Prior to 1985, the SEC did not consider the sale of a business structured as a stock sale to be a sale of securities under the securities laws. This was known as the Sale of Business Doctrine. As a result, the penalties and rules that apply to securities sales did not apply to the sale of a business, and business brokers and merger and acquisition brokers were able to receive commissions in connections with those sales without being registered as a broker dealer. This changed in 1985 when the Supreme Court of the United States took the position that the sale of a business structured as a stock sale was indeed the sale of securities. As a result, business brokers and merger and acquisition brokers were prohibited from earning commissions in connection with those sales unless they were registered as a broker dealer. This created substantial implications for business brokers and mergers and acquisition brokers, especially where a transaction started out structured as a sale of assets and then during the course of negotiations, the transaction was restructured to be a sale of stock. In that case, business brokers and merger and acquisition brokers that were not registered as broker dealers were theoretically prohibited from earning a commission, simply because the structure of the transaction had changed. This result was often thought of as unfair in the industry.

The ABA task force on private placement broker dealers noted in its year 2000 final report that the broker dealer registration process involved significant costs as well as a regulatory model that is not the right size to accommodate the particular role played by business brokers in connection with the sale of a business. The requirement to register as a broker dealer is a lengthy process and there are substantial costs and fees, together with start up and first year expenses, including legal, accounting, and operating costs that can equal several hundred thousand dollars. Persons effecting one or several transactions a year simply cannot bear this financial burden. These firms do not hold customer funds or securities and generally they merely introduce the parties to one another and transmit documents between the parties. They do not participate in structuring or negotiating these transactions or otherwise advise the parties. Both buyers and sellers in this type of transaction are typically represented by legal counsel who can assist with due diligence, draft the transactional documents and advise their clients on structure, tax considerations and contractual provisions and there are remedies, both contractual and by operation of law, that are available to the parties in these types of transactions.

On January 31, 2014, the SEC changed its mind about these matters and issued a long awaited no action letter permitting certain merger and acquisition brokers to receive commissions in connection with the sale of a business even where the sale is structured as a stock sale.

Under the new interpretation, merger and acquisition brokers are permitted to facilitate acquisitions, mergers, business sales, and business combinations on behalf of buyers and sellers of privately-held companies and receive commissions in connection with the transaction. Moreover, the letter does not limit the amount or type of compensation that a merger and acquisition broker may receive, and it does not limit the size of the privately-held company. The letter also permits merger and acquisition brokers to advertise the sale of a privately-held company and include in such advertisements a description, general location and price range of the business.

For purposes of this letter ruling, a privately-held company is one that does not have any class of securities registered or required to be registered with the SEC under Section 12 of The Exchange Act or to which it is required to file periodic reports under Section 15(d) of The Exchange Act. Also the company must be a going concern and not a shell company.

As is so often the case in these matters, there is a catch. In this case, the catch is that the relief available under this no action letter is only available if the transaction satisfies ten (10) very specific conditions.

Those conditions are as follows:

1. The “merger and acquisition broker” must not have the ability to bind a party to a merger and acquisition transaction. A “mergers and acquisition broker” for the purpose of the letter is a person engaged in the business of effecting the securities transaction solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or business combination involving securities or assets of the company, to a buyer that will actively operate the company or the business with the assets of the acquired company.

2. The merger and acquisition broker must not directly or indirectly through any of its affiliates provide financing for the merger and acquisition transaction. The merger and acquisition broker may assist the purchaser in obtaining financing from an unaffiliated third party but they must comply with all applicable legal requirements and disclose to their client, in writing, the receipt of any compensation in connection with the financing.

3. The mergers and acquisition broker is prohibited from having custody, control or possession of or otherwise handling funds or securities issued or exchanged in connection with the merger and acquisition transaction or other securities transactions for the account of others. The merger and acquisition transaction cannot involve a public offering. Any offering of securities must be conducted in compliance with an applicable exemption from registration.

4. No party to a merger and acquisition transaction may be a shell company, other than a business combination related company.

5. If a merger and acquisition broker represents both the buyer and the seller in a transaction it must provide clear written disclosure of the potential conflict to the parties it represents and it must obtain written consent from both parties to the joint representation.

6. A merger and acquisition broker may only facilitate a merger and acquisition transaction with a group of buyers if the group is formed without the assistance of the merger and acquisition broker.

7. Buyers or a group of buyers in a merger and acquisition transaction must control and actively operate the business acquired with the assets of that business. In this regard, control will be considered to be achieved if the buyers have the power directly or indirectly to manage the company or the policies of the company through ownership of securities by contract or otherwise. Under the view of the SEC, a buyer could be considered to actively operate an acquired company simply by possessing the power to elect executive officers and approve annual budgets or by service as an executive or other executive manager, among other things. The necessary control will be presumed if at the completion of the transaction the buyer or group of buyers has the right to vote 25% or more of the class of voting securities; has the power to sell or direct the sale of 25% or more of a class of voting securities; or in the case of a partnership or limited liability company has the right to receive, upon dissolution 25% or more of the proceeds from the dissolution, or has contributed 5% or more of the capital to the transaction. In addition, the buyer or a group of buyers must actively operate the company or the business acquired with the assets of the company.

8. No merger and acquisition transaction can result in the transfer of interests to a passive buyer or a group of passive buyers.

9. Any securities received by the buyer in the merger and acquisition transaction will be restricted securities within the meaning of Rule 144(a)(3) of The Securities Act.

10. A merger and acquisition broker must meet the following conditions:

(a) The broker has not been barred from association with a broker dealer by the SEC or any state or self-regulatory organization.

(b) The broker must not be suspended from association with a broker dealer.

These rules make very clear who will be entitled to the exemption provided in the no action letter. As a result of these changes, business brokers and merger and acquisition brokers will no longer have to worry whether or not they will be able to receive their commission in the event that a transaction is ultimately cast as a stock purchase. The SEC’s actions in this instance are grounded in an understanding of the realities of the typical sale of business transaction. The truth is that those transactions are structured on the basis of accounting or tax considerations, and not on the application of federal securities laws. The sale of a business between sellers and buyers of privately-owned companies are qualitatively different in virtually every respect from traditional retail or institutional brokerage transactions.

We are encouraged that the SEC recognized these distinctions. This decision will clarify a tricky area of the law and provide appropriate relief to business brokers and mergers and acquisition brokers who work in this area.

My Business Broker, My Banker

When you buy a business (or a franchise) the seller traditionally are willing to pay a finder fee or commission. Brokers will charge anywhere from 5-20% of the purchase price for listing the business. Franchisors will pay referral fees depending on what the total price of the franchise is. How can that be of benefit to you when you are buying your business?

During tough credit times most brokers are willing to carry back some portion of the commission to help the buyer and the seller complete the transaction. Some business brokers live and die by the idea that they will absolutely never carry back a commission, consequently they can and will kill the business purchase. When using these techniques remember that business brokers are professionals and they need to make a living to. These techniques are not to pull the wool over their eyes, they’re merely present to help you negotiate better.

Here are a few steps to get your business broker or franchise consultant to help finance your acquisition.

1. Listen to the first piece of information the business broker wants to know – Several brokers will start off their relationship with a buyer by initially asking, “How much cash can you put down IMMEDIATELY on this business if you were going to buy it?” This is the business brokers’ way of playing poker. Remember the object (the true object) of poker is to get the other party to show the maximum risk they are willing to accept. If you tell the business broker that you have $100,000 then they will try to get you to put even more down.

2. Ask the broker how business is going – This is the thermostat to knowing whether or not the broker is willing to play ball or not. A broker whose business is thriving may not worry about lending a qualified borrower a small amount of money to finish the acquisition. On the other hand a starving broker may be more than willing to lend money to get some portion of the commission.

3. Avoid engaging in a contract directly with the broker – Traditionally the business broker has engaged the seller for a listing. A business buyer can engage a broker to help them buy a business; however in many states brokers do not split commissions. Consequently a contract with the broker with the buyer may lead to a very odd relationship.

4. Ask the seller how much of a commission they are paying the broker – Here is your opportunity to play poke. Most business sellers feel like they are getting nailed to the wall when they are selling the business. They are giving up 5-20% of the business to some guy or gal that the seller considers to be a glorified real estate agent! What did they do in the past 20 years to earn this huge portion of the seller’s retirement fund? I find getting to see the listing agreement is one of the easiest parts of negotiations.

5. Ask the broker where to come up with the remainder of the money – The broker will try to get you to put more cash on the table. The greater the cash you commit to buying the business the more likely you are to close, and be successful with your new venture (according to the business broker.) When and if there is a “boot” or remaining funds that you need to come up with ask the business broker – frankly where to find it at. They may direct you to some lending sources, but a good broker may consider doing a carry back with the seller to accommodate the transaction.

7 Tips on Picking the Best Business Broker

Thinking of selling your small business? Are you one of those fearless entrepreneurs who think they can market, negotiate and close a deal by themselves or are you going to take the more logical route of working with a business broker? If sanity prevails and you are going to work with a pro, here are a few things to look for to find the best business broker.

1. Get recent references

Ignore all the hype a brokerage firm places in their literature and ask for recent references and then follow up and actually check them out. If you’re dealing with a larger business brokerage, get references from the broker you will be working with. Big offices will always have rookies and you want to insure that the broker you get knows his or her stuff.

2. Work with certified brokers

Many states require that business brokers hold a real estate license but just having that license does not mean that the broker necessarily knows anything about buying or selling a business. In fact a number of realtors turn “business brokers” when the real estate market gets slow. What you should be looking for is certification from the International Business Brokers Association who grants a certificate as Certified Business Intermediary (CBI) after completion of an extensive educational course.

3. Don’t be fooled

If the reason that you are considering selling is because you received a letter or email from a broker with the message “We have a buyer for you” then think again. This is one of the most common marketing ploys used in this business. Without question these brokers probably have people interested in buying a business but not necessarily yours.

4. Don’t rush to a decision

Selling your business is a big deal and one you want to be sure you do right. In your conversation with brokers ask them if now is a good time to sell. Ask for an opinion of value. Coming up with this could take a bit of time and if the broker is reputable, he or she may advise you not to put the business on the market but rather make suggestions on what to do to improve the value. A broker who makes this suggestion is looking to make both of you a bigger buck by making the business more attractive.

5. Pick a brokerage with experience in your industry

Look at current listings that the broker has. Check out both the size and types of industries to insure that he or she has experience in your market place. Again, don’t rely on marketing material find out the facts yourself.

6. How does the broker market

Ask what the broker’s marketing plans are and ask to see samples. If he simply puts an ad in the paper or posts it to a single website you probably aren’t getting the exposure you deserve. Good brokers have networks they can tap to find interested and qualified buyers.

7. Avoid packaged services

At some point in the sales process you are going to need the services of an attorney and a qualified accountant. Your broker will probably offer those services but in most cases what he or she is doing is outsourcing to someone else. If you have your own attorney and CPA just stick with them. Otherwise it may be less expensive to find and deal direct with those professionals rather than getting them through the broker.

Finding the best business broker isn’t really that difficult it simply requires some time and effort on your part. However, getting the best broker makes a huge difference in how the experience plays out and the total value of the deal.

Role Of Business Brokers In Selling A Business

Role of business brokers in selling a business is more important than buying a business. However, there are people who do not understand the importance of the role of business brokers when they decide to sell their business. Irony is that some people are happy with giving more time to the selection of a coffee machine rather than to choosing the right business broker. This is a big mistake on their part and can result in not only the loss of money and time but also sometimes resulting in inability to find any buyers.

Here are some points to consider when you choose the business broker for selling your business. However, it is not possible to get a broker who has all the qualifications yet you must look for experience, knowledge, reliability and compatibility with you.

Reliability is essential because the role of business broker in selling a business is very important. How can you judge whether a particular business is reliable or not? The best method is to contact the references given by the business broker. They are in the best position to tell about how the business broker performed the deal. Ask them whether they are satisfied with the role of business broker or not. Also, make sure that the business broker you are going to hire has the capability of taking the transaction to the end and can follow up.

These references can also give you indications regarding the price they got for selling their business. Could they get the price they were expecting? Also, ask them about the consistency of the business broker with the plan charted out in beginning. They can also tell about the level of knowledge the broker has and his capability of providing the right advice. One very important question that you can ask is if need be would they like to hire the same broker again or not. The answer to this question can help you in taking decision quickly regarding hiring the business broker for selling the business.

If the business broker you are going to hire for selling the business belongs to the association of brokers then this is a point in his favor adding to his reliability. This is because the Associations such as International Business Brokers Association apply very strict ethical rules. Similarly, you can gauge the level of the knowledge by asking some questions. The business broker should not only have completed formal education to perform his job perfectly, but also need to keep himself informed about the changes in the particular industry.

Finally, a tip regarding experience of the business broker you are going to hire. If the business broker has ever owned a business then he is a better choice than the others who never run any business.