Considerations for Buying a Broker Dealer
If you find yourself in need of a broker dealer, you have the option to either buy an existing one or start one from scratch. MasterCompliance has years of experience in both brokering broker dealer transactions as well as assisting our clients create new broker dealers, and in our experience buying a broker dealer tends to be the most popular choice. While the speed and convenience of buying a broker dealer are favorable, there are pros and cons to this option you should consider.
Pros of Buying a Broker Dealer
There is a good chance it will be faster to get up and running, as the BD is already registered, as long as FINRA doesn’t deny or delay the closing. If all goes well and FINRA doesn’t delay or deny the deal before you close, you can close in 30 days of application submission. Also, once you close, FINRA can no longer delay or deny the exchange. If you start a BD instead, once you close you will have to then go out and get registered with the SROs and the states and jump through a few more hoops before you ready to go.
You might retain employees, save time on staffing and finding the required licensed people. One of the big bottle necks for starting a BD is finding people with the required licenses like the Series 24. When you acquire an existing BD there is a chance you will be able to retain its employees with those licenses who trained and will need less time to adjust.
Brand is already established, and it is easier to secure financing. Because the BD previously existed and presumably conducted business, it will be easier and faster to secure financing.
Cons of Buying a Broker Dealer
Buying the wrong BD could lead to serious issues in the future. When you buy a BD, you assume their existing liabilities, meaning you can be sued for mistakes the previous owners made, even if they no longer have any affiliation to the BD. Also, there are some customers who lost money under the previous owners and see the BD changed owners and see this as an opportunity to recoup their losses and sue. When this happens, it can be hard to win the suit, and might cost more to fight then to settle.
It is usually more expensive to buy an existing BD then to start a new one. If the previous owners ran a successful and profitable BD, they are going to charge a premium to hand it over. The BD could also be their retirement plan, making them less likely to go below certain price ranges.
Delay and Denial
FINRA can deny or delay closings, and the buyer could lose a significant amount of money on the down payment. After you submit the CMA, FINRA has 30 days to make further inquiries or shut down the deal entirely. If they decide to deny the deal, then it’s over, and whatever money the buyer put up for the down payment is lost, which could be a large sum. If they make further inquiries, then the deal is put on hold until they are finished. This could lead to them shutting down the deal, but it also leaves more time for something else to go wrong, like the other party backing out.
You could get scammed, whether the contra party lies, gets you to sign shady contracts, or abuses a loophole. If this does happen and you do want to pursue legal recourse, the cost of legal fees may be more than what you lost.
If you are looking to buy, sell, or start a Broker Dealer, Contact Us and our team of expert consultants will help you with every aspect of the process to ensure you get or sell your BD quickly and minimize any issues that arise.