A change in federal law opens new options for owners considering the sale of their small business.
Language embedded in the $1.7 trillion federal spending bill that Congress enacted and President Joe Biden signed just before the new year creates an exemption for business brokers and M&A advisers who represent buyers and sellers in a transaction.
The exemption means that an owner of a small business can sell their equity shares without their M&A broker having been registered with the U.S. Securities and Exchange Commission, a requirement needed to buy and sell securities.
The change will allow owners to more readily sell their entire business to a seller, instead of just the assets.
“This legislation will allow business brokers and M&A advisors to assist small business owners with the sale of their actual business entities, their stock or membership interests,” Mark Andresky, principal of Performance Business Advisors LLC that has offices in Grand Rapids and Charlevoix, wrote in an email to MiBiz.
“Prior to this legislation, advisors were only permitted to assist in the sale of a company’s assets without facing potential regulatory violations. Those who wanted to assist owners with the sale of their company entities had to obtain securities licenses and affiliate with a broker-dealer or qualify to become a broker-dealer, an expensive and onerous process,” Andresky said. “This also resulted in cumbersome and needless compliance due diligence for small business owners and their advisors as well as higher fees in some cases.”
Business brokers, M&A attorneys and trade groups have been pushing for years to get Congress to enact the registration exemption.
U.S. Rep. Bill Huizenga, R-Zeeland, has repeatedly introduced legislation in Congress to create an exemption. The legislation often passed the House, but never got through the Senate.
After the exemption in May passed the U.S. House again on a unanimous 419-0 vote, proponents got the language added to the omnibus spending bill that President Biden signed into law Dec. 29, although Huizenga voted against the broader legislation.
Huizenga at the time said the move was “designed to level the playing field for small businesses by reforming a costly one-size-fits-all regulatory requirement when a small or medium-sized business transfers ownership.”
“This is a problem long identified by practitioners and the regulators themselves,” he said. “Whether it’s a locally owned store in Holland, Michigan, or a Fortune 500 company, today, the same rules apply, regardless of the size of the business, the size of the transaction, or whether they are publicly or privately held.”
Shane Hansen, an M&A attorney at Grand Rapids-based Warner Norcross + Judd LLP who’s been working on the issue for more than 15 years, called passage of the registration exemption a “blessing.” The exemption covers transactions involving privately owned companies with up to $250 million in gross revenue or $25 million in earnings before interest, taxes, depreciation and amortization, Hansen said.
The registration process for business brokers and M&A advisers can cost $150,000, including legal, accounting and other consulting services, and can take months to complete, Hansen said. Business brokers and M&A advisers also must maintain costly membership in the Financial Industry Regulatory Authority (FINRA).
A majority of transactions are structured with the seller selling the company’s assets, not their shares in the business, Hansen said. On some occasions, the buyers will decide later in the transaction process that they want to acquire the seller’s stock in a business rather than just the assets, whether for tax, liability and other reasons, triggering the requirement that the M&A brokers involved in the deal must be registered with the SEC, he said.
Hansen expects that the new registration exemption will result in more business brokers representing smaller businesses at rates that owners can afford.
“It will allow those privately owned companies to hire an M&A broker and not pay the full freight that a Wall Street investment banking firm charges to help sell the business or to buy a business,” he said.
The change in the federal law comes as Baby Boomer entrepreneurs look to retire and sell their businesses. BizBuySell.com, an online platform for selling and buying small businesses, noted in a November report on activity through the third quarter, that while “we have yet to truly see that gray tsunami swell, the clouds are brewing.” A BizBuySell survey of owners found that nearly half are selling to retire.
That trend will drive up demand for advisers who can market companies to sellers and assist owners in a transaction, Hansen said.
The COVID-19 pandemic also has led business owners who navigated through the turbulence of the last few years to decide to sell, he said.
“Both retirement and COVID have really created a demand for professional services to help sell a business,” Hansen said. “We’re talking millions of small businesses, everything from the corner bookstore, to the tool and die shop, to a car dealership and different kinds of manufacturing businesses.”