There is a surprising level of complexity that a business broker needs to navigate to be an effective broker. If you own a small business, odds are you will be dealing with a business broker when you come to sell. Here we look at how the business broker model works in New Zealand. For some, our model is quirky compared to what happens overseas. Even locally, many business owners don’t fully understand how brokers work.

My Experience in the Real Estate Industry

My perspective here is as a former broker. I worked as a business broker in Auckland from 2018 to 2021 (i.e., through the COVID period). I wasn’t a particularly successful broker; it didn’t come naturally to me. When I returned to New Zealand after about 10 years in Singapore and Australia, I wanted to stay in the M&A space. Many in my network suggested becoming a broker to leverage my skills. I studied through Open Polytech, and had discussions with a few brokerages before joining ABC Business Sales.

I have something of an unusual perspective on the real estate market in New Zealand. Both of my parents were licensed salespeople at times through their career, including running (and then owning) a busy residential sales office in Kerikeri. While I was teaching at the University of Auckland Business School, I spent a few years researching the real estate industry, specifically the strategic use of technology in the sales process. While doing this research, I spent six months overseeing some projects at REINZ (the Real Estate Institute of New Zealand – the professional membership body for the industry). I worked on the REINZ core systems strategy, covering RealENZ (now realestate.co.nz), and the collection of sales statistics. I also attended the National Association of Realtors’ (NAR) annual conference in San Francisco in late 2005. In sum, I have managed to collect quite a bit of knowledge about the local industry and how it works.

Who Can Be a Broker?

I want to start first by explaining who can be a broker. This actually sets the scene to explain what brokers do.

In New Zealand, you need to be a licensed real estate agent to sell a business on behalf of someone else, for a success-based commission. This is often a surprise to buyers and sellers. The rules and regulations that apply to real estate agents also cover brokers. As such, a business broker needs to have (at a minimum) a New Zealand Certificate in Real Estate (Salesperson) (Level 4), and a current salesperson’s licence issued by the government entity responsible for the sector, the Real Estate Authority (REA). The real estate licence needs to be renewed annually, and there is a requirement for agents (and brokers) to undertake professional training every year.

A broker therefore needs to meet the requirements to be a real estate licensee spelt out under the Real Estate Agents Act 2008:

• They need to be at least 18 years old.
• They need to be a ‘fit and proper’ person. This is an overall quite vague definition, but there are a number of factors that can disqualify or prevent someone from being a real estate agent. Despite what the public may think of real estate agents, one of the criteria is that an applicant for a licence must be of good character. This basically means they can’t have been convicted or be under investigation of a serious offence (in any country), particularly offences against other people. How long it has been since any conviction is taken into consideration, as is their age at the time of the offence. The REA may also prevent someone from becoming a licensee if
  • they are currently the subject of criminal proceedings; professional disciplinary proceedings; a complaint, investigation, or inquiry by a training or education provider, or a statutory regulatory body, in any country, where those proceedings reflect adversely on the person’s fitness to work in real estate.
  • they are subject to an order of a professional disciplinary body (or similar) in any country where the order may reflect adversely on the person’s fitness to work in real estate.
  • they have been declared bankrupt, or have been a director of a company that has gone into receivership or liquidation, or have been prohibited from being a company director, promoter, or senior manager in any country.
  • they have been a director or senior manager of a body corporate that has been convicted of a criminal offence, subject to civil penalties or regulatory enforcement action, or has received a caution or warning in respect body corporate matters in any country.
  • they have engaged in real estate agency work while unlicensed per the laws of the country they worked in.
  • they have contravened a law about trust money or a trust account, in any country.
  • their license to work in real estate has been cancelled or suspended in any country.
  • there are present grounds for concern that the person will not meet the duties and obligations of a real estate licensee.
• They need to be able to communicate effectively with the various parties involved, and be able and willing to treat others with respect. They need to be able to do the job of being a real estate salesperson, which can rule people out on health grounds.
• They need at least a salesperson’s licence (as above).

That’s a long list of quite subjective factors. Other than the age restriction and having the appropriate qualification, these factors are not black and white in their application. The REA will consider these various factors, the degree of involvement the applicant had, how long ago any transgression occurred, and how old they were when it happened.

Of course, a lot of this also relies on the honesty of the person applying for the license to disclose, particularly if the (potential) issue occured in one or more overseas jurisdictions. But this is quite often the case with many professions.

There is a common perception that becoming a real estate licensee is very easy, and something of a ‘career of last resort’ in New Zealand. There is an element of truth in this. The qualification can be attained in a matter of a few months – shorter if you enrol in one of the full-time courses. While the training courses are required to cover a broad range of topics, they are generally not covered in depth. Most salespeople I have spoken to about training don’t rate the course they took, and believe what they learned on the job, while under supervision, was far more valuable. Put bluntly, getting the qualification is not a high bar.

So, who can become a business broker? Almost anyone.

Working in Real Estate in New Zealand

The biggest barrier to becoming a broker is probably the need to be supervised and operate under an agent’s licence. An Agent’s licence requires more study – apparently far more onerous than the salesperson courses – and a minimum period of having worked in real estate in New Zealand. Currently you need three years, but there was a proposal to make it longer by requiring candidates to first attain the Branch Manager qualification.

There are just over 2,000 active Agents and around 12,500 active Salespeople (at of 31 August, 2023, according the the REA). There are also nearly 450 Branch Managers, who sit between the Agents and the Salespeople. I can’t find stats on the number of business brokers included in the data above, but I would currently put it no more than 500 who focus solely or largely on the sale of businesses. (The sale of farms is a grey area in-between). There is nothing you do to specialise in selling businesses, and there are no additional training courses taken as part of the real estate qualification. As long as the agent under whose licence you operate is OK for you to sell a business, then you can. In smaller towns across New Zealand, where none of the business broker brands are represented, quite a few business transactions are undertaken by (otherwise) residential salespeople.

A broker, however, will ideally have undertaken additional training under the supervision of their agent. This basically means the brokerage ‘brand’ will provide ongoing training and supervision to brokers on the unique aspects of selling businesses. In addition, all salespeople need to take annual Continuing Professional Education (CPE) hours to maintain their licence, and there are some modules now offered that specialise in aspects of being a business broker.

The model used by business brokers in New Zealand is very similar to that seen in residential real estate. Brokers are not employees of the brokerage company, they are self-employed contractors. They need to be GST registered personally and run their own P&L. There are some odd tax rules as to what they can deduct as costs.

Brokers work on a success fee basis – no sale, no fee. The fee is a sliding scale based on the value of the business being sold. For transactions under NZ$2M, you will pay in the ballpark of 7-10% in commission. This is roughly (and simplistically) split 50% to the salesperson, and 50% to the firm. If there is more than one broker involved, they have to agree how their 50% is split. To a large extent, you as the customer don’t really need to have visibility of this.

Brokerages also have a minimum fee they charge for a sale, in the range of NZ$17 – $25k. Irrespective of the size of your business, brokers still need to do a lot of what gets done to make a sale – and hence the minimum fee.

As a consequence of the contractual relationship between the brokerage and the broker, there is a highly competitive environment that operates within the brokerage firms, in addition to the normal competitive rivalry between firms. To a large degree, the broker sitting next to you in the office is as much of a competitor as a broker working for another firm. While the brokerages will talk about fostering collegiality within their firms, it doesn’t really work, and certainly doesn’t scale. There is very little incentive for a broker to work with another, to share their listings with each other, or even share successful techniques.

There is also an information difference between what a real estate salesperson needs to know and keep track of to sell a residential property, and what a broker needs to be across when selling a business. To sell a house, you can pretty much capture and maintain all the essential points about that property on a single, double-sided, page. This is not the case for a business, where the information requirements are much higher. For this reason (at least), it is very hard for brokers to share their business listings. Conjoint sales are very rare in business sales, and interbrand sales almost never happen. The broker (or brokers) that lists the business for sale are typically the only ones that market the business, deal with the vendor and any and all buyers.

Engaging a Broker as a Vendor

When you use a broker to sell your business, you first need to engage them: you need to give the broker’s firm your authority to sell you business. This is done on a ‘listing agreement,’ which is a legal contract. Pay attention to the terms (clauses). I always recommend my clients have their lawyer review the listing agreement. While listing agreements are normally standard boilerplates, you need to appreciate what you have agreed to.

It is actually illegal under the Act for a broker to market a business before they have a listing agreement.

The first listing agreement will generally be a sole agency – meaning you can’t engage anyone else to sell it during the agreed sole agency period. At the end of this period, the agreement will typically specify that the listing converts automatically to a general agency. Once it is a general agency, it can be easily cancelled, and other brokerages can represent it (if they also get a general listing agreement signed by you). The sole agency period for a business sale is generally six months (180 days).

Make sure you understand what sole agency means – if anyone buys the business during the exclusive period, you (as vendor) need to pay the commission to the brokerage. Therefore, if you sign two agency listing agreements running concurrently, you run the risk that you might have to pay two commissions. Further, if you find a buyer yourself during the sole agency, without the involvement of the broker, the commission is likely to be payable. You can attempt to ring-fence certain situations like these out of the listing agreement, but the brokerage needs to agree before signing the listing. This is the sort of thing your lawyer will also point out.

At the end of the sole agency period (unless extended), the broker should provide you with a list of names of the people/companies that they have ‘introduced’ to the business as a potential buyer. Many of these will have been behind the scenes interactions that you were not even aware of. Listing agreements require you to pay the agency commission if you end up selling to any of those parties in the following six months, even without their involvement. This is intended to prevent you from ‘running down the clock’ on a listing agreement, and selling to one of the parties the broker introduced without a fee.

Another thing to keep in mind is that while the commission is success-based, you will be expected to pay certain costs upfront. In most cases, these will be marketing expenses. Some brokerages will charge for the initial appraisal and Anti-Money-Laundering check (which the broker is legally required to complete for all vendors), and some charge for the ‘Information Memorandum.’ Where these items are charged in advance, they are generally deducted from the commission if and when the business is sold. Make sure you ask what the upfront fees are, and what they cover.

Engaging a Broker as a Buyer

You can use a business broker in one of two ways when you are a buyer: (i) you approach them when they are marketing a business you are interested in, or (ii) you engage them to find you a suitable business under a buyer’s mandate. A buyer’s mandate means they are working for you, and you pay them the commission on the sale, not the vendor. While covered by the Act, buyer’s mandates are so rare in New Zealand for business brokers that I discuss them no further here.

So, if you are looking to buy a business, you need to do the heavy lifting: you need to keep an eye on listing sites, broker newsletters and social posts, and newspapers to see what is for sale that may be of interest. You then contact the broker for more information about that listing. (This is typically done by filling in a form on the brokerage website, but you can still call them directly). In the first interaction with that broker, they will ask you some background questions – they are obliged to do this to ensure you not a nosy competitor, you are a legitimate buyer, and can fund the acquisition. In the course of these discussions, the broker may also discuss other businesses they have listed.

Earlier I mentioned that brokers work their own listings. In most cases, they don’t have any details on the other current listings in their office or more broadly across their brand. If they personally have a dozen current listings, those are the only ones they are likely to be able to discuss with you. This is quite different to the residential model, where it is easier to get all current listings under that brand from a single salesperson. As a consequence of this narrow view of available listings, you would need to talk to multiple brokers in the same office to get a complete picture of what is for sale. Furthermore, you need to be talking to all the different brokerages to cover the whole market. Thinking that you have found an ‘in’ with one friendly broker, and that they will enable you to access everything that brokerage has doesn’t work – and they often won’t even tell you that.

The only real workaround is to keep an eye on the common listing sites. In New Zealand, that means TradeMe and the individual brokerage websites or newsletters. None of the other listing websites are of much use when buying a business. Pretty much all business listings go on TradeMe at the same time as they are added to that brand’s website. Many also push the listing to RealEstate.co.nz (run by REINZ), but hardly anyone uses this for business searches, and reportedly not all brokerages put their listings on this site. Other sites, like BizBuySell or Brown Paper Bag, only include a subset of listings. You will find listings of businesses being sold by their owner or other (non-broker) representative on these latter sites, but in many cases even these will also be on TradeMe.

As a buyer, the biggest issue you need to keep in mind is that the broker is solely working for the vendor. They have a fiduciary responsibility to the vendor, meaning they need to do what they can to get their client the best deal. They do, however, have a duty of care to you as a buyer. This duty of care basically obliges them to behave fairly and professionally, and they can’t tell a lie about the listed business. They are not allowed to make up an answer, keep information they know about the business (or its surrounds that may be material) from you, or obfuscate or hide any pertinent information. They also need to get the approval of the vendor before they disclose information to you. This can lead to an ethical quandary: they can’t deceive you, but the vendor may not permit them to tell you something pertinent to the business. They can’t even tell you there is something they can’t tell you. In this situation, they either have to convince the vendor to disclose, or they are supposed to stop working for the vendor (i.e., cancel this listing). You don’t hear of many listings being cancelled by the brokerages for this reason.

One of the services we offer at TEQ is to act as a buyer coach, to help buyers – particularly first-time buyers – work through the process of buying a business. We have very few clients for this service because they think brokers will help them. I don’t know any brokers that won’t try to be helpful within the limit of their available listings. But, at the end of the day, they are not working for you, they are working for the vendor.

A somewhat blurry area of practice is the ‘off market’ listing. The broker will still have a completed listing form, but has agreed not to undertake public marketing. They will market exclusively to their ‘database’ of contacts. This can happen where the vendor wants to keep the sale very quiet and they believe their business will be easily recognised – causing concerns with employees and customers. Sometimes it is because the vendor doesn’t want to pay for marketing (you are selling your $500k business but won’t spend $10k on marketing?), and sometimes it is because they believe the brokerage marketing about ‘having a database of over 40,000 active buyers.’ As a buyer, you need to make sure you are on these client lists. Sign up to get their newsletters. And you need to reach out to as many brokers who work the space you are interested in as you can to be on their databases.

We can classify brokers into two categories: specialists or generalists. Sometimes this is self-imposed, sometimes it is the way the brokerage runs things. Specialists will have an industry space (and often geography) they service: e.g., hospitality, childcare, franchises. Generalists will list and sell anything. Check to see if there are specialists that focus on your field. If there are, introduce yourself. Otherwise you need to employ a shotgun approach and get in front of a lot of generalists.

Incentives and Behaviour

There is a claim – widely promulgated in the New Zealand industry – that by having the broker’s commission based on a percentage of the sale price that a broker’s incentive is to maximise the sale price. Great theory, but not what is seen in practice. A broker is after a quick sale, not necessarily the highest price. They would rather a commission rather than no commission. Pushing the buyer for a better price risks the sale. This is how any success-fee intermediary will operate.

Say you have a million-dollar business. At a 9% commission, you will pay $90,000 in commission. The broker gets roughly half of this, so $45,000. The choice between $45,000 and nothing (i.e., no sale) provides a very strong incentive for the broker to make the deal happen. Consider, however, the offer received for $900,000. Will the broker encourage the vendor to turn that down? A $900k sale at 9% is a total commission of $81,000, or $40,500 to the broker. What are the incentives for the broker between $40,500 and $45,000? If they can get a deal to happen at $900k, they would naturally prefer that to no sale. If there are buyers willing to pay more, they will encourage the higher price, but not at the expense of ending up without a sale.

While I haven’t found any research on business brokers specifically, the behavioural research on real estate salespeople when they are selling their own property consistently shows behaviour contrary to what they advocate to their clients. There is no reason to expect this research in the residential space would not carry over to the business sales world. When a real estate salesperson sells their own property, they tend to have it on the market longer than average, and will hold out for a price closer to the asking price. While you may be told ‘the first offer is (usually) the best offer,’ this isn’t supported by real estate salespeople’s own behaviour.

Why Is This Important?

Having an appreciation for the industry rules, structure, and the incentives that drive brokers can be useful for buyers and sellers to understand when dealing with brokerages and brokers.

It is also essential to understand there is no meaningful broker stereotype. They are all different. They all have had previous careers outside real estate and being a business broker. Most have owned one or more businesses before becoming a broker. Brokers are highly experienced and accomplished business people who choose to apply their skills to help people sell their business.