Seek Counsel Before You Sign
I have many clients who own small to medium sized businesses. Sooner or later they decide to sell out and retire or move on to a new business venture. Sometimes they decide to sell off a particular part of their business that causes them the most headaches, such as their retail store division. Most successful business owners have a lot of hard-nosed business experience. They know what they want to accomplish with the sale. Many business owners want their corporation to sell the stores in the manner known in the business and legal world as an asset sale. That basically means the company they own will sell the stores, the land they are located on, along with the fixtures, assets and everything inside the stores that make them work. To do this, most business owners hire a business broker to help them find a qualified buyer.
Most often the business owner signs the business broker’s brokerage agreement and agrees to pay the broker a commission based on the sales price negotiated by the broker and owner. Because these brokerage agreements seem innocuous many business owners don’t give them the attention they deserve. In my experience, this is the place where many business owners get tripped-up. Nobody, it seems, ever tries to negotiate additional terms to these form brokerage agreements to cover the most common contingencies and disputes that occur between the business owner and broker. For example, what happens when the broker finds a qualified buyer for the stores, but the business owner doesn’t like the buyer that the broker found? After all, even though they are selling the stores, no business owner wants to see all their hard work placed in the wrong hands. But, if the buyer meets all of the terms of the brokerage agreement then the business owner finds him or herself stuck dealing with a buyer he/she can’t stand.
Sometimes the business owner attempts to just walk away from the deal. However, business brokers can be aggressive and their contracts are drafted in such a way as to put the odds of winning a lawsuit heavily in the broker’s favor. When that happens, the brokerage agreement the business owner didn’t pay much attention to becomes very important. Business owners often find things go from bad to worse in a hurry when they are sued by their business broker for breach of the brokerage agreement. Many business brokers are located out of state. It can come as a nasty surprise to the business owner when they realize their broker’s contract states the venue for any lawsuit for breach of the brokerage agreement is the broker’s home state, like Florida! No Oklahoma business owner wants to be in a lawsuit filed in another state and controlled by another state’s laws. Additionally the business brokerage agreement almost always provides that whoever loses the lawsuit pays the winner’s attorney’s fees.
Suddenly, the business owner finds that their idea to walk away from a bad sale to the wrong buyer has become a huge headache which detracts from the business owner’s goal of selling the chain of stores. The business owner finds he/she was so busy looking past the broker to a successful sale that he/she failed to pay enough attention to the brokerage contract. Now they are being sued in Florida - a very not-fun place to travel for a deposition and a trial. Just as important, they soon learn that the high cost of living in Florida compared to Oklahoma means the attorney they have to hire in Florida charges $700.00 an hour as opposed to the $250.00 to $350.00 an hour charged by most attorneys in Oklahoma.
To top it all off, a business owner may learn they simply signed their name to the brokerage agreement, rather than specifying that he/she was signing as the president of their corporation. That one little oversight can give the unscrupulous business broker the ability to claim the business owner is personally liable for his commission and attorney’s fees. It’s a crafty trap when one party to a contract (and usually the contract drafter) leaves a blank line for the business owner to sign, knowing they will just sign their John Hancock on that contract line, and never even think to qualify their signature as, “president of ABC Corporation.” It’s my experience that out of state business brokers want their clients to be personally liable for their commission. They don’t want to run the risk of being stiffed and have to pursue a company that may not have any assets. On the flip side of the coin, the business owner can find him or herself facing a lawsuit in a faraway place like Florida; an expensive legal bill; the prospect of paying the broker’s attorney’s fees if he/she loses; and being personally liable for the whole thing!
What are the lessons to be learned here? First, most of us run our businesses through a corporation or a limited liability company for a reason. We do this so that if our business causes somebody to get hurt and/or gets sued, the injured party has to sue the business and not the business owner. In the legal business this is called “the corporate shield.” Even if the aggrieved person or company sues your company and wins, in most cases they can only look to the company’s assets/insurance to get paid – they can’t come after your personal assets because the company protects the owner. But, if you sign a contract and forget to make it clear you are signing as the company president or manager/agent, you leave yourself open to the claim that you, as the business owner, signed the contract on behalf of yourself. That one mistake can take away your “corporate shield” and leave you in a place you don’t want to be. Second, if you don’t bother to read the fine print then you are setting yourself up for trouble. You may well find yourself agreeing to be sued in a distant state with different rules than Oklahoma – making your legal experience much, much worse. Bottom line, every contract you sign is important and a little legal advice up front from your lawyer can save you a lot of money down the road.
The information in this article is not legal advice, and you should not take any action based on information you find in this article without first consulting qualified legal counsel concerning the facts and circumstances of your situation. No attorney-client relationship is established by reading this article.