Joe is an international lawyer who started his career at the number one international M&A and finance law firm, Freshfields Bruckhaus Deringer. Joe also clerked at the Securities and Exchange Commission, worked at Baker & McKenzie, Morgan...
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[00:00:00] Ron Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with M&A Attorney, Joe Prencipe. Thank you for being on the show today, man.
[00:00:07] Joe Prencipe: Hey, yeah, thanks for having me. I'm looking forward to talking with you today.
[00:00:10] Ron Skelton: So, we've had some attorneys on this show before you and I were talking about what to talk to, now. I think there's some cool stuff we can do today, so it'll be unique. So if you listen to shows with the, if you're out there, you're listening, you're like, Hey, I listened to the show on your show with attorneys before. This will be different. We've got some cool stuff coming up for you. So hang in there. Listen with us. Let's start where we start with most people though.
[00:00:29] What got you in the m and a law, kind of, I always joke around with the same joke, is like, you were born and now you ended up on a show about mergers and acquisitions. Could you fill out the gap in between? But mostly focused on, put you into m and a law, why you like this and, let's tell the audience kind of who you are and what you're up to.
[00:00:45] Joe Prencipe: Yeah, sure. So I wasn't one of those guys who grew up and went to business school or study economics and was like, I'm gonna be an m a lawyer in private. I went to law school. I wanted to be a litigator. Ultimately, I got a job outta law [00:01:00] school doing m and a in finance. That's just how I started my career. It's kind of innocuous. What ended up happening was I ended up starting at the number one international m and a law firm. They're called Freshfields Bruckhaus Deringer. They're a UK and Germany firm. Of course, the two biggest economies in Europe and European businesses tend to be very international.
[00:01:20] They tend to own a lot of stuff, throughout Asia, South America. So we did, we did cross-border, massive international transactions. Everything we did was, well, a hundred million plus a billion plus. There another big law firm our worked out. And so everything we did was, in the news. It was really cool. I really liked the work. It's very sophisticated, complicated stuff, especially when you're around those type of people. It's like you're just in a room of really smart people and it's nothing funnier than that. And so that's where I started off. Enjoyed it. I ended up then working at Baker Mackenzie, a top five, by gross revenue, or, I don't keep up with the league tables. [00:02:00] But they've been, consecutively top five by gross revenue global law firm for several years. I went and worked, began working at Bakers in the same space, finance and m and a. I worked at both those places in their Japan office, so I speak Japanese.
[00:02:15] I lived in Japan for a long time. I studied abroad there for a couple years, so I worked at Bakers, continued doing the same thing. After that, I ended up building, or I ended up working in-house at some tech businesses, and then I ended up building and running my own businesses. So, to this day, right now, I practice, my m and a firm. So I have a lot of clients in m and a, and then I also own some businesses. And after a few years of building businesses and stuff, as a lot of people do say there's so much, only so much new effort that you wanna, ring yourself dry out of every single day.
[00:02:50] So I very much so lean into my expertise in m and a and in some business spaces that I'm good at. And kind of repeat myself there [00:03:00] and then I'll do a few little fun things on the side. But, so that brought me to this point now for the last few years where I'm focusing almost all my time just on m and a. I find that in America, with searchers, with these smaller deals that people really do find a lot of value in my sophisticated experience in M and A, cuz I'm used to working with these again, like Wall Street banks, private equity guys, everything is very serious. So I was kind of put through that trial by fire.
[00:03:28] And when it comes to learning and, people, I'm able to really help people out and I'm able to help people dodge bullets. Even in these small deals, people are, people are at risk of losing their money and there's nothing worse than thinking you're doing a win or thinking you're gaining something and a few months later you do a deal and you're like, oh my gosh. What did I do? And so we could talk about that today. What are these bullets I'm talking about? What are some big issues? I see pretty frequently in these smaller deals and things that, [00:04:00] I have found that I, repeatedly advise or repeatedly see, and people, do get value out of.
[00:04:06] Ron Skelton: A lot of the guys out there teach in this space and in the space I'm referring to are, just below the investment bank's p and e guys, right? A lot of the guys listening to this show are acquisition entrepreneurs and their goal is to buy something. Either some of the guys are buying hold, the guys are gonna buy small companies that SBA range between, zero to $5 million in, valuation. And there's guys that listen to the show, quite a few that kind of go right up to their industries line where the private equity plays.
[00:04:35] So, and like manufacturing and stuff like that, it might be 25 million valuation. And in some industries it dips all the way down into the $10 million range. But everybody listening here that most of the guys, I say everybody, there's a certain percentage that are probably above that, but most people here in this small to medium space businesses. So that said, there are a lot of guys, and I've taken a few courses where they're talking about trying to do primarily [00:05:00] seller finance deals, where the seller's financing a lot of it, and inside of that, they say that makes you a lot more protected from risk and a lot less needing of attorneys to do the deal.
[00:05:11] And I don't necessarily agree with it. So my question to you is, at what size of a deal should a, mergers and acquisitions attorney, somebody that knows, not your family attorney that set up your corporate bylaws and your L L C, but an attorney that knows the space. At what point should they be involved?
[00:05:29] Joe Prencipe: Yeah, so I mean, when you've seen the things I've seen, and that's typically the story with attorneys, is when they've seen how it goes wrong. When you see the same things I've seen, there's no choice but to use an attorney on every deal. Now if you're doing a hundred thousand dollars deal, he's only gonna have to do a few hours of work. So things do scale. So if you're, I like to make an analogy because a lot of people have this experience. You buy $500,000, a million dollar house. There's a lot to that process. Not as much as buying a [00:06:00] business, but unless you were, for example, a real estate broker and you just know everything about that state and all the issues that can come up, you definitely need a sophisticated broker or an attorney on your transaction or you will you will lose a lot of money.
[00:06:16] So by analogy there with an attorney, if you're spending a few million dollars, why would you not want that protection? And we'll get into some of the things of, so what is there to be protected from? Everything looks fine. Well, when you don't know what you don't know, that's when you get hurt. I say every transaction, we definitely do see a lot of people when they're sub 250k that they just can't be helped for an attorney. We also see people that do get an attorney in those, in that space. But I mean, most typically it's at 500 k plus where people feel the urgency that they need an attorney.
[00:06:51] Ron Skelton: I had a broker friend of mine reach out and said, Hey, do you have an example of an earn out clause inside of in a contract? It's like, yeah, absolutely. You probably should have an attorney draw that [00:07:00] up. He goes, I just wanna see what it looks like. So I sent him something out of one of my contracts I've had drawn up. Deal didn't get done, but we were, it was a pretty good sized company. So, and he is like, that's pretty lengthy. Why is it so long? I said, well, the snippet I just grabbed to you and gave you the earn out clause, section two something through whatever is out of a 96 page document, of an asset purchase agreement. His response was 96 pages that two people asked me for this.
[00:07:23] What? I'm like 96 pages. Why is it so long? I said, well, it's 20 something million dollar company. And the reps and warranty section of that is pretty long . Right? When you're taking, especially when you're using institutional money, cuz this was a deal I was just a member of, when you use an institutional money, they want certain protections. Right? If you're looking at getting reps and warranties insurance on particular deals, they want certain protections in the contract. Right. So that's why I was asking like, at what level should an attorney get involved? Honestly, I think at any level, right. Especially on the due diligence side of it.
[00:07:58] Let's walk through, the [00:08:00] process, right. Somebody's thinking about, I always kind of do seller then buyer then advisor. But, just somebody's looking to sell their company, when should they call their attorney? Like, they're gonna start calling people, they're gonna call their CPA, they're gonna need to call their attorney, and they're gonna, eventually, they're gonna pick a broker. But, at what point should the attorney know, the attorney know that things need to be starting to get ready to sell?
[00:08:23] Joe Prencipe: Yeah. We can touch on that and we could talk a little bit about problems with, burnouts too. When you mentioned that. Here we talk about, when to talk to an attorney. I think it's important, first of all to understand that when you talk to an m and a attorney, it's not like talking to a general business attorney. Oh, like, I'm selling my car. People don't even do it for a car, but they should. I'm selling this thing, or, I need a marketing contract. I'll go get it from a business attorney. That's it. It's kind of like a guy who gives you forms. Or it's kind of like a guy who might, he might give you one piece of legal advice. That's just not really how m and a works. So in the m and a space, there's a lot of things [00:09:00] that are standard practice that you need to be doing from even the stage of considering selling your business.
[00:09:06] So I would recommend that you use your m and a attorney as a sounding board from the very beginning of when you're thinking, okay, I own this business, I wanna sell it. I think you should use your m and a attorney as a sounding board, the listing broker as a sounding board and a CPA as a sounding board. At the very beginning talk to 'em. Explain to 'em what you're doing. Get information out of them. Ask questions like, what should I be looking for? What are reasons other people have sold their business and have failed at doing it? Use them as a resource for, especially if you're a first time seller and you don't know the ropes and you kind of just think it's easy.
[00:09:44] There's not much to it there, there is a lot to it. So use them as that sounding board. Get their guidance. You don't need to, for an attorney, you don't really need to, as a seller, you don't really need to start paying a lot or paying, this substantial amount or material amount of his fees [00:10:00] until you're doing the agreements. So, but up until that point, which is, down the line after you have a buyer lined up and you feel like you're ready to hire an attorney and you feel like you're ready to spend, maybe a couple, it depends on attorney and on the deal, but let's just use the phrase several, spend several hours worth of legal fees.
[00:10:21] That's the kinda later on when you get there. At the beginning, you could have a half an hour conversation with them. They might even do, do the first consult or the first few hours for free, just because you're talking about a potential deal. And you'll get so much value outta that. Don't just kind of play Google like, oh, Google will tell me everything I need to know. That's not really a legitimate way to do. I like to say to people, when you're dealing with million dollar or multimillion dollar transactions for potentially the first time, now's not the time to pretend you're an accountant. Now's not the time to pretend you're a lawyer and get your Google law degree. You learn along the [00:11:00] way, but definitely don't start mistaking what you're not an expert in, for what you are an expert in.
[00:11:06] Ron Skelton: This whole thing with the ChatGPT to come out, I actually have it open right now. I use it constantly. The trick is, it's brilliant and it's only as powerful as knowing the right questions. That when you were brought in up, don't become a Google attorney, or, like a lot of people become Google doctors before they go see their doctor, right? And it really makes doctors mad. The problem is if you don't know the basics and know what questions to ask, then you are not gonna get a full picture of it.
[00:11:33] So I interviewed ChatGPT as if it was one of my guests. And then I put it in, I did it. There's an episode a few weeks ago it's out there if you wanna see it, but I interviewed it as if it was one of my guests. I went as far as putting the transcript. I asked it questions based off its responses. I asked deeper questions and then I stuck it into a tool that actually deep faked the voice for the ChatGPT and for fun, I trained it on my voice and it deep faked my voice. So it's not me either, right? It's [00:12:00] close to my voice. Its voice sounds better than mine because I didn't spend a lot of hours.
[00:12:04] I kind of didn't want this tool to really be good at my voice. I just kind of wanted to be good enough to be cute for the show. But I was like, I don't know that I really want it to be really good, cuz I don't know this, I paid this company $20 a month, but that's not enough to have a good signature of my voice. I guess they could do it anyway cuz they, they have hours and hours and hours of my recordings cuz we use it for editing. It did a really great job. Probably one of the better interviews I've done, but, I've interviewed over a hundred people. I've spent over 200 hours asking questions, between pre-interviews and interviews and stuff.
[00:12:33] I knew what to ask next, and that's what my biggest concern is. People going to use this for, you ask it right now to write up an LOI. It'll write one. And it's very, I refer to the ChatGPT as like a 10 year old kid. It's confident. Incompetence, it's confident. Sorry, I think I made the word messed up. Confident. It's confident in what it tells you, but a lot of times it's incompetent in what it delivers because you didn't ask it right. It's only as good as the prompt.
[00:12:58] Joe Prencipe: I've seen that [00:13:00] people, like, there was even a book, a book, we'll call it a PDF on, there's a website called Product Hunt. You might know him, and this guy had posted a week or two, a couple weeks ago. He posted this book where it was 150 ChatGPT prompts that kind of spit out the book. And that was it. And I thought it was really awesome. It's like, oh my gosh, this is so much better than Google. I'll golf all day.
[00:13:23] Even though, great company and great technology, I'll still make fun of them. ChatGPT is so stellar. And when it comes to looking for information, it is now my number one go-to source. I just go there and I'm, I just talk to it. It's a little creepy. I talk to it for a bit. The way you can talk to, it can be super colloquial. When it comes to the legal stuff, it does a really good job. But you don't know what it doesn't know. And every time I do it, cuz I, I've asked it legal questions I already know the answer to just to see how it performs. And you'll get like 85% of it right.
[00:13:59] Ron Skelton: [00:14:00] That's a C student. It's a B student or a C students. Exactly what it is. And I don't wanna hire a C-Attorney.
[00:14:07] Joe Prencipe: Oh no. When you're at a big firm and you see the documents and how they deal with documents and then you look at a rocket lawyer or legal Zoom document or something, you Google, Hey, I want this type of document. And when you look at 'em, it's night and day. It's not the same thing. It's very dangerous to think that those forms are good. There is a good resource though. I would like to point people too, is SEC, the Security Exchange Commission has a website. Let's just call you, just type in SEC Edgar.
[00:14:41] This is what you do. Type in SEC Edgar, like the normal, like the person name. E D G A R. Now Edgar is a place where companies, big companies, when they buy and sell businesses or when they do securities offerings, they're required to file certain documents with the SEC. So you could get big [00:15:00] law firm contracts, like the highest quality agreements. These are not crappy forms you'd find on the internet and pay 50 bucks for. These are things that, big attorneys billing, a thousand, $2,000 an hour. Spent tens, a hundred plus hours working on, and you can get 'em and read 'em for free online. I would totally go in and type in purchase agreement, SEC Edgar, then type in the name of a big law firm like Wachtell, W A C H T E L L, and then it'll give you an agreement made by Wachtell.
[00:15:32] That's a purchase agreement. Obviously every agreement's different by the transaction, so don't, mistake yourself, but you can learn so much just by reading those and being like, what does this provision do? What is it protecting the buyer or seller from? How does it operate? That's the a way that's a course to becoming a master from the legal perspective. It takes years and stuff, but that's a course to really learn so much as to what's going on in these agreements and [00:16:00] from tax provisions to reps and warranties to covenants, et cetera.
[00:16:04] Ron Skelton: Sounds like something I would dig into. Not because I'd ever write my own contracts, I think it's a bad idea, but I love developing what I refer to as my BS meter. Like, I wanna know enough about a subject. If I hire you to do it, and I read what you've done, that I have a meter to go that's, that looks really good. Or man, that's, I'm that way with real estate. I've done so many real estate transactions. I can look at a real estate contract and go, yeah, I don't think you've had an attorney draw this up.
[00:16:27] It's a mess. Or I can look at it and go, that's pretty good. You covered all your normal stuff inside of that. That said, I think I wanna develop that set of, when I look at something like I, I told you at one document we have it's 96 pages. Our attorney fees for that little thing that roll up was 60 something thousand dollars. And we hadn't, they hadn't gotten into negotiations yet. That was just setting up all of our complex documents cuz we were doing this really weird waterfall effect and only participating in the upside of the transaction stuff. It was fairly complicated of a transaction on a roll up.[00:17:00]
[00:17:00] But that said, that was just like, okay, here's your, that was a LOI and the purchase and sell agreement and, I think our legal fees were up to 60 grand already.
[00:17:09] Joe Prencipe: I guess a few come to mind when you say that is, the simpler you keep things, if you do a straight purchase and you don't try and overcomplicate or invent any, don't try too much financial wizardry. Even if you are, you have really great things you can do financially. I'm not saying don't apply lessons learned and release in relation to financing mechanism, et cetera, but there's a point at which you're increasing the transaction cost, we call it from a legal perspective. So straight transactions cheaper.
[00:17:35] And my second point that I, that came to mind was, people should be aware of the general prices, a million to $10 million deal, it's gonna be 15 to 35 grand on a typical transaction. Everything's different. Some sellers are gonna negotiate the heck out of it, and you're 10 hours in, you're 20 hours in negotiation. They're wasting time on the clock. They're just killing it. It doesn't mean you can't get the deal done, but [00:18:00] it does mean it's gonna take a little bit more effort. It's gonna be more back and forth between the attorneys, and that's obviously, bill. So, another thing I guess I'll point out there is treating, working with your attorney as a project management exercise, where you plan out in advance what needs to get done, how long it's gonna take, when it's gonna be done by.
[00:18:20] And definitely don't hound your attorney and treat 'em like a third rate employee. You're gonna get fired as a client quickly. But if you do that and you set general goals and objectives, that's the way to getting, the lowest price. That's the way to making sure the attorney's not overbilling or, not just wasting time on, oh he did 50 hours to make a document. Stuff like that. That's a good way to keep the price down and to make sure you're getting everything you need and not missing anything.
[00:18:50] Ron Skelton: The interesting area I want, I wanna step back cuz there's some concern I had about something we said earlier. There's a difference between a corporate attorney and an m and a [00:19:00] attorney. In my mind, the guy that drives up, draws up your L L C, your operating agreement and helps you file paperwork.
[00:19:05] This with estate isn't necessarily, in my opinion, I wanna get your opinion on this isn't necessarily the same guy. You want to negotiate the purchase of sell of your company. There are two different expertise inside of a law. Not every business attorney is an m and a attorney. Do I have that assumption correct?
[00:19:23] Joe Prencipe: Almost correct. As with everything law, there's a little bit of a bit there. So you're entirely, almost entirely. Right. And just to kind of point out what I mean, there is the, this is gonna be really great for the audience to kind of get an understanding of. Every single law firm in the country has a different way of explaining what their corporate or their m and a or business or commercial practice group is. And they have a different way of explaining what their core set of expertise is. So it's very hard for a non-attorney to kind of look at the firm and see, oh, a corporate group that's m and a right? At [00:20:00] one firm, it is a corporate is m and a. At some firms, corporate is general corporate matters and not m and a.
[00:20:06] And then there's a separate group. At some firms, it's a subgroup. It's all over the place. So, right in the sense that sometimes there is alignment, but you definitely don't wanna make assumptions and you just wanna ask, you just want to get to the bottom of it. Definitely look for the letters m and a and not the word corporate or business or commercial.
[00:20:26] Ron Skelton: Okay. What would be some good things to ask attorney to know that they're confident in the mergers and acquisition? Like, if I go into there, I'm gonna either buy a company or sell a company and I see their company, their, maybe it's an independent attorney or the, or it's a full blown firm. I see that they offer the service of buy, helping you negotiate the purchase of a company or something. Are there things I need to ask that attorney, other than, can you give me five examples of deals you closed? I mean, are there things that you would ask if you were like looking for somebody to help you on a transaction or something?
[00:20:58] Joe Prencipe: That's really a great [00:21:00] question. And I think that, it's definitely like, kicking the tires on a car, it's very easy to figure out ultimately whether or not you're gonna be getting what you need. So, the first thing I would ask is what you just said. I would say send me your deal sheet. In that deal sheet it needs to have, well, I mean, honestly, if the person's only been doing million dollar transactions for 20 years, that's kind of a red flag. It might sound great, but it's really not in the m and a world. The person should be, you want somebody who's done 20, $50 million plus transactions at a bare minimum.
[00:21:32] Because that's really where you're, that's where you're dealing with somebody who's in or been in a practice group or in a sophisticated environment that's really just honed down on these transactions. If somebody's just been a solo practitioner dealing with small deals for a lot of years, they simply weren't trained in. There's a lot of people that are great in all these buckets. So I'm not pointing any fingers, but there's just a difference in training environment and experience and Caliber for sure. So [00:22:00] I would look at the firms the person's been associated with. I'd go to Chambers, which is one of the lawyer rankings websites, and check the rankings of those firms.
[00:22:09] No offense to, smaller offices in country or not in big towns because, I live in the countryside nowadays. I love it. There's a lot of great attorneys out there. But I definitely, if I were to hire an m and a attorney, I wouldn't, I mean, I definitely have represented myself before in selling my own business. If I were to, I would only go for a New York or like a LA or a San Francisco lawyer. I know it kind of sounds being like I'm being a little picky, but that's simply how the market works. I would wanna make sure in check has this person worked for a New York firm? And that's where you're gonna really know whether the person's a super high caliber person or not.
[00:22:49] And again, not being judgmental there. New York attorneys are trained differently. New York is the capital of America when it comes to m and a. There's only few other cities in the entire [00:23:00] world, like Tokyo, where I was at, or like London where I also lived at. There's only a few places in the entire world where you can even see the expertise. It's weird. Law is weird in that way. And you might know that, but a lot of people just don't, aren't aware of that. These are like just where the banks are and where the big firms are. There's it's night and day there.
[00:23:20] Ron Skelton: You'd be surprised on how many small business owners when I asked them, okay, we're going to go through this process. I'm interested, you're interested. When we get to the point where we're doing contracts, who's gonna represent you on your side? Who's your attorney? And, cause I'll ask. You'd be surprised at how many times I get told, well, we have a family attorney we've been using for years, or we have a business attorney that helped me set up the L L C and I would, I always, because what it does is eventually kills a deal because I'm gonna use somebody that knows mergers and acquisition and he's not gonna speak the same language as your family attorney who'd set up your LLC, right. Who's a broad practice attorney who's not,[00:24:00] in that corporate space on a day-to-day basis.
[00:24:03] As much so, and I've seen it, I've seen it twice right now to where, I wasn't the acquirer but I was, in the deal helping with the deal and guy uses family attorney. The same attorney that did as a divorce. Had a guy in the office that does LLC formations trust and some other stuff. And so they, they were handling his side of it. And when our, the attorney we were using start talking about reps and warranties and all this stuff, he's like, what's all this stuff in this contract? It's overdone, and it was just really knee-jerk reaction cuz he just hadn't seen that, that stuff. And it pretty much killed the deal cuz the owner, the business owner's, like, I'm not promising any of this stuff. Right. I thought you were just wanting to buy the business.
[00:24:43] Joe Prencipe: Yeah, m and a is definitely the subspecialty in law and he definitely want a guy who does that. And that's another question you could ask is, so how much of your practice is just M and A? And if somebody says, oh, 10%, 5%, that's not what you're looking [00:25:00] for. And again, I'm not trying to be over general, but that's a great general rule to live by. If it's percent, well m and a attorneys, so I guess the real lesson I'm trying to get across there is m and a attorneys. They do m and a, they don't do other stuff.
[00:25:15] Ron Skelton: So, let's talk about, the contracts that are out there. I've seen one of the notes you gave me ahead of time is like business owners and or buyers signing contracts that the seller or the buyer just gives them, without having it reviewed and stuff. What are some of the horror stories? I know you've been in this industry for quite a while. Like what are some of the stories you've had where people got themselves into trouble for not making sure they did their full legal due diligence and or had great contracts in place?
[00:25:43] Joe Prencipe: Yeah, no, totally. This is one of those very sketchy spots. I'll kind of start off with a little bit of a introduction and some context here. The general concept or, learning to always carry with you is the seller broker's gonna give you some doc or the listing broker. The seller's broker is going to [00:26:00] give you some documents. He's gonna tell you to sign 'em. It's in his interest to get you to sign as soon as possible. Those are not documents that were drafted in your favor. He might even say, Hey, the state provided these documents. These are what everyone uses. Does that sound like sound legal advice? That sounds like a way of trying to convince you to sign something without the review of an attorney.
[00:26:24] So those documents famously known by m and a attorneys are horrible. And I haven't seen one ever that was good and ever that I told a client to sign without at least some material revisions. They're that bad. And so, these brokers, they're not attorneys and they're kind of just giving you forms. Neither should, of course, I think this is obvious, but just to state it, neither should you be expecting or taking any advice from them or asking them any questions. They are simply not aligned with [00:27:00] your interests. There is a conflict there. They might even ask you to sign the waiver of the conflict of interest.
[00:27:06] Again, do not do that. So that's kind of the foundation there. These documents are bad news. Don't sign 'em. Have your attorney review 'em. And if your attorney is not asking for revisions, then you don't have an m and a attorney probably. So what's wrong with these documents? What's going on here? Well, they're usually kind of, they're usually all about some of the basic terms that protect the seller. There's usually a lot of terms in there that protect the broker. I mean, they're kind of obvious. Those are the guys giving you the forms to sign. They're usually missing a lot of the extremely important provisions that would protect you if you were a buyer.
[00:27:46] Now we could talk about this. Conversely, if you are the seller right now, I'm just kind of going from this talk from the perspective of you being the buyer. So I'll get into some examples of what's wrong there. But why don't I go ahead and [00:28:00] liaise this into a story. Now, obviously, attorney client privilege, I do not give any personally identifying information ever. I can generally tell you of some recent stories using general words. So I'll tell you a not so bad story first. We have a recent client who was, buying a business. He didn't think he had signed anything. He comes to us and said, Hey, I haven't signed anything yet. I need you to review these documents before closing.
[00:28:28] It turns out that the broker, or the listing broker had gotten him to sign the purchase agreement like three months before, and now he was get asking him to sign all the closing documents, several other documents to wrap up the transaction. So we get in there and we see him, and not only did the client not know, he had signed this really big arduous document that is totally horribly drafted, that would, leaves him open to so many risks, but now the broker was trying to jam down his throat, all these other documents.
[00:28:57] The day I get in the transaction, the [00:29:00] broker is literally shouting me down saying, no, your client needs to sign these documents right now. My response is, obviously, my client's not signing anything until I get the addend day. They're gonna, apply his protections and the revisions to your draft. Their response back is, we've had enough of this. What is that? This is that conducive to making a transaction? Close it for me. I was just like, come on, this is not how things are done. And you should be aware of that. If you're getting pressure from people to do things, don't fall in line to what somebody else is telling you to do.
[00:29:35] Follow the advice of your counsel who's looking out for your interest, not the other side ever. I told him, no, we need to revise this. The client completely understood what I was saying. Thankfully, he was very understanding and he got the picture, cuz some clients are like, but I really want to close. Can I just sign it? He got the picture. He knew that he couldn't sign it. So a few days later the broker explodes [00:30:00] a couple, they exploded a couple times. They pulled the transaction. The whole deal is off completely. With the point in mind that the only way they wanted to go, the only way they were gonna do it is if the, if my client signed all their documents, which were missing so much, it was horrifying.
[00:30:16] So that's one, one example that's very common, by the way. And that's why I tell that he got out, he got protected, he did not get into the fire. So that's more of an innocuous example. Kind of moving on to a horror story, what happened when the guy signed the documents and we were brought in later to review stuff, we were not the council. We weren't a part of the transaction when stuff was signed. So what goes wrong? What's missing? What's the horror story here? Here's a, the story about another client and, but, did you have any questions by the way before I kind of just continue?
[00:30:50] Ron Skelton: No, I've seen some of the bad contracts that are out there. I've seen non-disclosure agreements that basically had non-compete clauses that it was like, look, I'm buy, I'm looking to buy companies in this industry by default. [00:31:00] I'm gonna compete with your guy if he doesn't sell his company to me. So I'm not signing anything that has non-compete language in an, in an NDA type of document.
[00:31:08] Like, it was very broad too. Like, buyer will not compete in this industry, blah, blah, blah. And I was like, how am I supposed to sign that, right? I'm gonna look at a hundred of these before I actually pick, not necessarily a hundred, but I could look at a hundred of these before I like say that's the one. But the other one was, is, the lifetime things of some of those contracts, right? Like, buyer agrees never in, like, never, ever, ever kind of contact this seller. Like, wait a second, what if he's selling something else? A lot of these guys are serial entrepreneurs, right? I make really good friends with buyer or sellers when I talk to 'em.
[00:31:39] Cuz if I look at their history, they've built something, they sold it, they're building something new, I might buy it. And I'm hoping if they built something later on and I'm a good buyer, they'll call me again. Right? So I don't wanna sign something that says, if your buyer rings me something I don't buy, then I can never contact that individual again. And some of it's like, you could tell like the broker wrote it almost cuz it was just so[00:32:00] broad in protecting him that it's just stupid. So yeah. So let's fi let's do your story there.
[00:32:07] Joe Prencipe: Okay. Yeah. Yeah. And that's a great example by the way, is like, why is this provision in this agreement that's not about, this agreement is about that provision. That's hilarious. That's how it works. It slipped in everywhere. Yeah. So kind of getting into this story to set the stage, we get involved in this transaction and to keep it short, I don't wanna, you have too much time with these stories, but we get brought into the transaction. The buyer had signed up all the documents.
[00:32:35] The seller decided they didn't want to transfer the crown jewel asset of the business. It is mind boggling. It's completely insane. Doesn't make any sense. And so, we're brought into review and to see what's going on really. We get in there and we in this seller is just the slimiest of the slimy. He's one of those guys that thinks he is, if you think that you're getting [00:33:00] by, like on all of your wit, that's probably a sign that, maybe you should kind of rethink how you think about things. He thought he was just the smartest guy in the world, but let me tell you, he's not a lawyer. And for some reason he thought he was gonna be skating by us.
[00:33:13] You know what I'm saying? He was gonna get away with this. He was completely insane. So I get on the phone with him and he's just, sounds crazy, and here's the deal. So, he signed the buyer signed these documents and there was a few issues. He does have the protections or certain protections, and particularly under state law that protect him. So it's great. So he's doing good, but it could have been a lot better. So for example, in the asset list, it didn't even list the asset. I mean, what are we talking about here? Like, who's your attorney? Your attorney definitely needs to be listing all your assets and your asset list.
[00:33:53] Thankfully, there was a catchall clause that covered it. Separately, was actually a couple that covered it. But you can't [00:34:00] be relying on like triple netting, for big problems in your documents. That's not the best way to go about things ever. It actually didn't list several assets in the asset list. It was pretty confusing. Just looking at it, it's like, this isn't the business you bought. I mean, the assets aren't even in there. The seller and the seller broker, obviously, I think they didn't even know it was, or the listing broker, I don't even think they knew what was going on either though, because just the stuff was just missing.
[00:34:25] It's not in their interest to make sure the asset list is perfect. If stuff's missing in there, technically it benefits them. Technically it's good. Right now, the buyers in the red. They bought the business and the business doesn't really, doesn't run technically. It does not run as, as sold to 'em. We're definitely going after the seller. We're definitely gonna make the seller give us that. And that's what we're doing. But you don't wanna wind up in litigation. That's not your goal when you're doing a deal. You don't wanna line up in a, wind up in a dispute or any type of conflict. [00:35:00] You want to be so protected at every step that you're just good to go from the close of the transaction.
[00:35:06] So we came in, we're going after the guy, and we know that the different, different issues and state law protection and stuff to apply. So we're gonna be successful in that on the recoupment phase. But that's just all the headache, all the trauma. That is not where you want to be when you're supposed to be stepping into a business that is running very smoothly and you kind of just smooth on in there. You don't wanna make a bunch of big changes suddenly. Accept your win is kind of the feeling that it should be as opposed to, oh crap, what happened to me?
[00:35:40] Ron Skelton: I've actually seen real estate contracts where, it was written in the contract that you waived your, the contract was a contract and you're waiving your rights to, certain things that were state law. And I had to explain to the guy, look, that doesn't exist inside the contracts. I contract law is contract law. I'm not an attorney, but I'm pretty damn sure that if [00:36:00] the state has a law or they, or there's a contract law around for particular thing, you're not gonna be able to just waive it with a single line inside of your contract.
[00:36:08] Right? So, like, I think it's a scare tactic more than anything. But, a lot of people just don't get that, that they can't just, you just can't write a contract to say anything you want it to say and have it totally hold up. There's a reason why there's contract law. There's a reason why the states have certain laws about certain transactions and stuff. Instead of me making a bold statement, what is the order of things, how they apply on that?
[00:36:32] Joe Prencipe: Oh, sure. I mean, there are certain state laws which you're allowed to waive, and there's certain ones that you're not. That's kind of the general principle. Typically if you're seeing provisions such as, buyer waives his rights under X, y, z, then, that's not that normal. Now waving, like for example, the right to a jury trial, that is a very typical provision in M and A agreement. There just aren't many other provisions that are just buckets. Like, you don't have the right to this. If you're seeing stuff like that, that's definitely a [00:37:00] red flag.
[00:37:01] Ron Skelton: Well, this one was a, it was real estate, so it's a, not in this thing, but I'll give you an example. One of the guys in our, at one point I owned the local Real Estate Investors Association. He was bragging about his contract and he said that his contract on contract for deed waived the right for foreclosure because it was a contract for a deed. And as Oklahoma State treats a contract for deed as a mortgage, and they won't, you go, you walk in there and try to evict somebody with a contract for a deed. As soon as they figure out there's any type of buying system in place where they're getting equity in their property, they'll kick it out. Cause he doesn't have jurisdiction. And I argue with this guy left and right, that like, look, state treats this differently. When you go to actually try to move somebody outta one of your houses, they're gonna laugh at you and tell you Yeah, that's cute and you gotta go upstairs and deal with the, with a different court, right?
[00:37:43] Because the, the attorney that, the judge that has the thing to a, do evictions and stuff, that's not his space. And, he argued with me, he argued with me about six months later, he calls me back and goes, I'm in foreclosure court. I've got a less pen that's filed. They didn't honor my contract for deed. And the judge asked me who [00:38:00] the hell wrote it, right. That's where I was going with that, there's certain things you're, that are, especially consumer protection things that you're just not gonna be able to waive.
[00:38:08] Joe Prencipe: Yeah. No, that's crazy. Kind of similar to that and the story I was just telling, there were just some provisions and I'm trying not to get too detailed actually about it. But there were some provision, for confidentiality reasons, but there were some provisions in there that just, the wording of 'em was just like, who the heck wrote this? Like this was clearly not the best wording. So to kind of just turn that on its head a little bit in another matter, we had a seller, you know, transfer all the assets and stuff, but they weren't maintained. So he actually got all the stuff. It's a horror story, but done right, protected on, cuz we did this other transaction. And so the guy gives him all the stuff. It was, trucks, not just your normal like trucks with the cab, but the, commercial, transport trucks.
[00:38:55] And so, and there was a lot of 'em. And when you have that expensive and large of an asset, they definitely [00:39:00] need to be being maintained very well up to standards, et cetera. So the seller, he apparently hadn't been maintaining and thought he could just sell trucks, which weren't in full working order. It kind of makes sense if you're like, oh, maybe I won't have to pay for that from the seller's perspective, but from a buyer's perspective, it's a, what the heck situation. I thought I was buying a business with these assets and obviously they didn't operate. Now, we had a provision in there kind of in the inverse of the other, case I was referring to.
[00:39:27] We had a provision in there that said, Hey, all these assets need to be in good and working order. And what does that mean? And we had a set off we could even talk about this. Set offs under the seller note is something that's really important and, where we always use to protect our clients. And the, buyer, exercising our provisions outta the agreement was basically able to just tell the seller, I don't have to pay you X dollars. He didn't have to enter into a dispute. He didn't have to negotiate. All he had to do was send a notice of, of [00:40:00] exercising a right under the agreement style. That's a winning situation. He has no disruption of the business. He's from a cash flow perspective, he's not interrupted cuz now he can pay off the maintenance and doesn't have to pay the seller a certain amount under the seller note.
[00:40:13] I know that's kind of a little complicated, the mechanics I'm talking about there, but the general point of the moral of the story is there are things that happen. Things that you thought was gonna be perfect, and the agreements seem to be covering all those circumstances.
[00:40:28] Ron Skelton: So a set off is, I know what it is, but, for a lot of the guys out there, can you give a kind of a short definition of what a setoff inside of a contract would be?
[00:40:37] Joe Prencipe: Sure, yeah. So in a seller note, always make sure that there is a setoff provision is more common than not. It's pretty typical in a seller note. Always makes sure there's one in there. The way it's usually worded is if any liabilities arise under the agreement, and I'm using liabilities arise under the agreement, that's a very broad language. That's, typically more defined. What type of liabilities? Is there a breach? [00:41:00] Is indemnification issue, et cetera. But the general rule is if any liabilities arise, then you can set off the amount you owe the seller under the seller note, and you don't have to pay him. So if, like, if he now owes you 25 grand and you still owe him a hundred grand, now you, you could set that off and you no longer have to pay him 25 grand of that.
[00:41:23] The thing is, and this is a good thing to kind of be aware of when you're looking at these provisions, is some of them are drafted such that you basically need to go to court to get your right to set off. Again, especially in these smaller a million dollar business, it could cost you a few million dollars just to be in court. It just doesn't make any sense. You should reject any language like that. If it says that like for example, buyer will give notice to the seller, if the seller doesn't agree in his sole discretion, in other words, he can do whatever he want. He doesn't agree, then he gives you notice back saying, so maybe there's a good faith [00:42:00] negotiation period and then it has to go to court.
[00:42:03] A lot of the provisions were drafted that way. But as you can imagine, that's almost not helpful, that almost doesn't even give you the right. If the right is to basically go to court and collect, then what are you getting out of it? So you should make sure those provisions don't require adjudication, where are granted on a notice basis. There could be some language in there about it being reasonable or backed by evidence, or in other words, good for both the seller and the buyer. Neither should the buyer just have free reign on these situations. But you should definitely be looking at those provisions and thinking, how am I gonna make sure I can exercise this? And be protected and without having to do anything arduous.
[00:42:46] Ron Skelton: Could you put something in there that's like, I'm trying to think, going back to the truck situation, right? You could put some, I don't know what, how it would be worded or something, but can you put something in there that says, look, the trucks are good in good working [00:43:00] order. If they're not, then we get to set off the amount and that amount is, can be verified by quotes from a third party source. And you pay the actual, kinda like car, like you think of sometimes you, if you get car insurance, you got damage coming, you go get three repair estimates and then, the insurance company will say, okay, those are all within range and you get to pick one of 'em and go do your work.
[00:43:22] Or some insurance company that says we gotta pick the lowest. That's not necessarily legal. I don't think they can do that. But you, there's something in a range. Is there some way to put in the contract that says, if we come across this and you disagree, then I'll go out and get third party opinions or some formal estimate of what it's valued at, and as long as they're competent third party opinions, you have to go along with that. Is there a way to do that?
[00:43:48] Joe Prencipe: Yeah, a hundred percent. That's exactly right. You can do that. And we do that. It would say kind of just what you just said. It would say something like, and then to determine the value, which is to be set [00:44:00] off. If you're the buyer, obviously you just want to be able to have the right to pick the independent third party. Buyer shall have the right to pick a reputable, independent third party and receive a quote from him. And the setoff sum shall be equal to all sums due and ultimately paid there under. It definitely that, the seller might argue, Hey, well I want to be the person that picks any, anybody who's giving any in or any quote basically.
[00:44:27] Now that's not necessarily in your best interest. And the seller might also argue, well, we have to agree on the person that's also not in your best interest, cuz then he can choose not to agree. And now you're, yeah, because then it gets deadlocked out and you don't have any rights. So, a better way to, if the seller were to ask for something like that, a better way to handle it is that you have to get multiple quotes. So you have to get three quotes from reputable people in the relevant industry, and you can kind of work on that language to make sure the seller really feels like they're gonna be really [00:45:00] independent third parties in relation to it. And, you'll pick the average or whatever of the quote. And so you can work on that. You have the right, generally when you deal with contracts and contract law to really massage the language to ensure that it fits your needs and the other side's needs.
[00:45:17] Ron Skelton: Cool. Sorry, I'm having a little bit of issues with my camera there. We'll just keep going. The special effects on me got this Halo. I dunno what happened there. So I wanna touch on one more topic before we wrap up the show and stuff. We talked a little bit about the show before that. There are people in our space, this small to medium size acquisitions. And they're raising money publicly online. I know you clerked at the SEC, you got some experience in that. Can you give us a high level of what should be done as far as like, if you're gonna raise money, there's some rules and stuff.
[00:45:52] You gotta file, you gotta do private placement rems. This applies to both search funders. You guys out there thinking about raising money for a search fund and or if you're [00:46:00] just looking to do, some type of raise to help you buy your first company, there's some rules you gotta follow.
[00:46:06] Joe Prencipe: Yeah. I'd love to touch on that. And we were talking about earlier before this show, because we just keep seeing people not following the rules or it appears to not be following the rules. Especially, search funder type guys. And it alarms us. I mean, the SEC is not the DOJ, the Department of Justice. They're not gonna go after you for criminal charges. The DOJ, will. But the SEC, their MO is to protect investors. That is literally why they exist to ensure that investors are receiving adequate information and accurate information, and they're protected.
[00:46:41] Obviously, there's also state law securities regulators too. So right now I'm just gonna talk generally about the federal securities regulator, the SEC. Now, in the context of protecting investors, with disclosures and with information, the SEC basically has some rules [00:47:00] around, what you're allowed to do when it comes to raising funds like online. If you're on Facebook saying, Hey, invest in my next acquisition vehicle. or if you're on LinkedIn or even speaking publicly, elsewhere, there's strict rules around that. Now it's easy to follow the rules, but most people aren't really aware of 'em or aren't really aware of how they operate.
[00:47:21] So I'll go ahead and explain that, the word or the catchphrase to describe this, this area is called a general solicitation. That means trying to raise funds from, generally or publicly. And so when you're doing a general solicitation, you need to satisfy from what's called a certain, a 5 0 6 C, exemption from registration. Now, what does that mean? Under Section five of the 1933 Securities Act, you're required when you're selling securities to get capital, you're required to register with the SEC. In other words, [00:48:00] file a form and some information, with the SEC certain documents. However, that's the general rule.
[00:48:07] However you're exempted from that rule, as long as you fit in within certain other rules. And for general solicitation, the usual go-to rule, exemption is 5 0 6 C. And there's also, if you're not generally soliciting, the go-to one is 5 0 6 B . You'll hear a lot about those two. Those two are pretty common exemptions. And 5 0 6 B is actually, it actually has some advantages to it. If you think that you're not really gonna, if you're just gonna put one Facebook post, but you're mostly gonna raise everything from people you already know, then you might actually just not do that Facebook post, cuz it's gonna cause problems for you in your other fundraising.
[00:48:49] So I'll go ahead and get into the meat of it. The details of what we're talking about here. In 5 0 6 C, you're allowed to raise from a number, or from an unlimited [00:49:00] number of accredited investors. So obviously you may know, and you could just Google on the SEC accredited investor definition, to get all the details about that. Some of the basic requirements for that, or the person you're raising funds from needs to have a million dollars in net assets, not including their home property. They also need to have, depend, if they're married or not, 200 or $300,000 in income over the past, at least two consecutive years, with the likelihood that that's going to continue.
[00:49:33] So they need to be making money and have a lot of money. It's kind of a high bar. If you don't do 5 0 6 C the general solicitation exemption and you do 5 0 6 B, you're also allowed to raise funds from non-accredited investors. Which are called sophisticated investors. Not in unlimited number of them, just up to 35 of them. But basically, if you're raising funds from three people who make a hundred grand and have [00:50:00] 500 grand in assets, you can't use 5 0 6 C. You have to use 5 0 6 B. So that's really important to keep in mind. You might not, the guys you're raising funds from might just, might not satisfy this general solicitation rule, and you're gonna have to not take their money, which may be against your objectives.
[00:50:17] So when we talk about 5 0 6 C, you're only allowed to raise from a credit investors, not even these sophisticated investors, guys who have money. Maybe he has 50 grand, a hundred grand he wants to put in. But he just doesn't fit the qualification. You cannot take his money. If you're relying on that exemption. You will be breaking the securities laws and you definitely don't want to be doing that, especially when you're raising funds and you're doing these larger deals, it's gonna be connected to a multimillion dollar transaction. There's gonna be lenders involved potentially. You don't want to be anywhere near that with a 10 or touching that with a 10 foot pole. Now the big problem, and this is kind of my last point on this subject, cuz it is a, it is quite complicated, [00:51:00] but these are definitely the key points.
[00:51:02] The last key point I have is that if you're doing, an exemption under the 5 0 6 C regulation, then you're required to do certain things that you're not. You kind of have to do more stuff than you have to do when you're not soliciting generally from the public. And what that usually means is you have to give accurate financial disclosures and some other information to the people you're raising funds from. So now you have a burden. You have to start giving people stuff and you have to verify their accredited status. That doesn't just mean you talk to 'em on the phone. You actually are required under the law, to go look at their documents that prove they're an accredited investor. So now you have these extra burdens when you're, raising funds like on Facebook or online, and you definitely need to include them in your fundraising process.
[00:51:51] You should have something like an inve accredited investor questionnaire that you hand to everybody and they have to send you the documents that verifies it [00:52:00] back. That's how you check that off in relation to the disclosures. You need to check exactly what you need to be sending people, prepare the packet and just make sure you're sending it to everybody that you're raising funds from. It is that simple, but you definitely need to make sure you're checking it out. I guess one last thing I guess, I guess I do would like to add one last key point though. You do have to, you still have to make a filing. We talked about the wording exemption from registration.
[00:52:26] Well, you still have to file a different form, a very light form with the SEC if you rely on these exemptions. So you have to file a Form D, it's called, and again, I'm not giving legal advice here. This is just general legal knowledge I'm sharing. I'm not, anybody's attorney here through, giving this legal advice. I need to put that, classic attorney disclaimer. The general rule is you have to file a Form D. With the SEC, you also need to make sure that you file the, that same form or related form in each state. [00:53:00] Each state again has their own securities regime. They're called the blue sky laws, is the word you use in the industry for it.
[00:53:06] So you have to go check. If you're in Texas, you just check type in Texas securities, requirements and you look through that. And then I'll give you an understanding of what's going on. You definitely should have a securities attorney or m and a attorneys who generally deal with this basic level securities work. You definitely wanna have an attorney do file the forms for you. You don't want to get 'em wrong or anything. But you have to make sure that you file those forms also to close out. A lot of people are raising money without satisfying the exemption. They're not filing the Form D, which, it's just not good.
[00:53:39] Ron Skelton: I know of at least two people in back in Oklahoma before I moved to California, who got cease and desist orders from the SEC for publicly raising funds online. They were posting posts and all of a sudden they got a formal letter. One of 'em framed it and put it on his wall like a trophy. I was like, yeah, I don't think I'd hang that on my wall. He might have done that because me, I used to have one on my wall. I had a cease and desist from a big, big [00:54:00] internet company.
[00:54:00] I won't say which one, but a big, big internet company because I had a domain that their company sucked. And this is like, they wanted me to release a domain to 'em. I was mean when they sent me a cease and desist order and told me I had a real, give them the domain name or they were gonna sue me and I just went in there and canceled it. So now they have to bid against somebody else to get it. There's nothing they could do. Right? Like you told me to quit using it. It's not up. I don't own it anymore. It's out there in public. Good luck getting it. I hope nobody gets it before you. And they're like, that's not what we told you to do. I was like, yeah, I don't care. What would be the right way for people to reach out to you if they wanted to reach out and work with you?
[00:54:33] Joe Prencipe: Oh, sure. So, yeah, and I mean, I should have said that sooner. So, our m and a practice, our firm is called Optimist Legal. Not like Optimus Prime, the Transformers, but Optimist Legal. Optimistlegal.com is our website. You can reach me directly at my email. It's joe at prencipe.com. You can see my spelling of my name here. So joe at prencipe.com is the best way. And I think even my,[00:55:00] I think my phone number is even on my website, so you can access me in all sorts of ways. I do prefer email though, so, please do hit me up by email.
[00:55:07] Ron Skelton: You and your firm, are you licensed to practice in certain states or is it pretty, pretty wide?
[00:55:12] Joe Prencipe: That's right. So, both I and my partner Omeed Tabiei are licensed in California. The general practice in America is that M and A attorneys are licensed in either New York and California. We do most of our stuff under Delaware. Delaware law for if it's a Delaware entity, or Delaware protections for transactions. So most of our stuff ends up being under those laws anyways. There are some states in which we do not practice, but typically the way the rules work when you're, when you're working in commercial transactions, we can use the phrase here cause that's the phrase used in the laws. Generally you're allowed to do m and a across the, across many states. So we're pretty open. There are some states we don't practice in. You could reach out to us and ask, we would tell you, you don't even have to ask us. You could just reach out, tell us about your transaction, we'll [00:56:00] tell you if we can't do that state. But that's not that common.
[00:56:04] Ron Skelton: Okay. Alright. I appreciate having you here today and I think we had a good time. So let's call that a show.
[00:56:09] Joe Prencipe: Okay, sounds good.