What is A Listing Agreement?

A business listing agreement is a contract between a business broker and business owner concerning the sale of the owner’s business. The listing agreement spells out the broker’s commission percentage, the listing period, the listed price, and other terms governing the broker-seller relationship. A legitimate business broker never charges up front fees and only collects a commission unless and until the business is actually sold. In exchange for the business broker’s time, skills, and expenses in confidentially procuring a buyer, the listing agreement also spells out the seller’s responsibilities. It is extremely rare for a business owner to breach a listing agreement by not fulfilling their responsibilities under the listing agreement, especially if the broker clarifies the seller’s responsibilities prior to listing the business.

Seller’s Responsibilities Under Listing Agreement

When signing a listing agreement, business owners should not be made to pay any fees or made to feel uncomfortable by signing something with which they are unfamiliar. A business broker should patiently and clearly explain the seller’s responsibilities under the contract so there are no ambiguities and subsequent misapprehensions about what is expected of the seller. In general, the seller’s responsibilities when signing a listing contract include maintaining the exclusivity of the agreement during the listed term, being willing to sell their business at the listed price during the listed term, and cooperating with the sale during the listed term. The vast majority of business owners will understand and agree to these provisions, which helps the business owner sell their business in a non-disruptive and confidential manner.

Exclusive Listing for Business Sales

The first aspect of the seller’s responsibilities under a listing agreement with a business broker is maintaining the exclusivity of the business listing during the listed term. This means that the business owner may not use another business broker during the listed term. It also means that the business owner may not take active steps to sell the business themselves by placing competing advertisements in an attempt to procure buyers. In order for a business broker to be financially motivated to incur costs and time in procuring a buyer, they must be assured that they will ultimately bear the fruits of their labor. Further, competing online advertisements of the same business by multiple brokers (or by the business owner) confuses potential buyers and jeopardizes the confidentiality of the sales process.

Willing to Sell for Listed Price

The seller must also being willing and able to sell their business during the listed term at the listed price which appears in the listing contract or is otherwise communicated to the broker as the seller’s asking price.
This means that during the listed term, the seller can not simply change their mind and demand a higher price for their business.
In fact, if a buyer who makes a full price offer (based on the last listed price communicated by the seller to the broker) that the seller refuses, then the broker is legally owed a commission.
For the vast majority of business owners, this intuitively makes sense as a matter of fairness.
Business brokers – like any other professional – expect to get paid for their efforts based on the signed listing agreement.
After all, the listing contract’s most important component is the mutually agreed upon listed price that the broker will convey to all prospective buyers.
The listed price is based on the business broker’s careful evaluation of the seller’s business including its historical financials, physical assets, lease, and any unique competitive advantages.
It is almost never appropriate to raise the listed price during the listed term unless the business has significantly improved financials (as demonstrated over a twelve month period) or increased physical assets that were obtained after the business was originally listed.
In such a unique instance, then the broker and the seller must both agree to raise the listed price.
In practice, raising the listed price will scare away most prospective buyers absent a very compelling justification.
Importantly, the business broker must verbally discuss the importance of setting the maximum listed price with the seller prior to signing the listing agreement.

Cooperate With The Sale

Lastly, a listing contract provides that the business owner must cooperate with the sales process during the listed term. In legal terms, this means that a seller who refuses to entertain the sale of their business during the listed term has breached the listing agreement. Refusing to cooperate with a sale includes not agreeing to meet or speak with potential buyers. In practical terms, this provision prevents a seller from changing their mind about selling their business once they sign a listing agreement. A business owner should never be pressured by a business broker to sign a listing agreement, particularly because of this reason. Once a business owner signs a listing agreement and induces the business broker to incur time and expenses on their behalf, then they may not change their mind without compensating the broker.

Cooperate with Due Diligence

As a part of signing a listing agreement, the seller will need to provide the broker with financial documents (such as tax returns or profit and loss statements) and company documents (such as asset lists or licenses) pertinent to their business. This information is used by the broker to compile a comprehensive listing package which is given only to qualified buyers (after signing a Non-Disclosure Agreement). It is critical that – before the listing agreement is signed – the business broker itemize what documents are required from the seller in order that prospective buyers are given sufficient information with which to conduct preliminary due diligence. This way, prospective buyers may make an offer on the business. The seller should provide such available documents to the broker as soon as is practicable.

Signing a listing agreement between a broker and a business owner should not be an adversarial process. Rather, it should be a constructive and cooperative process with the goal of selling the business confidentially for the best possible price and terms.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.