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Selling your business should not be a 50/50 coin flip

So, you’re ready to sell your business. You have an M&A advisor helping you, your numbers are in order, and you’re feeling confident. But did you know that only half of businesses will successfully sell—and that’s with a qualified advisor?

For years, member advisors of the International Business Brokers Association and the M&A Source have been reporting their quarterly closing rates in the Market Pulse Report. Every quarter, roughly 50% of deals terminate without a successful sale. And these are professionals who invest in their craft and their career.

In fact, analysts estimate the actual closing rate for small and medium businesses is closer to 25-30%. That number includes business owners who try to sell on their own as well as those who list with real estate agents, lawyers, and other “hobbyist” M&A advisors.

What makes the failure rate so high? Advisors in the Q4 2022 Market Pulse Report were asked to share why their deals failed. Here’s a breakdown by sector:


Main Street failures due to financials and financing  

In the Main Street market, that is businesses valued at less than $2 million, poor financials and financing problems were the leading reasons companies didn’t sell.

There are any number of reasons a business isn’t performing well, and many factors (like economic swings, bubbles, and pandemics) are outside an owner’s control. But some sellers hold on too long, waiting until they’re burned out or the business has evolved past their skill set.

Generally, you’ll get the best value for your business when you go out on a growth trend. Once a business is on a downward slide, it gets harder (and sometimes impossible) to sell.

As for financing the Main Street market, banks generally prefer to lend off hard assets, not cash flow, and individual buyers can struggle to raise the capital they need. That can leave a bit of a no man’s land at the upper end of the market, unless the deal qualifies for an SBA loan.

A small business is a lifestyle operation for many owners, generating a sufficient income. Meanwhile, many buyers in this market are looking to “buy a job.” But at a certain scale, the business doesn’t generate enough profit for the buyer to both earn a living and pay debt service. These deals are tough to get done.


Unrealistic expectations plague lower middle market  

In the lower middle market, where businesses are valued between $2 million and $50 million, seller expectations become the bigger concern. In these situations, the seller believes their business is worth more than the market will bear. When the advisor can’t deliver on those lofty goals, the engagement terminates.

In an ideal world, advisors wouldn’t even take these deals. You can do a lot of harm by testing the market with unrealistic expectations. You can burn through buyers, risk confidentiality, and weaken your own drive to keep the business performing.

The market ultimately determines the value, not what you want or need out of the business. It’s important to trust your advisor and the process they’re running. If they’re reaching a large pool of capable buyers, then you probably have a true reflection of the demand for, and value of, your business.


Economic uncertainty played a role 

For Main Street and the lower middle market together, advisors reported that economic uncertainty was the second leading cause of deal failure. Just five or six months ago inflation was rising, and economists were warning of a recession in 2023. (Now they’re predicting a “shallow” downturn in 2024.)

When there’s uncertainty in the market, deals get shaky. If it’s a perfect business, the transaction still gets done. But if there’s any hair on it, lending can be a problem. Equity shortfalls can trigger a price adjustment and bad feelings follow. Other times, buyers simply hit the pause button while they wait to see what the economy will do.


Plan ahead to avoid pitfalls 

It’s important to understand why businesses fail to sell. Poor financials, financing, risk conditions, delays, and unrealistic expectations all play a role.

Business owners should get a regular estimate of value so they know what their business is worth and how to increase that value in a future sale. Advance planning can help you make informed decisions and put your business in the best position for success.

Remember, deals can fall apart for any number of reasons, and market conditions can change rapidly. But with the right mindset, preparation, and advisor, you can find yourself on the right side of that 50/50 statistic.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

A Key Performance Indicator to Improve the Results of your Testing Lab Exit

When preparing to sell your Testing Laboratory using Key Performance Indicators (KPIs) can help to focus your efforts and resources in the right areas.  While numerous KPIs exist, one metric that should be on the radar of all business owners in the testing laboratory industry is the Sales/Employee Ratio. Labor costs make up the largest single expense for Laboratory Testing businesses, accounting for an estimated 38.4% of industry revenue in 2022 (IBIS WORLD July 2022).  For lab owners, monitoring labor costs is critical to improve financial performance and improve business valuations.  This KPI is simple to calculate, easy to understand, and offers valuable insights into a company’s efficiency, productivity, and overall financial health.


Defining the Sales/Employee Ratio:

The Sales/Employee Ratio, also known as Sales per Full-Time Equivalent (FTE), measures the sales generated by a company divided by the total number of full-time employees. It provides a clear picture of how efficiently a business is utilizing its workforce to generate sales. The formula for calculating this ratio is straightforward:

Sales/Employee Ratio = Total Sales Revenue / Number of Full-Time Employees


Why Sales/Employee Ratio Matters:

  1. Efficiency and Productivity: A high Sales/Employee Ratio indicates that a company efficiently utilizes its human resources to generate revenue. It signifies that employees are productive, effective, and contributing significantly to the organization’s bottom line. A low ratio, on the other hand, could suggest inefficiency, underutilization of staff, or a need to optimize processes.
  2. Financial Performance: The Sales/Employee Ratio directly correlates with a company’s financial performance. By analyzing this KPI over time, businesses can identify trends, measure growth, and evaluate their competitiveness within the industry. A higher ratio indicates strong financial health, profitability, and the ability to generate revenue with fewer resources.
  3. Resource Allocation: The Sales/Employee Ratio can aid in resource allocation decisions. By benchmarking against industry standards and peers, businesses can determine whether they need to adjust their workforce size, invest in employee training, or streamline processes. This ratio can guide decision-making and help optimize human resource utilization.
  4. Scalability and Growth Potential: As businesses expand, the Sales/Employee Ratio becomes even more critical. It helps identify if the current workforce is capable of supporting growth or if additional employees are required to maintain efficiency. A consistent or improving ratio amidst growth indicates that a company has the potential for scalable operations without compromising productivity.


How to improve your company’s Sales/Employee Ratio:

Achieving and maintaining a favorable Sales/Employee Ratio requires a strategic approach. Here are some key considerations for improving this KPI:

  1. Training and Skill Development: Invest in training programs to enhance the skills and capabilities of your team. By improving their effectiveness, they can generate higher sales, and be more productive thereby increasing the Sales/Employee Ratio.
  2. Process Optimization: Continuously analyze and refine business processes to eliminate inefficiencies and bottlenecks. Streamline operations can lead to improved productivity and higher sales output per employee.
  3. Technology Adoption: Leverage technology solutions such as customer relationship management (CRM) systems, lab automation tools, and analytics platforms. These tools enable better customer management, data-driven decision-making, and increased production efficiency.
  4. Performance Incentives: Implement performance-based incentive programs to motivate employees and drive them towards achieving higher production targets. Aligning incentives with the Sales/Employee Ratio can create a culture of productivity and accountability.



Figure 1:US Testing Laboratories Sales/Employee   VerticalIQ, May 2023, US Census


It is possible for the Sales/Employee Ratio to be too high.  This could mean that the business is working their employees too hard or not investing sufficiently in business operations.  Figure 1 above shows the average Sales/Employee for Testing Labs in the US based on the number of employees.  This can serve as a benchmark for your company.



The Sales/Employee Ratio is a powerful and simple-to-understand KPI for the owners of Testing Laboratories that want to improve their company’s financial performance in preparation for an exit. By monitoring and optimizing this ratio, business owners can make informed decisions about resource allocation, training, and growth strategies. It serves as a compass for sustainable success, helping organizations unlock the full potential of their workforce while driving revenue growth.


Exit Strategies Group helps the owners of Testing Laboratories to navigate their best exits.  If you’d like to have a confidential, no commitment discussion on your exit plans or have related questions, please contact Adam Wiskind, Senior M&A Advisor at (707) 781-8744 or awiskind@exitstrategiesgroup.com.


Tags: KPI, testing laboratories, testing lab, exit, M&A, labor costs, sales, key performance indicator

Exit Strategies Group Advises Shepherd Controls in Sale

May 2023 – Exit Strategies Group is pleased to announce that it represented Shepherd Controls & Associates, a leading regional supplier of industrial automation products, in a recent sale to Flow Control Group, a portfolio company of KKR.

Shepherd Controls & Associates, founded in 1985 by Ron Shepherd and Bill Benko, is headquartered in Allen, Texas. The Company has branch offices in El Paso and Houston and serves the Gulf states and Mexico. It offers a broad portfolio of innovative industrial automation products including robotics, pneumatics, motion controls, sensors, safety, vision, machine framing and material handling technologies. Value-added services include technical support, vision system and robotic proof of concept, custom mixed technology systems design-build, panel building, kitting and sub-assembly production.

“Exit Strategies Group took the time to thoroughly understand our business and positioned us to achieve a very successful transaction,” stated Ron Shepherd, cofounder of Shepherd Controls. “They brought several candidates to the table who saw the value of our company, and their guidance throughout the process was spot on,” added cofounder Bill Benko.

Shepherd was advised by an Exit Strategies Group team led by founder and M&A advisor Al Statz. “We are delighted to have partnered with Ron and Bill and their leadership team. We were seeking an acquirer who recognized the value that the Shepherd team had created, would nourish Shepherd’s culture and provide opportunities for its employees, had a track record of successful acquisitions, and had a clear strategy for expanding the business further. FCG checked all of those boxes,” said Al.

This transaction demonstrates Exit Strategies Group’s expertise in lower middle market transactions and continued commitment to providing strategic valuation and M&A advisory services to North American industrial automation technology companies.  Our expertise spans all areas of automation, including custom machine building, product manufacturing and distribution, control system integration and repair services.

If you have questions or want information about Exit Strategies Group’s M&A advisory or business valuation services, please contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com. Deal terms will not be disclosed.

Exit Strategies Advises IRR Los Angeles & Orange County on their Sale to CBRE

Exit Strategies, a California based mergers and acquisitions (M&A) brokerage and business valuation firm, recently advised the owners of Integra Realty Resources of Los Angeles and Orange County on the sale of their Southern California commercial property and right-of-way appraisal business to CBRE Group, Inc.

IRR Los Angeles co-owner, John Ellis, said, “Roy Martinez of Exit Strategies helped us understand the value of our business and introduced us to resources needed to complete the transaction. We could not have done it without him.”

IRR is a network of commercial real estate valuation, counseling and advisory firms in the United States.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm.

Terms of the acquisition were not disclosed.

This sale is an example of Exit Strategies’ M&A brokerage experience and valuation expertise in the business-to-business services sector. Exit Strategies has appraised and brokered hundreds of service businesses. If you are looking to sell, merge or acquire, we would be interested in hearing from you. Roy Martinez can be reached at 707-781-8583 or jroymartinez@exitstrategiesgroup.com.

Cornerstone International Alliance sets new record: $1.3 billion in business transactions

Exit Strategies Group is a partner in the Cornerstone International Alliance

After a record setting year in 2021, Cornerstone International Alliance members, a consortium of industry-leading lower middle market mergers and acquisitions (M&A) and investment banking firms, shattered that record in 2022, completing 169 deals with an enterprise value of more than $1.3 billion.

“2021 was a milestone year with $1.1 billion in deals closed for the first time. So to have another record year in 2022 is evidence of the strength of the Alliance and its members,” said Nick Olsen, Managing Director of Cornerstone International Alliance. “Notably, this past year was unique with so much uncertainty in the global market. The way our group made it a successful one, speaks volumes to their experience, focus and drive to do what is best for their clients. Even more encouraging is the outlook for 2023 is also very promising.”

Echoing Olsen’s sentiment is Craig Castelli, found and CEO of Caber Hill Advisors, an Alliance member headquartered in Chicago. “Congratulations to Cornerstone International Alliance and its member firms for another fantastic year,” said Castelli. “It’s a testament to the disciplined focus on only accepting best-in-class firms into the network. It’s an honor to be considered worthy of membership. I’d like to personally thank my team at Caber Hill and all of our clients and partners as we celebrate a great 2022 and a strong start this year. We couldn’t have done any of this without you and the Alliance.”

Alliance members typically work with business owners whose companies have $500,000 to $15 million in EBITDA or $5 million to $150 million in revenue. The members’ primary services provided include business sales, acquisitions, and valuations. Since its founding in 2018, the Alliance has selectively grown its membership and now has 27 members on four continents, creating a global network that opens doors to transactions being completed worldwide along with access to industry experts and an array of tools to best service their clients.

The organization’s most recent international member is Netherlands-based, Florijnz Corporate Finance.

“At the same time we’re celebrating our 10-year anniversary in 2022, we’re also celebrating a significant growth in business, leading us to hire additional staff and move to a new office location,” explained Hans Minnaar, Florijnz founder and director. “Last year we served 20 Dutch businesses in national and cross-border transactions and we’re on track to beat that this year. A part of that success is derived from our membership with the Alliance, the global connections it creates and the ability to share experiences and expertise that can’t be found anywhere else.”

The Alliance’s diverse membership creates a global footprint that is unmatched in the lower middle market. That, combined with members’ experience, resources and collaborative efforts are the driving force behind this continued level of success. To date, members have completed more than 3,750 business transactions.

CIA members are high performers with high integrity. Together we are working to set the standard for M&A excellence in the lower middle market.

Al Statz, CEO of Exit Strategies Group, Inc., alstatz@exitstrategiesgroup.com.

Pros and Cons of Selling to Family

A business transfer to your children or other family members is a great way to ensure your business culture and legacy remain intact. You get to share a valuable asset with people you love and will probably have ongoing opportunities to stay involved in the business you started.

On the downside, your children may not actually want the business and may feel pressured to take on something for which they have no real interest (or even aptitude). What’s more, selling to your kids typically involves a gradual payout, most times 7-10 years, meaning you lose out if business performance declines. That can be a difficult, dicey thing, capable of driving a wedge between you and the people you care about most.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

How to Divest Part of a Company

Selling a division or line of business is often more complex than selling an entire company. If you’re like most private business owners, you have never sold a business, let alone carved out and divested part of one. This article shares some of what I’ve learned about planning and executing a successful divestiture during my 20+ years of investment banking.

In my experience, most divestitures are intentional efforts to generate liquidity or streamline and strengthen core business operations. Often, the divested unit is underperforming and out of alignment with the company’s strategic direction.

Sometimes the asset to be divested is a distinct business unit with its own P&L and minimal overlap with the selling company’s main business. Other times, the asset is significantly integrated with the company’s primary business and some amount of “disentanglement” is needed before it can be reliably marketed and sold for an attractive price.

Spinning off the business into a standalone entity before a sale might even be necessary. From a buyer’s perspective, stand-alone or near-stand-alone entities are more attractive investment opportunities — because they are easier to value, perform due diligence on, and integrate. And since sellers want the buyer to take on and operate the acquired entity as soon as possible, a presale spin-off by the seller should be given consideration.

An entangled business is more challenging to acquire, and therefore sell, because of the added risk of misunderstanding exactly how the target business functions and the risk of making mistakes in the carveout/integration process. Also, consider that buyers will need to make significant investments beyond the purchase consideration. Plus, the pool of potential buyers is generally much smaller for a significantly entangled business.

When selling an entangled business, sellers must often enter into a Transition Services Agreement (TSA) that extends beyond the sale closing. This is an agreement in which the seller agrees to provide certain services to the buyer to maintain business continuity until the buyer is fully prepared to operate the acquired business.

Before attempting a divestiture, it’s worth having an experienced M&A advisor, business attorney and CPA help you conduct due diligence to assess the value and sale readiness of the assets or unit to be divested, and to identify potential challenges that are likely to arise during the sale process and whether a presale spin-off may be warranted. They will help you see the business through a buyer’s eyes and can help you develop a roadmap and budget for a successful divesture.

The divestiture’s purpose and expected financial benefits to the parent and its shareholders should be clear, and potential risks should be well understood. Your team will need to determine the specific assets and liabilities to be transferred, and each entity’s expected future cash flows. The acquisition costs and incremental investments required of an acquirer must also be estimated to arrive at a justifiable valuation. Sellers may decide to delay a sale to boost the group’s performance and show a track record of results before beginning the sale process.

For the sale process you’ll need reasonably accurate and reliable proforma financial statements. You’ll need to provide figures from the parent company’s books to show a buyer how expenses have been allocated.  It pays to be diligent and thoughtful in your preparation. Sloppiness here can lead to no deal and wasted time and money.

Beyond financial considerations, the “separation review” must consider business processes, customers and vendors, equipment, facilities, IT systems, IP, brand and market perception, leadership and governance, tribal knowledge, employee retention and engagement, and more. Acquirers pay a premium when they confidently understand a target business and clearly see how it will fit into their operations, support their strategic goals, and accelerate their future growth.

You’ll also need a strategy for communicating the spin-off and/or divestiture plans to key stakeholders, including employees, shareholders, suppliers, and customers. This will help ensure a successful transition and minimize disruption and potential harm to the business.

In a divesture, think of an M&A advisor as a strategic short-term member of your executive team. They help you develop a winning strategy and manage the entire process — performing financial modeling and valuation, preparing detailed and compelling offering materials, identifying best-fit buyers, conducting buyer outreach, attracting multiple bids and negotiating deal terms, facilitating due diligence, and liaising with attorneys and diligence providers.

All these efforts ensure that the divestiture is completed smoothly and efficiently. Preparation is key. You’d be surprised how challenging it is to maintain deal momentum while still unravelling organizational and operational entanglements.

In conclusion, divesting part of a business is a complex endeavor requiring thoughtful planning and precise execution. Following these steps will increase your odds of closing a deal and achieving your desired outcomes.

Continue the Conversation

Al Statz is president and founder of Exit Strategies Group, Inc. For further information on divesting a business unit or to discuss a potential need, confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Highlight Your Company’s Intangible Assets When Selling

Intangible assets represent most of the value in almost all of the companies we sell, so it only makes sense that showcasing the intangible assets that make your company unique and successful can significantly impact your final transaction value. Here are some practical tips to help you leverage your intangible assets in a sale process.

Intangible assets are non-physical assets such as contracts, customer lists, proprietary software, databases, designs, recipes, proprietary business processes, well protected trade secrets, works of authorship, key employees, strategic relationships, audit reports, credentials, licenses, and brand recognition. Intellectual property (“IP”), such as patents, trademarks, and copyrights, are all intangible assets. These assets generally produce value for a company, but don’t appear on its balance sheet.

Three steps to inventory your intangible assets:

  1. Conduct an internal audit of your business operations to identify all intangible assets owned by or used in the business and gather appropriate supporting documentation for each asset.
  2. Prepare a detailed description of each item including the nature, scope and history of the asset, how it is used, its original cost, past and future economic benefits, ownership, licenses and any legal restrictions, useful life, potential threats, etc. Include references to supporting documentation.
  3. Group assets into appropriate asset classes (by type and business function) and save the supporting documents in a well-organized virtual data room.

Engaging the services of legal, financial, and valuation experts can help bring to light intangible assets that may not be immediately obvious. An attorney can verify ownership rights and ensure that your assets are properly protected and legally transferable.

When taking a business to market, M&A advisors prepare a marketing document known as a Confidential Information Memorandum or CIM. The CIM will highlight your company’s intangible assets and suggest how buyers can utilize them to create new revenue streams, increase profits, or mitigate potential risks. Of course, buyers will do their own due diligence on your assets, and lots more, before closing the deal, so all assertions in the CIM must be reasonable. Overhyping a company can be a quick turnoff for buyers.

The M&A advisor or investment banker also uses your intangible asset documentation to help them identify potential acquirers that stand the most to gain from obtaining access to those assets.

Intangible assets can exist and not have value to their current owner. When a target business is profitable and growing, it usually isn’t necessary to place values on individual intangible assets for sale purposes. If a business is a pre-revenue startup or marginally profitable, or if certain intangible assets aren’t being used productively in the business, it may be helpful to have an expert determine the economic value of individual assets.

Even owners with long expected hold periods can benefit from identifying and monitoring their company’s intangible assets by using this information in strategic planning and investment decision making. The asset inventory and supporting documents should be reviewed and updated periodically by the executive team as part of its planning process.

In conclusion, having a full inventory of a company’s intangible assets is an advantage when marketing and negotiating the sale of a business. Take the time to identify and document your intangible assets to ensure that you receive the best possible reward for your life’s work.

Continue the Conversation

Al Statz is president and founder of Exit Strategies Group, Inc. For further information on leveraging your intangible assets in a business sale or to discuss a potential M&A need, confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

“In God we trust; all others bring data”: A Due Diligence Survival Guide for Sellers

“In God we trust; all others bring data” is a famous quote from W. Edwards Deming that emphasizes the importance of data analysis in business decision making. The due diligence process is a critical part of every M&A transaction, and in today’s data-driven world, having relevant and accurate company data has never been more important. Buyer due diligence has become increasingly thorough and wide ranging over the 20 years that I’ve been advising sellers. Contributing factors are advancements in ERP, CRM and BI systems, more laws and regulations to comply with, increased globalization, increased reliance on intellectual property and growing cybersecurity risks to name a few. This post provides a brief due diligence survival guide for company owners looking to sell or recapitalize.

Tips for surviving an M&A due diligence process:

Be prepared

You should start preparing for due diligence well in advance of the sale process by becoming equipped and well-prepared with accurate and reliable data. Compile all the necessary information, including financial statements and accounting records, contracts, leases, tax filings, HR records, legal records, customer, supplier and transaction data, and lots of detailed operational data. An M&A advisor can recommend the appropriate documents and reports to collect and can evaluate your state of readiness.

Conduct an IT audit

If your expected sale is a few years away, an IT audit can help you identify system limitations, highlight opportunities for improvement, and make informed decisions about what updates or upgrades to make. By modernizing software, implementing BI tools and cybersecurity measures, upgrading hardware, using data analytics to drive your business, and investing in training, you will increase the chances of a successful due diligence process and sale.

Get organized

Present information in an organized and professional manner and make it easily accessible to the buyer. This will make it easier for the buyer to understand the information and will help save time and keep your sale process moving forward. It also demonstrates that you have a handle on your business and shows your attention to detail and professionalism. M&A advisors typically provide a sample due diligence list and organize everything for you in a virtual data room.

Be transparent

Be transparent and forthcoming with information during the due diligence process. The buyer will be hunting for red flags and discrepancies in the data. By providing full information and being transparent and honest, you will build trust and credibility, help avoid potential transaction roadblocks, and reduce unpleasant and potentially costly surprises later on. Your M&A advisor and attorney can advise you on how and when to disclose certain sensitive information.

Be Proactive

Buyers will have lots of questions to understand your business and the data that you provide. Anticipating their questions and addressing them up front (in a Confidential Information Memorandum or virtual data room exhibits) and having ready answers helps everyone navigate the sale process more smoothly and reduces the time it takes to complete due diligence. A seasoned M&A advisor will know what to communicate and when.

Work with a team

Assemble a team of competent advisors — an M&A attorney, CPA and M&A advisor at minimum — to help you navigate the due diligence process. They can provide guidance, answer questions, and help you avoid potential pitfalls. Having the right internal staff involved is also crucial. An M&A advisor can help assemble and organize your team, reduce the burden on you, and minimize the risk of a failed process.

Stay focused

The overarching goal of due diligence is to help the buyer confirm their decision to proceed to a transaction closing on the price and terms agreed upon in the LOI. Stay focused on this goal, don’t get discouraged by what seems like an endless onslaught of requests, and resist getting sidetracked. Due diligence is just one part of the sale process. M&A advisors manage the overall process and work with deal participants to keep things moving forward in parallel.

Be flexible

Inevitably, issues arise during the due diligence process and that need to be researched and resolved or worked around in order to keep the sale moving forward. Be ready to pivot and prepared to negotiate.

In summary, surviving due diligence in a business sale requires preparation, organization, robust IT systems, transparency, proactivity, flexibility, and experience. By following these tips, you can help to ensure that your due diligence process goes smoothly. And if you take to heart, “In God we trust; all others bring data”, you will be well on your way to a successful business sale.

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For further information on M&A due diligence requirements or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

New law exempting M&A Advisors from SEC registration is welcomed by small businesses and those who depend on them

The Consolidated Appropriations Act, 2023 (H.R. 2617), signed into law by President Biden on December 29, 2022, includes a provision exempting brokers that facilitate small business M&A (Mergers and Acquisitions) from federal broker-dealer registration. The section on “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification” amends the Securities Exchange Act of 1934, effectively codifying the SEC’s sweeping 2014 M&A Broker No Action Letter. It benefits businesses who work with M&A advisors because advisors will no longer have the increased transaction cost and complexity of working under a broker-dealer who adds no real value to a transaction except to ensure compliance. The new exemption will go into effect at the end of March 2023.

The Securities Act amendment responds to the growing demand for M&A activities in the small business sector, which has increased in recent years. This exemption is expected to make it easier for small privately held companies to access M&A services and, by eliminating regulatory burden, reduce transaction costs for those looking to sell, merge or acquire other companies. Small businesses are defined in the law as those with up to $250 million revenue or $25 million EBITDA, which covers more than 99% of all privately held companies in the U.S.
The new law should bolster the overall economy as small businesses contribute significantly to job creation and economic growth.

The exemption applies to change-of-control transactions only, not equity securities offerings (i.e., capital raising). To qualify as a control transaction, the acquirer must end up with a 25% or greater interest in the acquired company and participate directly or indirectly in its management (e.g., board representation or executive management). The limits on the exemption easily cover all of Exit Strategies Group’s M&A activities.

In conclusion, this new law exempts M&A brokers from federal broker-dealer registration and right-sizes federal regulation of small business transactions while preserving important investor protections. It is a welcome change for small privately held companies and their stakeholders, those who advise them, and the broader economy.

For further information on this topic contact Al Statz. And don’t hesitate to reach out to a member of our team with any M&A or business valuation questions, needs or referrals.