CBB Client Relations & Ethics 2 — Questions and Answers
Question 1: A business broker learns that a seller client is withholding information about pending litigation from potential buyers. What is the broker's ethical obligation?
- Respect client confidentiality and say nothing
- Advise the seller to disclose the litigation or withdraw from the engagement (Correct answer)
- Disclose the litigation directly to all buyers without telling the seller
- Reduce the asking price to compensate for the undisclosed risk
Correct answer: Advise the seller to disclose the litigation or withdraw from the engagement
Brokers must advise clients to make required disclosures or terminate the engagement rather than participate in misrepresentation.
Question 2: Which practice best demonstrates a business broker's fiduciary duty to a seller client?
- Accepting the first offer received to close quickly
- Negotiating aggressively on price while fully informing the seller of all offers (Correct answer)
- Sharing the seller's minimum acceptable price with the buyer to speed up the deal
- Charging a higher commission when the business sells above asking price
Correct answer: Negotiating aggressively on price while fully informing the seller of all offers
Fiduciary duty requires the broker to act in the client's best interest, which includes thorough negotiation and full disclosure of all offers.
Question 3: A broker represents both the seller and a buyer in the same transaction. Which term describes this arrangement?
- Exclusive agency
- Dual agency (Correct answer)
- Net listing
- Transactional brokerage
Correct answer: Dual agency
Dual agency occurs when a broker represents both parties in the same transaction, creating potential conflicts of interest that must be disclosed.
Question 4: Under the IBBA Code of Ethics, which action is explicitly prohibited when marketing a business for sale?
- Listing the business on multiple platforms simultaneously
- Making materially false or misleading statements about the business (Correct answer)
- Charging a retainer fee before beginning marketing efforts
- Contacting competitor buyers without seller approval
Correct answer: Making materially false or misleading statements about the business
The IBBA Code of Ethics prohibits brokers from making false or misleading statements about businesses they represent.
Question 5: A buyer client asks a business broker to help evaluate a target business that the broker previously listed. What should the broker do first?
- Decline to assist the buyer entirely
- Disclose the prior relationship to the buyer and obtain informed consent (Correct answer)
- Proceed normally since the listing has ended
- Transfer the engagement to a partner broker without disclosure
Correct answer: Disclose the prior relationship to the buyer and obtain informed consent
Prior relationships with parties in a transaction must be disclosed to current clients so they can make an informed decision about the representation.
Question 6: What is the primary purpose of a non-disclosure agreement (NDA) in a business sale?
- To prevent the broker from representing competing sellers
- To protect confidential business information shared with prospective buyers (Correct answer)
- To ensure the buyer cannot back out of an accepted offer
- To limit the seller's liability after the transaction closes
Correct answer: To protect confidential business information shared with prospective buyers
NDAs protect sensitive business data—such as financials, customer lists, and trade secrets—from being misused by prospective buyers who do not complete the purchase.
Question 7: A broker discovers that a long-standing seller client has overstated inventory values in the financial disclosures. The broker should:
- Ignore it since the buyer's accountant will catch the error during due diligence
- Counsel the seller to correct the financial disclosures immediately (Correct answer)
- Reduce the commission as a penalty for the inaccuracy
- Disclose the overstatement directly to all buyers without consulting the seller
Correct answer: Counsel the seller to correct the financial disclosures immediately
Brokers must counsel clients to correct inaccurate disclosures and cannot knowingly allow false financial information to be presented to buyers.
CBB Client Relations & Ethics 2
A business broker learns that a seller client is withholding information about pending litigation from potential buyers.
What is the broker's ethical obligation?