Here we go again. H.R. 935, the so-called “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021”, is back again after having been rejected by Congress on multiple occasions. Having represented hundreds of small and medium sized businesses in M&A transactions – either in the sale of a business or in the purchase of one – the undersigned can say from experience that H.R. 935 is a bad idea. It should be rejected again.
H.R. 935’s sponsors claim that it is aimed to help small businesses, but in fact it would do exactly the opposite, unleashing a wave of untrained, unlicensed and unsupervised financial middlemen on unsuspecting small business owners. It does not have to be this way. The current regulatory process – in which the SEC and the Financial Industry Regulatory Authority (FINRA) regulate and supervise mergers and acquisition activity - works exceedingly well, and has quietly and successfully protected small businesses and investors for many, many years.
How does requiring that M&A brokers be licensed help small businesses? By ensuring that the brokers who represent them are both competent and honest.
First, under current regulations, M&A brokers need to pass a variety of industry exams to show that they are competent to represent buyers and sellers beforethey become registered and begin to work. In addition, they are required by FINRA to take continuing education courses every year. Even small businesses can have complicated structural and valuation issues, and even small business owners, and perhaps especially small business owners, should have confidence that the broker representing them has the ability and the knowledge to professionally address their issues.
Second, under current regulations, the honesty and fair dealing of registered brokers is monitored and enforced. For example, before they are distributed, presentations describing a company for sale are reviewed and approved for truthfulness, and to make sure that any representations are based on facts and not just wishful thinking.
Doctors are licensed; dentists are licensed; lawyers are licensed; engineers are licensed. Why? Because they are doing important things that require expertise and that significantly impact people’s lives. In undertaking what is most likely the single most important transaction of their lives, the sale of the business that they may have spent their entire lives building, business owners also deserve the confidence that the person representing them is professional and honest and held to high standards, and that is what registration does.
The rules that currently apply to M&A brokers protect all parties, and the existing regulatory structure is functioning exceedingly well. Registration of M&A brokers is straightforward and effective. Supporters of the proposed legislation have not, and cannot, provide any evidence to the contrary.
The only rationale that has been put forward is the claim that the cost of registration is somehow prohibitive, and that is just not true. The cost of regulation – and the enforcement of professionalism and honesty - is nominal, and simply does not impact the cost of a M&A transaction. The fee charged by a M&A broker is determined by the nature of the transaction and competitive factors; it is entirely unimpacted by de minimis regulatory fees.
There is simply no good reason to strip away existing protections for small business owners. H.R. 935 endangers small businesses and should again be rejected.
