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Business Opportunity

DEFINITION

Assets of a business that can be purchased including the ability to use a business’s name, logo, and advertisements to gain more business.

EXPLANATION

Real Estate Law permits brokers to represent buyers or sellers in business opportunity sales. They can also represent buyers or sellers in franchise agreements between a company and an individual. A business opportunity sale can be the transferring of business assets, products, and branding rights.

Business opportunity sales or purchases may involve the transferring of stock and/or dividends that are a part of the company’s portfolio. A real estate broker, although not a licensed securities professional (stock broker), can help with the transferring of stock, but not the selling of stock.

Commercial and industrial real estate are huge sectors within the real estate industry. Retail space, restaurants, manufacturing and factories can all be handled by real estate brokers. Many brokers specialize in business real estate transactions, as such transactions offer brokers an incredibly sizeable percentage of gross real estate deals.

A business opportunity includes the execution of a purchase or sale of business assets, including personal property, real property, inventory, and the business’s name. A real estate agent and broker should understand the business dynamics of the business he or she is buying or selling. The agent should disclose the seller’s financial records to help the prospective buyer understand the business opportunity listing. Seller records may include:

Profit and loss of company and individual owner/partner

2-3 years of tax documents

Liabilities

Necessary permits

State payroll taxes

Workers compensation records

There are many complex factors that should be considered when calculating the cost of a business and its value. This can be done by verifying the income documents, property location of the business, number of employees, stock value, and other factors. Because of the detailed nature of business opportunities, many brokers will not allow real estate agents to act as principals in business opportunity transactions.Many buyers may be naïve about the prospective business they are buying. While impressive profits may make a business more attractive, this fact does not necessarily imply the absence of new or real responsibilities or risks for the purchaser. This is why a real estate agent or broker representing a business opportunity must have the necessary knowledge to help buyers make informed decisions. This includes informing the buyer of required permits, licenses, and government requirements for operating the business.

Many brokers specialize in business opportunity sales. Common businesses that are sold using an agent or broker are gas station sales and retail store sales. Because gas stations are accompanied by land owned by the gas station owner, gas station owners will request the help of an experienced agent to sell the gas station.

Business opportunity sales are a specialized field within the real estate industry and require the agent/broker to be informed of a transaction’s specifics. An agent should only represent business opportunity transactions if he or she is fully aware of the business assets and liabilities. Finally, the unique nature of business opportunity sales requires agents to understand the necessary business risks.

Business Opportunity Broker

A business opportunity broker is a professional who specializes in the transfer and sale of business opportunities. When an existing business owner decides to sell his or her business, a business opportunity broker assists them in selling or leasing that business.

The sale or lease of a business opportunity typically requires the transfer or sale of a property. For this reason, licensed real estate brokers have the authority to represent buyers and sellers of business opportunities.

A business broker must adhere to the same fiduciary duties as other real estate professionals, including full and accurate disclosure, confidentiality, and proper advisement. Among the responsibilities specific to a business opportunity broker are:

Assess risk: brokers determine the risk associated with buying or selling a business.

Appraisals: brokers are tasked with appraising the value of a business. This is done by analyzing a business’s income, assets, and expenses (i.e. property taxes, mortgage payments, business expenses) and determining how it will continue to perform based on past performance.

Locate buyers: Because of their experience, access to clientele, and ability to connect with other business brokers, business brokers have the ability to retain maximum value for the sale of a business opportunity. This is much different than a business owner who can maximize the final sale price of the business opportunity by locating the ideal buyer.

Prequalify business buyers: a broker determines whether a potential buyer qualifies for a business loan or has the means to purchase the business.

The Law as it Relates to Business Opportunities

The Franchise Investment Law regulates the franchise industry.

Its main provisions relate to disclosures. The Law requires that a prospective franchisee must be provided with as much relevant information about the company as possible, including the cost of products, the cost of service, and the general process of the business. All disclosures must be provided at least ten business days prior to the sale of a business opportunity.

All franchises that have 25 or less locations, or less than $5 million in annual sales, must register their business offerings with the California Commissioner of Corporations.

California law does not require a buyer of a business opportunity to take on a seller’s debt, unless the buyer agreed to purchase the business with its outstanding debt.

Legal Case as it Relates to Business Opportunities

Case Review: Salazar v. Interland (2007)

The case, Salazar v. Interland (2007) 152 Cal.4th 1031., involved a dispute over whether a business opportunity broker had to be licensed.

A business (AT&T) was looking to sell its existing small- and medium-sized customer contracts. It hired a business opportunity broker (Salazar) to find a suitable buyer. Salazar did not have a broker’s license, but still introduced AT&T to a potential buyer (Interland) and arranged meetings between the two companies. Interland ultimately agreed to purchase AT&T’s customer contracts.

Upon the close of the sale, Interland refused to pay Salazar over his failure to have a license. Salazar sued, alleging that he was owed commission for the sale, and for every new client gained by Interland as a result. He sought $20 million in damages.

The Superior Court argued that the transaction constituted a business opportunity sale, and therefore, Salazar was required to be a licensed real estate broker. The court indicated that the purpose of “licensing requirements is to protect public from incompetent or untrustworthy practitioners”. It ruled in favor of Interland. Salazar appealed. He argued that the transaction was not a business opportunity sale, as it was not the sale of the entire company, only a portion of it. The Court of Appeals reasoned that any business transaction, regardless of size or percentage of the company, must be arranged by a licensed real estate broker. The lower court’s ruling was held.

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