How Business Brokers Double Dip on SBA Deals Without Telling You: Legal but Unethical?

If you have ever worked with a business broker to sell or buy a company, you may have heard claims of a business being “pre-approved for SBA financing” or the broker telling sellers and buyers they “have a preferred bank that can close faster than others.” What you likely did not hear is that the broker also gets paid by that bank when the loan closes.

This practice of collecting both a commission from the seller and a referral fee from the lender happens every day across the country. While it may not violate the letter of current SBA regulations, it violates the spirit of fairness and transparency those rules were meant to protect. As a business attorney who deals with SBA-financed transactions, I have seen this scenario repeatedly. The result is predictable: buyers and sellers lose leverage, while brokers quietly make more money by taking commissions from both sides of the transaction.

Understanding the Rules: 13 CFR §103.4(g) and SBA Form 159

At the core of this issue are two important SBA oversight tools: 13 CFR §103.4(g) and SBA Form 159.

13 CFR §103.4(g) is a federal regulation that defines who can receive compensation in connection with an SBA loan. Often called the “two masters” rule, it prevents loan agents from being paid by both the borrower and the lender unless both parties are informed in writing. The rule was intended to keep loan agents from secretly double dipping and to ensure that neither the borrower nor the lender was misled about where money was changing hands.

The regulation allows one exception. If the same person acts as both a loan packager for the borrower and a referral agent for the lender, that person can receive compensation from both sides only after disclosing the arrangement in writing to each party. Without this disclosure, the dual payment violates SBA ethics standards and can result in revocation of a broker or lender’s ability to participate in SBA programs.

SBA Form 159, known as the Fee Disclosure and Compensation Agreement, is the form used to document these payments. Every SBA loan requires one. The form identifies anyone who receives fees or compensation related to the loan and specifies who pays them and how much. The lender must collect signatures from both parties and submit the completed form to the SBA after closing.

On paper, this form should protect borrowers from hidden referral fees or inflated costs. The problem is that it covers only payments related to the borrower’s side of the transaction. If a business broker represents the seller in a deal and collects a separate commission from a lender for steering the buyer’s financing, that payment is invisible to the seller. The SBA’s oversight does not extend to the seller’s side of the transaction. That is the loophole brokers rely on.

The Hidden Economics of Business Brokerage

Most business brokers earn a commission based on the sale price of the business they represent. For smaller transactions, the typical commission is between 10 and 15 percent. Deals over $5 million often use a sliding scale where the percentage drops as the price increases. A $2.5 million sale at a 10 percent commission generates $250,000 in fees for the broker.

But some brokers take it further. Many establish relationships with SBA lenders who pay them additional referral fees when loans close. The standard referral payment ranges between 1 and 3 percent of the loan amount. On that same $2.5 million sale and associated loan, that equals another $25,000 to $75,000. The combined income from a single transaction can approach $325,000 or more when you add the seller’s commission and the lender’s referral fee.

Brokers rarely disclose these lender payments to sellers or buyers. They justify it by pointing to the fact that the SBA rules only require disclosure to the borrower through Form 159. Sellers, who hired and are paying the broker, are unaware their representative is also receiving money from the buyer’s financing source.

The “Preferred Bank” Pitch

One client I advised encountered a common situation. The broker strongly encouraged every potential buyer to use one particular bank for financing, claiming that bank had unbeatable rates and could close faster than others. What the broker left out was that the bank also paid them a referral fee for every loan that closed.

During the sale, the broker collected a $375,000 (15%) commission from the seller and a $50,000 (2%) referral fee from the bank. The seller had no idea the second payment existed. The broker’s advice about which bank to use was not motivated by a desire to help either party. It was based on maximizing income.

The result was a deal where both the seller and buyer made financial decisions under the illusion that the broker’s advice was unbiased. While we spoke to the bank and confirmed the referral fee, so, our client was aware of the fee. Our client, the buyer, could have selected a lender with better terms, but chose not to "rock the boat" and comply with the requested bank.. The seller believed they had a broker focused on their success when, in reality, the broker was serving two financial interests. The deal also took twice as long as SBA loans typically take to process.

The LOI Bank Requirement

Another recent case involved a broker who went beyond persuasion and imposed a requirement in the Letter of Intent that the buyer must use a bank “approved” by the broker. The buyer already had a pre-approval with another lender offering better terms. The broker refused to allow it.

That broker had referral arrangements with several banks. By controlling which lender the buyer used, the broker guaranteed they would receive their extra 1-3 percent referral fee. When our client learned about the hidden incentive, they were clearly upset and had them questioning everything from the broker and seller going forward - ultimately causing the deal to fall apart for multiple reasoning including the failure to disclose referral fees. This level of control mirrors the behavior the “two masters” rule was designed to stop, yet it remains technically permissible because of how SBA disclosure rules are written.

The SBA Pre-Approval Myth

Perhaps the most effective way brokers influence both buyers and sellers is through the notion of “SBA pre-approval.” Sellers often boast that their business is “pre-approved” for SBA financing because a lender has already reviewed their numbers. Brokers then use that phrase to create a false sense of security and urgency.

Here is what SBA pre-approval actually means: a lender did a quick glance at basic financials to see whether the business looks like it could support a loan. It is not a guarantee, it is not formal underwriting, and it does not account for a buyer’s credit, collateral, or management experience.

Despite that, brokers present pre-approval as if funding is virtually guaranteed. Sellers hear this and believe their business is more marketable, assuming lenders have endorsed the deal. Buyers hear it and think they will close faster if they use the broker’s chosen bank. Both parties buy into an illusion that primarily serves the broker’s financial interest.

How Business Broker Double Dipping Hurts Sellers

The lack of disclosure damages sellers first. Sellers typically hire brokers expecting loyalty and transparent advice. When a broker also earns from the lender, that loyalty splits.

The false sense of confidence created by pre-approval claims often causes sellers to make poor strategic decisions. They believe their business has already been vetted for financing and that any qualified buyer will close quickly. Sellers may reject legitimate offers or hold out for a higher price under that assumption. When the lender finally reviews the real financial documents and declines the loan or delays closing, the seller loses valuable time and momentum.

Sellers also suffer from reduced market competition. When brokers restrict buyers to certain lenders, fewer financing options are explored, and fewer competitors bid for the business. The lack of competitive financing options leads to lower sale prices or failed deals. The seller never knows the buyer might have made a stronger offer with better financing elsewhere.

Even more concerning is the breach of trust. When a seller pays a broker’s commission of 10 to 15 percent, they reasonably expect that broker’s advice to be free of conflicting incentives. Discovering that their representative took another check from a lender while presenting themselves as an unbiased advisor is corrosive to the entire process.

How Business Broker Double Dipping Hurts Buyers

While sellers lose time and money from false expectations, buyers often face the most immediate harm. Buyers rely on brokers for guidance, assuming their recommendations stem from experience. This false scense of guidance is most likely precieved when they hear the broker tell them they "here to help get the business sold" or are "here to help guide what terms of the deal the seller is most likely to accept." When a broker is being paid by a lender, that assumption becomes dangerous.

Buyers are told that using the broker’s bank will make everything easier because the deal is pre-approved. They are pressured to skip independent loan shopping and trust the broker’s preferred lenders. This stifles competition among lenders and prevents buyers from securing the best loan terms for their situation.

In the SBA lending market, rates, fees, guarantee structures, and prepayment penalties vary widely between banks. A buyer could save tens of thousands of dollars over the loan term by comparing multiple offers. Brokers who restrict that process are not simplifying the deal for the buyer - they are securing their referral payment.

Buyers also waste time and money when pre-approval turns out to be meaningless. They invest in due diligence, appraisals, and legal work believing the financing is guaranteed. When underwriting reveals issues that disqualify the deal, buyers are out thousands of dollars and months of effort.

The larger impact is market-level. By steering buyers to certain banks and labeling businesses as pre-approved, brokers reduce overall competition among lenders. When fewer banks compete for small business acquisitions, interest rates and fees stay higher than they should be. The only consistent winner in that equation is the broker, who collects an extra one to three percent of the loan amount for every deal.

Why Brokers Get Away With It

The reason this practice continues comes down to the narrow focus of the existing regulations. SBA rules were written for loan packagers and referral agents, not for business brokers representing sellers. The expectation was that anyone directly assisting a borrower would be the one posing a potential conflict of interest. Legislators never considered that brokers representing sellers could become indirect participants in SBA deals.

Because the broker’s commission is paid by the seller and the referral fee is paid by the lender, each payment seems to exist in its own universe. There is no single transaction requiring full disclosure to both parties. The buyer’s lender discloses the referral payment on Form 159, satisfying the SBA’s requirement, while the seller, who paid the broker’s commission, is never informed.

This structure allows brokers to claim they are complying with all applicable laws even when their conduct would clearly be unethical under any reasonable disclosure standard.

The Need for Reform

To fix this issue, the SBA should update its Standard Operating Procedures to require universal disclosure whenever someone receives compensation from both a transaction principal and a lender on the same SBA-financed deal. Rather than having Form 159 cover only borrower-side payments, a new standard disclosure should also reach seller-side participants like brokers.

State business broker licensing agencies can help by requiring brokers to disclose referral fee arrangements to all clients. If the real estate industry can manage basic conflict-of-interest rules through its affiliated business disclosures, the business brokerage community can do the same.

Transparency is not about banning referral fees. Lenders and brokers can have relationships that speed up legitimate financing. But everyone in the deal deserves to know when those relationships exist and how much money changes hands because of them.

Until that happens, buyers and sellers must take individual precautions. Ask brokers directly if they receive any compensation from lenders they recommend. Require written disclosure. If a broker insists a business is pre-approved, ask which specific bank issued the pre-approval, what documents were reviewed, and whether that bank has any financial relationship with the broker. If they avoid the question, that tells you what you need to know.

For brokers and bankers that avoid answering our questions, posed as the legal representation of buyers, we have gone as far as requesting this infomration as part of due diligence (in the case where the bank is an LOI requirement) and also adding in the purchase agreement a requirement of the seller to provide buyer an additional document disclosing broker's referral fees.

Breaking it All Down

The double dipping problem among business brokers erodes trust and distorts SBA financed transactions. Brokers who claim to represent sellers while secretly collecting referral fees from lenders act against the interests of the very clients who pay them. Sellers are misled into believing deals will close quickly because their businesses are pre-approved, and buyers lose out on better financing options because they are pressured to use the broker’s preferred bank.

This lack of transparency inflates broker income, reduces competition between lenders, and threatens confidence in small business lending overall. The referral payments are not small. Combined with a standard 10-15 percent commission and a two percent lender kickback, a broker on a $2.5 million sale can collect over $375,000 in compensation; most of it invisible to the people who believe the broker is guiding them in good faith.

Whether the SBA updates its regulations or state brokers uphold higher ethical standards, the solution is simple: full disclosure. Until then, buyers and sellers must protect themselves by asking direct questions, shopping for their own lenders, and keeping their eyes open for conflicts of interest that may cost them far more than they realize.

Important Legal Disclaimer: This article is for general educational purposes only and is not legal advice. It reflects perspectives from experienced North Carolina business attorneys and M&A advisors at Howard Law regarding documented cases of business broker misconduct and regulatory failures. This is not legal advice for any specific jurisdiction. Reading or relying on this article does not create an attorney-client relationship with Howard Law. Case information is based on publicly available court records and regulatory filings.

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Howard Law is a legal and M&A advisory firm providing experienced representation for buyers and sellers navigating business transactions nationwide. We specialize in protecting client interests from unqualified or unethical intermediaries while ensuring successful deal completion with appropriate professional standards. Contact us at www.ehowardlaw.com for consultation on your business acquisition needs.