Key Points From the Interview
y day, he works on billion-dollar deals. By night, he helps out acquisition entrepreneurs on Twitter.
“He” is @SMB_Attorney, whom we'll only refer to only by his Twitter pseudonym.
He’s only recently started participating on that platform but has quickly amassed a following.
Follow him here: @SMB_Attorney
He joined Acquiring Minds to explain how entrepreneurs looking to buy a business should think about legal counsel.
Following are key takeaways from the conversation.
Acquisition Tips From the Episode
Top takeaways from this conversation
💎 Absolutely necessary: a good lawyer
It may sound obvious, but you should get the best lawyer you can for your acquisition. It is likely to be the largest transaction of your life, so you really don’t want to screw it up.
While this seems self-evident, good counsel is expensive (also obvious) so there is a temptation to cut corners here or hire Cousin Billy the lawyer who has no M&A experience.
Don’t do that.
@SMB_Attorney puts it nicely:
“You will pay for legal counsel at some point in the deal cycle, whether you pay for it up front by acquiring really good transactional counsel and paying for quality, or you pay for it later because things were missed and you run into difficulties on the backend.”
🎯 What to look for
There are 3 characteristics @SMB_Attorney suggests you look for in an attorney to handle your transaction:
- Demonstrable experience. This will take the form of a deal sheet, on which the attorney lists the transactions (often with client names redacted) they’ve participated in.
- Experience as an entrepreneur. This will allow them to understand the stakes and the psychology of the parties.
- Appropriate manner. You always hear that your lawyer can play “bad cop” in a deal, and this is true. But serving this purpose and being an agreeable person to do business with are not mutually exclusive. @SMB_Attorney:
“Getting it right legally is super important. But also getting it right politically and emotionally and not being an a--hole (excuse my language) is really critical. Because they’re your representative, they’re your agent… You need to make sure that your counsel is representing you well.”
🤷♀️ References? Reviews? Hmm, difficult
Restaurants have Yelp, lawyers have Avvo.
And just like Yelp, Avvo — unfortunately — isn’t the most reliable source of reviews.
It’s also difficult for attorneys to provide references, since so much of their work is protected behind attorney-client privilege.
So to identify a great attorney you’re really left with good ol’ fashioned word-of-mouth. Ask your network.
Asking on Twitter can also be helpful, though you’ll need to have a following for many people to see your request.
Finally, @SMB_Attorney himself is happy to provide a list of acquisition attorneys he trusts; DM him for that.
💳 What you'll pay
The going hourly rate for a small business M&A attorney is $300 to $500.
Assuming 30 hours of work, that’s $9,000-$15,000 all in.
Yes, it's significant. But when you weigh it against the cost of the acquisition itself, it’s around 1 percent (assuming a $1M acquisition).
🤝 Don’t be afraid to negotiate price
But don’t forget, @SMB_Attorney points out, that lawyers are fundamentally service providers like any other.
“If you’re going to hire a painter, you’re going to go through the process of bringing that painter in. You’re going to find out what type of relevant experience they have. You’re going to find out how much they charge… This shouldn’t be viewed that differently.”
And just like you’d negotiate with a painter, don’t be intimidated by doing so with an attorney.
“There’s nothing stopping you from having a conversation about compensation.”
One of the possibilities to explore is a different compensation structure than hourly, such as:
- Flat fee
- Success fee
- Equity fee (rare outside Silicon Valley)
@SMB_Attorney does note that given the tightness of the market, attorneys are busy and may be unlikely to entertain one of these alternative compensation structures.
But the point remains: don’t assume that you have to take an attorney’s rates at face value without any negotiation at all.
🗺️ Do they need to be in the same location as your deal?
No, in most cases.
“I will tell you that in all of my years of large law firm work, on very few occasions have I sat across the table from the counterparty or from my own client even.”
His firm maintains beautiful high-end office spaces in New York, San Francisco, DC, and Houston — offices that clients never visit.
“You find the best person to do the job, that you jive with the best, that has the most availability and experience, and you hire that person notwithstanding geography.”
🧨 You don’t want to sue
Protect yourself up front; don’t be under the impression that you’ll just sue the seller later if something goes wrong.
For one thing, a lawsuit would be expensive and time consuming, robbing you of the precious attention and energy you should be putting toward your new acquisition.
Also, it’s strategically fraught. How will your new employees react to learning that you are suing their old boss? What if vendors and clients get wind of it?
Perhaps most importantly, your seller probably has valuable knowledge and relationships to transfer to you as you take over the business. You’ll jeopardize all of that if you lawyer up post-acquisition.
🛡️ Indemnification: Get familiar with it
OK, but what happens if the worst happens?
You buy the business, something is very wrong, and you blame the seller.
All private M&A purchase agreements (worth their salt) will include an indemnification provision.
“It’s a really important tool, and that’s why it’s probably the most, if not one of the two most, heavily negotiated provisions in the purchase agreement,” according to @SMB_Attorney.
Your lawyer negotiates “a very fulsome set of representations and warranties,” statements about the business the seller agrees are true. And then, to the extent that any of those statements turn out not to be true, your indemnification provision enables you to recover the damages based on those inaccuracies.
As fundamental as it is, @SMB_Attorney has seen purchase documents that lack indemnification altogether. (Further evidence that you need a good attorney!)
In addition to indemnification, you can structure protections into the deal itself.
Explains @SMB_Attorney, “You can set aside, in either an escrow or holdback, 7 to 15% of the transaction compensation and use that as a pool of money to draw from for the survival period of the reps and warranties.”
You can use a seller note for the same thing.
✉️ More questions?
@SMB_Attorney is fielding tons of questions from SMB Twitter already, and happy to help you with yours.
Reach him here: @SMB_Attorney.