Six Ways Business Brokers Can Avoid Litigation
GABB member Lawrence Domenico, an experienced litigator, spoke to the Georgia Association of Business Brokers about how you can avoid litigation. Here’s what he had to say:
For you guys as Business Brokers, it almost always is better to avoid litigation if you can. Courts and Arbitration proceedings take a long time to complete and lawyers are expensive. The quickest you can expect to have a trial in Fulton County is a year after you file suit. Most business cases take several years. Moreover, there are lots of lawyers out there who are very happy to litigate to the death.
Before I tell you how to avoid litigation, please keep in mind, I don’t see most deals of business brokers because most go through to closing or the listing expires without success.
I only see the matters where brokers contact me because something is wrong with the listing.
It is probably not possible to never have a problem listing. There is a percentage of people that you cannot please and you will be in conflict them.
There are people that do not care about living up to their obligations, be it in a contract or otherwise.
These are often the same folks who have a tenuous grasp on reality and have a hard time telling the truth.
But there is good news, because these kinds of people exist, I will always have work to do.
What I would like to help you all with today is not dealing with these folks that I have just described. You will either have to sue those folks or walk away from them.
What I want to help you with today is minimizing the number of times you have to sue folks who have a grasp of reality, who generally do respect their obligations, but for some reason or another don’t see things the way you see them.
I have 6 recommendations for you to avoid litigation.
- First, avoid these problem clients. Easier said than done, I know, but I think you already know how to spot these people. First and most importantly, trust your gut. Call it instinct or experience or karma, whatever, when you have a bad feeling about working with a client, you are probably right. Almost all my clients say at some point, “You know, I had a bad feeling about this guy way back when, but I went ahead with the engagement.”
In my own practice, I know this is true. The greatest regrets and biggest losses of money in my practice were when I blindly trusted a client, or thought they would change once they saw how sincere and diligent I worked for them, or got blinded by the potential fee.
If your gut is not warning you about a client, there are still things you need to do to avoid problems.
Ask yourself, what do you really know about new client?
Sometimes the concern is not so much stealing money from you as wasting your time. A referral is the best, in my experience
This is true for hiring help, too. I far prefer to hire someone already known to me or someone at my firm. I always ask, “Are they crazy?” If not, you are way ahead.
Other options: make a personal visit to business; Google them; D&B; check references.
What do you know about the business? Co-broker if you’re not comfortable with the business or your experience.
- Next, you must, must, must have a written listing agreement. Since the late Middle Ages, there has been a law called the Statute of Frauds that says certain contracts have to be in writing. Real estate contracts have to be in writing. Contracts which take more than a year to perform have to be in writing. So, if you want to sell a business, your listing agreement has to be in writing.
Don’t call me if you don’t have a listing agreement. I won’t have anything to work with.
Use the GABB form listing agreement. If not that, at least look at it to see if there is something you should add or change in the form you use.
The listing agreement must be in writing. If the seller is hesitant to sign, that is another strong sign that you may have a problem client. You should think long and hard about continuing your efforts for that client.
Also, if the client only wants to sign a listing agreement in the name of the company, and not individually as an owner, that is another strong indication that you have a problem client. Most of the business sales I have ever seen are really asset sales. The selling company still exists after the sale, but it has no assets. If you have a listing agreement only signed by a company with no assets, you have a problem.
- Once you think you know something about the potential client, one of the best things you can do to avoid problem clients is to ask for a modest upfront fee. I know you guys typically get paid your fee at closing, but you do all your work before closing. If a client is not willing to pay you a small fee up front, and you can call it a marketing fee or an administrative fee or a listing fee, that is a strong indication that the client is going to be a problem going forward.
It’s the same in my business. If someone is not interested in paying me a retainer, that is a red flag.
- Include a minimum fee in your listing agreement. I have had a number of cases where the listing agreement said the fee was a percentage of the consideration paid at closing. But what if there was no closing? Most of the cases in which I represent business brokers are cases in which there was no closing. The seller withdrew the business from the market or sabotaged the sale. If you don’t have a minimum fee listed, and there is no closing, the judge or arbitrator is going to have a difficult time awarding you any damages.
Judges and lawyers are familiar with contingency fees. If you don’t have a minimum fee provision in your listing agreement, it is going to look like a contingency fee agreement to the judge or arbitrator.
- Put a mandatory arbitration clause in your listing agreement. Arbitration is slow and expensive. Litigation is painfully slow and painfully expensive.
In arbitration, you get a lawyer to make the decision as to who wins and who loses. In litigation, 12 people off the street make that decision. A jury is a crazy way to make decisions. In my humble opinion, juries make sense in criminal cases. They are a check on the government. But in a business case, I don’t think they make any sense. If you have ever interviewed jurors after a case, you would hear the most random explanations for why they made the decisions they did. Your jury may think $20,000 is a lot of money to award you for a year’s worth of work. Speak with an arbitrator after he or she makes a decision, and you’ll get a thoughtful, reasoned decision, even if you don’t agree with it.
- If you have a signed listing agreement, I encourage you to communicate regularly with your client. In my experience, clients don’t really understand what you do to market their business. Either through ignorance or willful ignorance, some clients think all you do is show up at closing to get a check. To fight against that ignorance, I recommend that you send regular letters or emails to the client detailing what you have been doing. Don’t go 3 months without communicating with your client. Regular updates to your client will not only combat the notion that you are not working for the client, it will be great evidence at a trial or a hearing if you end up in a dispute with the client.
Document your disputes. Lawyers are always asking clients whether they have anything in writing to document a dispute. I find that many people think that the kind of writing that lawyers are looking for is only a document that says Contract at the top of the page and is signed and notarized. That is not the case at all.
What is a “writing?” It can be a letter, or email, or a check. And here’s your tip of the day, confirm your agreement in a writing even without client’s signature. Send your client an email, “Jim, thanks for meeting with me today. I appreciate your promise to get me those financial statements by Monday. I’ll contact the buyers today and tell them the financial statements are on the way. As we discussed, this is one of the things you promised in our engagement agreement and if we don’t get those financial statements we cannot market your business.”
There is an assumption in the law that the recipient of a communication will respond if he or she does not agree with the communication.
This kind of email will give the judge, jury, or arbitrator a date, time, and the precise terms of the communication. It is not a “he said, she said” matter.
That’s my 6 recommendations. Probably not worth thousands of dollars. Don’t be afraid to call me or another lawyer before your relationship with the client has totally fallen apart. A good lawyer will tell you the good and the bad of your situation. Most times there are things you can do to save the situation. With counsel, you can make a bad situation better. And even if things fall apart, and you want to litigate, having a lawyer involved earlier will probably help you prepare your case for litigation which will increase your chances for winning.