Licensing Needed To Sell Businesses

The licensing needed to sell businesses boils down to two sets of laws:

(1) Real Estate Law, and

(2) Securities Law.

Real Estate Licensing

Certain states require business brokers to be licensed as real estate brokers, or sales agents of a brokerage. This is due to the lease or real estate portion of a sale. Some states don’t require licensure. States not requiring a license typically don’t view the payment of commission as being generated from the real estate portion of the sale; thus, they don’t require a license. However, it would be wise for business brokers to seek the assistance of a licensed real estate pro to handle any lease or real estate transfers. In non-licensure states, some business brokers stay off the radar by working with a real estate attorney, who handles that portion of the sale. Keep in mind, if your state requires a real estate license to sell businesses, you need to have a real estate license, whether you bring an attorney into the deal, or not. See states that require a license below.

Securities Licensing

Another possible conundrum for business brokers is the possible breach of securities laws. In January 2014 the SEC issued a ‘No Action Letter‘ to business brokers who sell private companies mostly as asset sales. This letter lays out the general everyday activities business brokers can engage in, without requiring  investment banking or stock brokers licenses. See more detail in the next section, ‘What you can and can’t do.’

Securities laws can become even more complex due to state securities laws, which can be different than federal laws. As a rule of thumb, states usually follow SEC regulations; however, you should do some research to make sure your state adheres to the same regulatory framework. If you decide you’d rather be licensed you’ll need the following licenses:

(1) Series 7 (general brokerage), and

(2) Series 79 (investment banking).

Remember, to broker the sale of small private businesses, based on assets being sold, you probably don’t need a securities license.

What You Can And Can’t Do

Business Brokers can sell small private businesses between interested parties who are buying the business as a means of income. The income should be derived from the revenues of the business and not the sale of securities. A typical business sale involves the buyer and seller agreeing to transfer ownership from one party to another. The ownership the buyer is receiving is based on assets, e.g., revenue, cashflow, inventory, fixtures, real estate, etc. When the sale transpires the buyer and seller will sign contracts to transfer ownership of the assets. If a legal entity owns the assets and is being transferred to the buyer, a ‘legal formality’ of that transfer is the transfer of stock shares (or units of ownership in a partnership or LLC). Again, the sale is based on the purchase of ‘assets,’ not securities.

In many cases businesses are sold as ‘asset sales.’ In an asset sale the legal entity that owns the assets is not transferred in the sale, while the assets themselves are transferred to the new owner. Nevertheless, in an asset sale the real estate is still an issue, as there is usually a lease, or other real estate, to transfer. When securities are involved business brokers should seek the services of an attorney to transfer them. An attorney will write the language in the contract clearly stating what is being purchased. If the Acquisition Agreement, or Sales Agreement, states that the buyer is buying securities and not assets, an overzealous attorney could use that to unravel a deal and possibly destroy the business broker’s career. Another possible concern is that real estate can be considered a security. Again, the language in the purchase contract is very important, as is the broker contract with the buyer or seller. We provide a good library of contract templates to guide brokers through the sale and hand it off to an attorney to finalize and close.

How To Get Paid

Charge a commission for your services. You can also charge ancillary service fees for certain services performed, e.g., appraisals, specific industry consulting, research reports, etc. These ancillary fees can be upfront or upon a successful sale.

Business brokers should not receive a commission, or any other type of fee, for selling securities of any kind, including for mergers and acquisitions that involve the purchase of securities, unless you’re properly licensed to do so. You should not get creative with the language used to define a ‘fee’ and/or what is defined as a ‘security.’ Fees are “any remuneration paid for a service,” including ‘consulting fees’, ‘advisory fees,’ etc.. Securities are “property given or pledged to guarantee the performance of an obligation.” Here’s the general definition as framed by the American Bar Association.

Remember, attorneys are masters of language and they use it against their adversaries. Don’t become their adversary. The laws are well defined in the realm of securities. If that scares you remember this, as a business broker you need to have some allies in business, with particularity, (1) a good lawyer, (2) a good CPA, (3) a good lender/banker, and (4) a good real estate broker (if you’re not licensed).

Stay in the safety of your lane. Get professionals involved to legally consummate the sale. It’s worth a few thousand dollars of your commission to make sure you’re legally safe. You may even be able to negotiate the legal fees into the sale and have the buyer or seller cover those costs separately.

States That Require A Real Estate License

The following states require business brokers to maintain a real estate license:

• Alaska
• Arizona
• California
• Colorado
• Florida
• Georgia
• Idaho
• Illinois
• Michigan
• Minnesota
• Nebraska
• Nevada
• Oregon
• South Dakota
• Utah
• Washington
• Wisconsin
• Wyoming

The license can be a real estate brokers license, or a sales agent license, working under a broker. We’ve seen some real estate agents working as a business broker separately from their real estate practice, while their real estate license was held by a real estate broker who didn’t operate as a business broker.

Private Regulatory Organizations

If your state doesn’t require a real estate license chances are fairly good that anyone can broker the sale of businesses within that state. However, be careful, the business brokering industry is closely monitored by private organizations such as the IBBA, along with many regional offshoots modeled after the IBBA. Most states have an offshoot. We suggest all new business brokers join the IBBA and their local offshoot org. However, if it’s too expensive you can most definitely bypass it for a few months, until you get some deals under your belt. You’ll come up on the radar fairly quickly if you start to see some success, so, it’s a good idea to beat them to the punch. The business broker community is a very tight knit and competitive community. They all talk, yet they all compete.

Start your Business Broker career by downloading our Contract Template Library for Business Brokers.

Published: 12/17/2021

Updated: 05/24/2022