4. Business Valuation
• Many, if not all, Moore Stephens firms have at least one person
performing business valuation
• However, few have capitalized on shareholder planning services that
are outgrowths of business valuation
2010 International Conference CHALLENGES TO OPPORTUNITIES.
4
5. Why Get a Business Valuation?
•Of the many reasons to get a business valuation, many are related to
shareholder planning:
• Mergers and acquisitions (“About how much could I get if I sold my
business?”)
• Buy-sell agreements (“At what price should our ownership interests
change hands?”)
• Employee incentives including options, phantom stock, and ESOPs
(“How can I incentivize employees and/or efficiently transfer
ownership to them?”)
• Estate, gift, and income tax purposes (“How can I minimize my tax
liabilities while transferring ownership?”)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
5
6. From BV to STP
• BV professionals with expertise and experience in these areas
naturally fit into an advisory role in those areas (M&A, buy-sell, etc.)
• With combined experience of BV, estate, and tax expertise, Moore
Stephens firms are ideal advisors for transferring ownership
• We call this all-encompassing shareholder planning service
“Strategic Transition Planning,” or “STP,” others may call it “Exit
Planning,” “Succession Planning,” or “Ownership Planning”
2010 International Conference CHALLENGES TO OPPORTUNITIES.
6
8. Strategic Transition Planning
1. Identify Owner Objectives
2. Identify Business and Financial
1. Planning Resources
3. Develop STP Plan (Details Strategies to
maximize and protect value of business
and financial assets and execute
transition)
The Business Asset:
2. Preparing 1. Retain and Incentivize Key Employees
2. Entity Selection The Personal Assets:
1. Estate Planning (Designing an Estate to
(Maximizing and
3. Business Continuity
Minimize Tax Liabilities, Preserve Family
4. Successor Training Wealth, and Preserve Family Continuity)
5. Value Drivers 2. Wealth Planning (Performed by Outside
Protecting Value) 6. Estate Planning (Transfer Tax Planning)
6. Other Management Consulting Items
(Customer Concentration, etc.)
Advisor)
Execute Transition to Family, Co-Owner,
3. Executing Management, or Third Party
Transfers Wealth from Business Asset to
Personal Asset.
Continue with Estate and Wealth Planning
2010 International Conference CHALLENGES TO OPPORTUNITIES.
8
9. Phase One
1. Identify Owner Objectives
2. Identify Business and Financial
Resources
1. Planning 3. Develop STP Plan (Details
Strategies to maximize and protect
value of business and financial
assets and execute transition)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
9
10. Planning Phase
Identify, clarify, and prioritize owner objectives:
• When do you want to transfer?
• To whom? (family, management, or third party)
• How much money does the owner need?
• Other objectives (charitable, rewarding ee‟s)
Identify and value resources:
• Personal assets (financial planner performs a financial needs
analysis)
• Business asset perform a business valuation
2010 International Conference CHALLENGES TO OPPORTUNITIES.
10
11. Planning Phase
Why a business valuation from the start:
Are we there yet? ($ goal less $ personal assets = what owner needs in
value from the business)
• By comparing the valuation to the needed $ from transfer, we can
determine strategy for growth/maintenance of business value
(aggressive/ conservative)
Food for thought to aid the “to whom” decision:
• Different valuation methods can show relative value achieved by
transferring to different groups (family, management, and 3rd party)
and clarify these strategies vs. control interests
Input data for tax strategies: value of nonmarketable minority interests
Identify value drivers of the business and what is hindering value
2010 International Conference CHALLENGES TO OPPORTUNITIES.
11
12. Planning Phase
Work with current advisors (tax, legal) to develop appropriate strategies
to accomplish goals
Come up with an implementation plan with specific time frames per task
and assign the tasks to the right advisor
2010 International Conference CHALLENGES TO OPPORTUNITIES.
12
13. Phase Two
The Business Asset: The Personal Assets:
1. Retain and Incentivize Key 1. Estate Planning (Designing
Employees an Estate to Minimize Tax
1. Identify Owner Objectives Liabilities, Preserve Family
2. Entity Selection
Wealth, and Preserve Family
2. Preparing 3. Business Business and Financial
2. Identify Continuity Continuity)
Resources
(Maximizing and 4. Successor Training 2. Wealth Planning
3. Value Drivers Plan (Details (Performed by Outside
Develop STP
5.
Protecting Value) Strategies to maximize and protect
6. Estate Planning (Transfer
Advisor)
value of business and financial
Tax Planning)
assets ad execute transition)
6. Other Management
Consulting Items (Customer
Concentration, etc.)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
13
14. Preparing
Implement the strategies developed in planning phase designed to:
• Minimize tax liabilities (S vs. C-Corp, etc.)
• Increase cash flows and value (value drivers)
• Protect business and personal assets
• Motivating and retaining employees
• Set up estate to handle the size of the business asset
• Create an ability to sell the business (if necessary)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
14
15. Phase Three
Business Asset: Personal Assets:
Execute Transition to Continue with Estate
Family, Co-Owner, and Wealth Planning
Management, or Third Party $$$$
3. Executing Transfers Wealth from
Business Asset to Personal
Asset.
2010 International Conference CHALLENGES TO OPPORTUNITIES.
15
16. Family Transition
• Plan gifts or other appropriate methods of transition to minimize tax
liabilities
• Develop strategies to compensate current owner for interest in
business
• Prepare next generation for running the business
• Utilize tax-exempt gifting, if necessary
• Transfer control to the next generation
2010 International Conference CHALLENGES TO OPPORTUNITIES.
16
17. Management Transition
• Fund management transfer (get money to management for purpose
of buying out current owner)
• Determine the best means of transition: private equity-backed
management buyout, deferred compensation, or other
• Consider tax deferral strategies
• Prepare management for ownership and running the company
• Execute the transition to management
2010 International Conference CHALLENGES TO OPPORTUNITIES.
17
18. 3rd Party Transition
• Determine target pricing
• Develop sales materials and research potential buyers
• Approach and negotiate with buyers
• Secure and evaluate offers
• Due diligence
• Closing
2010 International Conference CHALLENGES TO OPPORTUNITIES.
18
20. DCF’s Three Phase Process
• Phase One: Business Review
• Phase Two: Research and Preparation of Marketing Materials
• Phase Three: Marketing the Company
2010 International Conference CHALLENGES TO OPPORTUNITIES.
20
21. DCF’s Three Phase Sell-Side Process
Prepare Teaser (1 to 2 page summary, Engage and qualify potential buyers,
Discuss and identify objectives.
doesn’t disclose company name). send Teasers and NDAs.
Review the Business’s performance. Begin preparing the Data Room for due
Prepare a Confidential Information diligence.
Memorandum (CIM, a detailed
Identify market position, competencies, description of company). Send the CIM and Procedures Letter to
and priorities. potential buyers that execute the NDA.
Prepare a Non-Disclosure Agreement
Field questions from interested buyers.
Identify the business’s qualities that (NDA) and Procedures Letter.
make it an attractive investment.
Discuss and finalize Teaser, CIM, and Receive, assess, and negotiate
NDA. Indications of Interest (IOIs).
Review business’s performance and
Arrange management interviews, visits,
broader economy. Research universe of potential buyers. and presentations.
Determine target value for the Receive, assess, and negotiate Letters of
Determine most probable potential
transaction. Intent (LOIs).
buyers.
Select finalist.
Prepare business and gather Discuss potential buyers, determine
information for the sale. which to approach. Assist due diligence and buyer financing.
CLOSE.
2010 International Conference CHALLENGES TO OPPORTUNITIES.
21
22. Discuss and identify objectives.
Review the Business’s performance
Research universe of potential buyers. Qualify potential buyers.
Send out Executive Summaries.
Prepare data room.
Identify market position, competencies, Discuss potential buyers, determine
and priorities. which to approach. Send CIM to buyers who sign non-
disclosure agreement.
Assess Letters of Interest.
Identify the business’s qualities that Negotiate with and select buyers.
make it an attractive investment Prepare Executive Summary (1 to 2 page
summary, doesn’t disclose company
Phase One – Business Valuation
name).
Reviews business’s performance and Assess Letters of Intent .
broader economy
Select finalist.
Prepare a Confidential Information
Memorandum (CIM, a detailed
Assist due diligence and buyer financing.
Determines target value for the description of company).
transaction. CLOSE.
Prepares business and gathers
information for the sale.
Perform a valuation, with particular focus on:
• Assessing core competencies of the company
• Identify the qualities that make the company an attractive acquisition
target
• Determine a target value for the company
2010 International Conference CHALLENGES TO OPPORTUNITIES.
22
23. Discuss and identify objectives.
Review the Business’s performance
Research universe of potential buyers. Qualify potential buyers.
Send out Executive Summaries.
Prepare data room.
Identify market position, competencies, Discuss potential buyers, determine
and priorities. which to approach. Send CIM to buyers who sign non-
disclosure agreement.
Assess Letters of Interest.
Identify the business’s qualities that Negotiate with and select buyers.
make it an attractive investment Prepare Executive Summary (1 to 2 page
summary, doesn’t disclose company
Phase One – Business Valuation
name).
Reviews business’s performance and Assess Letters of Intent .
broader economy
Select finalist.
Prepare a Confidential Information
Memorandum (CIM, a detailed
Assist due diligence and buyer financing.
Determines target value for the description of company).
transaction. CLOSE.
Prepares business and gathers
information for the sale.
Why perform a business valuation?
• Presents all the issues concerning the sale up-front
• Identifies concerns that may arise during Due Diligence
• Identifies business‟ key selling points
• Determines expectations for pricing of the transaction (saves the
advisor time and money)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
23
24. Research universe of potential buyers.
Qualify potential buyers.
Discuss and identify objectives.
Send out Executive Summaries.
Review the Business’s performance Discuss potential buyers, determine
which to approach. Prepare data room.
Send CIM to buyers who sign non-
Identify market position, competencies, disclosure agreement.
and priorities.
Assess Letters of Interest.
Identify the business’s qualities that Negotiate with and select buyers.
make it an attractive investment
Prepare Executive Summary (1 to 2 page
Reviews business’s performance and summary, doesn’t disclose company
broader economy
name). Assess Letters of Intent .
Determines target value for the
transaction. Select finalist.
Phase Two
Assist due diligence and buyer financing.
Prepares business and gathers
information for the sale. CLOSE.
Prepare a Confidential Information
Memorandum (CIM, a detailed
description of company).
Involves three steps:
• Research and determine potential buyers
• Prepare sales documents (valuation feeds into these):
– Prepare a Confidential Information Memorandum (CIM)
– Prepare a Teaser
2010 International Conference CHALLENGES TO OPPORTUNITIES.
24
25. Qualify potential buyers.
Send out Executive Summaries.
Research universe of potential buyers.
Discuss and identify objectives. Prepare data room.
Review the Business’s performance
Send CIM to buyers who sign non-
Discuss potential buyers, determine disclosure agreement.
which to approach.
Identify market position, competencies,
and priorities. Assess Letters of Interest.
Identify the business’s qualities that
make it an attractive investment Prepare Executive Summary (1 to 2 page
Negotiate with and select buyers.
summary, doesn’t disclose company
Phase Three – Marketing the Company
Reviews business’s performance and name).
broader economy Management interviews.
Determines target value for the
transaction.
Prepare a Confidential Information
Assess Letters of Intent .
Memorandum (CIM, a detailed
Prepares business and gathers description of company).
information for the sale.
Select finalist.
Assist due diligence and buyer financing.
CLOSE.
Sell-side stage:
• Qualifying buyers • Selecting finalists
• Sending out Teasers • Management interviews
• Preparing a Data Room • Assessing and negotiating
• Sending the CIM Letters of Intent
• Assessing Indications of Interest • Selecting the winner
• Negotiating with potential • Due diligence
buyers • Closing
2010 International Conference CHALLENGES TO OPPORTUNITIES.
25
26. WARNING
• Can you provide sell-side advisory without risking regulatory action?
• Many believe that must be licensed through a broker/dealer to
perform sell-side
• Take a brief look at relevant regulations
2010 International Conference CHALLENGES TO OPPORTUNITIES.
26
27. Do You Need a License?
What is the Series 79?
• The relevant information for CPAs and business valuation
professionals
Who needs to register with the SEC (and FINRA)?
• The relevant facts that can help you determine whether you
should register
How do you register?
• The options for registering and process involved for each
2010 International Conference CHALLENGES TO OPPORTUNITIES.
27
28. How Can You Register?
2010 International Conference CHALLENGES TO OPPORTUNITIES.
28
29. Registering with the SEC and FINRA
Two Options:
• Form your own broker/dealer firm
• Affiliate with a firm that already is a registered broker/dealer
Affiliating with a current broker/dealer requires that you:
• Find a willing firm to sponsor and employ you (probably only for the
purposes of your M&A-related advisory work)
• Pass the Series 79 and Series 63 (state licensing exam)
• Pay for licensing fees
• Disadvantages include lack of control over your business, sharing of
your fees, and lack of communication with your regulators
2010 International Conference CHALLENGES TO OPPORTUNITIES.
29
30. Registering with the SEC and FINRA
Registering your own broker/dealer is a much more complex process that,
in short, involves:
• Setting up a separate entity
• Putting up necessary initial funds with the SEC and FINRA (>$5,000)
• Submitting numerous forms (Form BD, Form U4 for each employee)
• Having at least two registered principals (these persons must pass the
Series 7, 24 (General Securities Principal), 63, and 79; one of these
persons must pass the 28 (Financial and Operations Principal))
• Completing the New Membership Application (NMA) – 8 long sections
• Develop policies and procedures (for many items that are unrelated to
the proposed business such as Anti-Money Laundering Procedures)
• Complete the Membership Interview at a FINRA office
• Apply for registration with the appropriate state regulators
• Have all of these materials approved by FINRA
This process typically takes six to twelve months – many choose to
employ a consultant (often a former FINRA or SEC employee)
2010 International Conference CHALLENGES TO OPPORTUNITIES.
30
31. A Warning from FINRA
FINRA‟s website says:
Submitting a FINRA membership application is a serious undertaking and should be considered
carefully. You may wish to consider alternatives to applying for membership depending on your
desired goals. For instance, working for an existing member firm or managing the branch office
of a member firm might achieve your objectives without going through [the New Member]
Application process.”
2010 International Conference CHALLENGES TO OPPORTUNITIES.
31
32. How We Structured our B/D
Accounting firm with nearly 150 CPAs
Headquartered in Chattanooga, TN
Offices in Cincinnati, OH; Atlanta and Dalton, GA; Grand Cayman,
USVI; Memphis, Nashville, and Knoxville, TN
Perform tax, audit, and/or business advisory for many restaurants
Expertise in multiple industries
2010 International Conference CHALLENGES TO OPPORTUNITIES.
32
33. How We Structured our B/D
Audit, tax, & more:
• Strategic Transition Planning, business succession planning, insurance and
estate planning, retirement plan consulting
• Forensic accounting, fraud risk assessment, and fraud prevention
• R&D tax credits, transfer pricing, U.S. Customs compliance and reporting,
tax services for global businesses and individuals, captive insurance
companies
• Network vulnerability testing and IT security consulting
• Healthcare consulting, due diligence, and M&A advisory, physician practice
management
• Recruiting and placement
• Real estate development consulting, hedge and real estate fund consulting
• Audit defense and representation, due diligence
2010 International Conference CHALLENGES TO OPPORTUNITIES.
33
34. How We Structured our B/D
A practice of Decosimo firm
Provides business valuation, litigation support, and transaction advisory
services
More than 35 years of transaction experience
Professionals hold ASA, CBA, and/or ABV credentials
Significant valuation, litigation support, and transaction advisory
experience with restaurants
2010 International Conference CHALLENGES TO OPPORTUNITIES.
34
35. How We Structured our B/D
“Maximizing Value for the Middle Market”:
• Sell-side and buy-side advisory,
• Debt and equity capital sourcing,
• Fairness opinions,
• Valuations,
• Due diligence, and other transaction advisory services.
Formalization of investment banking services provided by
Decosimo CPA firm for more than 35 years: involved in the
mergers and acquisitions of five major league baseball teams,
more than 100 Coca-Cola bottlers
Member FINRA/SIPC
2010 International Conference CHALLENGES TO OPPORTUNITIES.
35
36. Decosimo Corporate Finance
More than $17 billion in transactions
2010 International Conference CHALLENGES TO OPPORTUNITIES.
36
37. What is the Series 79?
2010 International Conference CHALLENGES TO OPPORTUNITIES.
37
38. A Brief Background on Securities
Regulation
• FINRA (the Financial Industry Regulation Authority, formerly the
National Association of Securities Dealers, or NASD) is the main
SRO that regulates broker/dealers (investment banks)
• FINRA can regulate its members, but cannot regulate (and has
no power against) non-members (persons and firms must
“volunteer” to be regulated by FINRA)
• However, the SEC determines who must register with FINRA,
and can take legal and criminal action against unregistered
persons
• So, the requirement for registration is ultimately a question for
the SEC
2010 International Conference CHALLENGES TO OPPORTUNITIES.
38
39. What is the Series 79?
• In July 2009, the SEC approved a change to NASD Rule 1032 (Categories
of Representative Registration), which became effective November 2, 2009
– This rule change added a new licensing category for associated persons of
FINRA member firms: the Series 79 – Investment Banking Limited
Representative
– The rule change requires that associated persons of member firms hold the
79 license if they are going to engage in “investment banking” activities
• The topics covered on the exam are much more related to the private
company M&A-advisory work that many business valuation professionals
perform
• This is somewhat of a relief for those already registered or who are
considering registering with FINRA since the only relevant exam previously
was the Series 7 – General Securities Representative exam, which has very
little relevant information out of a large amount of information required to
pass
2010 International Conference CHALLENGES TO OPPORTUNITIES.
39
40. Series 79: Investment Banking
NASD Rule 1032(i) now defines “investment banking” as:
“Advising on or facilitating debt or equity securities
offerings…through a private placement…including but not limited
to…marketing, structuring,…and pricing of such securities and
managing the allocation…activities of such offerings
OR
Advising on or facilitating mergers and acquisitions…financial
restructurings, asset sales, divestitures or other corporate
reorganizations or business combination transactions, including but
not limited to rendering a fairness, solvency, or similar opinion.”
2010 International Conference CHALLENGES TO OPPORTUNITIES.
40
41. Series 79: New Opportunity?
• The 79 creates a new license to perform certain specific services that
many CPAs provide
• As a “credential” it presents a possible marketing edge – especially
considering that it is issued from one of the U.S. Government‟s main
SROs
• The 79 exam is much more related to activities that business
valuation professionals may perform, as opposed to the Series 7
• However, the category could be a “Trojan horse” for private M&A
advisors:
– The license highlights and outlines activities that the SEC potentially
considers as requiring registration as a broker/dealer
– Registration as a broker/dealer can be a cumbersome and expensive
process
2010 International Conference CHALLENGES TO OPPORTUNITIES.
41
42. Do You Need To Register?
2010 International Conference CHALLENGES TO OPPORTUNITIES.
42
43. Do You Need to Register?
Why is the Series 79 important for CPAs and business valuation
professionals?
• How does the SEC treat FINRA‟s licensing categories?
What are some other relevant items to consider when determining
whether to register as a broker/dealer?
• The role you take in M&A:
– The actions laid out in the 79‟s definition of “investment banking” and
curriculum
– The „34 Act‟s definition of “broker”
– The SEC‟s Guide to Broker/Dealer Registration
– The SEC‟s recent intent to increase the breadth of its regulation
• The fees you receive:
– Contingent and/or success fees
• The exceptions you qualify for – the Country Business, Inc. No-Action
Letter
2010 International Conference CHALLENGES TO OPPORTUNITIES.
43
44. Series 79 Activities: Why Are They
Relevant?
Since the SEC has the power to act against unregistered
firms/individuals, let‟s explore how the SEC treated FINRA‟s newest
registration category (prior to the 79)
• The Series 82 (Limited Representative – Private Securities Offerings)
was approved on May 2001
• This category‟s definition in NASD Rule 1032 does not mention
advisory related to Private Investments in Public Equities (PIPEs)
• However, the Series 82‟s curriculum includes a section on PIPEs
Recently, the SEC (and other government bodies) have brought action
against those who have engaged in PIPE advisory unregistered
2010 International Conference CHALLENGES TO OPPORTUNITIES.
44
45. Series 82 Cases
Case Ram Capital Duncan Capital
When SEC 2009 2007
Brought Action
For Advising on 2001 to 2005 2003 to 2005
PIPES Between
Settlement Ram and its employees Duncan and its employees
“willfully violated” the „34 “willfully violated” the ‟34 Act.
Act. Refunded fees and Refunded fees and paid
paid penalties. The penalties. The company and
company and its employees its employees were fined,
were suspended or barred, and/or censured
censured
Total Fees/Fines > $1 million $9.6 million
2010 International Conference CHALLENGES TO OPPORTUNITIES.
45
46. The Securities Act of 1934
• What is a broker?
– As defined in the Act, a broker is, “Any person [or entity] engaged in the
business of effecting transactions in securities for the account of others”
• While this may sound unrelated to services that business valuation
professionals might provide, the question is how broadly the SEC
interprets what activities qualify as “effecting transactions in securities”
• If we assume history will repeat itself (and the SEC will respond to the
79 as it did with the 82), then we can use the 79 as a guide of what the
SEC considers “effecting transactions” – after all, the SEC did approve
the category
• As previously discussed, Rule 1032(i)‟s definition of investment
banking includes many activities that business valuation professionals
often perform, including fairness opinions and advising on asset sales
2010 International Conference CHALLENGES TO OPPORTUNITIES.
46
47. The SEC’s Suggested Questions
The SEC‟s Guide to Broker/Dealer Registration provides informal guidance on what
firms/people and types of activities require registration:
• “Finders, “business brokers,” and other individuals that engage in the following
activities:
– Finding investment banking clients for registered broker/dealers
– Finding investors for “issuers” (entities issuing securities), even in a “consultant
capacity”
– Engaging in, or finding investors for, venture capital or “angel” financings, including
private placements
– Finding buyers and sellers of businesses (i.e., activities relating to mergers and
acquisitions where securities are involved)
• Investment advisers and financial consultants
• Persons that provide support services to registered broker/dealers
This Guide also suggests that “some of the questions you should ask to determine
whether you are acting as a broker” are:
• Does your compensation for participation in the transaction depend upon, or is it
related to, the outcome or size of the transaction or deal?
• Do you receive any other transaction-related compensation?
• Are you otherwise engaged in the business of effecting or facilitating securities
transactions?
2010 International Conference CHALLENGES TO OPPORTUNITIES.
47
48. How Broadly Will the SEC Interpret
“Effecting Transactions?”
In recent testimony given before a Senate subcommittee by Andrew Donohue, Director
of the Division of Investment Management at the SEC
• Donohue expressed the SEC‟s desire that lawmakers broaden the definition of
investment advisors that require registration to include private equity and venture
capital groups
• Stated that the current situation presented a “significant regulatory gap in need of
closing”
• Part of his reasoning was that, without regulation of such entities, the SEC is unable
to gather important information on the private M&A marketplace
At the SEC Government-Business Forum on Small Business Capital Formation in
November 2008, Kristina Fausti of the SEC Division of Trading and Markets stated:
“Even if you‟re getting a flat fee…some people have thought in the past there might
be one bite at the apple or maybe you‟re only talking about a one-time introduction.
The [SEC] staff takes, I don‟t want to say a grim view, but we really don‟t believe
that. We believe that a lot of people are out there to make money and to be “in the
business” [of effecting transactions].
More recently, criticisms of SEC/FINRA regulation, due to the financial collapse and
discovery of, among others, Bernie Madoff‟s ponzi scheme, have pressured the
SEC and FINRA to increase regulation
2010 International Conference CHALLENGES TO OPPORTUNITIES.
48
49. SEC Interpretation of “Effecting Transactions?”
• Recently passed Frank-Dodd Act requires private equity firms to
register with the SEC
• Fulfills Donohue‟s request
• Reaction to financial collapse is increased regulation – possibly
means a broader interpretation of “effecting transactions”
2010 International Conference CHALLENGES TO OPPORTUNITIES.
49
50. Transaction-Based Fees
Transaction-based compensation is another key factor:
• The SEC cited transaction-based compensation as one reason that Ram Capital
and Duncan Capital had willfully violated the „34 Act
• In Torsiello v. Sunshine, Torsiello Capital Partners sued Sunshine State Holding
Corporation for breach of contract because Sunshine had not paid Torsiello its
success fee upon sale of the company
• Sunshine‟s counter was that Torsiello could not legally perform the M&A advisory
duties stated in the contract because it wasn‟t a registered broker/dealer
• The court found in favor of Sunshine – and forced Torsiello to refund its $50,000
retainer
• The court cited the „34 Act, “[every] contract made in violation of the [Act] or the
performance of which involves such violation „shall be void.‟”
• The court also stated that “One of the hallmarks of a broker is the receipt of
transaction-based compensation.”
Fausti stated in the previously mentioned speech, “If you‟re getting a transaction-
based fee, we consider you engaged in the business.” She also said that even a
flat fee is questionable if your involvement includes connecting the parties involved.
2010 International Conference CHALLENGES TO OPPORTUNITIES.
50
51. The Exception
In its Country Business, Inc. No-Action Letter, the SEC points out what it considers the
“small business broker,” which it would not require to register:
• Client must meet the small business standards of the Small Business Administration
• Role in negotiations limited to:transmitting documents between parties, valuing the
assets of the business as a going concern, providing the seller with
administrative support, assisting the seller with preparation of financial statements,
and cannot offer advice to the purchaser or seller about the value of the
securities, or have the power to bind
• Business must be a going concern (no financial distress mergers or acquisitions)
• Compensation must be determined before sale
• Only assets will be advertised or offered for sale
• Must be 100% of the company‟s equity if equity is sold
• Cannot advise on whether to issue securities, effect the transaction by means of
securities, or assess the value of the securities sold
• Any contingent fees must be received in the same form as the seller receives them
• Cannot assist purchasers with financing, other than uncompensated introductions or
help with paperwork
2010 International Conference CHALLENGES TO OPPORTUNITIES.
51
52. The Exception
We believe the “small business broker” is very limiting on the advisor (i.e., all
clients must meet SBA‟s small business standards) and severely hinders
the advisor‟s ability to add-value for the client (i.e., can‟t negotiate for the
client)
However, using the CBI letter as a framework, we can infer what activities the
SEC considers to count toward requiring registration:
• Advising businesses larger than SBA standards,
• Being involved in negotiations in any way,
• Valuing equity or debt for transactional purposes,
• Being involved in and compensated from a transaction of less than all of a
company‟s equity,
• Raising capital,
• Advising on a transaction‟s structure,
• Marketing the equity of a company for sale,
• Assisting purchasers with financing or structuring a transaction, and
• Advising on transactions of distressed companies.
2010 International Conference CHALLENGES TO OPPORTUNITIES.
52