Session #1: Introduction
Class Overview & Introduction to M&A
THE DEDICATION
To the crazy people of SMB Twitter and to those of you who, like us, no longer care about prestige, titles, work travel, fancy offices or expensive work lunches. To those that want a little money in the bank, to control their time, and invest in building great families, businesses and lives. This is for us.
Prologue
In the Fall of 2021, I had the bright idea that I’d write a free primer on legal M&A.
At the time, I was a generic BigLaw associate turning paper for global corporations and private equity funds in eight- and nine-figure transactions.
In hindsight, I’m not really sure what I was trying to accomplish. The truth is, I was horribly bored by my day job during the height of the pandemic and I was looking for an alternative to the typical (and bland) BigLaw exit options.
Enter “SMB Twitter”
As many of you know, there is an incredible community of SMB (small- and medium-sized business) buyers, operators and service providers sharing endless value on, of all places, Twitter (and, if you don’t know before now, boy are you in for a treat).
In early 2021, several years after reading the seminal entrepreneurship-through-acquisition (ETA) books like “HBR Guide to Buying a Small Business” and “Buy Then Build,” I had a bright idea… I’d leave the practice of law and buy a business. But first, how would I acquire the knowledge, skills and network to do it well?
Aha! “I’ll trade my knowledge of legal M&A for goodwill in the SMB Twitter community.”
The First Tweet
So on August 23, 2022, I sent my first tweet. Flash forward almost two surreal years later and my partners and I are now building a rapidly growing SMB-focused M&A law firm, we have written on ETA for a variety of noteworthy publications including American Express, and (as of these keystrokes) have had over 90-million impressions on Twitter alone in the last 28 days. Insane!
When we wrote Version 1 of this Masterclass, Kevin and I had billions of dollars in corporate transactions under our belts. We took what we knew about M&A, brought in some guests contributors to bridge the SBA and SMB gaps, and off we went.
To be honest, I wasn’t sure if anyone would even read it. It’s M&A and M&A is boring right?
Well they did. With over 6,000 subscribers we heard from law students and professors, private equity professionals and, of course, traditional and self-funded searchers. The response was, frankly, pretty cool.
So, here we are 1.5 years later. We now have over $100 million in SMB M&A behind us, have worked with every major SBA lender and on transactions all across the country. We’ve done asset deals and stock deals. We’ve mastered SBA requirements for forgivable seller notes. And, most importantly, we’ve gone head-to-head with small business attorneys and SMB sellers.
Kevin and I hope that, like the first time, at least a few of you get something of value from this.
Warm regards,
Eric Pacifici (@smb_attorney)
INTRODUCTION
The Entrepreneurship-Through-Acquisition (ETA) Secret
What comes to mind when you think of entrepreneurship?
Most people picture Silicon Valley, Steve Jobs, Mark Zuckerberg and Elon Musk.
They imagine bootstrapping a tech unicorn. Years of low or no-income before eventually landing on the Forbes list.
This, however, is not the reality, or even the goal, for 99% of entrepreneurs.
Instead, the goal is to grow a “boring” or “enduringly profitable” (as the academics would call it) local business with a bland name like “Bob’s Plumbing & HVAC” to a few million in earnings, to control their time, to invest in their communities and build something for their children.
In fact, these mundane millionaires (as we call them) are everywhere, making boat loads of money with basic everyday goods and services we all take for granted, like commercial cleaning, plumbing, HVAC, tree trimming, lawncare, and pallets.
Unfortunately, building a business from scratch is not easy and comes with a high failure rate.
When it comes to newly-launched ventures, approximately 20% of small businesses fail within their first year, and around 50% fail by their fifth year (according to the U.S. Bureau of Labor Statistics).
Enter business buying.
Buying an established and profitable business is a shortcut to entrepreneurship and, when done correctly, the lowest risk and fastest path into the top 1%.
In short, why start a business from scratch when you could acquire a long-established and profitable business with customers, employees and juicy cashflows already in place?
Unfortunately, however, like all good things in life, ETA is incredibly challenging, comes with risks equal to its rewards, and is definitely not a get rich quick scheme.
So what do we mean when we say: “when done correctly”? Well, in this course, we’ll show you.
The “Silver Tsunami”
You’re joining us in this journey at an interesting point in time.
Throughout the 20th and 21st centuries, a generation called the “Baby Boomers” (the group of Americans born between 1946 and 1964) amassed more wealth than any generation in history, a staggering $70 trillion (according to some estimates).
The Baby Boomers, however, are getting older, now ranging in age from 58 to 76. The average U.S. life expectancy is 77 years, which means their wealth will be on the move very soon.
Economists estimate that roughly $7 trillion of this wealth is held in the form of small- and medium-sized businesses (“SMBs” as we call them), many of which do not have family members or other related persons interested in taking over the family the business.
The reality is that the children of these entrepreneurs have grown up, in many cases, to be doctors, lawyers and accountants, and have no interest in moving home to takeover the family tree-trimming business.
This puts the owners in a tough spot. Either shut the business down or sell to a third party.
Enter you!
Welcome to the Wild World of SMB M&A.
M&A is M&A right?
Often times, in SMB matters, we’re opposite of very well-educated and experienced middle-market and BigLaw private equity M&A attorneys.
Having worked for some of the most prestigious law firms in the country during our nearly two decades of collective experience prior to pivoting to SMB, these attorneys don’t scare us.
At the beginning of each matter, however, we do our best to warn these opposing lawyers: SMB M&A is a different animal than private equity or middle market M&A.
Of course, they almost never listen and are shocked by how long and difficult the process can be when not handled correctly. Legal bills and tensions rise!
In “up-market” M&A — i.e., larger transactions north of $20 million in enterprise value — there is a well-worn path. Yes, the deals are heavily negotiated. However, everyone is aware of the “market” terms and almost all deals end up within a certain reasonably limited band thereof. These terms are well documented in “deal point” studies and other publications.
In SMB M&A, however, anything goes.
The terms are murky. There is no “market.”
The SBA lenders — which are primarily built for a high-volume of transactions and for unsophisticated borrowers — wield a ton of power, are rigid and often take inconsistent positions as they try and interpret the SBA Standard Operating Procedures (SOPs).
The sellers are inexperienced with M&A, often a little grouchy and need a lot of hand holding.
To be candid, the seller and lender lawyers are mostly terrible. Many don’t know M&A at all, shouldn’t be practicing in the area, and flat out fail their client and put the transaction in jeopardy.
Getting SMB M&A transactions done correctly takes more than just knowledge of M&A terms and processes.
Closing an SMB M&A deal effectively takes grit and savvy that only comes with real SMB M&A experience.
Today’s Lesson
With that introduction behind us, we’ll keep today’s lesson brief, laying the ground work for what’s to come over the next several months with an overview of the course.
For many of you, the first few lessons may cover a lot of basic information that you probably already know. However, given the incredible disparity in backgrounds of subscribers, we think it makes sense to take it from the top.
As the class progresses, the materials will become increasingly technical and the difficulty level / usefulness will rise, but we have to level the playing field and start from the top. So, please bear with us!
Before we get started, let’s go over a few procedural items:
Class Format
Easily Digestible. Referenceable later.
The goal of this class is to focus primarily on the legal components of an M&A deal so you have background, familiarity and a reference guide when navigating through your transaction.
Our hope is to provide bite-sized lessons that will be easily digestible so that it can act as that reference guide for you.
But we aren’t going to stop there. We’re going to go the extra mile, also!
We’ll provide case studies, expert interviews, recommendations on service providers to use… we’re going to share with you everything we know about the SMB M&A process.
As such, here is a few specifics on how we’ll proceed:
1. One lesson per week, emailed and posted at 9 a.m. Eastern Time, on Saturday.
2. As soon as possible thereafter, a podcast episode with audio of the written class will be posted for those of you who prefer listening to reading.
3. The lessons will progress in chronological order through a typical M&A deal.
4. On select days, we’ll open a Twitter Spaces (or other live, interactive) session with appropriate advanced notice, where you can discuss the material and ask questions, if folks are interested in chatting.*
*Please note that we are unable to answer particularized questions about specific ongoing matters due to legal ethical rules. Sorry!
What will this course cover?
Beginning to end. Geared towards buy-side, lower-lower-middle-market (SMB) participants.
In this course, we plan to cover everything from the preparatory stage all the way to negotiating a definitive purchase agreement, closing your transaction, and everything in between.
M&A is obviously an enormous discipline that includes buying and selling transactions conducted by both public and private entities. Because this audience is comprised mostly of folks interested in buy-side, lower-lower-middle-market or “premium Main Street” (SMB) transactions, that will be our principal focus.
A rough agenda of what’s to come is the following:
Introduction to M&A
M&A Players & Overview of the Process
Preparatory Stage - Conducting a Search
Preliminary Documents - Letters of Intent
Structuring the Deal
Valuing a Business
Due Diligence
Financing the Deal - SBA Debt
Financing the Deal - Equity Investors
Purchase Agreement - Purchase Price Mechanics (including Seller Financing)
Purchase Agreement - Representations & Warranties, Covenants and Indemnity
Ancillary Agreements
Tax Matters
How to Find Good Transactional Specialists
Rescuing Your Deal
Closing Your Deal
Final Thoughts / Additional Resources
If there are any subjects you’d like to see added, please let us know. We’re doing this for YOU, so we’re happy to accommodate requests.
Guest Lecturers
If you’re interested in contributing, please shoot me a DM or message. We’re happy to accommodate any contributor / topic that will add value to the community.
Please, don’t be shy!
Disclaimers
Now for a few required disclaimers. Sorry in advance!
This course is being presented strictly for educational and informational purposes, and not for the purpose of marketing any legal services or seeking legal employment and is not motivated by pecuniary gain.
The opinions stated in this course from the authors represent the opinions of such individual author and not the opinions of any other person or organization.
Nothing contained in this course or otherwise from the authors hereof is to be interpreted as legal, financial, tax, investment and/or any other form of advice. Please consult your own legal, financial, tax, investment and/or other advisors.
The authors are not your lawyer, and no information provided in the course of this class or otherwise has the affect of forming an attorney-client relationship between you and the authors. In short, get your own lawyer!
This course is being presented by The SMB Center LLC and has no affiliation or relationship SMB Law Group LLP.
About the Authors
The authors have worked for some of the world’s most elite law firms in the world.
During their time in BigLaw, they regularly worked on transactions in the hundreds of millions to billion dollar plus range for some of the most recognizable companies in the world and have extensive experience with M&A.
The authors have since begun investing in select SMB acquisitions and have co-founded an SMB-focused law firm where they’ve collectively worked on hundreds of millions of dollars in SMB-focused M&A .
Why are we doing this?
We love the community of acquisition entrepreneurs and SMB searchers. We believe you are some of the most driven, giving, ambitious, and frankly cool people that exist.
We love what you’re trying to do and we know it’s HARD, so we hope this helps you in some way.
Excited for the course! Thanks, Eric and Kevin. I’m a young associate in BigLaw—let me know if I can contribute to the diligence lesson!