M&A and Business Broker Licensing

There are two methods to be licensed to sell businesses in the US.  One is to become a real estate broker and/or real estate sales agent, and the majority of states require at least this in order to sell businesses. The other, generally in order to sell larger businesses, is to become a registered FINRA securities broker/dealer, with each intermediary being a FINRA registered securities representative.

Department of Real Estate / Business Broker

Most states, and I know that all western states, require the minimum of a real estate sales agent license.  Like in real estate, all agents must work under a broker. I took the California real estate agent’s test years ago, and the frustrating thing is that most of it is completely irrelevant to selling businesses.

Here is a sample question:

From an historical standpoint, the major function, objective and aim of the Federal Housing Administration program has been provided by which of the following sections of the law:

            A) Title I
            B) Title II
            C) Title III
            D) Title IV

The sections that do apply are about escrow, as most small business use essentially the same escrow process as real estate, and there are strict laws about how you can handle a client's money (basically, you don’t).  But most of the test just plain doesn’t apply.

Even though it may be a bit irrelevant, it is the law to be licensed and some intermediaries will turn outlaw brokers into the authorities.  I have been called on it twice because I use my middle name Ney.  My license at the California department of real estate is under my full name so they failed to find it, and demanded to know how I could operate.   I had some degree of satisfaction in giving them my full name and suggesting they check again.  All kidding aside, it is the law, so you may want to make sure your broker or M&A advisor is actually license and legal to do the work.  In California, the place to check is https://www2.dre.ca.gov/PublicASP/pplinfo.asp

FINRA securities representative / Mergers and Acquisitions

Most small businesses are sold as an “asset sale” where portions of the business are sold off (e.g. the name, goodwill, AR, but not liabilities, etc).  Versus a “stock sale” where the entire corporation is sold.  A stock sale is technically selling securities, but the SEC has issued a “no action” letter that gives business brokers some comfort that if they occasionally do stock sales, and they don’t advertise they are selling the stock, they probably will not get in trouble. 

However if you do sell larger companies where stock sales are common, then you need a securities license.  Like the real estate license, there needs to be a broker, in this case called a broker/dealer.  Then registered representatives (the M&A advisors)work under the broker/dealer.  This isn’t a state government license like the real estate license, but is administered under FINRA (www.finra.org) , which is a national self-regulatory arm of the NASD and NYSE stock exchanges.

I have taken the FINRA Series 7 securities test (6 hours) as well, and like the real estate test much of it doesn’t have a lot to do with selling businesses, although I did find it a lot more interesting.  Here is a sample problem:

In May a customer sells a STC July 40 listed Call for a $6 premium and buys a STC July 30 listed Call for $10.  The customer has created a:

I. Bullish spread
II. Bearish spread
III. Debit spread
IV. Credit spread

The answer choices:

            A) I and III
            B) II and III
            C) II and IV
            D) III and IV

Not a heck of a lot of relevance to what I do each day.  But again, it is the law, and the point of the law is to protect the customer.  In fact, FINRA does establish clear rules on working with clients, and even requires that all email correspondence be backed up and saved by the broker/dealer.  If you want to check the FINRA database for the status of a person or company: https://www.finra.org/Investors/ToolsCalculators/BrokerCheck/p085698

While writing this I checked the status of a guy that once stole some text from our website's homepage to put on his.  Their broker/dealer status was suspended in May for not performing some actions agreed to during arbitration with a customer.  So it turns out the site is fun to use.