UNDERSTANDING DEAL TERMS

Mergers and Acquisitions

We explain the terms most often used in a merger or acquisition.

By Steve Murray, publisher

Most brokerage owners don’t routinely use deal terms when buying or selling a brokerage firm. While they understand negotiating deals and pricing, they haven’t dealt with things like the difference between an asset purchase and a stock purchase, or what non-competition and non-solicitation agreements mean. It’s important to understand some basic concepts in these two areas.

A warning: We are not attorneys nor are we tax experts. However, having participated as an advisor on nearly 700 sales and purchases of realty firms, we have some familiarity with these issues. In each case, someone buying or selling a brokerage firm should always consult his or her corporate attorney and get tax advice.

ASSET PURCHASE VS. STOCK PURCHASE

First, almost all brokerage firm buyers will only buy another brokerage firm though an asset purchase. They are buying specific assets of the seller, normally including listings and pendings as of the close date, furniture, fixtures and equipment pertaining to the brokerage firm being purchased, trade names and electronic addresses, independent contractor agreements and a reasonable non-compete, non-solicitation agreement. Purchasers may also assume certain liabilities, such as office leases and equipment leases.

Purchasers desire to use an asset purchase for two main reasons. First, in not buying the stock of a firm, they are limiting their future liability from claims that may arise after the purchase. They are only buying specific assets, not the company, and the seller retains the ownership of the legal entity and must deal with and residual issues. Secondly, there are some tax advantages available to purchasers when buying assets instead of stock. These vary significantly, so it is only sufficient to know that this is the case.

For Sellers, the sale of stock seems more advantageous from a tax point of view and many times it does result in a lower tax rate on the proceeds from the sale. However, when purchasers are compelled to purchase stock, losing their own tax advantages and having to assume more liability, they will generally also lower the price they are willing to pay. Further, a purchaser may require much stronger indemnification, representations and warranties when choosing a stock purchase versus an asset purchase.

The bottom line is that virtually all purchasers will choose to purchase another brokerage firm through an Asset Purchase rather than a Stock Purchase. And, if, through some legal issues, they are compelled to acquire through a Stock Purchase, they will lower the price and terms paid versus what they would pay to do an Asset Purchase.

NON-COMPETE AND NON-SOLICITATION

I cannot recall at any time where any sellers of brokerage firms didn’t have to enter into a non-compete and non-solicitation agreement with the purchaser. These agreements are legal and, in many jurisdictions, binding and will be upheld in most cases. Again, each state and jurisdiction has its own view of these agreements. Your counsel will be better able to describe the situation in your area.

The non-competition usually means a seller cannot invest in, work for, consult with or otherwise aid and assist any similar firms within a certain described geographic area. Frequently, the geographic area covered under a non-compete, non-solicitation agreement is a county or certain counties in a state or may be described by, for instance, “50 miles from any office currently operated by the Seller.” Non-solicitation agreements or clauses are usually a part of the non-compete agreement and often more specifically cover the solicitation of agents, employees and/pr clients and customers of the firm that they have sold. Again, it will be for a specific geographic area.

Many wonder about the length of time that a non-compete and non-solicitation runs. Most frequently we see purchasers requiring no less than three years from the date of closing or two years after a seller departs the purchased company, whichever is longer. However, it’s far more common that these run no less than five years from closing or two years after departure, whichever is longer. Both HomeServices and NRT require five years from closing as a minimum, as do some of the larger, privately-owned buyers.

When we are representing a seller, our client often ask if these agreements are truly binding. As we said earlier, you should seek counsel for a definitive answer. However, in our experience, the non-solicitation portion of a non-compete agreement is virtually always upheld in the courts where we have been called to testify. Certain portions or all of the non-compete agreements are also upheld frequently, again depending on the jurisdiction where one operates.

To us, what is far more important is that when a seller sells his or her business to a purchaser, accepts payment of the funds, essentially takes the deal, then he or she should always honor the agreement and avoid competing or soliciting agents or employees from the former firm. You took the deal, and you should live wit the terms , in fact and spirit. For the most part, in our 29 years of working on these kinds of deals, we have found that the men and women of this industry respect the deals they have made. ^

This article originally appeared in the May 2016 issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

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