Tax Blog

Business Brokers Beware: Are You Following State Business Broker Laws?

While some states do not have an act governing the practice of a business broker, other states have very detailed requirements that require a business broker to register with the state. Some brokers are often exempt from this requirement, for example, if they are a licensed attorney within the state or a licensed real estate broker within the state. However, for those that do not meet any exceptions, strict compliance with a state’s business brokers act is strongly encouraged.

First, the act is not required by every state. As of today, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Minnesota, Nebraska, Nevada, Oregon, Rhode Island, South Dakota, Utah, Wisconsin, and Wyoming all have some sort of law that governs the licensing of business brokers. The process varies state by state. For example, California requires a either a business broker license or a law license just to advise a business owner on a transaction. But Illinois states that licensed attorneys and licensed real estate brokers are exempt from the Act. Most states allow a licensed real estate broker of the state to circumvent the business brokers laws, but for those who don’t qualify for the exceptions or register in accordance with the state act, the results could be damaging.

Take for example, the Illinois Business Brokers Act, 815 ILCS 307/10-1. The Act serves to protect sellers that are damaged from brokers who do an inadequate job on the sale of a business. However, the text of the Act opens up a different legal issue with regards to penalties under the Act. As the current Act is written, a material violation of the Act (such as not registering), even if no harm is done to the seller, means that any contract between a business broker and seller is void. The Act also provides that any monies paid to the broker as a result of the contract should be paid back to the seller, under Section 10-60 of the Act. This creates a huge problem for brokers. The Act encourages in-state businesses to contract with unlicensed brokers, then leave the broker dry when it comes time to pay the broker for the services.

I encourage you, if you are a business broker, to make sure that you are either acting in accordance with a state’s business brokers act or you are somehow exempt from the act. Failure to do so could result in a complete forfeiture of any fees of the transaction. If you have any other questions, the professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions. Please contact us at (618) 997-3436.

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