If you’re looking into an M&A transaction and/or looking to hire an investment banker, you’ve probably got questions. Luckily, we have answers.
Smart Business spoke with Albert D. Melchiorre, president of MelCap Partners, LLC, about M&A advisors, licensing requirements, and the unique characteristics associated with the middle market.
1. What are the licensure requirements?
M&A advisors are required to comply with securities laws and be a licensed broker-dealer or be a representative of a licensed broker-dealer firm in order to carry out M&A transactions involving a company’s securities. In the M&A world, this includes any transactions involving the sale of a company’s stock to effect the sale of the business, often referred to as a “stock deal”. What many people don’t realize, however, is that transactions conducted through the sale of the assets of the business, or “asset deals”, also require a licensed advisor due to some fairly common circumstances. For example, when any part of the consideration paid to the seller in an asset deal is deferred in the form of a seller note, a licensed advisor is required because the seller note is often considered to be security of the seller.
2. How does this impact middle market business owners?
The selection of a properly-licensed advisor can have a profound impact on the sale of a business, particularly a middle-market business. Since a typical middle-market business owner will sell a business only once, selecting the right business advisor to handle the transaction is one of the most important decisions they can make in their lifetime. This decision can impact not only the business owner, but also key managers and employees, family members, customers, suppliers, and others.
3. What are the risks of the unlicensed M&A advisor?
The bottom line is that the selection of an unlicensed advisor can put the entire sale transaction at risk and can result in the possible rescission of the entire transaction if challenged in court. If that weren’t bad enough, additional fines and penalties can also arise. Because of the negative impact of a rescinded sale in the form of uncertainty among customers, suppliers, and employees, conducting business as usual can be similar to trying to put toothpaste back into the tube. The sale process needs to be done once and done correctly.
4. What are the benefits of proper licensing to the middle market business owner?
Proper licensing may give the business owner greater confidence that the sale of their business is being handled in the most professional and effective way. A licensed advisor may have a thorough understanding of the risks of improper licensing for their clients, and has chosen to eliminate those risks by completing the licensing process and the ongoing requirements to keep the license active.
5. What does proper licensing say about your M&A advisor?
Proper licensing can assist in demonstrating that the M&A advisor is current on relevant regulatory issues and has proactively taken steps to eliminate licensure risk for their clients. Going through the licensing process requires a commitment of financial resources and time on the part of the advisor, as well as continuous monitoring of business activities by regulatory authorities such as the Financial Industry Regulatory Authority (FINRA). By passing several rigorous examinations, the licensed advisor has also demonstrated a sufficient grasp of the specialized knowledge involved in the M&A process for the benefit of their clients.
Albert D. Melchiorre is President of MelCap Partners, LLC. You can reach Al at at (330) 239-1990
or [email protected].
