First Steps Finally Taken to Introduce Better M&A Regulation in the U.S.


August 12, 2013

As many of the baby boom generation approach retirement, with some already having reached this stage, an estimated $10trillion of privately owned businesses will be sold or closed in the coming years.  The selling and buying of businesses is crucial to the stability and growth of the economy, and is one of the major factors supporting job preservation and creation.


The Role of Brokers
Merger and acquisition (M&A) brokers play a crucial part in the sale and purchase of businesses.  Their role is to connect those looking to sell their business with individuals or investment groups looking to buy, before facilitating due diligence and offering advice to both parties prior to a cash for assets agreement and/or the transferring of business ownership rights.


The costs associated with using registered M&A brokers – often starting at $500,000 and quickly increasing – can be prohibitive and unaffordable to small businesses looking to sell.  While the M&A industry and the brokers themselves are regulated, the costs they charge and apply are currently not.  Consequently, a buyer may decide to use an unregistered broker to lower costs.


However, such brokers are guilty of violating securities laws, and in some cases business owners will lose money on failed sales, or face a later lawsuit from a buyer when it is discovered an unregistered broker is being knowingly used.  At this point, the seller will have little left to sell, having covered their costs, and an unviable business to operate, if anything at all.


Having the choice between spending upwards of $500,000 to sell a business, or taking a risk that could easily see you end up with nothing, isn’t a great place to be in after perhaps 50 years of hard work and effort to succeed and grow a business.


The Alliance of Merger and Acquisition Advisors (AM&AA)
Since 2006, AM&AA has been working with numerous groups, including the International Business Brokers Association (IBBA), to pressure the Securities and Exchange Commission (SEC) into making regulation of M&A broker costs a priority.


While the SEC accepted it was something that should be looked into, AM&AA recognised a pressing need to help small businesses urgently and bring regulation to M&A costs, particularly as such a large number of sales, both numerically and in dollar terms, were potentially imminent.


During this time, AM&AA lobbied a number of politicians regarding the need for urgent legislative action, including Republican Bill Huizenga, in the U.S House of Representatives for Michigan’s 2nd congressional district.


AM&AA’s initial objective was achieved when, on June 6 2013, Huizenga, cosponsored by fellow Representatives Brian Higgins and Bill Posey (and later, on June 27, Joe Heck) brought H.R. 2274 – The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013 – before the House.  This step represents a significant success for AM&AA in their quest to bring greater levels of fairness and transparency to M&A.


A Summary of H.R. 2274
H.R. 2274 aims to simplify the regulation of brokerage services to reduce costs and ensure business owners are protected during a sale and able to use high quality, registered M&A brokers to facilitate their sale.


Were the legislation to be passed, it would make it simpler for M&A brokers to register their operations with the SEC, while it also directs the SEC around amendments to guidelines and regulations it should create in light of the activities of M&A brokers.


The SEC would also take on a number of responsibilities from the Financial Industry Regulatory Authority (FINRA), and work in conjunction with state securities regulators to establish consistent standards, training, and practices across all M&A brokers.


Next Steps
H.R. 2274 was immediately referred to the House Committee on Financial Services, on which Representatives Huizenga and Posey sit. Once the legislation has been approved in the House of Representatives, it will move onto Senate, before finally being signed into law by President Obama, subject to any amendments or additions made at any stage in the interim.

You can download the full legislative text concerning H.R. 2274 by clicking here.

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