Beware of the Dual-Headed Monster - Why You Should Avoid Dual Representation Brokerage Firms

By Scott A. Cabral, Esq.

Throughout our 16 years of meeting with practice owners, one question that comes up often is “ARE YOU A DUAL REP FIRM”?  Our rapid response is always an emphatic “NO”. Not only do we find the concept to be unethical, we feel it should be prohibited as currently constructed.

Although we will not mention any competitor names throughout this article, we will point out some of the common practices many of these dual rep companies promote and why it is our opinion you should carefully consider each point when deciding who best to engage to protect your interests.

The Ethical Dilemma of Serving Two Masters
The first set of concerns with dual rep companies comes from the concept that they represent both sides. How can you maintain a fiduciary responsibility to two sides that have opposite interests in key aspects of a purchase/sale and transition? Ask yourself this question . . . If a substantial commission is on the line and a material  issue arises between the parties whereby a non-­biased advisor would advise you against proceeding in a certain manner or agreeing to a specific request, do you think the dual rep company advisor would advise you the same? Maybe some representatives with strong moral character might, but the moral dilemma and financial enticement is enough to realize that dual rep contracts should not exist and that no client should ever be put in a position whereby their representative has to make that choice.

Buyer Beware
This above point leads to another issue and a recent example we came across. If you are a potential buyer and you sign up with a dual rep firm, you are being told that you are paying a fee and are being represented as well in the transition.  What are you truly getting for the substantial fee you will pay? Are your interests really being protected?  I recently was approached by a buyer, who was signed-­?up with a dual   rep firm, who submitted a full price offer on one of their listings. While under the impression that the firm was truly representing him, they also were encouraging other buyers to submit offers. Another female candidate, also signed up with the same dual-­?rep firm, offered full price as well and the owner of the practice decided   to go with her instead. Upon hearing the news that he lost out to another candidate, he was confused and angry. It is an ethical breach of responsibility to lead one to believe they are being represented and having their interests at heart while working against them simultaneously simply to earn a commission at any cost.

The Unauthorized Practice of Law
Another common practice we have been told exists with some of the dual rep companies is that the parties are being forced to use a master set of legal documents for the transaction provided by the dual-­?rep firm.  Some of these companies  further charge the seller a significant “document preparation” fee to prepare these boilerplate documents. Furthermore, we have been told stories where the seller or the buyer was instructed NOT to hire an attorney to review the provided documents. What many people do not know is that this is against the law. Black's Law Dictionary succinctly defines "unauthorized practice of law” as the practice of law by a person, typically a non-­?lawyer, who has not been licensed or admitted to practice law in a given jurisdiction. Therefore, even a licensed attorney in one state cannot provide final version legal documentation in any other state in which he/she is not licensed while advising the client not to seek licensed legal counsel in that state. No one ever should be advised against seeking counsel to look out for their interests, nor forced to use a set of documents that contain clauses, conditions, representations, or warranties that you are not comfortable in signing. Besides, under such a relationship, who is really looking out for you?

The Take It or Leave It Approach – No Negotiations Allowed
Some dual rep firms actually take the approach that they set the price and there is no negotiation. Then they try to sell the seller on the fact that this is in their best interest. Let’s think about this logically.  We already know from above that there exist the many moral and ethical issues of representing both sides. Now in addition, other issues are created with the determination of the price.  This is because (i.) they represent a buyer as well in the same deal – they should be placing a price on the practice that is beneficial to that buyer as well or they are not acting in the best interest of the buyer; and (ii.) because they have to try to guarantee that their business plan is sound and that they are able to sell all practices for a set price, they must set a price reasonable to fulfill that challenge. How do these issues affect the seller? It usually results in a lower selling price than what the seller should have been entitled to. I actually met with a seller on Long Island, NY not to long ago who said he interviewed a dual rep company and asked “what if I am willing to take less than the asking price, are those offers presented to me?” and the rep answered him that it was full asking price or nothing. This philosophy actually takes the decision making away from the Seller, the owner of the asset who should be able to decide if a certain price is acceptable. The owner of that practice stated to me that he thought that was ridiculous.

Don’t Be Fooled By The Fee-­Splitting Ploy
Most, if not all, dual rep companies charge a fee to both the seller and buyer.  In other words, they may charge the seller 7% and the buyer 3%. In my opinion, this is one of the biggest misconceptions to sellers and the one that cost them the most.

Here’s why.

First, compare it to going to a dealership to buy a new car. You have a car you want to trade in. We all know one of two things will happen. You are either going to get more off the sticker price and less for your trade; or just the opposite. The same holds true here.  If a buyer knows they have to pay a broker $15,000, $25,000, $50,000, etc, whatever the percentage calculates out to, they are going to factor that into the price they offer the seller. Additionally, lending institutions cap out the loan to collection ratio when approving practice acquisition loans, including the working capital amounts requested in addition to the purchase price amount. Therefore, if the practice is appraised correctly, rather than set at a lower than fair market value for reasons described above, and a buyer adds another 3% to the loan request to cover the cost of the brokerage fee, the loan may be declined unless the purchase price is lowered accordingly. So in the end, it is the seller who ultimately pays the buyer’s fee by accepting less on the practice.

Secondly, what if your practice is for sale and another practice very similar to yours is for sale down the road? A dual rep firm, charging the buyer a fee, brokers your practice. A firm that is not charging the buyer a fee brokers the other practice. A buyer looks at both practices. Which practice will they choose if most everything else is comparable? Of course the one in which they do not have to pay a substantial fee to the broker.  Once again, the seller is hurt by the concept.

We feel it is only a matter of time before state legislation steps in and places strict requirements on dual representation firms for the sale of businesses. The same as they have now in place for real estate transactions. Until such time, if you are contemplating the use of a broker, keep these points in mind when deciding who should be responsible for one of your greatest assets you have worked hard to build over the years, or for providing you information and advice on the purchase of a practice.