Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

If I am a micro-cap today (under $200M), I would definitely be giving a lot of consideration to going private. The price of compliance today is simply too high on companies this size. By the time you add up all of the professional fees (acct, legal, etc.) for SOX and quarterly filings you could be talking 5-10% of revenues for a micro-cap. In addition, the Big 4 auditing firms really put the screws to these smaller companies for audit fees and the timing of the audit.

Best, Bconnery

Very thoughtful post, Devin. I agree with you.

When the government overreacts to corporate scandals, e.g., the Enron and WorldCom scandals, by imposing excessive regulatory burdens on companies, the investors—the very people the regulations are designed to protect—ultimately pay the price. As you so correctly note, the “price” isn’t limited to the out-of-pocket expenses incurred to effect compliance. It also includes the incalculable losses caused by diverting the attention of ethical executives away from where it belongs—running the business and generating a healthy return for investors—to complying with a web of complex regulations that don't seem all that necessary in the first place. Other than the lawyers, accountants, and consultants, who are hired to achieve compliance and who, ironically, are paid with the money that rightfully belongs to the investors themselves, seem to benefit from a such system of over-regulation.

That said, we cannot forget how we got here. If not for the Enron’s and WorldCom’s of the world, Corporate America wouldn’t now be saddled with Sarbanes-Oxley. So, where do we go from here? The government with input from corporations and investors alike must do a better job of striking a balance between protecting investors from the unscrupulous business executive and allowing the honest one to focus on giving investors the return on their investment that they seek. We’re obviously not there yet, but initiatives like those we’re seeing in connection with smallcap and microcap companies are a step in the right direction.

Devin,

That is good analysis and I am in agreement. Very insightful comments are also noted.

I am an economist at heart and generally assume markets should self-regulate. However, that is not always true in the real world. That being said, income taxes are a good example where the complexities make it impossible to "knowingly" comply. Accountants do their best but the cost of perfect compliance is too high and therefore, most companies and individuals assume some risk by doing "their best within reason."

Unscrupulous officers and executives (like any criminal) can always find ways to skirt laws and regulations. We lower blue collar crime by imposing severe penalties not more laws. More regulation is generally not the best answer but the easy answer for politicians trying to please a constituency.