Buying and Selling Small Businesses

Business brokers and M&A specialists may soon be able to earn commissions for arranging sales of small, privately-owned businesses without submitting to full-blown federal regulation.  There is a movement afoot to free them from government oversight so as to facilitate the acquisition of existing businesses by new entrepreneurs.

Last month, Representative Bill Huizenga (R – MI) introduced legislation in the House that would create a new category of transaction intermediary called a “merger & acquisition broker” who could earn commissions for brokering the sales of small, privately-held companies by simply notifying the SEC of its intentions in a publicly-available, electronic filing.  The information required in that filing about the broker and its personnel is to be determined by SEC rulemaking, along with any information that may need to be given to the buyers or sellers of the businesses being sold.

Under current federal law, earning a commission for brokering the sale of any business involving an exchange of securities would normally require the broker to be regulated by the SEC and supervised by a FINRA member firm (see SEC Zeroes in on Internal Marketers at Top Funds) regardless of the size of the business being sold or whether the securities involved in the transaction are privately-held or publicly-traded.  The argument for the proposed exemption is that sales of private companies are heavily negotiated transactions in which the principals do not need the protections of federal government regulation.

In the Huizenga bill, a business broker can only qualify for an exemption from SEC regulation and FINRA membership if the companies whose sales it facilitates do not have any publicly-traded securities outstanding and who have EBITDAs of less than $25 million or gross revenues of less than $250 million (both amounts to be inflation-adjusted every five years).

Each sale must also result in a change of control of the company and, if the consideration includes securities of the buyer, the seller must also be given the buyer’s most recent financial statements. Additionally, the broker must limit its involvement in the negotiations and avoid advising either seller or buyer, handling any of the securities involved in the transaction or assisting buyers in obtaining financing.  Lastly, the broker must have a clean securities record.

The proposed bill does not preempt state securities regulation of business brokers which varies all over the map.  Some states exempt brokers from registration solely for sales of entire businesses; others require licensing where brokers are paid commissions for arranging sales.  Model state rules are apparently also in the offing.

To put the scope of this proposed legislation in perspective, there are reportedly $10 trillion of privately-held US businesses projected to come onstream as baby-boomers retire.  That’s approaching the size of the entire US economy today.