Licensing for Business Brokers

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A Business Brokers License?

What’s Up With That??

I don’t do this often but it’s time for a brief Caffrey’s Rant.

Business Brokers LicenseI get questions all the time about whether or not a business broker – or aspiring business broker – has to be licensed. And, as I’ve written before, it depends – mostly on where you are and where you wish to practice. But what gets me is that, in spite of the fact that there are certain jurisdictions that require business brokers to be licensed, there is no such thing as a business brokers license.

That’s right. Nowhere is there such an animal.

But if that’s the case, you might ask, what kind of license does a business broker need to operate?

Well, first let’s clarify that what we’re talking about here is NOT the Series 7 securities license that is required to sell all or part of larger companies with many shareholders where stock sales are more common. Most small businesses are sold as an “asset sale” where the assets of the business – its name, goodwill, intellectual property (logo, website, etc.), FF&E, sometimes payables and receivables, etc – are sold versus a “stock sale”. A stock sale is technically selling securities, but the SEC  (Securities and Exchange Commission) recognizes that some small businesses will change hands in a “stock sale” transaction, it has issued a “no action” letter that allows business brokers in the United States to facilitate or intermediate such sales as long as they don’t advertise they are selling the stock.

So, if that’s the case, what kind of license could conceivably be required to sell businesses? Believe it or not, a real estate license.

Is It Relevant?

Now, needing a real estate license to work as a business broker is only moderately less ridiculous than needing a cosmetology license to work as a veterinarian. They don’t relate.

As it happens, I have a real estate license is two US states and have worked in commercial real estate since the early 1990s. I’ve gone through the required courses, paid the requisite fees, taken the necessary exams and fulfilled the continuing education requirements. But all those courses, exams, continuing ed and licenses are completely irrelevant to what I do as a business broker.

And in all real estate markets that I’m aware of, you cannot act as a real estate agent by yourself. No siree, Bubba, you have to work under the auspices and license of a real estate broker – to whom you have to pay part of your commissions for selling businesses.

But the issue that I have with requiring business brokers to be licensed to sell real estate is that the two professions are completely different and the training you get in one is not relevant to the other.

As a case in point, consider this partial list of course topics required to obtain a real estate license:

  • Fair Housing Laws
  • Real Estate Brokerage and the Law of Agency
  • Real Estate Law
  • Types of Home Ownership
  • Real Property versus Personal Property
  • Appurtenances, Easements, Water Rights
  • Eminent Domain and Adverse Possession
  • General Warranty Deed, Special Warranty Deed, Bargain and Sale Deed, Quitclaim Deed.
  • Title Search, Title Abstracts, Title Defects, Title Insurance
  • Redlining, Steering
  • Freehold Estate Types
  • Life Estate Types
  • Title Theory and Lien Theory
  • Subordination and Estoppel Clauses
  • RESPA
  • The Nature of Leases and Tenancies

None of these topics bear the slightest relation to what most professional business brokers do for a living – and this is just a PARTIAL list.

Here are some sample exam questions:

  • The law in all states provides that contracts for the sale of real estate or an interest in real estate are unenforceable unless they are in writing and signed by the parties. What law is this?
  • From an historical standpoint, the major function, objective and aim of the Federal Housing Administration program has been provided by which of the following sections of the law:
    • A) Title I
    • B) Title II
    • C) Title III
    • D) Title IV
  • What is the difference between a specific lien and a general lien?
  • The principal of appraisal that dictates that home values tend to increase when demand increases is the principle of _____________.
  • Which of the following is the standard real estate settlement form for federally-related mortgage loans?

As you can see, the relevance of a real estate license to business brokerage is about the same as that of an interior designer or “nail technician”.

Escrow

VaultNow before anyone responds with “what about escrowing funds?”, allow me to stipulate that, yes, the sale of most businesses involves “deposits” or other such funds that must not be intermingled with your regular operating funds. These funds, generally applied to the purchase price when the deal closes, must always be available to be returned to the buyer should the buyer, in accordance with the termination clauses of the acquisition agreement, walk from the deal. In this aspect, there is a similarity to real estate. However, there are two simple ways around this issue that will not require you, as a broker, to establish yourself or your business as an escrow agent.

In most jurisdictions, escrow agents must be licensed and audited. In the US, having a law license or real estate brokers license confers the right to be an escrow agent. As well, there are other firms that are licensed to be escrow agents, the most obvious of which are title and settlement companies.

In transactions where the buyer has an attorney involved, it is fairly common that the buyer’s attorney will “open escrow” and hold the buyer’s funds until the transaction closes. For some smaller transactions, in which the buyer is not using an attorney, we hire a local attorney or title company to handle this task.

The Bottom Line

So, the bottom line is that requiring a business broker to obtain a real estate license just doesn’t seem to make much sense. Depending on where you work, such licensing requires anywhere from 40 to 80 hours of classes, the commensurate fees for those courses and course materials, the placing of your license with a real estate brokerage – with whom you will share your commissions (to add insult to injury) – and the requirement that you complete additional hours of training every couple of years to renew your real estate license – none of which will be even remotely relevant to your business brokers practice.

But the law is the law. If you want to know which US states and Canadian provinces require business brokers to hold real estate licenses, let me know here and I send it along. It’s free.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!

Joe

#business #howto #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation

The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com

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