Sale of business failed to close because spouse of the founder refused to sell.
February 23, 2021
Business brokers can help you sell your business. However, the broker listing or engagement agreement creates legal obligations which need to be understood by the seller before signing.
The seller here operates a Texas based business which provides patent drawings and other services to customers. The founder decided to sell the business and entered into a listing agreement with a broker.
The broker brought a buyer to the table and the seller and buyer executed a letter of intent for a $6.5 million acquisition. But the deal did not close. The founder’s wife, about two weeks before expected date of the execution of the asset purchase agreement and closing, announced that she refused to sell.
The seller did not pay a commission to the broker and that resulted in a broker $600K lawsuit against the founder in a Nashville federal district court. The founder moved to dismiss the lawsuit.
The court looked at the listing agreement which said: “In the event the Broker finds a willing buyer and the Company decides not sell, [sic] the Broker will still be owed full commission described above. This is to protect all of the time and expenses the Broker is investing into this process.”
That language clinched it for the court, and it denied the founder’s motion to dismiss the broker’s $600K claim: “Therefore, the Court finds that Broker has plausibly alleged that he found a “willing buyer” and that he is entitled to damages.”
This case is referred to as Ross v. Kirkpatrick, No. 3:20-cv-00536, United States District Court, M.D. Tennessee, Nashville Division, (February 12, 2021)
As a seller’s lawyer I would want the broker to be paid only if there is a closing. Then I know there will be no dispute over whether the broker should be paid because there could be no fight over whether the closing occurred or not.
However, would not it be fair to pay the broker if he or she brought a willing and able buyer to the table at the right price, even if the deal does not close? The listing agreement in this deal said yes.
However, the “willing buyer” term is, as described by the court in this case, an ambiguous term. A seller should look to see if this kind of term is in their proposed broker agreement, because if it is, the seller may be on the hook for a broker’s commission even if a sale does not close.
By John McCauley: I help people manage M&A legal risks.
Telephone: 714 273-6291
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