Profession: “An occupation in which a professed knowledge of some subject, field, or science is applied; a vocation or career, especially one that involves prolonged training and a formal qualification.”
Standard: “An authoritative or recognized exemplar of correctness, perfection, or some definite degree of any quality.”
Ethics: “A system or set of moral principles.”
Oxford English Dictionary
When businesspeople conclude a deal, they shake hands. That handshake is symbolic of the fact that a deal is a promise: If you do this, I will do that. Because a deal is a promise, business is—or it ought to be—inherently ethical. Yet in the heat of daily battles in doing deals, conscious thought about professional standards and ethics is often overlooked. A glance at the business news or a look around one's business network all too often reveals breaches of professional standards and ethics, inappropriate, and even criminal behavior—in many cases by those of repute. Pressured by time, cost, short‐term economic advantage, or a host of other self‐justifications, any of us can be tempted to take a path of least resistance—the easier wrong. So it is that ingraining into one's character the highest of professional standards and ethics becomes paramount, not just to prevent loss or punishment but, as Aristotle pointed out in the context of lying, because it is in each of our interests to do so. If that handshake does not carry a promise you can trust, how can business get done?
How, then, might one look at the standards and ethics for the M&A advisor? The mission of each M&A advisor is to serve the interests of the advisor's client in matters involving a potential or actual future or imminent purchase by, sale of, or merger involving a client's business—and to do so in conjunction with all other persons who may impact such activity. The M&A advisor does so (i) by developing an understanding of the client, the client's business, and the interests of the client as well as the various actual and potential stakeholders, and (ii) by utilizing professional competence to ethically achieve the objectives set forth by the client, assisting, where one's remit permits and to the extent qualified, in setting or modifying those objectives. In so acting, professional and diverse leaders of character, competence, and commitment are integral to making successful deals happen and preventing or avoiding ill‐advised transactions.
The M&A advisor profession is a unique vocation of professionals, including ones with interdisciplinary expertise, with the needed knowledge, skills, ethics, and commitment who have been retained or employed under the client's authority to serve their interests in connection with such mission. The M&A advisor educates, inspires, and motivates the client to make right decisions and to take right action according to sound business, legal, and ethical principles.
The M&A marketplace is somewhat chaotic, highly fragmented, and often fails to capture any substantial efficiency in scale, particularly in the lower end of the middle market. It is served by numerous advisors and intermediaries ranging broadly from accountants and management consultants to investment bankers to small business brokers. This fragmentation makes ethical standards harder to enforce, but it also makes them more important.
Unfortunately, some current market participants are less than fully qualified or reputable. Throughout the middle market, and particularly at the lower end, too many business owners often lack a knowledgeable and trustworthy M&A advisor.
The highly fragmented marketplace for middle market corporate financial advisory services is transforming and maturing. The middle market's fragmentation is both a blessing and a curse. The same “Wild West” attitude that empowers business owners and yields innovation can open the door for inconsistent or even duplicitous professional services. Specific to this book's subject, M&A service providers in the middle market often possess varied levels of competence, professionalism, and ethics. That said, and as there are really no established industry standards or license requirements for the lower end of the middle market, it is strongly recommended that extra care be exercised by the seller in thoroughly investigating the professional reputation and past experience of any M&A advisor under consideration. The goal of this chapter is to highlight what can be viewed as superior standards of conduct and ethical behavior (maybe even aspirational for some), while hopefully not detracting from the uniqueness and creativity that the middle market allows.
M&A advisors facilitate the process that provides essential capital access and liquidity to small and private businesses. Large businesses have the public markets to access growth capital and liquidity. However, access to public market capital and liquidity is not easily available to most small and midsize companies. Also, many entrepreneurs are not motivated to go public or do not want to face the scrutiny or manage the process burdens of external oversight. They rely on the services of intermediaries for capital access and liquidity. The M&A advisor, sometimes in conjunction with other advisors, thus plays an important role for these companies and for business as a whole by creating a marketplace and exchange process.
Most financial advisory professionals focus on one, perhaps two, specialized services in the spectrum of service offerings (from business valuation to estate planning). Many fail to fully understand the owner's fundamental personal needs or have the knowledge and skills to comprehensively evaluate their client's overall business performance and potential and apply experienced judgment to provide the sort of value required by the client for a transaction, growth, and sometimes even survival. Because the needs of the middle market private business owner and the company are inextricably intertwined, higher‐performing M&A advisors rightly focus on the whole and not just individual parts, even if their main focus will be to address solely one or two specific areas.
The most highly valued advisors combine wisdom with the expertise of deep specialty know‐how with broad generalist knowledge across many strategically critical and diverse disciplines. They can—and frequently do—create extraordinary value by synergistically managing, coordinating, or leading the delivery of the following types of interrelated business and financial advisory services:
The best M&A advisors build relationships with other professionals with complementary specialist skills to help clients establish transaction strategies and goals that are consistent with their risk tolerances, unique circumstances, needs, and objectives. While maintaining high ethical standards and adhering to any fiduciary duty due the client, all professionals working with private company owners should use a holistic framework to consider a client's total situation, landscape, and goals, both financial and nonfinancial.
As with other more mature professions such as accounting and legal professional associations, M&A and corporate financial advisory service professionals have an obligation to the public, their profession, their clients, the organization they serve, and themselves, to maintain the highest standards of ethical and professional conduct.
Most professional standards are codified in laws, rules, and regulations promulgated by governmental agencies or trade associations. The M&A profession has such rules and regulations as they relate to transactions among publicly traded entities. Regulatory bodies such as the SEC and FINRA provide strict regulations and standards, which include review and enforcement mechanisms. However, neither of these agencies' regulations currently have technical oversight of most private middle market M&A advisors and their transactions.
In addition, the rules and standards for public transactions are not always applicable in the middle market. The SEC and FINRA primarily protect retail investors, who rarely make direct investments in middle market companies. As a result, even those M&A advisors who are registered and comply with the SEC and FINRA rules do not find most of their requirements relevant to middle market transactions in which they engage. Chapter 19 delves deeper into these regulatory differences and explains to what extent M&A advisors may need to register and comply with SEC and FINRA regulations.
At a state level, there are various laws that may relate to the activities of some M&A advisors; however, these laws do not generally address professionalism or behavior beyond the concepts relating to anti‐fraud.
Despite lacking a regulatory agency, M&A advisors serving the middle market have an obligation to conduct themselves in a manner that adheres to the same level of professionalism as their public transaction counterparts, and in some cases go beyond those minimums. In recognition of this obligation, the following standards of conduct are considered best practice for M&A professionals serving the middle market.
M&A advisory professionals have a responsibility to:
M&A advisory professionals have a responsibility to:
M&A advisory professionals have a responsibility to:
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