13 Dec 2019
There are rules which regulate business broker activities including the use of the agency agreement, which is a written agreement that must be prepared for all services to be performed by an agent for a client. Business brokers in New South Wales (NSW), Australia are governed by the Property, Stock and Business Agents Act 2002 and come under the auspices of the state body, Fair Trading NSW. After you have decided to engage the services of a business broker, you will be asked to sign the agency agreement that gives formal permission for the business broker to sell your business in exchange for some form of remuneration. You need to know what you are signing up for. The below are explanations to some items on the agency agreement.
According to Fair Trading NSW, the agency agreement must include a term specifying:
For business brokers, this usually means a commission of some kind. Not all broking agencies charge the same way, so beware!
The Commission could be a % rate of the Sales Price, or a flat fee. For example, 10% of the purchase price. Or $20,000 + GST regardless of the purchase price.
Or a combination of the above such as 10% on the first $100,000 + GST of the purchase price, 8% on the balance of the purchase price + GST, or the minimum of $20,000 + GST whichever amount is the greater.
In this instance, if your business sold for $300,000, then the commission payable is:
10% on the first $100,000 = $10,000 (10% x $100,000) + 8% on the balance of the purchase price = $16,000 (8% x $200,000) Total Commission Payable = $26,000 + GST
If you are unsure, don't be afraid to ask the business broker to explain the commission fee structure to you as you do not want to be in a dispute with the agency later on that could jeopardize the sale with a prospective buyer.
Some broking agencies will apply the commission on the purchase price and on the Stock-At-Valuation (SAV). Personally, I don't like it as some businesses have large Stock-At-Valuation especially those in retail trade. This makes the commission payable uncertain and open to dispute as the business broker will need to verify the stocktake between the vendor and the buyer.
Exclusive Agency Agreement VS Sole Agency Agreement
Sometimes, your business broker may ask you for an Exclusive Agency Agreement or a Sole Agency Agreement.
Fair Trading NSW defines Exclusive Agency Agreement as an agreement that provides for the agent to be entitled to commission on the happening of an event whether or not the agent is the effective cause of the happening of the event and whether or not the client is the effective cause of the happening of the event.
In layman's terms, that means you pay a commission to the business broker regardless of who sold the business - including yourself and other agents!
Sole Agency Agreement is where the agent is entitled to commission on the happening of an event (whether or not the agent is the effective cause of the happening of the event) unless the client is the effective cause of the happening of the event.
Under a Sole Agency Agreement, you pay a commission to the business broker regardless of who sold the business, unless the person who sold the business is you.
An Exclusive Agency Agreement is most commonly used because it is easy to understand and does not give rise to loop-holes and disputes that can exist under a Sole Agency Agreement.
In my opinion, I would advise against signing any Exclusive or Sole Agency Agreement for reasons that I will write about in another post. If an agency insists to take on your listing on the condition you sign an Exclusive or Sole Agency Agreement, then you certainly can walk away and explore your options.
You must be aware that you could be liable for commission payments to the business broker under an exclusive or sole agency agreement, even if the business broker is not involved in getting your business sold.
The Retainer is merely a fee in return for services performed by the business broker, regardless of whether the business has been sold or not.
Succinctly, a Retainer is a fee you must pay for engaging the services of the business broker in and above the commission payable on the sale.
There may be times where a Retainer is justified. If your business broker has quoted a Retainer, ask why s/he is charging this fee and what you will get in return. Do not hesitate to discuss the Retainer with the broker if you feel that the value of the Retainer is understated.
You may also want to enlist the services of more than one business broking agency and paying a Retainer to every agency can add up fairly quickly without any guarantees that your business will be sold.
If you are unsure, don't be afraid to ask your Business Broker questions on the fees charged. (Photos: Pexels.com)
Advertising & Ancillary Services
Advertising your business is a real cost to the agency, whether the advertising is in print, on the internet or on some other media. Hence your business broker may discuss the cost of advertising with you.
The nature and cost of advertising is between the business broking agency and the vendor (business owner).
The agency may charge the costs of advertising wholesale to the vendor. This means that every dollar that the agency incurs is charged to the vendor. Or the agency may asked for a fixed contribution.
If you believe that the costs of advertising is excessive, then do your research before you agree to pay. For example, call up a few newspapers to find out the rate-card on the cost of print advertising. Do the same with online websites. This will ensure that you do not overpay for advertising.
Another method is to charge the vendor a nominal, fixed fee to cover some of the agency's advertising costs. This could be a one time fixed rate typically between $1,000 to $3,000.
The fixed fee only partially covers the costs of advertising incurred by the agency. This method motivates the agency and your broker to sell your business as quickly as possible because the advertising costs will start to add up for the agency if your business remains unsold.
It may also be necessary for the agency to prepare the Information Memorandum, engage professional photography and other ancillary services to get your business ready. These costs should be discussed with you at the meeting.
Again, don't be afraid to ask questions on costs to get your business listed with the broker agent.
Parties To The Agreement You will need to identify yourself as the party entering the Agency Agreement. For this purpose, you should provide an Australian Business Number (ABN) and the registered name of the ABN. If you are unsure of your ABN or your registered name, simply visit www.ABR.Business.gov.au and look it up. You should be the registered director, partner or owner of the business. I have seen husbands, parents, spouses and even cousins who have tried to sign on an Agency Agreement on behalf of the Business Owners. If you are not the legal Business Owner, then you will need the Business Owner to sign on the Agency Agreement before the Business Broker is able to provide the agreed service.
Ready Your Business For Sale Once the Agency Agreement is signed, the business broker will get to work. This may involve preparing the advertisement creative drafts, copy-writing, creating support documents and placing the ads with the agreed advertising channels. You should be allowed to review any ads and have your input, within the parameters of the media specifications. Even with great advertising and marketing, business brokers are unlikely to shovel a buyer into buying a bad business, or a business that is poorly presented. Hence, it is important that you prepare your business for sale.
Josh Foo contributed to this post.
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