The seller sold his practice to a buyer brought to the seller by the broker within the three year “tail period” after broker terminated the engagement with the seller.
M&A Stories
March 17, 2023
Introduction
A seller of a business often hires a business broker or investment banker to help sell the business. The engagement agreement usually requires payment of the broker or banker fee for a buyer brought to the seller which results in a sale within a “tail period” after termination of the engagement.
The Story:
In this case, the seller owned an accounting practice and enlisted the services of a business broker to facilitate the sale. The broker presented several potential buyers to the seller. However, when the seller requested the broker to generate a bidding war by having the prospects submit new offers, the broker declined and terminated the engagement.
Nevertheless, the seller eventually sold their practice to one of the buyers introduced by the broker within three years of terminating the broker agreement. The broker claimed a ten percent fee, which the seller refused to pay.
The lawsuit
The broker filed a lawsuit against the seller in an Illinois trial court, citing the broker agreement that stated the fee was earned if the seller sold the practice to a buyer identified by the broker within three years of terminating the agreement. The seller argued that the broker was not entitled to the fee due to their material breach of the agreement by terminating the engagement.
The trial court ruled in favor of the broker, and the seller decided to appeal. The appellate court affirmed the decision, stating that the broker had not materially breached the agreement because they had the right to terminate the engagement.
See APS Holmes Group, LLC v. Sorkin, No. 1-21-1668, Appellate Court of Illinois, First District, First Division, (February 27, 2023).
Comment
Although the broker agreement did not explicitly grant the broker the right to terminate the agreement, the appellate court held that contracts in Illinois are generally terminable at will unless otherwise specified. As a result, the court ordered the seller, as the losing party, to cover the broker’s legal fees and costs.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
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