Guide
How to check an M&A advisory firm before you sign
Updated
Choosing an M&A adviser is usually done on introduction and chemistry, and the checkable part is skipped entirely. It takes about ten minutes, it is free, and it uses two public databases most business owners have never heard of.
FINRA BrokerCheck, for anyone registered
BrokerCheck is free and returns, for a firm or an individual, registration status, employment history, exams passed and disclosure events including customer complaints and regulatory actions.
Search the individual as well as the firm. A partner's history follows them between firms, and disclosure events are attached to people. If the firm says it is registered and BrokerCheck does not know it, that is the end of the conversation.
SEC IAPD, for advisers
adviserinfo.sec.gov returns the firm's Form ADV. Part 2 is the one to read: it is required to be in plain English and it sets out services, fee schedule, conflicts of interest and disciplinary history.
For an owner, the fee and conflicts sections are the value. It is often the most candid published account of how a firm is actually paid, and it is filed under penalty rather than written by marketing.
The one question for everyone else
Most lower middle market advisers appear in neither database, lawfully, because they rely on the M&A broker exemption and there is no register of exempt brokers. So ask, in writing: are you registered, relying on the M&A broker exemption, or handling asset sales only?
The answer should be immediate and specific. A firm that has thought about its own regulatory position answers in one sentence. A firm that has not is a firm that has not read the disqualifier list either.
Four things to read in the engagement letter
Whether the firm takes custody of any funds or securities at any point, including escrow. Under the exemption it may not.
Whether it may represent the buyer too, and on what disclosure and consent. The statute permits dual representation only with clear written disclosure and consent.
Whether it will assist with buyer financing, which is restricted and requires compliance and disclosure.
And what happens to the fee if the deal is restructured from an asset sale to a share sale, or the other way. That single clause is where a business broker's position can change late, and it is almost never negotiated because almost nobody reads for it.