sound a bit harsh.  But from a business broker’s perspective, it is through their client that they generally face the greatest exposure.

As a business broker, not only do you have to worry about the protections afforded to a seller through the Property Agents and Motor Dealers Act, but you also have to worry about whether you have adequately managed the risks a seller poses to you through the appointment to act.  To name just a few of those risks:

• What if the seller gives you misleading information about the business that you pass on to a potential buyer?
• What if the seller changes the nature of the sale from a sale of assets to a sale of shares and then blames you?
• What if the seller says that they never received a copy of the appointment to act?
• What if the seller company is wound up or deregistered after completion to avoid a debt?

Identifying the Risks

Depending upon the type of businesses that the business broker deals with, there are varying types of risks.  The obvious point is for a business broker to first identify the typical risks that they are exposed to when acting for a seller.

Generally, the most damaging potential risk is the exposure to liability for information about a business that is not true or accurate.  If a business broker is implicated in misleading or deceptive conduct under the Competition and Consumer Protection Act, whether as a principal or as an accessory, the consequences could be very serious.

Disclaimers on business information supplied to a prospective buyer can help to a certain extent, but in addition, a business broker should insert terms into the Form 21a to deal with the risk of misleading and deceptive information.

Managing the Risks

The starting point should be the PAMD Form 21a Appointment to Act.  This is the document that formalises the contractual relationship between the seller and the business broker.  It is typically the only document that a business broker will have to rely on to determine the rights and responsibilities of the parties.

Unfortunately, anecdotal evidence suggests that many business brokers are not fully utilising the Form 21a: either by not completing the form to fully record their client’s instructions or by not adding any terms to manage the risks that a seller poses to them.

Aside from fully completing the Form 21a, incorporating additional terms and conditions into the form is ideal as it reduces the chance that a seller could argue that the terms were not part of the appointment.

Generally the following issues (in the very least) should be addressed in the Form 21a:

• Information:Has the seller warranted that all information provided to the business broker, whether in the Form 21a or in relation to the business, is true and accurate?
• Estimates: If the business broker gives the seller an estimated sale price, does the seller understand that the business broker is only giving an opinion?  Does the seller think the business broker is a licensed valuer?  Does the seller think the opinion is actually a “sworn valuation”?  Can the estimate be used or relied upon by a third party?
• Liability: Can the business broker limit its liability for negligence, breach of contract or under a law such as the Competition and Consumer Protection Act for misleading and deceptive conduct?  Has liability been effectively limited under the appointment to act?
• Indemnity: What if the business broker is sued because of misleading information sourced from the seller?  Is the business broker indemnified by the seller for false or misleading information or for any other liability incurred as a result of the seller’s actions?
• Guarantees:     If the seller is a company, is there a need to have the seller’s obligations in respect of the business broker guaranteed by the seller’s directors?  What if the company decides not to pay the business broker’s fee and is later wound up or deregistered?
• Formalities: Has the seller been given an opportunity to get independent legal advice about the appointment to act?  Did the seller read, understand and agree to the conditions?  Was the seller provided with a copy of the PAMD Form 21a?

Addressing these types of issues in an appointment to act may have a twofold effect.

Firstly, the risk might be reduced because the parties have turned their minds to specific issues and have consequently taken steps to address the risks proactively.  For example, by having the seller warrant that the information is true and correct, a seller might be more careful with the information it supplies to the business broker and less likely to furnish information that might mislead or deceive a buyer.

Secondly, even if the risk is not removed, liability might be limited because the seller has clearly accepted the liability for that particular risk; for example, by warranting that the information supplied to a business broker is true and accurate.  Also, by including indemnities, the business broker has limited its liability by creating other avenues for recovery.  For example, if the business broker is sued by a buyer for being misled or deceived, a suitable indemnity might protect the business broker from any loss or damage it suffers due to the buyer’s action.

Protecting Yourself

It is risky for a business broker to deny that their client is potentially their worst enemy.

The realistic business brokers take steps to identify the typical risks they face and endeavour to address them in the appointment to act.

By addressing the risks, a business broker can minimise the chance of the risk being realised.  Even if the risk is realised, the business broker can at least maximise its protection from such risks.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Liability limited by a scheme approved under professional standards legislation.