It is unfortunate that I have to write this article, but SellingRestaurants' has a fiduciary duty to educate consumers, making them aware of unethical business brokerage practices so as to avoid those brokerage houses that practice them. I can't tell you the names of those houses, but if you read and study the below information you can avoid what several of our clients have endure dealing with these unethical brokerage house, and there are several of these houses in the Phoenix area.
The brokerage house is a regional player with at least another office in Las Vegas that I know of if not in more areas. It was a franchise operation, but I don’t think it is any longer. The one that uses the unethical contract I’m describing below is located in Phoenix. This broker calls the document used to lure buyers into a purchase agreement a "DEPOSIT/RECEIPT EARNEST MONEY AGREEMENT," that is frankly one of the most lopsided, unfair, messy contracts I've ever read, and as a law student who aced contract law, I have some knowledge in this space.
Before I share some of the language in the agreement, the bottom-line is a so called Deposit Receipt is nothing more than an unethical way to create a purchase agreement, and a sloppy one at that.
Here is some of the language:
"Purchaser agrees that if he fails or refuses to complete this transaction...purchaser is personally responsible for payment to the Broker for the commission..."
The above paragraph says, if you cancel this deal, for any reason, you owe me a commission. How absurd! A buyer, that I now represent, made an offer. The broker put an unreasonable deadline that was dependent on the Broker and landlord providing information to the Buyer. Nevertheless, the broker failed to provide the information, the deadline passed, the buyer canceled the deal after the deadline, and now the broker is demanding a commission payment, the seller is threatening lawsuit, and it is a holy mess right now. No doubt the broker is taking advantage of the Buyer’s lack of legal knowledge and hopes the buyer will want to avoid a lawsuit and give-up the deposit.
If you’re a buyer, you never want to language in the agreement whereby you’re paying the broker, unless of course you breach the agreement without the broker or seller having culpability in your breach.
"Purchaser has personally examined the equipment, stock on hand and other assets..."
This is an offer! How can one have accomplished this before an offer has been accepted? It is impossible to do so. First, the buyer would have to have a specialist go into the restaurant to inspect the equipment to make sure it works, and in the restaurant business, there is one certainty, equipment breaks all the time. It is customary to have the equipment examined and inspected after the lease assignment or new lease is complete and a week before escrow closes to make sure the Buyer get the equipment in good operating condition just before taking over the restaurant. Yet this broker has the audacity to write this into their contract where the buyer is giving-up his or her right to inspect the equipment. Keep in mind, this buyer is at the early stages of making an offer and could be a month or two away from actually getting the business. So to inspect today is a fruitless and costly effort when in the restaurant business equipment breaks every day.
"Broker need not advise Seller of any subsequent offer received for the Premises until after the forfeiture by Buyer..."
If you're a business owner, and you see this language it is at worse a violation of Agency law and at best a violation of a broker's fiduciary duty to make his principal aware of all offers. Why would a business owner ever agree to such language is beyond me.
"All conditions shall be deemed satisfied unless Buyer notifies Seller in writing to the contrary by no later than..."
Conditions are always reliant upon another person to supply information and to give the buyer adequate information to determine whether the information satisfies what was represented to the buyer by the Broker, Seller and Landlord.
This broker hopes the deadlines pass unnoticed and unchallenged by the innocent buyer, creating a forfeiture of the buyer's deposit despite the fact several of the conditions are completely reliant upon the Broker, Landlord and Seller to supply the required information. If those parties fail to supply the information on a timely basis, or even supply it at all, this sentence doesn't care, and it creates a buyer default situation. It only cares that the deadline has passed and deposit is forfeited.
These are a few of the unethical approaches used by this brokerage house that you MUST avoid. This brokerage house often advertises business for sale whereby they don’t have an exclusive listing, in fact most of their listings are not exclusive. This brokerage house is often unprepared; lack the basic information such as financials, lease, equipment lists, etc.
So to protect yourself, and ask some of the basic questions. Ask the broker if he or she has tax returns if it is an income sale. Asset sales, meaning they are selling the facility and equipment, won’t have financials, and are usually priced to sell that way. Ask if they have an equipment list. Ask if you can get a copy of the lease. If you feel resistance on any of these points, turn-a-round and run from the broker. If the broker doesn’t prepare for the sale of his or her listings, then you’re walking into a trap that you’ll regret.
We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions.
Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry. Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer. Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world. There he participated in more than $11.5 billion of merger and acquisition transactions. He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions.