Acquisitions Anonymous - #1 for business buying, selling and operating - Legal secrets you need to know for SMB M&A with @SMB_Attorney_Acquisitions Anonymous Episode 99

Episode Date: June 1, 2022

If you liked this episode, subscribe to our weekly newsletter and receive new episodes, offers and learnings directly to your inbox, every week:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) and Mills Snell (@thegeneralmills) are joined by Eric Pacifici (@SMB_Attorney), to talk about all things legal:M&A legal documentation, what an attorney does, the different legal aspects between small and big deals, litigation, indemnification, intervening when the lawyers slow down your deal, buyer & seller best practices on deals, negotiation leverages, and MUCH more.-----Thanks to our sponsors!* CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:(00:00) - Introduction to legal secrets you need to know for SMB M&A(00:50) - Our sponsor is Cloudbookkeeping.com(02:15) - SMB Attorney has Come Out of the Closet!(05:46) - How Do You Find An Attorney?(11:36) - What is Indemnity and the Mechanics Around It?(21:00) - What is a realistic amount of time budgeted for legal documentation?(23:53) - How can you keep your deal on time when an assessor slows you down?(27:00) - How can you keep the other parties’ lawyers on time to avoid a deal from breaking down?(36:06) - What is the role of the lawyer in the deal?(38:55) - Who should prepare legal documents? Buyer, seller? How does that play in the evolution of the deal?(43:02) - Big Firms vs small firm tradeoff: What’s to note?(48:04) - Money, fees & fee structure: Explained(54:10) - What usually prevents litigation?-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#98 Insurance Broker Secrets for Business Buying - Tom Gilroy - Acquisitions Anonymous Episode 98#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-host, joined today by Michael Gurdley. We have an awesome guest today. S&B attorney, he is a celebrity, minor celebrity, in the S&B Twitter world, and we talk about all things legal and legal documentation, M&A-related. And so we have a fun conversation. We talk about things that are very nuts and bolts, very in the weeds, like things that probably will make your eyes glaze over if you're not interested in these topics, but reps and warranties and deminification, things that you don't want to learn the hard way. But then we also talk big picture about how to hire a good attorney. What are questions to ask when you're interviewing attorneys? Does location matter? What about fees? How do you pay the attorney?

What's the fee structure? I think you're really going to enjoy this one today. Thanks for joining us. Here's a word from our sponsors. Hey, guys, Michael here. I want to talk to you about one of our sponsors in our never-ending quest to make acquisitions anonymous break even. And that sponsor is cloudbookkeeping.com. It's actually run by my neighbor, Charlie, who's a great guy. And he has been our longest tenured sponsor. And we're super grateful for him to just support the podcast. So what cloud bookkeeping does, it is a set of cloud bookkeepers that if you're a small

business person, help you get out of the business of doing your books and let you focus on the business of taking care of your customers. So they do all the complexities, bookkeeping, payroll. and they come across in our very client service first. That's their phrase, but I know that's true because I've spent time with Charlie and dug into their business. So full suite of accounting services,

sophisticated reporting quickbook software solutions, and full service payroll options. So definitely talk to Charlie if you want to get out of doing bookkeeping and outsource that to a trusted third party, and you can find them at cloudbookkeeping.com. So thanks again for sponsoring today, cloudbookkeeping.com. Welcome back, everybody, to another episode of Acquisitions Anonymous. We're joined today by someone who I would call a good friend, but my wife would joke is just one of my internet friends, but SMB attorney.

What's up, man? Hey, guys, thanks for having me on the show. Huge fan of both of yours, so I'm excited to be here. We're really glad to have you. This is kind of a fun episode for us for a few different reasons because you're breaking your anonymity, or like I was joking with you, you're coming out of the closet. it. So, S&B attorney is no longer anonymous. And Eric, give us a little bit of just background on who you are and kind of how you found your way into the Twitter S&B space. Yeah, thanks, Mills. Again, excited to be here. A little bit weird to be doing this publicly, but I'm kind of excited to

drop the cloak and do it here. But my background, I work for a large corporate law firm depending on the metric, arguably the most prestigious or best corporate transactional law firm. We do really large transactions, $100 million, billion plus for some of the most well-known companies in the country, like the Wall Street Journal, front page type stuff. But my passions with small and medium-sized business buying and search funds and the ETA community, I got introduced to ETA in 2017 by a good friend of mine who, you know, jokingly over lunch said, you know, Eric, why don't you, you know, sounds like you'd be a good fit to buy a business. And I said, buy a business. Like, what are you? You know, I was an M&A lawyer at the time,

but the idea of, you know, going out and buying a business myself was pretty foreign to me and, you know, got introduced to the Harvard book and then read buy them build and kind of just sat with it for a couple years and really fell in love with the concept, you know, the idea of controlling your own destiny and, you know, buying a business and operating is, it's pretty sexy. So, I sat with it for a couple years and then found the S&B Twitter community and after some time decided, hey, you know, I'm going to get on here. Couldn't do it publicly for, you know, career reasons and legal advertising reasons and so on and sort of ethical implications to it, but wanted to get in on the conversation and realize that there was a huge void in contribution on the legal front. And so

about August of last year, started just tweeting out general M&A advice and getting to know folks, networking, and having a ton of fun with it. And one thing led to another, and here we are. And now myself and two other guys who are pretty well known in the S&B Twitter community are starting a S&B focused law firm designed specifically for searchers and operators in the S&B space. That's awesome, man. Eric, you've kind of skyrocketed onto the Twitter scene. And it looks like, you know, you get a lot of people who reach out to you via DMs and, you know, in the comments who were saying, you know, hey, I have these questions or, you know, this is my first time. I've never bought a business. You know, how should I hire an attorney? What should I look for? So we're going to

kind of cover a handful of those things today. And, you know, we'll just maybe jump right in. The question I think that, you know, comes up for a lot of people when they're first contemplating buying a business is, you know, who do I need on my team? And the typical answers they'll get, right, is you need a CPA or you need somebody who can kind of give you tax and accounting advice. You need good, you need good transaction counsel, legal counsel for the deal. And then, you know, you may need like a by side advisor or you may need, you know, due diligence, third party due diligence. We've had some people on talk about that.

But in terms of that legal counsel aspect of getting a transaction done, how do most people that, you know, you're interacting with, how do they find an attorney? my experience is that attorneys are kind of like barbers, right? If you ask them, hey, will you do this? They say, yeah, of course. It's like the guy could be skilled in family law. And you ask him, hey, can you help me with my transaction? And he'll say, yeah, sure.

How do most people find, you know, legal counsel for M&A work? Yeah, that's a great question. And I think that's part of the issue is that there's a huge disconnect. You know, the fact that I'm getting, you know, tens, 20s, you know, hundreds of, DMs from people who are looking for lawyers that can do M&A tells me that there's a big disconnect between the lawyers that are out there right now and how people are finding lawyers. And it's a little bit emblematic of the larger problem, which is in the SMB space or the small business buying space, you can find high-quality lawyers that will take those deals,

but they're not dedicated to SMB. If you look at the bullet points in their bio, they're trying to do $50 million deal, $100 million deals, lawyers are constantly trying to chase up market for the larger fees and for the prestige and the accolades. And so finding a high-quality lawyer in the space that will take your deal, you know, if a $50 million deal or $100 million deal comes in the door behind you, good luck getting that lawyer. Right.

So there's a little bit of a chicken and an egg problem in the space in the first place. But, you know, to answer your question more directly, how do you find a high-quality? lawyer, you know, to do your S&B deal, I think the answer is it's much like hiring any service company. You know, you're going to want to ask around for referrals. You're going to want to see that they have demonstrable experience in the space, know that they've done small business transactions, you know, the type of transaction that you're looking to do if you're trying to buy a roofing company like yourself, Mills, it's great to, you know, to have somebody who has that experience and they know what to look for in diligence, although I will say, you know, to some extent,

M&A is M&A, but, you know, I think it's much like your experience. I think you worked, if I understand it correctly, you worked with a great lawyer named Dan Diaberto in South Carolina. You know, when Fund of One, another South Carolina-based buyer was looking to hire a lawyer, I think he reached out to you and you said, hey, you know, go hire Dan. And that's a, I guess that's a plug for Dan here. But, you know, that's probably how you want to do it. Because like you said, a lawyer is the last person to tell you that they're not capable of

doing the type of work. And so if you're hiring the same guy who did your lease, the same guy who did your divorce to do your M&A transaction, you know, you're putting yourself in a pretty bad spot. Eric, hey, I was going to ask what, you know, you talked about what the job an attorney does in a $50 million deal is different than the say the job an attorney's going to do in a $5 million deal or a million dollar deal. You know, what, what materially changes such that, you know, I want to find somebody who's done a deal like my deal in the past versus somebody who's just done M&A in general. Like what materially changes between those deal sizes? Yeah, I think the point I was trying to make is not that the deal necessarily changes, but the focus of the lawyer changes. So if you're, you know,

if you've brought your lawyer a $5 million HVAC deal and a $50 million deal walks in the door behind you, it's going to be really difficult to get your lawyer to answer the phone. But, you know, more specifically to answer your question, you know, at those two price points at a 15, million dollar deal, you're going to have a corporate buyer, you know, who's backed by investor dollars or corporate dollars that has a little bit different incentive structure, a little bit more of an appetite to negotiate. And same thing on the self side, right? The seller's going to have a little bit more of a higher level of sophistication, not to insult our S&B sellers, you know, very successful and oftentimes very experienced individuals, but, you know, things like

working capital, right? There's no desire in most cases. among S&B sellers to negotiate working capital. I think one searcher put it eloquently that they brought up working capital to somebody in a $2 million deal. And the seller said, you know, sounds like a you problem, right? But on a $50 million deal, we're going to spend, you know, tens, 20, you know, we're going to spend a lot of hours negotiating working capital. So they're just, they're a little bit different.

But, you know, M&A is generally M&A. So not that different. Well, and then there, I mean, I guess just from experience, there are things that start to show up, say, specifically at bigger deals or in smaller deals, right? So I guess if you, if you're doing an SBA deal, there's SBA things that the lawyer needs to know about on the smaller end. On the larger end, like, you might have to go through FTC rules, right, and make sure that you pass kind of competition agreements. So anyway, I agree with you. I've seen it. You know, there's different things that happen in each one of those things as well as what, what, what, affect like the industry you're in is important as well. Like I've seen transactions happen in the

software space and the lawyer's like super worried about patents. Well, patents don't actually mean that much in software. So that kind of experience really really is a good point. Yeah. And I think generally speaking in the small business space, I mean, there's just a huge appetite among sellers to keep it simple. You know, they don't want lawyers coming in and monkeying with things and trying to put in place you know, complicated indemnities and escrows and caps and baskets and deductibles. Whereas in the larger deal, you know, we'll spend hours opposite of just the legal, you know, hashing that kind of thing out. Eric, you just said some amazing jargon that I really want to unpack, but it may be a little

bit too nerdy for this conversation. Go for that. This is a podcast by nerds for nerds. Let's go. Let's talk about some of those things. So let's maybe talk about. maybe let's talk about first like an indemnity and and and just the mechanics around indemnity and whether it's like deductible or tipping basket like you can give us the cliff notes yeah so the

the the broad strokes on indemnity let's let's back way up right so what is indemnification um in these agreements um you're going to want to negotiate a contractual dispute mechanism right The last thing you want is to be in a position post-closing where you're having to litigate issues. It's very expensive. It's just not a very streamlined way to hash out very ordinary course disputes. So backing up, so what you do in these transactions is you obviously, you conduct due diligence, right? So you want to lift the hood. You want to take a close look at the business and try to understand everything you can about that business and try to ferret out all the skeletons in the closet.

but that's not really practical, right? The sellers, no matter how much diligence you do, the seller is going to know that business better than you are. So, you know, if you push too hard, all you're going to do really is upset them and spend a lot of time and money and time kills deals, so you need to move fast. And so what you do is you negotiate a set of reps and warranties.

And reps and warranties are just a set of statements that the seller is going to make about the business. They're going to tell you that, you know, fundamental stuff, like it was properly formed, that they have the proper authorization. that they own 100% of the equity of the business. And then to some less fundamental things like issues around the contracts and that kind of thing. They make those statements in the contract.

And then to the extent that those statements turn out to not be true after closing, you have an indemnification provision that handles breaches of those statements. And oftentimes you'll set aside a bucket of money or an escrow or a holdback to pay for those breaches, right? And there's a number of contractual elements to those mechanisms or to one, to the bucket of money, you know, you'll have like a health care deductible, right? You have to clear a certain amount of money before money starts to come out of the escrow or out of the indemnity generally. You'll have caps saying, you know, this is the maximum amount of the indemnity that's put in place. Some of those deductibles are tipping, right? So once you fill up the

deductible or you fill up the basket, which those terms are used interchangeably often, then the basket tips and it goes back to dollar one. You get paid out dollar one. So let's go over an example because I think this might help. Right. So let's say we'll kind of leave like environmental and employment and tax matters to the side because those are a little bit more complicated. But let's say that there's, you know, a representation, reps is short for representations in warranty. So the seller is saying, these things are true and I'm going to put them in black and white. And one of them is, you know, the financial statements have been true. I've paid all my bills, you know, those kinds of things.

Let's say a third party landlord after your transaction is done comes back and says, hey, by the way, your seller didn't pay me 12 months worth of rent. And it's, you know, it's $20,000 a month. and you, you know, you guys owe me this money. You have to figure it out. And the seller says, well, I disagree. It's not my problem. Your problem, you know, where he can evict you. All of a sudden, you have a dispute. And it's worth $240,000. So if there was a deductible, right, in this case, you would say, hey, look, I'm going to cover, in essence, the first maybe, let's just call it, $20,000 worth of issues. I'm not going to come back and nickel and dime you when I found out

there was like a late fee on this thing I paid for you that, you know, rolled in the door after we closed. But the deductible in this case is definitely triggered. The cap, right, might be because this is part of the negotiation back and forth, is that the seller wants to create a limit to their liability. They don't want to have unlimited liability forever out into the future on everything. So if they had negotiated a $100,000 cap on indemnity, then you're having to, you know, in this case, eat $140,000 worth of, you know, lost rent. If there's a tipping basket, like you said, the, you know, the first, let's say it's a $50,000 tipping basket. The first $50,000, me as the buyer, I'm responsible for. But once we get to $50,001, the basket tips, and I'm able to recoup

all of that. The seller is paying me back all that. And it can be held in escrow, which is best case scenario or if it's not an escrow, then you got to go find a way to collect from the seller. Is that the general gist? It is. Yeah. I mean, the idea is the seller wants certainty around how those disputes are going to be handled. I mean, as the buyer, you don't want to be litigating.

It's expensive. It's not productive. Same thing for the sell side. So, you know, in a large-scale transaction, we'll spend, you know, that's probably one of the two most hotly negotiated areas of the. agreement. We'll spend a ton of time there. And then what I see in SMB is there's very little time spent there. And oftentimes there's no indemnification provision at all. Sellers don't understand it or, you know, sellers look through it and they see very ordinary course stuff like an escrow and they say,

we're just going to cross that out, you know. And so the desire to keep it a little bit simpler in SMB. Thanks for going into the weeds with us. Eric, we can nerd out on this kind of stuff, you know, infinitely. I was going to say, I think that's a great testament to why you want a lawyer who's very experienced in this stuff because imagine you're like a new buyer trying to learn how to do like basket based recovery and reps and warranties and stuff. And somebody somebody calls you up and says, hey, you owe me 300 grand. That's not that much fun. So a lawyer should be able to do that for you. So Eric, I kind of wanted to maybe, maybe ask a different question.

Like what are what are the biggest mistakes you see from buyers these days, especially on the legal side? Like if you had to just like take the typical buyer and be like stop doing this like what is number one maybe two and number two as you see them? Well, it's not the buyer's fault, right? But the biggest issue that I see, and this is going to sound a little bit self-serving, but it's true, is that there's a reluctance to bring in help early in the transaction, right? And so the biggest issue facing the pre-LO searcher is that they've got a certain sum of money set aside to make this this transaction. It's their war chest. If they run it down, they're SOL, and they go back to work.

So I understand the desire to preserve those funds, but one of the biggest issues that I keep seeing pop up for searchers is that they don't have properly negotiated LOIs, right? So really critical material terms are missed. And that sets you up for potential fallout in the transaction, busted deal fees, where you'll get to the three yard line. and then you have a knockdown, drag out fight about the terms of the non-compete, something that you should have established, you know, six, seven weeks ago in the LOI. And so that's an issue that has to be solved, right? Because not every seller or not every researcher can afford to be paying to have each LOI negotiated by their counsel, but you really need that help.

And it goes a little bit further than that, right? You get post-L-OI, and oftentimes buyers still want to wait, right? They want to wait till Q of E's done. They want to wait till, you know, they've cleared this diligence hurdle, that diligence hurdle. And then they want to bring their lawyer in with 45 days to go in the process. And I totally get it, right? Like the preservation of funds is critical. But the flip side is you put your most trusted, you know, advisor, the person who ultimately

is the only person who has your back down the stretch in a position where they're then drinking through a fire hose, you know, trying to quickly diligence the operation side of thing while negotiating the purchase agreement. And, you know, if you don't have a, you know, a great foundation in that L-O-I, you turn the deal over to your attorney with 45 days to go before closing. And you say, hey, quickly, you know, quickly, you know, put this into a purchase agreement. And there's really egregious things that are missing. Or you've agreed to things that you absolutely should not have agreed to.

It puts us in a position where then we have to go to you and say, hey, are you sure you want this cap on indemnity? Like, this is not market. It's really going to hurt you. You know, and then you look at your counsel and you go, these damn lawyers. You know, I'm sorry, I didn't mean to, I don't know if we can cuss on the show, but these little pause. Hell yeah, you can.

These, you know, these lawyers, you know, they want to overnegotiate everything. And in reality, some of this stuff, you know, we just, you know, we have to bring material risks to your attention. So I'd say that's probably the biggest mistake that folks are made. Eric, that brings up a good point. What is a realistic, there is no short answer to this, but I'm going to ask you to try and, you know, buck all of your natural intuition. What is a realistic amount of time that someone should budget for legal documentation of a deal? Yeah.

I'd say the more, the better. But. because it comes up right it comes up because sellers are like you know pre-LOI you'll hear this from advisors all the time you know the price matters yada yada yada but also whatever buyer can indicate you know the most you know expedient path to close it's like well that's not good for me as the buyer and it's really probably not good for the seller it's great for the advisor you know great for the for the investment banker but what's realistic Yeah, I mean, time kills deals, right? So when you're bringing your counsel, I mean, they should be able to tell you. And it's facts and circumstance dependent. If I have, you know, five deals that I'm trying to close that month. And I just don't have the bandwidth to do it. You know, I should be communicating that to you. Oftentimes, what you run into is that lawyers are not particularly good business people. And so they're not communicating that stuff. And they want to take the deal, right? They don't want to turn you away, especially if you're a repeat buyer. They're not going to want to send you to another lawyer. And so, I mean, I would say that I could probably

hammer out of purchase agreement in 15 days. But the flip side is, then I have to send that to sellers council. And oftentimes in this space in particular, they've hired their next door neighbor's brother's cousin Billy who also did their lease, who knows absolutely nothing about M&A, gets your paper, goes nuts. And it comes back to you and goes, if this thing's more than 12 pages, we're not signing it. And so then you got to go back to the drawing board and, you know, or they send it back with red all over it and it you know and even when you just have sophisticated counsel on the other side and they want to negotiate hard you know that process can take time so while you can tell your client hey you know males i can do this for you in 15 days i can't control what the south side is

going to do if they're incentivized to move quickly i mean i think you can especially if you've got a good l-l-li that's covered off the terms um and if your counsel is a reasonable individual that you know puts together really middle-tier reps and knows of what market is and is respectful and says, hey, you know, Mills does not have an appetite. He's not trying to kill this guy. He just wants to get this deal done. You know, we go back to them with middle tier stuff. You know, I'd say you could do it in 15 days, but it's difficult to make promises like that. But time kills deals. You know, it's something that I emphasize over and over again on Twitter to folks is that's the biggest way to lose your transaction,

to incur a bunch of fees and to have nothing to show for it at the end is to take too much time. And you can't control what the seller is going to do. But on our side of things, on the buy side or whatever side of the table we are, we should be moving as expeditiously as possible to get to close. We talk about this time idea. And one of the things I've seen slow down deals more than anything when the lawyers are to blame. And I use capital B blame because this is fun. Unlike with Heather Driesen, we were like, we love you, you're a banker. You're a lawyer.

So we get to hate you. It's fantastic. It's a life to hate. No, bring it. I'm the first one. I love the lawyer jokes. Let's have it. Oh, no, there's no lawyer jokes.

We're just going to hate. That's the way this is going to be. No, just kidding. No, I mean, good lawyers are amazing. Like, they'll save you so much money. Bad lawyers, not so much. But yeah, so speaking of bad lawyers, one of things like I've seen over and over again, lawyers slowing stuff down, they do this like red line email slinging back to each other

where it's just like, here's 40 changes to you. Here's 40 changes back. And like one of the things I've learned to do is eventually when I see that going on and know my bills running up is I tell the lawyers like get on the phone and talk through all these, stop doing that. Right. So I was just curious your opinion on that as a way to keep like the asset purchase agreement or the stock purchase agreement from being that long leg in your poll.

Like it first of all that you could tell me that's the stupidest thing ever, which would be fine would be the first time somebody called me stupid. But like is that a good tactic? And then what other things can you do to speed up like the legal aspect of your deal beyond kind of that one, right, which is get off an email and start talking. Any other ones come to mind? I mean, I think that's big. I think having conversations and specifically the business people talking to each other, the buyer and seller talking to each other. And I know that agents and brokers are often reluctant to allow that to happen. And I don't know why that is.

I feel like that really helps move things along. When you've got lawyers, and this is something that drove me crazy as a first, second, third year lawyer, is we spend a ton of time, you know, drafting these really long agreements, lob them over the fence, right? They'd give it on the other side of the fence. They'd spend two, three weeks carving it up and then they'd lob it back over, all marked up, right? Meanwhile, you haven't heard from the client, you haven't talked to the seller. It's almost like two transactions happening simultaneously where you've got the lawyers that are just doing war with each other. And oftentimes when those lawyers even get on the phone with each other, you know, we'll be real tough in email. There's no way my client's going to agree to that.

Michael. And then I'll, you know, we'll pick up the phone. We'll, Michael, you know, how's it, how's it going, man? How are things in Boston? You know? And so, uh, communication is big, but I, I preach this all the time. Do not let your advisors hijack your transaction. It's nice when you can hire a really good lawyer who can handle the legal side of things for you, right? So you can focus on the financial diligence and the business diligence and, you know, divide and conquer, but you still have to be controlling that element. of the process because lawyers and brokers have a tendency to go crazy, forget whose transaction it is, and especially, we can talk about this more, but the incentive structure of lawyers with the

billable hour, you know, the more noise we make, the more value we add, the more money we make, you know, and so I always laugh because there's always that third year lawyer. Why do lawyers, why do lawyers intermediaries? Why do they love to take over deals and kill them? And then like when they do that, what do you do when you're on the other side? I'm curious what your strategy is. I know my strategy is. But I'm curious, what do you do when you see the other side's lawyer taking over the deal and potentially killing it? I mean, when that happens, you tell your client, hey, call the other side, call the business people.

You need to get in touch with them. We need to have that rapport established aside from the lawyers. I don't think that lawyers are trying to kill deals, right? First of all, you have to appreciate who the typical lawyer is in the transactional law firm. They're that same obnoxious guy that was in the first row of law school with his hand up constantly, you know, that always has to put in their two cents. And then you layer on top of them. It's just, it's like, and I'm going to get in trouble for status.

I'm not supposed to disparage the legal profession. So I've got to be careful for it. It's part of my code of ethics. And I'm not disparaging anybody. It's just, it's emblematic. So we are typically the type A individual, right? That's who's drawn to this profession and it's who's drawn to corporate M&A, right? And so you then take those people and you layer on top of us this, the more you do, the more you make.

And it's not really even a more you make thing in the law firm. It's, you know, we're driven by ours. You know, we've got our hours target. You want to hit 2,000 hours or whatever it is. You get your bonus at 2,000. and then you make partner if you build 8,000. I don't know what people are doing. But it creates people who lose sight of what they're doing,

especially when you're talking about corporate money and you're talking about blank checks. And that's what I love about the S&B space, right, is that this isn't limitless money. It's really important transactions to people who have wives and kids and need to get it right. I was talking to a searcher the other day who's,

he's military, an awesome guy. He said, getting this right for me feels more important than, more mission critical than when I was being shot at and backed at. You know, I've got a one-year-old, a four-year-old. And so I love the incentive structure in the SMB space being real people doing real transactions. If that, yeah. We're going to pause for a sec for a quick. at break.

Hey, everybody. Michael here. I want to talk to you a bit about one of our very welcome sponsors for today's episode. It's the folks at Moore staffing, specifically Greg and his team over there have been a great friend of the podcast. And what more helps people do, and you can find them at more now.com on the internet, you know, what they help small business owners do kind of goes above and beyond what

you're seeing other folks doing in helping small business owners like you build overseas teams, specifically in the Philippines. And what they do is they're helping, helping you find not only the people that are basic individual contributors and oftentimes virtual assistance and that sort of thing overseas, but going above and beyond that and helping small businesses really upskill and hire strong competency and experience, you know, at a discount overseas. So a lot of that is hiring director and manager level folks, people that can, you know, really meet the needs of what you need in terms of running. a complex business with complex needs and stuff like that.

So a lot of these folks are very experienced, have been in an industry for a long time. So in the end, makes your life a lot easier by hiring great people and experienced people in that way. So, you know, given what's going on with COVID and remote work becoming more normalized and more things getting pushed into different corners of the globe, more has turned into a great resource for a number of folks. I know a number of listeners of our podcast have signed up as customers there. and we're grateful to Greg and his team. You can find them at more now.com.

Take a look there. Tell them we sent you. And if you're starting to build not only a basic fundamental level of team overseas, but you want to bring on people who are more experienced as well, this is a great resource to go check out and definitely friends of the pod. So thanks to them and check them out, more now.com. So Eric, what are some of the signs, you know, a lot of our listeners might be kind of the first time working on a transaction

and maybe they've had, you know, good experiences, bad experiences with sellers. What are some signs to you that a seller has prepared well? That the seller has prepared well. That's a great question. I mean, I think that, you know, there's, and sorry, I thought, can we pause for signals? I thought you were going to ask me that the deal is going to die. So I was looking at those questions. What are the signs that the deal is going to die?

Okay. Okay. here's the zinger why would you never as a lawyer work for mike girdley there you go that's the hard-hitting 60 minutes you're here for all right what's the question sorry are we still recording i mean that's a good question too i think i think let's just keep let's keep all this in we're not adding any of this out because those are live stream this yeah yeah this is up we're alive yeah i love yeah we're getting ready to post your home address it's going to be great let's go i want to know both of these things. I want to know, you know, when I get, when I come into a conversation with a seller, right,

everything feels good typically if you're, if you're doing it right on a site visit. And then all a sudden it's like, hey, I'm going to send you some document request. And then, you know, counsel gets introduced to each other. What are some signs that, hey, this, this seller is taking this seriously. They're bought in. They may be done some prep work. And then you could also invert that and ask the opposite question is, what's the telltale sign that this is never getting to close? Yeah, I mean, I think I think telltale sign that they're serious about the transaction, at least in this space, is that valuation will be reasonable. You know, I think that there's a process that most sellers go through where they start with very absurd expectations based on who knows what, right? And there's a winnowing of understanding whether working with their broker or whomever or doing their own research or just getting hammered by buyers that they finally come around to the idea that, hey, 500,000 an SDs probably worth.

two and a half to four times and whatever it's worth these days. And, you know, if you see them in a reasonable valuation range, you can then surmise that, hey, this is somebody who's working with representation. You know, they'll be led by representation to, you know, a good broker who's certified, you know, that can speak to their preparation. Also, you know, a well curated data room is a good indication. You know, there's going to be requests that the buyers are going to make that they're going to have to go looking for. or as you winnow the diligence process.

But by and large, I mean, if they don't have a data room set aside with all their org docs and things like that ready to go, then they're not ready to start the process. I had a buyer who the broker asked him to submit a driver's license three weeks ago for a to get a SIM and he still doesn't have the SIM. He submitted the driver's license for better or worse. And yeah, it does not have the SIM today. So that's an indication that, hey, we're a little bit early in the process.

And then deals dying. I mean, this is something that I pitch over and over again is that time kills deals, right? If you see a transaction that's dragging out, you're giving that seller more and more of an opportunity to change their mind. Right. I mean, they're selling their baby. They're losing sleep. They're thinking about their customers, their legacy. You know, hey, I'm 60 or 62 or whatever.

I want to go traveling. You know, I'm taking it two and a half to five and a half times payout. If I just hang on for a couple more years, maybe we'll get through supply chain issues and labor shortages and maybe this post-COVID bump is normal and I'm not, you know, getting out at the right time. And the more time you give them to have those conversations with themselves, the more likely you are to lose that transaction. It's like the longer you reel in a fish, more likely it is to get off the line.

And so that's probably the biggest thing. I'll just interject. It took me 10 months to do my deal. So I totally agree. The longer it goes, not only the more risk, right, is introduced to the transaction itself, but also the higher the expectations get for both buyer and seller. You know, it's like, oh, now it really has to go well. And then you're, you know, two months later and you're like, okay, now it's really got to be perfect for everybody. And then you go two months longer. You know, the bar just gets raised and raised and raised. Yeah. And the more time you give, no, sorry, the more time you give somebody else to emerge, you know, to outbid you on the transaction, especially you've cleared 100 days of exclusivity

or whatever it is. And, you know, if somebody can come in from the wings and make a superior offer and, you know, seller is going to take it. So, Eric, in a lot of these smaller deals, especially when you're, they're not banked, right? There's no business broker involved. You know, a lot of times I see the lawyer step in and be kind of that, someone. a strategic consultant for the buy side or the sell side. How do you think about that? Is that something you recommend to people? I mean, does your typical lawyer enjoy doing that kind of advising on some strategy and stuff like that? And in particular, I was thinking about kind of the dynamic of what happens when a deal gets under exclusivity. One of the things I tell people is when the deal gets

under exclusivity, all the leverage shifts from the, basically from the seller to the buyer. The buyer is in in the poll position at that point. So exclusivity to some extent is very dangerous to you as a seller because like if your deal doesn't close, you know, you don't have a really good bat in the best alternative to negotiated agreement because the next buyer is going to wonder what weren't wrong. So just curious how you think about the role the lawyer in kind of the strategy of the deal and then in the context of that leverage on both sides. Yeah. I mean, to be very candid as much as, you know, we want to say nasty things about brokers. It's not ideal, right, to utilize. a lawyer exclusively, you know, investment bankers, brokers, good ones can add a ton of value to the

transaction, specifically with valuation. If you're asking a lawyer about valuation, you know, you're probably barking up the wrong tree. He'll give it to you. He'll tell you he knows, you know, he's not going to tell you he doesn't, but it's not ideal. And there's a lot of soft skills around the transaction, you know, a well-prepared sim, you know, or teaser. It's not are strong suit. It's something that a broker, you know, has extensive experience doing marketing the transaction and also vetting buyers, you know, it's, I don't have a ton of experience, although I guess I can surmise what questions I'd ask a potential buyer on their financing and, you know, trying to determine how likely they are to close the deal. But, you know, I think that

brokers have, and I shudder as I want to say this, but they, they, they have good instincts and they've, they've been, you know, they've been in that role. you should involve legal. I mean, ultimately, you know, if you want to get a lot of value, if you've got a good marketable business and you want to run an auction process and try to get, you know, extract as much value as possible, bringing your lawyer early and have them prepare, you know, it's not uncommon for you to go to market and have a draft APA or purchase agreement that you've prepared on your side of things. And if you've got five, six, seven, eight, nine interested parties, you flip them that document and you say, who's going to give me the best terms,

you know, and you look at price and you look at terms. And that's something that a broker is probably not going to be well positioned to handle us the legal end of things. So if you've got a very marketable business in this environment, you know, you can benefit from both services. Can you maybe talk a little bit about the idea of who should prepare documents? And I know it's like a seller, for example, you're going to be like, you're like, oh, man, I don't want to pay some lawyer to put together an asset purchase agreement.

But like, should I pay it if I'm selling a business? should I want to prepare the APA? I found the buyer, should I want to prepare it? And like, how does that play into where, you know, where the kind of deal ends up in your experience? I mean, you should always, if you're the buyer, I preach this constantly. Don't give up that advantage, right?

You're anchoring in negotiations with where you start the purchase agreement. One thing I didn't understand before becoming a lawyer is the deal is not just the price, right? The terms are very important in the transaction. And you can, you know, some people have the expression, my terms, your price or whatever it is. but it's equally important. And so if you're on by side, you know, there is a market expectation that you're going to utilize your paper.

And then you're not put in a position of weakness, right? Because if you're byside and you receive seller's draft and it's egregiously seller-friendly, everything's to their advantage. And you've got to mark that whole document, turn it bloody red to send it back, basically drop your form in. That's not going to make them very happy. be, right? And especially in SMB where you're trying to keep things simple. But on the sell side, if you can get away with it, if you've got the leverage and if you're in a position where you've got multiple buyers and you can utilize that leverage to anchor in the negotiations, you absolutely

should do it. Right. And I'm going to probably eat those words at some point. But you should. I mean, you should try to, right, if you can angle that way. But don't ever give away that advantage because the typical customary market expectation is buyer prepares initial practice. So, Eric, let's say that I'm a buyer and I haven't worked with an M&A attorney before and I'm doing SMB or mid market or lower middle market. And I want to interview that attorney to understand if they're the right fit for me, right, and for my deal. What would be the process you would run to identify that person and like what kind of

question should I ask them, what kind of data points should I find? Yeah. So, I mean, again, back to my earlier point, I would really spend some time asking around. Ask people who've sold businesses in the same place, same type of business, who they utilized. You know, try to find a list where you have direct references. I mean, it's much like hiring any service provider. You know, if you were going to hire a painter, right? You'd bring in a few of them. You'd interview them. You'd talk about price. You'd want to look at some referrals, you know, which is a little difficult with legal ethics and attorney client privilege. But, you know, you know, if their previous clients are willing to do it, they can do it and try to understand, you know, who has the most relevant, demonstrable experience in this space. And then it's a couple of things, right? Like personality-wise, you're going to be in the Foxhole together, so you absolutely have to click. This has to be a person that you like. And then second is that this person's going to be your representative, right? And so on the by side in particular, it's very,

important that you find somebody who has good bedside manner because these sellers are you get yeah I mean they're selling their baby right this is their business they're worried about their employees they're looking at mills and saying hey as mills the person to take this business into the next generation does he remind me of myself is he somebody that I like you know is he going to come in here tear this business apart is he going to burn to the ground and if your lawyer comes in and they're the best legal technician in the space you know they know the legal nuts and bolts better than anybody. They went to Yale law school, but they have no bedside manner. I mean, you're putting a really bad representative out there, especially in a competitive bidding

situation. And so, I mean, experience is one, you have to like them, two, and then three, make sure that they're a good person that you'd want to, you know, send out there to represent you because they are. So two quick questions also in terms of searching for an attorney. So number one, like big firm small firm tradeoff right like what how do you think about those two especially at the small end to me i i love to work with just the yeah i love to work with the experience person who's running their own show maybe as one paralegal in an admin but curious how you think about that and then i have another question after that so how do you think about the big firm small firm trade off especially on the small and medium deals yeah if you understand the way that the large

firm works you'd probably be horrified with bringing them your your small deal i mean seriously and Again, but the reason being is that you're going to go to the big firm partner, right, who's responsible for bringing in work. And let's say they bill at $1,000 an hour, which many are billing at much higher than that. It's not reasonable for them to do your deal. It's just not economically. It doesn't make sense at this price point, right?

And so what they're going to do is push that work down to first, second, third year, fourth year lawyers who are billing at a much more reasonable hourly rate to do the work. And so that's that's not ideal, right? You want to make sure that the lawyer who's actually working the deal is experienced, knows what to look for, didn't just take the work to take the work, actually wants to do the work. And so, again, it's a little bit of a chicken and egg problem of finding a high quality lawyer that has really good M&A experience that wants to do SMB. It's a little bit difficult to find.

They are out there, but you do have to spend some time looking. And the flip side of that really quick is just that a large firm has to work on big deals because they have all those personnel that have to be allocated billable hours. You know, you can't as a solo guy with a paralegal do, you know, a $200 million deal. deal because you just don't have enough staff. You just have to put hours on those. And so right size, I think, is really good on that. Yeah, that's exactly. Eric, Eric, one more for me. Oh, sorry, one for me. How do you think about geography and how should I think about that? Do I need to hire somebody in my town? Do I need to hire somebody in the town where I'm going to buy a business? Does it really

not matter in terms of all that kind of stuff? Let's say I'm in Texas and I'm buying a business in Florida. I don't know why anybody would do that, but like, let's say that you did want to own something in Florida. By the way, I'm about to alienate like half our... By the way, I'm in Orlando, Florida just as an FYI, but please continue. Oh, this podcast is done. We're done. Click the stop button. No, anyway, Eric, so how do I think about geography in terms of, in terms of that kind of stuff?

How important is it? Can one lawyer who's in Virginia do a deal in Florida? Like, how does all that work? Yeah, so the answer is it's governed by ethical rules. Most, on the litigation side, it's just a hard dough. I mean, you can't be a litigator who's licensed in Ohio going to court in Virginia. They're not going to let you in. But on the transactional side, it's a little bit grayer.

You have to look at the ethics rules of each state to determine, you know, how they view transactions in their state. The ABA rules, which are the model rules for all 50 states, say something to be effective. You have to have a nexus to the jurisdiction, which gets a little bit gray in 2020. when a lot of businesses are online, e-commerce, multi-state businesses, you're selling, you know, product all over the country, you know, where are you truly located? Are you, you know, so most firms, most transactional firms have gotten comfortable with doing transactions in states where you're not licensed so long as it's not very specific state stuff like real estate or, you know, anything that really requires a knowledge of state law. But there are practitioners out there that

have a preference to not even flirt with that. I know I brought up Dan once before. Dan's a South Carolina lawyer. If you ask Dan, he'll only do transactions in South Carolina. And that could be because Dan's the king of South Carolina. It has an unlimited deal flow. But, you know, it really depends on the practitioner in the state. That's a good. That's a good answer. It's, I think that's really tough a lot of times, too, because, you know, in certain, certain aspects of law, it's really important. And in others, you know, maybe even deal specific, right? Like if you own a funeral home and you're selling a funeral home, that's a kind of specific thing. You may want a guy who has that expertise. Does he actually kind of have, you know, nexus or justifiable

reason to work with you in your area? Oh, I was just going to say, and that's from the lawyer's perspective, from the client's perspective, too. I mean, Mills, if you want somebody that's there with you in South Carolina and that's your preference, that's perfectly acceptable also. I think in 2020, you most people are pretty comfortable with the internet and with especially post-pandemic. So yeah. Let's talk about something super fun and awkward. Let's talk about money and fees and fee structure. So everybody knows and is accustomed to the idea that attorneys bill by the hour and you've probably been living your life in six minute increments, one-tenth of an hour, you know, just for years and years. Help set the stage for somebody who's never done this before.

should they think about, you know, different fee structures? Is it all hourly? Is it hourly with a big retainer at the front? What's the role of success fees? You know, I think you would view that a certain way as an attorney and most searchers really probably want a success fee. But let's talk about some of those things and how people set expectations and budget for legal counsel as a part of their overall deal fees. Yeah. So this is something Mills said I've spent a lot of time with recently and really trying to understand the pain points and see if we can create a better model because the traditional model is the following. Most law firms are going to bill you between, in the SMB space, between 300 and 600 an hour. And they may tell you, you know, hey, here's the budget. They may say,

you know, based on this transaction, I think it's going to be about this much. I think the rule of thumb that most experienced buyers have stated is, you know, one to, you know, one to be. to 3% of transaction values, what you can really think about in terms of overall fees. But it's a little hazy. And somebody said to me recently, you know, with the billable hour, I really feel like I'm writing a blank check, you know. And there are, but there are some very staunch proponents of the billable hour. I went out with the Twitter poll recently and I said, what do you guys think of the

billable hour? And it was less than 10% of people that said, I prefer a straight billable structure. But that 10% of people were very vocal. They said, you know, I can control my counsel. I have a good relationship with them. I can direct them. I can control the spend. I feel like it's a good model. I like it. Don't change it. Almost everybody else, and not just the plurality, but the majority said that they would prefer in SMB buying either a fixed fee or a success fee. And what that tells me is that there's two principal problems that people are trying to solve for with fees. The first is certainty. You want to know how much it's going to cost. You've got a certain amount of money to go make your purchase and it's precious and you want to conserve it. The second is the concern about the busted DOP. I get 74 days into a 75 day process. I've spent, you know, $20,000 and then the deal dies because the seller gets cold fee and I have nothing to show for it. What do I do about that? And so I think for most buyers, our conclusion is that the fixed fee with a success component would be very popular among searchers. The flip side of it from the provider's side, like you mentioned, is that we also have a business to run. And so working for 74 days and losing 50% of your compensation on the back end is a little

bit of a difficult pill to swallow and you also have, you know, costs. I think you guys had Elliot Hollandum recently who was asked a similar question about how he deals with searchers. And, you know, he has real costs that start being incurred the moment he takes your transaction. So it's it's a problem that doesn't have a perfect answer. But that's the general conversation that's being happened. What about the timing of those fees, Eric? So if somebody is a self-funded searcher versus maybe, you know, a funded one, there's maybe more or less, you know, capital that can be expended in due diligence. And, you know, I think from most lender's standpoint, you know, a lot of those deal costs can be rolled into the, you know, the overall transaction financing.

How do you think about that, you know, balancing that tension and making sure that you're covered as a provider, but also, you know, that, you know, that the searcher or the buyer can manage the deal costs along the way. Yeah, I think that to design an effective fixed fee that has a success or, you know, closing contingent piece to it, you really have to, one, have a good handle on the scope of the transaction, right? How much time do you think that this deal is going to take. And then it's the law of averages. You know, you've got to design a good product that, you know, takes into consideration that sometimes you're going to come up short and sometimes you're going to get a little premium. And sellers have by and large said, or some of them have

said, we don't care if you have a little premium as long as we have that protection against the busted deal. And that seems like a very reasonable middle ground. The problem that I think researchers have run into what I've seen over the last seven, eight months is that there just really is not a desire in the legal profession to innovate. Particularly right now, lawyers are, for lack of a better way to put it, there's more work than there is supply. There's more demand than there is supply, and so they're fat and they're happy and they're not interested in switching things up. It's easier to just say, hey, we're going to charge by the hour.

we're going to take a retainer up front so we don't even have to chase you for payments, so we're going to make it really easy on ourselves. I think that they're missing the point in this space, and I think that there's a huge opportunity for somebody in the space to be a little bit more pragmatic and to design a product that's a little bit more understanding of searchers' needs for certainty and for protection against the busted deal fees. That's good, man. That's really good.

what about um you know obviously you you guys think primarily about risk mitigation and risk in this case is usually not you know that the you buy the company and it doesn't work right you fail and the business goes bankrupt you guys are i think are more obviously focused not on the unit economics and the overall strategy of the business but mitigating the risk around you know you know the situation between buyer and seller devolving, it ending in a lawsuit, it ending in some kind of gridlock. What steps are the kind of, if you had to say, hey, look, these one or two things prevent litigation, prevent a lawsuit as kind of sellers and buyers think about kind of keeping their side of the street clean? Yeah, I think the biggest thing that's going to prevent litigation is building a good rapport in the sale process.

I don't know if that's a legal thing is building that relationship and having a seller who really sees the buyer as the next generation and doesn't view it as I'm getting my payday and then I'm out the door. Having that is going to allow us to do what we need to do. If there's risks in the transaction, if there's skeletons in the closet, it can all be mitigated. If you've got contingent lawsuits that have been threatened, but you don't tell us about them. we can't protect against that, and then it ends up in litigation, that's a big mess. And so having a well-negotiated purchase agreement that really takes into consideration all of the potential risks of the business is in everybody's best interest. But you have a tendency of sellers to do this.

And I get it to an extent. But I think that kind of answers your question. Yeah, that's really good. We're coming up on an hour, and I know you've been. by the hour. And so I really want to avoid, you know, the full, you know, $1,200 an hour fee that I know we're going to get. Eric, in closing, you've been really kind and generous with your time. What can our followers do to follow along with your journey and just watch what you're doing? Yeah, thanks, Mills and Michael. Appreciate you guys having me on the show. It's been a real pleasure,

a huge fan of the show. So a real treat to be here. You know, communicate with me. I'm out there trying to learn what are the pain points for searchers and SMB operators. And we're trying to design, you know, a meaningful legal business that's not your grandfather's law firm that really understands that there's a really awesome, robust community that's developing in entrepreneurship through acquisition and small business buying that needs effective legal solutions that cater to more than just, you know, a billable hour and a lawyer, you know, getting paid. And so anything we can do. to be helpful to folks in the community.

I'm happy to do it. You know, I've spent the last six, seven months networking, getting to know folks, and happy to continue just being a resource for the community. Well, thanks, Eric. You've been really kind to be with us and glad that we could have you on. Thanks for teaching us some things.

Thanks, guys. All right, see you guys later.