Explore a case where a failed business sale led to a broker lawsuit seeking a $600,000 commission. Learn about the legal complexities surrounding broker agreements and the importance of clear terms to avoid disputes.
M&A Stories
February 23, 2021
Introduction:
Selling a business often involves hiring a broker to assist in the process. However, it’s important for business owners to grasp the legal responsibilities outlined in the broker agreement before signing.
Background:
A recent case highlights the complexities of business sales involving brokers. In this instance, a Texas-based business specializing in patent drawings and related services was up for sale. The company’s founder engaged a broker and entered into a listing agreement.
The Deal:
Following the broker’s efforts, a potential buyer was found, and both parties agreed in principle to a $6.5 million acquisition. Unfortunately, the deal fell through when, just prior to the expected signing of the asset purchase agreement and closing, the founder’s spouse refused to sell.
Legal Action:
As a result of the deal’s failure, the broker filed a lawsuit against the founder, seeking a $600,000 commission. The founder attempted to dismiss the lawsuit, but the court examined the listing agreement’s language, which stipulated that even if the business chose not to proceed with a sale after a suitable buyer was identified, the broker would still be entitled to their commission due to the time and effort invested in the process.
Outcome:
The court ruled in favor of the broker’s claim, citing the wording in the listing agreement. This case highlights the importance of clarity in such agreements to avoid disputes later on.
Analysis:
While some sellers may prefer brokers to be compensated only upon a successful sale, this case raises questions about fairness. Should a broker receive compensation if they successfully connect a willing and financially capable buyer to the negotiation table, even if the deal doesn’t ultimately close? This case’s “willing buyer” term proved to be a point of contention, emphasizing the need for sellers to carefully review and consider such clauses in their broker agreements.
This case is referred to as Ross v. Kirkpatrick, No. 3:20-cv-00536, United States District Court, M.D. Tennessee, Nashville Division, (February 12, 2021)
Conclusion:
Sellers must be cautious when engaging brokers and should thoroughly comprehend the terms of their agreements. Ambiguous terms like “willing buyer” can have significant financial implications, potentially leading to unexpected costs if a sale falls through. It’s advisable for sellers to seek legal counsel to ensure they fully understand and agree with the terms before proceeding with such agreements.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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