Negotiating the Broker Agreement

Key Takeaways

• A Broker Agreement (also called a listing agreement or client engagement agreement) governs the relationship between a seller and broker.
• Most agreements include an Exclusivity Period of 1 to 3 months, which can differ from the agreement’s overall term.
• Broker commission is usually a percentage of the sale price, but how the sale price is defined matters — earnouts, promissory notes, and inventory payments may or may not be commission-eligible.
• Ambiguity over what counts as an “introduction” is a common source of dispute and should be addressed in the contract.

What Is a Broker Agreement?

A Broker Agreement — also referred to as a listing agreement or client engagement agreement — is a contract between the broker and seller that governs the relationship between the parties.

Numerous provisions in a broker agreement can be highly consequential to the business and business owner, and should be carefully reviewed and negotiated before signing. At Rafelson Law, attorneys have reviewed and revised hundreds of broker agreements.

Term, Termination, and Exclusivity

A Broker Agreement should explicitly state:

• The duration of the contract
• How it can be terminated (at will by either party, or only by mutual agreement)
• Whether the agreement automatically extends if the sale has not materialized
• The rights and obligations of each party during the term

Almost all Broker Agreements include an Exclusivity Clause giving the broker the exclusive right to list the business for a set period — typically 1 to 3 months.

The Exclusivity Period may not be the same as the term of the agreement as a whole. For example, a Broker Agreement may have a 1-year duration but a 3-month Exclusivity Period during which the seller cannot work with any other broker or third party.

Questions the Agreement Should Answer

• When is the broker entitled to a commission?
• If the broker introduces a buyer during the term but the sale closes after the term ends, is the broker still entitled to its full fee? A reduced fee?
• When does the term — and the Exclusivity Period — technically begin? At signing? When the listing is posted?

These questions should be reviewed by an attorney to ensure the agreement is unambiguous and addresses possible outcomes. Ambiguity and unaddressed scenarios can lead to disputes that are costly and time-consuming to resolve.

Broker Commission and Compensation

Broker compensation can take several forms:

• A percentage of the sale price (most common)
• A flat fee
• A monthly fee
• A combination of the above

The challenge is how the sale price is defined. In a typical eCommerce business sale, the purchase price is often comprised of multiple components, which may include any of:

• A cash payment at closing
• A promissory note
• An inventory payment
• An earnout payment

Earnouts and Promissory Notes Are Not Guaranteed

An earnout payment (sometimes called a stability payment) is delayed and based on the performance of the business after closing. If the business does not hit certain metrics, the seller may not receive the earnout.

A promissory note or other seller financing also carries risk. The buyer’s business could fail and payments may stop. Even if the buyer personally guaranteed the note, the buyer may have asset protection mechanisms in place that prevent enforcement.

Questions to Negotiate

• Should the broker earn a percentage of an earnout or promissory note that the seller is not guaranteed to receive?
• Should the broker earn a percentage of the inventory payment?
• Is the broker paid in full at closing, or only as the seller actually receives payment?

What Counts as an “Introduction”?

The Broker Agreement should explicitly define what constitutes an “introduction.” For example:

• Does sending a single email blast about the business to 100 potential buyers count?
• Or does a potential buyer need to express written interest first?

Without a clear definition, parties may disagree about whether the broker actually introduced a buyer to the seller — leading to avoidable conflict.

Broker Services to Be Provided

The agreement should clearly state what the broker is and is not doing. Brokers vary widely:

• Some are heavily involved in valuation, due diligence, drafting the purchase agreement, and negotiating terms.
• Others provide a listing platform and advise on what to include in the listing, but do not engage in transaction negotiation.

Clarifying expectations up front prevents misunderstandings later.

Conclusion

The Broker Agreement can have significant consequences if it is not drafted to avoid ambiguity and address all factors of the broker relationship. An experienced attorney can save you from unnecessary disputes and expenses — Rafelson Law has reviewed and negotiated hundreds of broker agreements for eCommerce sellers.

Frequently Asked Questions

What is a Broker Agreement?

A Broker Agreement, also called a listing agreement or client engagement agreement, is a contract between a business broker and a seller that governs the broker’s role, compensation, and the seller’s obligations during the engagement.

How long is the typical Exclusivity Period in a Broker Agreement?

Typically 1 to 3 months. The Exclusivity Period may differ from the overall term of the agreement.

How are business brokers paid?

Most commonly through a percentage of the sale price. Some brokers use flat fees, monthly fees, or a combination.

Is the broker paid on the full purchase price including earnouts and promissory notes?

This depends on what the agreement specifies. Because earnouts and promissory notes are not guaranteed payments to the seller, the broker’s entitlement to commission on these components should be carefully negotiated.

What counts as a broker “introduction”?

There is no universal definition — it depends on what the agreement says. Without an explicit definition, sellers and brokers can dispute whether an introduction was actually made, which is why this term should be defined in the contract.