Do I Need a License to be a Business Broker?

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Do I need a License to be a Business Broker??

We get this question at least once a week; “Do I need a business brokers license?” The short answer is, “it depends”.

First of all, I want to be clear that we’re talking about a professional license, like a license to practice law, a license to be an accountant or a medical license; specifically, a Business Brokers License. What we’re NOT talking about is a business license, which is something you need if you want to run pretty much any business in pretty much any jurisdiction in pretty much any first-world country.

Professional licensure is intended to ensure the public that a person is competent to practice in whatever profession the license is granted for. Generally, professionals become licensed through training or experience and by passing an exam. In many fields, the person seeking to be licensed must obtain an advanced degree before becoming eligible for the license or to sit for the exam that, if passed, demonstrates the person has acquired an acceptable level of proficiency in performing the tasks required by the profession the person wants to work or practice in.

In the United States, whether you need a license to be a business broker depends on which state you plan to do business in. As of this writing, 17 states require a license to be a business broker.

Become a professional business broker!

What Kind of License do I Need??

Another good question but this time the answer borders on the moronic. Why? Because a professional license is supposed to signify proficiency in the field in which the licensee is licensed and the license required by the 17 licensing states bears only a remote relationship to the profession of business brokering.

For example, you cannot practice law without a law license. In order to gain a law license, you must meet certain educational requirements, not least of which is graduation from law school. The same is true for every licensed profession from doctors, dentists and veterinarians to nursing, teaching and even hair-braiding.

But to my knowledge, there is no such thing as a business brokers license anywhere. But if that’s true, what kind of license do the 17 enlightened states require you to have?

A real estate sales person’s license!

Really?!? Yes, really.

I happen to be in possession of a real estate license in two states that do not require me to have any license in order to act as a professional business broker and, though I started Worldwide Business Brokers in 2001, I have been so licensed since 2003. To the extent that my license comes into play, it is in commercial real estate, at best a distant cousin to the business of selling houses and requiring a completely different skill set, educational requirements and certifications. That said, to the extent that brokering businesses involves real estate – and it almost always does – having a commercial real estate background is extremely helpful. (In fact, we think that people with a background in commercial real estate are excellent candidates for becoming business brokers.)

Related: How to Handle the Real Estate in a Business Sale.

What Good is a Real Estate License for Selling Businesses??

Good question, Bucko! And the answer is a bit dicey, in my humble opinion.

A real estate sales-person’s license teaches the basics of real estate law such as the Fair Housing Act, the Americans With Disabilities Act, what information a real estate ad must contain, the requirements of the various Civil Rights acts, the essential elements of a contract and much additional minutiae that is completely irrelevant to the process of selling a business. Granted, there are certain aspects of real estate sales-person licensing requirements – ethical business practices and fraud concepts among them – that cross over, but the process of selling a business is not even remotely related to what you learn getting a real estate license or the process of selling a house.

All that said, there is an aspect of real estate training that is extremely helpful and relevant to selling businesses and that is the training offered by the CCIM Institute.

CCIM stands for Certified Commercial Investment Member and signifies that anyone with that designation has completed multiple in-depth courses on how to perform investment analyses of and value commercial and investment real estate. Some of the methods used to value commercial real estate are similar to those used to value businesses. And being able to perform an investment analysis of a business helps justify the price of the business to both the seller and potential buyers. It is also a valuable tool when discussing with a buyer the business’ likely potential.

But you have to be a licensed real estate agent before you can enroll in any of the CCIM courses so we’re back to the issue of having a real estate license.

What Good Will a Real Estate License Be if my State Doesn’t Require One?

Most business sales involve real estate to one extent or another and whether you can learn anything from the process of getting a license or not, without one you may violate certain provisions of your state’s law if the business buyer and/or seller want you to help facilitate the entire transaction, including the real estate aspect. That is because EVERY state requires that anyone selling, leasing or managing ANY real estate other than their own, must have a license to do so. Alternatively, if you don’t have a real estate license and want to stay out of the cross hairs of both the authorities and the legions of lawyers looking for someone to harass, you may have to split the commission with someone that isn’t involved in your business or even involved on the deal; i.e., someone that DOES have a real estate license.

Office LeasesBy way of example, let’s say that the business you’re selling – an internet marketing company with a few dozen millennials slaving over hot computers – leases its premises on the second floor of a cool 19th Century warehouse building in some regentrifying downtown somewhere. You’ve been able to get the attention of the Big Dogs in the buying universe and both Giggle and Faceplant want this company. In addition to the buyer and seller, the landlord becomes part of this deal because the lease has to be transferred, assigned or terminated.

First, you need to know how to accomplish and negotiate this transfer, assignment or termination. Second, you need to be knowledgeable about the market for such space so that you can advise your client(s) accordingly.

In many of the states that don’t require a license to sell a business, the lease is considered incidental to the business transfer and is of little consequence as far as the licensing authorities are concerned. However, many states require a licensed real estate broker to be involved if a lease is transferred or assigned. If you handle the lease assignment and are not that licensed broker and something goes wrong six months down the road, the aggrieved party – buyer, seller or landlord – will likely have an attorney that will be laser-focused on suing the pants off everybody involved, and you, my friend, are sure to be a prime target.

Whether you’re working in a state that requires a business broker to be licensed or not, individuals that do not have a real estate license are not supposed to be involved in any leasing activity, including the assignment of a lease. And real estate is almost always involved in the transfer of a business. If you plan to work in a state that requires a real estate license and are not inclined to pay for and go through the courses necessary to obtain such a license, you should consider partnering with a real estate professional to make sure that your tender patooty does not wind up in the cross-hairs of some marauding law firm.

An Additional Complication…

And you knew there would be one, right?

Having a real estate license is not enough. In order for a real estate licensee to legally work in real estate, the licensee has to be affiliated with a broker. The licensee cannot free-lance; his or her license must, figuratively speaking, be “hung with a broker”. Every licensee that you know or see in an ad is affiliated with a brokerage. What this means for the business broker is that either you hang your real estate license with a broker – thereby forfeiting some portion of the commission on each deal to the broker – or you go back to school and add a brokers license to your résumé!

Find out if your state requires a license. You can download the complete list free by requesting it here:)

There is an upside to having a real estate license insofar as you are able to sell or lease real estate in conjunction with your business brokerage practice. But if you are not a broker, you have to be careful to learn how to differentiate the value of the business from the value of the real estate when selling a business. Why? Because when a real estate agent sells a house, the commission is split – sometimes evenly, sometimes not – between the agent that did the selling and the brokerage where the agent’s license is “hung”. There is a significant possibility that the broker you approach to affiliate with will want his or her split. You want to make sure that the only fee that the broker gets is based on the amount of the transaction related to the real estate value.

Is There a Better Way? I Think So!

Thomas EdisonIf you are focused on the business of brokering and advising businesses, I would recommend that you set yourself and your business up so as to both make yourself bullet-proof (to the extant that one can be bullet-proof in our litigious age) and open additional revenue potential by getting a real estate license. Next, interview a couple of brokerages – from the big names like Coldwell Banker and ReMax to the smaller, hometown companies. Explain that you are a business broker with a real estate license and are focused on selling and advising businesses. Tell the broker that you know that many of your deals will involve real estate – primarily the assignment or termination of leases – and that you want to hang your license with a firm so that whenever a business transfer involves real estate, you are in compliance with the law. Explain that you don’t plan to use any of the brokerage’s resources – no office, no copying or faxing, no phone, no secretarial, no marketing; no nothing. Essentially, you really want only to rent a 4″ by 8″ space on a wall in the brokerage where a hard copy of your license will hang. Offer to pay the broker a flat fee for each business transaction that your business brokerage handles; perhaps $250 or $500.

As a real estate licensee, you’ll endure other fees over the course of the year that cover compulsory membership in organizations such as the National Association of Realtors (NAR) and its state affiliates as well as subscriptions to one or more multiple listing services (MLS) even if none of these expenses will ever benefit your business. You will also likely be required by your broker to pay a pro-rata portion of the broker’s E&O insurance. But all these fees are unlikely to total more than, say, $1,500 or so annually and you should look at them as a cost of doing business.

So, the bottom line is that, in most jurisdictions, you do not need a license to be a professional business broker – but in ALL states, it is better to have one to assure that you are always operating in compliance with whatever laws, particularly those relating to real estate, apply to your business.

If you have any questions, leave them in the Comments box, below. If we get enough on the same topic, I may do a post or podcast tackling that topic specifically.

Finally, we’ve had several people ask if we have a course to teach them how to become business brokers. I’ve been thinking of putting together such a course and will do so if there are enough people interested in it. So, let me know your thoughts on this, as well.

Joe

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

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