Reasons to rethink a 20-80 sale of your firm.

Greetings from the Broker Dealer Exchange!

As you get older in life you sometimes pine for those younger days when you had 20/20 vision and could tell what type of nut a squirrel on a rooftop across the street was eating without even squinting. I had perfect vision for nearly 40 years and couldn't understand why my older friends struggled so much and I basked in my perfect clarity. Then I turned 42 years old and the rapid decline began and suddenly, I have a three pack of reading glasses just so I can read the paper or the I-pad. I’m over due for my updated license and was told that 20/40 vision would require me to have my glasses with me at all time and if god forbid, I scored 20/80 I might be required to get prescription glasses and wear them at all times! I haven’t felt this much fear about 20/80 since a buyer approached me about doing a 20/80 purchase of a brokerage firm. It occurred to me that most do not understand the concept so maybe I should break it down in terms that they might understand.

20-80 purchase:
There are some consultants out there who continually recommend this route to their clients and quite frankly, I have yet to be told by anyone what the advantage is to the SELLER. Under this scenario, a buyer approaches me and looks to buy a $60,000 shell Broker dealer from me. But instead of closing 30 days after FINRA receives the notice (and provided of course that they do not restrict the closing) the buyer instead would like to buy 20% of the firm. Under these terms the buyer sets up an “initial close” in which you receive a check for $12,000 and turn over a stock certificate for 20% of your firm to this buyer. The contract is then written to include verbiage that ‘We will file a 1017 application with FINRA and upon approval we will buy the other 80%”. While this seems very straight forward, what they don’t tell you is this:

1) What if they don’t get FINRA approval or don’t file the application?

2) How much of that initial $12,000 goes to the seller?

3) What does FINRA think?

Let us explain what can happen if you sign over 20% of your stock to somebody in a deal of this nature. You may have a Purchase agreement that states clearly that if FINRA does not approve, the buyer must immediately remit the shares and sign back the stock power to the company. This sound well and dandy on paper but what happens if he says “NO” or demands that unless you give him back his $12,000.00 he will not comply? I can tell you firsthand that I have received calls from Owners of Broker dealers who were duped into this practice and unfortunately, I had to break the news to them that unless those shares are signed back over to them, the firm is worthless in my eyes. In addition, you must utilize FINRA arbitration in these matters and to get your 20% back may end up costing you over $25, 000 in legal and arbitration fees. What new buyer wants to buy a shell that has potential litigation from a minority owner on the horizon? The owner of the Firm has a new minority partner and like marriage it’s for better or worse. In addition, we have seen where once a 20% owner gets his foot in the door and starts running some business, his priorities change. Instead of getting the enormous paperwork prepared that is required in a 1017 filing, they instead treat the 1017 as a time consuming afterthought and the filing that was supposed to be made in 30 days is now on day 120. Meanwhile, the Seller is bound and obligated and cannot entertain any offers because he now has a contract and a 20% partner. As stated earlier, I cannot find one single benefit to a seller of a firm unless it’s a way to put a little cash in his pocket? Well before we jump on that bandwagon, let’s explore number 2 below.

How much of the initial 20% payment will the firm owner receive? In most cases, little if any of that amount. In most brokered deals, the agreement states that if any assets transfer, the broker is due his fee, so in this case, most of the $12,000 will go to the broker who arranged this awful deal. That’s pretty convenient isn’t it? A seller sells 20% of his firm, takes his firm off the market to any other potential bidders and waits with baited breadth for the rest of the deal to go through and he literally receives next to nothing for his sale. It really is a bizarre concept that can only happen in the brokerage world. Would you sell your 2012 Benz for $30,000 under these same terms? A guy drives up, pays $6,000 and that goes to the car dealer and then drives away with your car and you have to hope the title transfers at DMV or that he will buy the other 80%?

Lastly, there is the FINRA aspect of this. As we all know, FINRA is a different bird and has a set of rules that even Einstein could not fully comprehend. However, time and again I have seen where FINRA routinely restricts 20-80 deals almost as a matter of practice. Its almost as if they know that a buyer and seller were trying to circumvent their Rule 1017 and they purposely put restrictions on. Obviously this is not the case and quite frankly, from a FINRA perspective, I too would be worried about an applicant that was this afraid to face Regulatory scrutiny. We routinely tell prospective buyers that “If you have any doubt about whether you will be approved by FINRA , Please do not sign our agreement”. This is the way it should be and I don’t blame FINRA for hitting the breaks when they see a 20% purchase and start asking more questions than normal.


Clean 5k Connecticut based private placement shell. clean , up to date with little or no business. owner will assist in transition. Firm is also approved for Direct Participation programs as well. 60k

New Illinois based firm. Has yet to run a trade. Clean up to date and fully audited. Approved for Stocks, options, mutual funds. Owners willing to assist and or stay on. 80k

TEXAS 5k net cap firm. Approved for nearly every business line! stocks, bonds, options, mutual funds, private placements, Commission sharing Clean and up to date. The firm has not conducted a trade in 9 years, that is not a typo!, 9 years without a trade in the firm so liability is extremely limited. Asking $140k

Crystal Clean 5k CA Firm approved for Private placements. Up to date and has run little if any business the last few years.

5k Mutual fund firm Also approved for VA's and Private placements. Up to date and clean as snow. 60k

25 million book of assets for sale. generating 700-900k per year. Cleared at Pershing. Owner is not interested in a buy out over time. Serious buyers only please.

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