Small Main Street businesses may find it easier to engage in crucial M&A activity if Congress can get its act together this year. A remarkably bi-partisan bill was reintroduced in January that would allow small business M&A advisors who are not registered as “broker-dealers” with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) to advise small business owners seeking to purchase or sell their businesses.
Less Expensive M&A Advice
Small, non-complex businesses such as auto mechanic shops or plumbing operations who are seeking to expand through acquisition or mergers have long complained about having to pay exorbitant fees to SEC- and FINRA-certified brokers who are probably over-qualified to advise on such small transactions.
Why the Bill Matters
This bill would allow smaller broker-dealers who specialize in analyzing local markets to advise small businesses, rather than forcing Main Street businesses to seek advice from expensive, large financial institutions that may not even consider small business deals to be lucrative enough to spend time on.
Both a broker-dealer and M&A advisor will take a percentage of a deal’s total value as a fee. The M&A advisor, however, typically charges additional fees for more in-depth research such as finding out the national deal size per industry or global accounting methods that can be used to valuate the deal. These are services, however, that an auto body shop seeking to buy its competitor across town most likely doesn’t need. A broker, however, will research the local area and come up with a list of acquisition targets and a deal valuation that fits the local market.
Additionally, registering with the SEC and FINRA is a long, costly process, especially for smaller broker-dealers, who would have to pass that cost onto its clients.
“Whether they want to buy new ventures, sell their businesses or retire, small business owners depend on M&A brokers to help them navigate these changes,” said Kennedy in a public statement. “We need to ensure that Main Street entrepreneurs have consistent access to financial services so that America’s small businesses—and the jobs that depend on them—can continue to thrive.”
Senator John Kennedy (R-LA) introduced the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act, a bill that is nearly identical to the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act, a bi-partisan bill that was introduced in the House in 2019 by Reps. Bill Huizenga (R-MI) and Brian Higgins (D-NY).
The latter bill was rare in that it received 100% bi-partisan support – the bill passed the House in 2018 with a 426-0 vote but was never voted upon in the Senate. Later in the session, the House attached the bill to the Jobs and Investor Confidence Act of 2018. Neither bill was ever voted upon by the Senate, which was wrestling with the Tax Cuts and Jobs Act of 2018 (which was eventually passed) and other partisan battles at the time.
The bill is currently being debated in the Senate Finance Committee. Once again, however, Congress is in the midst of debating partisan issues and bills, including President Biden’s highly contested Build Back Better Act, and it remains to be seen whether the M&A bill will get lost in the shuffle before the current 117th session of Congress ends at the beginning of 2023.
M&A Activity Continuing to Increase
The bill, if passed, would affect millions of small business owners seeking to sell their business or acquire another. It’s no secret that the COVID-19 pandemic has forced small business owners to rethink their operations. Hiring and retaining good employees, remote work becoming the norm, spikes in inflation and supply chain disruptions have threatened the very survival of many small businesses (9.4 million small businesses were forced to close in 2020).
According to Bloomberg research, US M&A activity hit a record of nearly $5 trillion in 2021. Many small business owners have sought to merge or acquire a competing or complementary business to survive, or looked to sell their business and retire. Also, financing a merger or acquisition has been less expensive due to a historically low federal funds overnight rate, but that could change as the Federal Reserve has openly said it will seek to hike the overnight rate to fight inflation.
Other Legislation – Bill Watch 2022
There are dozens of pieces of legislation on the table in this session of Congress, such as the 7(a) Loan Agent Transparency Act and the Small Business Development Center Cyber Training Act that could dramatically affect the way small businesses operate and gain financing. Kapitus will examine which pieces of legislation could affect you the most in future articles.