Host: Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. My guest today is an attorney. We'll refer to him as SMB Attorney, his Twitter handle. We actually keep his identity private since lawyers have to worry about such things due to the sensitivity of marketing or perception of marketing. SMB Attorney has made a splash on Twitter providing an attorney's perspective on buying small businesses. So he was a natural fit for Acquiring Minds. Without further intro, here is Mbattorney SMB Acquisition Attorney. Thank you for joining me today on Acquiring Minds.

Guest: Thanks for having me.

Host: Will, you are a large presence on Twitter where you bring to bear your corporate M and A experience. You work on very large deals, $100 million billion dollar wall Street Journal front page type deals and have taken an interest in the small business acquisition space. You have, I think considered buying a business yourself. I think you told me your brother is searching for a business to buy. So this is a space that really interests you and you're contributing to the community, the SMB Twitter community, a lot. So wanted to get you, get you, get you in the interview seat here. What we're going to do today is really just do a high level conversation, a primer on for people probably who haven't bought a business before. Know that there are obviously many legal aspects to doing that, lots of documents involved, but don't know much more than that. And you know, we, the non attorneys among us, we're all at that stage at some point. So we're just going to kind of talk about those legal aspects, talk about the importance of really investing in a good attorney, where to find that good attorney and give people kind of, as I said, a primer on how to think about a small business acquisition deal from a legal perspective. Before I stop talking, I will also say that we are keeping you anonymous. So you are a high powered lawyer and we are going to respect, we're going to respect the sensitivity of that and I'm just going to refer to you as your pseudonym, your Twitter pseudonym, SMB acquisition attorney. So Mr. SMB acquisition attorney, start us off with a minute or two on you.

Guest: Yeah, sounds good Will. And thanks for having me on. This is my first time doing a podcast so it's a little bit of an unusual experience here for me. Yeah, and the whole anonymous thing, kind of interesting, you know, ethical rules around advertising. It's tricky being a lawyer and so, yeah, so staying anonymous for now and kind of weird being referred to as S and P attorney. But, but, but it's been fun. I, my background is I work for, like you said, I work for a large law firm, depending on the metric, probably considered the best transactional law firm in the country. We do really high profile corporate transactions for some of the most well known companies in the country. You know, your Wall Street Journal, front page stuff, billion dollar plus, $100 million plus regular transactions. Because of that, my current billable rate really isn't helpful in the S and P space. I'm north of a thousand bucks an hour. And you know, that really doesn't, that doesn't help anybody trying to buy one or four, you know, one to four million dollar business. So I've been, you know, a lot of inbound traffic from folks. So obviously I touched a nerve and there's a lot of need for quality legal counsel in the S and B space. And so, you know, have really been making a lot of referrals to other great lawyers in my network and just trying to, like I said, add value and not really ask anything in return. It's been a fun experience.

[4:07] Host: The people that you have reaching out to you, have any trends jumped out at you as a point of friction or struggle that is common among people trying to buy a small business?

Guest: Yeah, a lot of the conversations go this, pretty much like this, will they call me or they send me a message and they say, hey, you know, I just signed an NDA or I just signed an LOI and I really don't know what to do. You know, these are really sophisticated folks oftentimes too, you know, guys that have been in investment banking or are, you know, in different corporate, high level corporate jobs that, you know, have caught the same bug and have, you know, followed the same trend that I've followed that are now deciding to kind of leave corporate America and go buy a business. But if you don't do M and A or if you've never been around M and A, you wouldn't necessarily know what to do. You know, you read some of these, these books, the Harvard Business Review book and Buy Them, Build and you know, other books in the area, they don't, you know, they give you the broad strokes of how to buy a business. But you know, there's a lot of uncertainty and fear and things start moving really quickly once you sign that NDA or, or have a, you know, an LOI or you're under loi. And so they're really saying, what do I do? How do I find a lawyer? Do I need an accountant? What's next?

Host: Well, let's talk about the importance of hiring a good lawyer. I mean, that sounds like self evident, but in fact, in your experience, and probably many frugal people trying to save their money as they buy a business would consider maybe cutting corners or using the family lawyer or, you know, and lawyers are expensive, so they're a big expense in the deal. What? You're biased, we all recognize that. But still talk us through, like how to think about how much money to spend or how important an investment it might be to get a good lawyer at the outset for my transaction. And what are the risks if I choose the wrong lawyer?

[6:15] Guest: Yeah, so I think that I try to stay unbiased. I'm going to try to see both sides of it. As an attorney, obviously I'm very close to this, but I'm not selling any services. I'm not doing any of this to try to gain clients or monetize this really in any way, shape or form. And so I feel like I can really be unbiased here. There is a desire, and for good reason among searchers. You're trying to buy business, you're bootstrapping it, you're trying to save cost. But when we're talking about buying a one to $4 million business, in most cases, this is going to be your largest financial transaction of your life. People use that expression oftentimes for buying your home, but this is that times 10, particularly if you're using SBA debt, you start running into personal guarantees and actually having to put up your home as collateral. And really making sure you get this right for your family is, is critical. And there's an expression in the law that an attorney who represents himself has a fool for a client. You know, so even for myself, if I were to go buy a business tomorrow, I would have that second set of eyes. And for, for a number of reasons. But you know, the biggest thing is that you need a seasoned, experienced set of eyes in this transaction to look at everything that's unemotional. They're not wrapped up in the transaction from an emot emotional perspective that can really give you that sober counsel that you need to make sure that you're, you're getting it right. Because to me, Will, and I think that this should be everybody's philosophy. I'd rather walk away from a good deal than mistakenly enter into a bad one because the repercussions of that are going to be massive. So that's the biggest reason. But you know, also importantly is that if you don't do M and A for a living, if you haven't been around these transactions, excuse me, you need somebody to quarterback that transaction for you. It's going to move really quickly. The seller is going to be trying to get you across the finish line as quickly as possible. And you need somebody who knows their way around, knows what's important, knows what to ask for, also knows how to deal politically with the seller. Because, you know, your, your audience understands that these sellers may get emotionally invested in these transactions. They're looking at you saying, is will the right person, you know, to lead this business into the next generation? Are they going to take care of my customers? You know, are they going to take care of my employees? So you also have to have that tactful counsel as well that can make sure that you, you represent yourself. Well.

[9:03] Host: That's an interesting point. So when assessing an attorney to work with, I should be, I should be also assessing their, their eq, their, their ability to massage a situation, the human side of things, not just, not just their, their legal iq.

Guest: Totally. Yeah, totally. You want to look for somebody who's very commercial. You know, the guys that I refer people out to and have, have, you know, I've received a lot of inbound and I think I, I added it up the other day and tweeted it out. It was like over 30 referrals. It's been 10 days since then, so there's been some more. But I try to send folks at this level to lawyers who have been entrepreneurs in their life that understand that 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, and, and you're not going to be able to control, you know, lawyers aren't notoriously fun people to deal with necessarily. You're not going to be able to control the seller's counsel, but you need to make sure that your counsel is representing you.

Host: Well, it's funny because, you know, one of the kind of tropes is that you, you can use your lawyer as the bad cop. They are the bad cop. If, if there's some sticky situation. And you, as the, as the principal in your own deal, don't want to seem like you're being the jerk, you just blame it on your lawyer. Or if you need, if you need somebody to get really aggressive, that's the lawyer's job. So interesting to hear that. Sometimes your lawyer needs to be more of a Salesman and not just the bad cop looking over the shoulder of the deal.

Guest: Yeah. Yeah. Well, I think that those things aren't mutually exclusive. There's going to be times that, you know, because, you know, oftentimes you're buying this business and you really need to think about it as a marriage almost. You know, you want to get off on the right foot with that seller because they have all the political clout. Oftentimes they'll be around during the transition, you need them around during the transition, you need them cooperative. And so, yes, your lawyer can operate as that person who runs interference and, you know, delivers the tough news and, you know, ask the tough questions. But ultimately they should be as much of an enjoyable person to work with as anybody else, in my opinion.

Host: Another way that I heard to think about this, which was pretty interesting from one of my previous guests, Jason Budd said this. He pointed out that your attorney is the only advocate. True, your only true advocate in the deal. So there are a bunch of stakeholders. There's you, there's the seller, there's the brokers, there's the other counsel. And the many people are going to be very incentivized to get this across the finish line. The seller, the broker, certainly, and probably you. And I think this, this touches on why it's. A lawyer can be helpful in being unemotional about the deal because you, as the buyer are going to have some emotions around this. And especially if it, if it gets close to the finish line, you're going to be, you're probably going to want to just get it across the finish line, even if maybe you shouldn't. So your attorney, if you, if you look at your attorney as the only true advocate in the room for you. And I thought that was a, that was a really interesting way to, way to think about it.

[12:35] Guest: Yeah, I think that's right. And, you know, I think one of the things that we're going to talk about is billable structures and how you compensate your lawyer. But for the reasons you just described. That's also why I'm, you know, keen on alternative fee arrangements. But we could talk about that later in the conversation.

Host: Well, let's hop into that now. So let's talk cost how, if you can give us a sense of price range. I know that varies widely, but maybe a ballpark of what I should expect to spend and how. I assume it's by the hour. But you're talking about alternative compensation models as well, so walk us through it.

Guest: Yeah. So the bullet points are most lawyers are going to charge you between three to $500 an hour for a transaction,

Host: 300 to $500 an hour for an

Guest: SMB acquisition, for an S and P acquisition. Now that sounds like a lot of money. Three to five hundred bucks an hour. And it is, right? I mean, that's not a small hourly rate. When you weigh that against buying a million dollar business, you know, 300 bucks an hour over 30 hours is $9,000 of legal fees towards a million dollar transaction that like we described earlier, you have to get, right? So, you know, you weigh that. It actually ultimately, in my opinion, isn't that much money. And I would be happy to pay that much, if not more. Because you will pay for legal counsel at some point in the deal cycle, whether you pay for it upfront 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 back end no matter what. Almost invariably there are, and this is something that I think most people miss. And the, you know, kind of the hesitation to reach out to lawyers and the fear about the billable structure. And you know, if I, you know, somebody told me once that his boss had said, don't call the lawyer because this is an SMB buyer. He, in his prior job, his boss said, do not call the lawyer because the minute you get him on the phone, he starts billing. We can't have that. So he calls me and says, what do I do? I'm afraid to talk to lawyers. The billable structure creates that incentive. But lawyers are service providers just like anybody else. 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, you're going to ask for some references. And this shouldn't be viewed that differently. With regard to compensation, there's nothing that's stopping you from having a conversation about compensation and saying, would you be willing to take a different fee structure, a flat fee where you say instead of paying you 300 bucks an hour, I'm going to pay you 10 grand for the transaction or a success fee, or in some limited instances, equity that's primarily done in the startup space and venture capital. But there's nothing that's stopping you from saying to your lawyer, why don't you take a piece of the deal? So that way, you being the only person that's in my corner, like you just mentioned a moment ago, is also rowing in the same direction that I am. You have the right incentives and you're not going to want to close on a bad transaction if you're incentivized with equity. Now that's, you know, somewhat rare and we're obviously in a very difficult labor market where everybody, lawyers included, are very busy. So it's probably challenging in some instances to find somebody who'd be willing to do that. But you should be asking because from my perspective, a pure billable structure incentivizes folks to bill and that's not necessarily ideal. And when you're talking about, like you mentioned a moment ago, this is the only person that probably has your back down, down the final stretch of the transaction. You need that person also psychologically to be thinking about it in the same way you are, if that makes sense.

[16:49] Host: Yes. Now let's talk about actually choosing the particular attorney. So what sort of experience should I look for? You've said the term commercial lawyer, commercial attorney now a few times. Elaborate on that. What experience am I looking for when I'm out there interviewing attorneys?

Guest: Yeah, so the biggest thing was you want to make sure that they have true transactional experience, that they've done deals. Lawyers come in different shapes and sizes. We do all kinds of different things. Litigation, I'm a transactional lawyer. I've done M and A capital markets and really pure play transactions throughout my career. I've been in a courtroom twice in my life. Once in, you know, mock trial in law school and once doing a pro bono adoption. And I would be terrible if you put me in a courtroom tomorrow. And likewise, you know, if you hire just anybody to do your transaction, they're probably going to be terrible because again, these things move very, very quickly. There's a lot of pressure. And this person's also your representative. So if they're learning on the job and they're getting frustrated, you know, invariably they're going to get frustrated. They're going to, they're going to become hyper focus focused on things that may not necessarily be material or matter. That's going to be a big problem for you. And you know, they're never going to tell you that. They're never going to come to you and say, hey, Will, I actually, you know, haven't done many transactions, so you should hire somebody else. They're not going to say that they're going to take the deal and then they're going to botch it. And so what you need to look for is you need to look for somebody who that has Demonstrable, you know, a deal sheet of transactions, ideally similar transactions to the one that you're trying to do. You know, if you're buying an H VAC company, it'd be great if they had experience in H Vac. I always say that M and A really is M and A. So whether you're buying a billion dollar company or you're buying a $4 million company, if it's private MA and not public, public is a different animal, but private ma, it really has the same components. Now the one caveat there is if you're in a specialized industry or something that's heavily regulated like health care or energy, you know, you'll want somebody that has that experience. But otherwise you should really be looking for M and a transactional experience.

[19:20] Host: What about size? Do I need to be looking that they've done deals of my size or larger? Or is that, I mean, you just said M and A. Is M and A. Is that less of a factor?

Guest: Yeah, so this is where it gets tricky and I don't want to get myself in trouble. But one hypothesis that I have about the field that, you know, I've been kind of learning my way through is that there aren't a lot of great lawyers that really want to work in the SMB space. Or I say SMB that really is medium sized businesses, but really the small business space, like the below $4 million space. Reason being is that like the economics aren't there and you're dealing with individuals and individuals, obviously it's their money versus if you're doing a $50 million deal or $100 million deal, it's corporate money. And you know, it's, it just the, the whole psychology of it is different. So, you know, the quality lawyers are going to want to do bigger deals. And so that's great, right? If you can go out well and you can find somebody who's done a $50 million deal or $100 million deal that also is willing to do your, you know, $1.5 million H vac deal, they probably be a great person for the job. My concern would be if another $50 million deal or $100 million deal comes in at the same time as you're doing my $1.5 million H vac deal, it might be difficult to get that lawyer on the phone all of a sudden, if that makes sense. So it's a little bit challenging. But again, this is just like hiring any other service provider you're going to. And there are some great folks that I've met over the course of the last few months that are in the small business space that really want to do these deals that are great council, great client service guys that pick up their phone and are working really hard to get the deal done. And so you just, you have to find them just like you would any other service provider and, you know, ask them tough questions, make sure you're comfortable with them from a personality perspective and that you guys kind of jive.

[21:25] Host: You'd mentioned that you've made a lot of references. Is this something that people should feel that they can reach out to you for a reference? We wouldn't want to do it on the podcast right now, but can people ping you on Twitter and you'll give them a reference of some of these lawyers?

Guest: Yeah, 100% happy to do it. Something that I tell everybody that's really important to know is that lawyer legal ethics, I can't receive any type of compensation, nothing of benefit for making a referral. In order to make money in the legal industry in every single state, you actually have to work a deal. And I'm not working any of these deals. So I am happy to be a conduit for folks to great counsel because there are a lot of great lawyers too, that, you know, have started their careers at really, you know, the best law firms in the world in New York City. And after a couple of years, they moved down market and moved to smaller law firms and are really commercial, pragmatic folks. And I've got a list of those. Those people will be happy to make referrals if needed.

Host: Great on once I'm talking to a few attorneys and trying to figure out who I want to work with. It's really interesting how you compare this to basically hiring any service. But one of the things that we all use when hiring service providers these days is Yelp or whatever industry review site there is. So first question, are there reliable sites like that for attorneys? And second question is, we also ask for references. So if I'm going to hire a landscaper, I ask the landscaper to provide a few references. But attorney client privilege in the legal profession makes providing references a lot trickier. So touch on that for me.

Guest: Yeah, so there are a number of things like Avvo and some of these sites where you can actually go in there and specify by practice area and they give you the rankings and they give you the number of stars and this and that. But what I've found will, is that the legal industry is really interesting because I think the nature of lawyers being like, super Type A prestige driven individuals. We're very susceptible. And folks out there, I think Thomson Reuters has 11 different awards themselves that they give out and, you know, rising star and, you know, this and that, that there are so many of them that almost anybody who has some experience is going to be able to say, hey, look, I am, you know, one of the local newspapers, 40 under 40s lawyer, you should work with me. Or, you know, legal avo. They gave me four stars, but you get three stars just for like updating what your practice area is, you know, type of thing. Yeah. So, you know, it really is something where you just have to drill down and do your diligence and talk to these folks and get a sense for them the same way you would for, for a lawn care company or a painter or an accountant or something like that. So the other thing is, you mentioned the attorney client privilege and the confidentiality issues that make providing traditional references difficult. That is true. Most of us, though, it's very customary for us to have our deal sheet, which even if it has to be anonymized, you know, they can say, you know, represented health care company or, you know, buyer in acquisition of $1.5 million health care company or whatever it is in their bio. And so you should be able to get a flavor for what they've done. Now, those are oftentimes a selection of their best transactions and maybe not representative of the quantity of work that they've done.

[25:17] Host: Right.

Guest: But another great way to do it, I know there's someone who's been active on Twitter recently who just bought a business fund of one. I don't know if you're familiar with him. Well, but he, you know, he found his counsel through another buyer who had recently bought, you know, somebody there in South Carolina and turned out to be a phenomenal small business lawyer. And, you know, so talking to other folks who have done deals is super helpful to you. One of the things I try to do is anytime I make a referral or to a lawyer, you know, I try to ask the person I referred, you know, if you're comfortable with it, you know, tell me how you felt about that person and how the experience that you got. So that way I can make appropriate recommendations in the future as well. And so, you know, you have to do a little bit of diligence like that. But

Host: it really sounds like word of mouth is going to be your best bet here rather than, I think, a review site or, you know, your local magazines, top 40 under 40 sort of ranking.

Guest: Exactly. And with SMB Twitter, I mean, we have a incredible resource at our fingertips to find information. And I haven't run into, it's been 70 days, so maybe there are folks out there, but I haven't run into anybody who's been unwilling to help or provide information or answer questions in that period of time. So it's, you know, so you can find somebody via our Twitter and I can make recommendations if needed as well.

Host: Cool. Couple more questions. So when I am looking at acquiring a business in a geography, let's say the Bay Area in San Francisco where I am, does the attorney that I work with need to be local to that geography or what? Talk us through thinking about the location of the attorney.

[27:08] Guest: Yeah, the short answer is not really, unless it's potentially a litigation matter, if it's litigation or there's some sort of conflicts and reached out the other day, they had a, an issue with a non compete, you know, that gets a little tricky jurisdictionally. But transactional law, you know, the aba, the American Bar association puts out the model rules and most states abide by those model rules. And it essentially says something to the effect of like the work has to have a relationship to the jurisdiction that you're licensed in. And so, you know, that's from the lawyer's perspective. And some lawyers say, hey, I'm a South Carolina license licensed attorney, I'm only going to work in South Carolina. And others say, you know, everything's on the Internet, so everything is reasonably related to my jurisdiction. And so I can do anything in the country from the, from the client's perspective. I will tell you that in all of my years of, you know, large law firm work, on very few occasions have I sat across the table from the counterparty or from my own client. Even, you know, we have like these beautiful high end office spaces in some of the most gorgeous high rises in New York, in San Francisco and Houston and D.C. and clients never visit them because, you know, everything is done electronically. You know, it used to be, you know, when my boss, bosses or part the partners I work for would do due diligence on a transaction, they'd go sit in a dark room, you know, for hours with stacks of documents and everything's done electronically now. And then obviously post Covid, you know, this is now a remote economy. So I think that that's the long answer. But I think when you think about finding counsel, you, 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 jurisdiction. I Think or not jurisdiction, but geography.

Host: Great last question for you. And this kind of touches on what happens if post acquisition things just go really south. Things just go wrong. So as a layperson you often hear that suing is not something that is that realistic. Of course it does happen. But for example, in a small business acquisition, the lawsuit is going to require so much time, so much resources, there's an opportunity cost because all of that, all of that attention you're going to give it, you should be putting into your new acquisition. So in many cases it just doesn't make sense to sue, even if you know you've been wronged somehow by your seller, or there was some misrepresentation or whatever could have gone wrong and you just got to eat it, absorb it and move on with your life. Is that accurate? Again, these are, every case is different. It's very hard to generalize. But, but should I expect that I will be able to take my seller to court or at this deal size, this end of the market, it probably won't make sense. And therefore it's just I really got to protect myself in the documents up front because a lawsuit is probably not going to make sense on the back end. What are your thoughts?

[30:33] Guest: Yeah, so that gets to the heart of why you need a really experienced lawyer, you know, representing you because you're 100% correct. Suing the seller on the back end is very challenging for a breach of contract or whatever would be very difficult. It also has the political ramifications I mentioned earlier, where, you know, you don't really want to be suing the person that has the best relationship with all of your employees and all of your customers, you know, even if you're protected by non competes and things like that. It's just, you know, especially if you're in a small town or some sort of limited geography where they have relationships, it's just, it's not a great way to start off what is a challenging thing in operating a business. So most all private M and A deals should have what's called an indemnification provision where essentially you've, you've negotiated that dispute resolution or conflict resolution mechanism in the document. And the very high level overview of how indemnification works is it ties into the representations and warranties that are made in the agreement. So broad strokes will, you're never going to know the business as well as the seller, no matter how much due diligence you do as a buyer. You're just never going to get to that level of knowledge. They know where all the bodies are buried. So what you do to protect yourself is you have your experienced transactional counsel negotiate a very fulsome set of representations and warranties where they make statements about the business and they say, you know, fundamentally the business was formed properly, we have proper authorizations, and there's not anybody who owns equity that's not present. And then also some minor things like, you know, we've given you all of our material contracts and there's no pending litigation, there's no undisclosed liabilities that aren't on the balance sheet. And then to the extent that any of those statements are not true, then you can utilize the indemnification provision to recover the damages that result based on those inaccuracies. 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 I've seen over the course of the last 70 days some pretty crazy things in these purchase agreements, some missing indemnification provisions altogether. So, you know. Right. So a huge problem.

[33:09] Host: Further evidence for spending that money on the attorney.

Guest: Exactly. Exactly right. You know, I've heard interviews with some folks and seen some Twitter threads where they said, hey, I bought a really good business, but ultimately had to shut it down in the back end because there were so many issues. And that indemnity will protect you. And you could take it one step further too, because one of the issues that we'll run into in the small business space is credit worthiness. You know, even to the extent that there's a great representation and warranty package and indemnification package, you know, if the seller doesn't have that money, let's say they, you know, you know, or they're not willing to give it up based on, you know, even arbitration or something of that nature, you can set aside in either an escrow or hold back 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. Or you can set. If there's a seller note in place, you can negotiate that, hey, we've got this indemnity in place. If anything comes up and there's damages, then we can set off against that note. Those are ways that you can properly allocate risk to prevent what you described. Because getting into that bad situation, and it's hard enough as it is to operate a business successfully, you're coming into a lot. You've seen Sam Leslie describe what he's seeing on a daily basis in the first 60 to 90 days of this transaction. You're very busy.

Host: Yeah.

Guest: Last thing you need to be dealing with is, you know, I don't have proper contractual remedies to recover damages for things that were out and out lies or things that were, you know, total misrepresentations in the documentation. So again, you know, case in point. Why you need that experience transactional counsel working on your behalf.

Host: Thank you for that explanation. That was great. I'm going to leave it there. I want everyone to check you out on Twitter. It's Mbattorney. And I've been following you, I think, since maybe day 11 or day 12 of your of your Twitter tenure. So it's been really valuable. I was really glad to get you on here, Mr. SMB acquisition attorney. And thank you for your time.

Guest: Yeah, thank you. Will appreciate being on.

Host: Sam.