Do’s and Don’ts of Selling a Business: Compensating Brokers.

Companies seeking to sell their business sometimes retain third party brokers to identify potential buyers and, if the broker finds a buyer for the business, the broker is often paid a finder’s fee based on the sales price. Such an arrangement is fine if the sale of the company is effected through a sale of the company’s assets. However if the transaction involves a sale of securities (i.e., either the equity holders sell their securities to the buyer, or the company itself sells securities to the buyer), and the broker is compensated by receiving a commission based on the sales price, then the transaction may very well violate securities laws. Specifically, the Securities Exchange Act of 1934 requires that any party who (i) finds investors, or (ii) finds buyers of businesses where securities are involved, must register as a broker with the Securities and Exchange Commission. If a third party engages in such activities without so registering a buyer of the securities can, among other things, seek to rescind the transaction. Thus, if a broker not registered as a broker with the SEC finds a buyer of a company, the buyer purchases stock in the company, and the broker receives a commission based on the sales price, the buyer can later unwind the transaction and demand its money back.

If you wish to learn more about the process and pitfall of selling a business please contact Stephen Goldstein at, or at (212) 586-5555.