E171: Navigating Small-Medium Business M&A with Eric Pacifici: Tips and Common Deal Killers

[00:00:00] Ronald Skelton: Welcome to the How2Exit podcast. Today I'm here with Eric Pacifici and he is a founding member of the SMB Law Group and active on Twitter, active social media. Great, uh, contributor to the small medium business community. You're always putting out good information, good hints, and a resource to all of us. Thank you for being on the show today. 

[00:00:19] Eric Pacifici: Yeah. Thanks for having me, Ron. Today's, uh, I feel like Thursday afternoon, we're headed into Friday, so a fun way to kind of round out the week here. 

[00:00:27] Ronald Skelton: Awesome. Awesome. Well, we always start with kind of origin stories. I've got a lot of questions in my head.

I'd love to, I'd love to get to start with some people that don't know you. But, uh, if they don't know you and they're in the space, kind of let people, what is your background? How did you end up in small business, uh, mergers and acquisitions law and we'll go from there. 

[00:00:45] Eric Pacifici: Yeah, for sure. I think, you know, many of the people listening may know who I am. I'm sure there are plenty of people who don't, but I'll give the, the simple version. If you know, feel free to ask any followups. Um, so I don't ramble on for too long, but love small business entrepreneurship. Love, um, entrepreneurship through acquisition.

Started my career at a large law firm, doing, you know, a hundred million dollar, billion dollar deals in large cap M&A. And was introduced to the idea of buying a business by a buddy of mine when I was a third or fourth year lawyer. He was at Goldman Sachs and he was getting ready to leave Dallas where we were, where I was practicing, he was working at Goldman, to move to Austin to start a search fund.

And we were having lunch and he was telling me about this idea of a search fund and yada, yada. And within, you know, a couple of days of that lunch, I had read, Buy Then Build, uh, HBR guide and everything I could get my hands on. I was doing M& A at the time, but the idea of going and buying a small business myself as an individual sounded crazy initially, honestly. And I think that you see that today when people first come across the idea of buying a small business, they think that's a crazy proposition and where would I get the money, you know? 

So it took me a couple of years, you know. We went into COVID and whatever else and started, um, deciding what I wanted my future to look like and began networking through social media in the entrepreneurship through acquisition community. Not realizing at the time that there aren't really a lot of high quality M&A or small business acquisition attorneys. 

And started having a lot of people coming to me saying, Hey, Eric, like, can you find me a good lawyer for my two, four, six, eight, $10 million deal?

I was working at Kirkland Ellis, billing at 1, 500 an hour at the time, and so I couldn't do it. And set out to find people that I liked a lot, good lawyers to help with their deals and quickly realize that in small business M& A, you really have one of two things. You either have lawyers that don't know M& A at all, will still take the transaction, will not tell their client that they don't know what they're doing.

Or you've got, true M& A attorneys, high quality ones, but they're built for 50, a hundred million dollar mid market deals. They bill by the hour. They're aggressive. They don't make a ton of cents in small business M& A. They're also really busy. So getting return phone calls moving quickly is not something that they do.

And so I started having conversations with Sam Rosati, Kevin Henderson, my partner, who's an amazing lawyer. I think he's been on the pod, I believe. And we decided to launch a firm in the space. That was beginning part of last year, uh, uh, January of 2022. We started in earnest in July of 2022. And since then we've done, I don't want to make up a number, but somewhere in the neighborhood of the high 300 millions in transactions. Average deal size, about 4 million.

We've grown our team to about 13 total people. We've got lawyers, um, in just about every corner of the country now. Um, New York, Florida, Texas, California, Colorado, North Carolina, Michigan, Maryland. And, um, having a ton of fun doing small business M& A. So that's the highlights. 

[00:03:36] Ronald Skelton: Awesome. Awesome. And Sam has been on the show, but he deferred to you to talk about SMB law.

And we talked about his pursuant capital, right? <Awesome.> So, uh, that way, cause he's like, well, let's just do it this way. So that was, that was cool. Cause he, I already told him I had you lined up. We're rescheduling and playing, you know, tag at the time. But uh, we'd had this plan. So, one of the questions I have in a lot of attorneys, you know, I've asked, why did you get in the small business? 

You just explained that. But a a lot of people understand for those, you know, on the hourly rates, it doesn't take a ton more time or less time, I guess I should say, to do one of these small deals. There's cer, still certain things you have to do, right? So wouldn't it be more prudent as a, an attorney to go after the 10 million, 20 million, $50 million deals because, you're gonna make more money on those? 

[00:04:23] Eric Pacifici: Well, the upmarket push, right? And this is what every lawyer has done. And I'm reluctant, frankly, to talk about this because I don't want to encourage a bunch of people to come compete with us. Uh, but I will talk about it because there's enough opportunity for, for everybody. And frankly, lawyers are just not designed to want to do these deals.

They're not, they want to go up market. They want to chase prestige. They want to chase big, big numbers. And I'm just not built that way, Ron. I'm not. I love the entrepreneur. I love the guy or the gal that's 25 to 50 years old, has a couple of kids, has been in corporate for a couple of decades, has saved up a few hundred thousand dollars, wants to do something different with their life.

They still want to work. You know, they still want to have a great career, but they want to have control. You know, they want to be able to pick their kids up and, uh, from school. They want to be able to go to the soccer games. They want to, for better or worse, sometimes good, sometimes bad. They want to control the upside at the risk of the downside.

And those are my people, man. That's my tribe. And that's what we're doing in our business as well. And I'm, I'm just incredibly, insanely passionate about those individuals. So could I make more money going up market? Maybe. But I'm also a big believer on how much money do you need, Ron. There's more to life than just dollars and cents.

And when you do things the right way, there's still plenty of, of value to be had on main street as well. 

[00:05:47] Ronald Skelton: So did you end up buying that business with that buddy of yours? Did you, do you have dealings outside of the law or you just stick with just law right now? 

[00:05:54] Eric Pacifici: So my primary focus is SMB Law Group and scaling the business. I mean, there's so much opportunity for us. We've done, you know, nearly 400 million in 14 months. Uh, we're on pace to do 450 to 500 million in deals in our first full calendar year. I think we could do, I tell everybody they think I'm crazy. I think we could do a billion dollars in small business M& A in our second full calendar year.

That is an incredible opportunity. It would be such a, a remarkable accomplishment that kind of all in on, on that. But you know, I also, you know, we're right at the middle of the entrepreneurship through acquisition and SMB world. And so the investment opportunities are there. And my, my brother who's, who happens to now be our chief of staff, not because he's my brother, but because he is incredibly well qualified. Him and I had a, uh, a, a fun little venture that will go unmentioned.

But before we launched the law firm, um, him and I did some small business stuff together. So 

[00:06:47] Ronald Skelton: That's cool. I was just curious 'cause uh, you know, a lot of the, a lot of the attorneys I have interviewed, they have side projects and other things they've invested in and they even have an investment criteria. They're still looking for projects and stuff and you know, and that's how they're supplementing going after like, you know, they're in the game too on a regular basis, but I see the reason you're not like actively in the game as you're playing such a big game with SMB Law Group, you just don't have the cycles, right?

You're not going to be able to fulfill the vision you have with SMB Law Group and there's, have to, CEOs are reporting to you on the side and making sure they're getting their stuff done. That would be difficult.

[00:07:25] Eric Pacifici: I like the expression dilution of focus, dilution of results. And we have a tendency, particularly I think in small business, Twitter.

To kind of chase shiny objects because there's a lot of in recent years, there's been a lot of really incredible opportunities. The STR movement, crypto, being an entrepreneur through acquisition yourself. There's a lot of different ways that you can make money. And, but I do believe that dilution of focus, dilution of results.

So I'm, I'm all in on a SMB Law Group right now. 

[00:07:57] Ronald Skelton: That's cool. That's cool. So I also seen you guys, mostly I believe you, were doing these mini courses, right? You're doing stuff. That had to spur from a lot of people have to be coming to you and they just don't know how to structure deals or something spurred.

You know what the entrepreneurial pool out there needs is a little bit better source of information or a way to get deals to the table that we can close or something. What was, what was there that created a need for you to go, yeah, we probably ought to carve off some time and put some stuff out there.

[00:08:27] Eric Pacifici: Well, I mean, a lot of things, right? Number one, I thought it'd be fun because I love talking about this. I tweet about it and think about it and talk about it. Like I would say 22 hours a day is an exaggeration, but like there is days where it's 22 hours a day. I'm, I'm obsessed and that's why, you know, I can, can tweet, can tweet day in, day out. Year, year in, year out about the subject.

And I see kind of other people come and go, I love it. But there are a lot of people that ask the same questions over and over again. My DMs are packed to the gills and the questions are the same. And yes, I can put together just a simple FAQ and say, Hey, when they ask the same question, how do I find a good business is one, I could do that.

Or we put together a free business buying masterclass, Kevin and I, where we had Clint Fiore and Ed Mizogland and a number of other people, proprietary searchers tell their story, you know, and answer questions and write pieces on it. And that's, that's fun. And we did it all completely free. To, totally free.

We have no desire to monetize that. There needs to be more of that. I see a lot of people that spend, you know, they'll, they've bought a business Ron and now they're a business coach and they're gonna charge you five grand to teach you how to buy a business. And I listen, don't hate the player, hate the game or whatever.

I, I get it. Like everybody trying , 

[00:09:46] Ronald Skelton: I call 'em 'new-rus'. I hate 'new-rus'. Yep. 

[00:09:48] Eric Pacifici: 'New-rus'. Yeah. You know, and to me, like I, after doing, you know, nearly 400 million in small business M& A, I still don't feel like we're to the place where you need to pay us to come tell us how to do deals or how to think about it. And that's been the ethos of, of SMB Twitter from the beginning.

And what frankly got us going was the abundance mindset and the giving mindset of there's plenty for all of us. And by adding value, you'll get value in return. And, you know, for the first portion of me being on social media is probably the better part of a year. You know, I was working up market.

I was anonymous on social media and my objective was simply to network in the space and I was using my knowledge of M&A as currency to trade for relationship building and when we ultimately launched our firm, the return of, on that value and on that time was 1000 times what I had given. I mean, so I am such a strong believer on, give, give, give, give, give. 

Don't ask anything in return. It will come. That cannot be your objective, it has to be sincere. But in life and in business, like things will come out in the wash. And so, that's how I think about that, that class. 

[00:11:07] Ronald Skelton: Yeah. I get it. Absolutely. And I, I started this podcast because I paid one mentor to teach me.

And I still had questions. So I paid another mentor to teach me and I still had questions. And I came from, you know, I have a master's degree in marketing, so I have my MBA. And then I, you know, created multiple businesses. I've had some exits, like we had mostly exiting the partners where we, you know, split the equity of companies up and stuff like that, but never, never taken one to the market. But, um, I still have so many questions about this.

So I thought, well, I was doing a, do a podcast on another subject. I was like, I got this equipment. I'm just gonna start interviewing people and learning this. And then I figured out, I love the getting to meet people and know them and figure out what they're up in the world. And the content that we're putting out, it helps people.

I get people all the time. They'll see that. And we can, I take the shows and turn them into articles and stories and bullet points and posts. Enough so that people reach out to me and go, Hey, will you coach me through one of those deals? Nope. Like why? I'm still too new in this section. Well, if you've, you've interviewed 180 people, you have all the answers.

Like, no, I have their answers. But when we're talking about deploying your money and your capital, you should probably get an M&A advisor who's done a hundred deals or seen a hundred deals. Right. That's who I want. I want somebody who's seen a hundred deals and seen, 10 percent of them or 20 percent of them have issues.

They've, they've encountered those problems and then know how to get through that stuff. You want that thick skinness of somebody's like, okay, like, you know, you guys are getting up there where you've done dozens and dozens of deals. You have the answers to random stuff that's going to pop up that's a trend, right?

There's, there's things that are recurring, inside of this. I wouldn't have that answer unless I happened to ask that question to a couple people on the show. But uh, no, I don't coach anything and I probably, somebody said well, when will you start coaching? I was like, I don't know maybe if I hit a billion dollars in transactions, I'll coach. And like I have no plan to get there.

So it's kind of a, an interesting way to tell them no. Going back to the whole the environment, you've been doing all these deals, are there some common threads you see out there? Like, okay, this happens more often than not. In my world that I keep going back to it's the people but the business is about rapport, connections, and people. 

If you don't have that, you know, but from a lawyer's perspective, when you're looking at these deals, what are some common threads that make for successful deals? And they'll circle around and cover what are some common threads that cause deals to fail? 

[00:13:32] Eric Pacifici: Well, that's a very broad question because there's a lot of them.

Um, at every conceivable stage of the transaction, there are things that happen over and over again. And even though no two deals are the same, no two deals go by without some sort of common theme or threat in them. And I think what, you know, what's very common is we get a lot of very smart, sophisticated people out of mid market M&A, or they've been investment bankers.

And a lot of these guys and gals are coming out of Wharton, Stanford, Harvard, Chicago. They're very smart, very accomplished. They've been around deals. And then you come to Main Street. And it's different. And even for us, when, when we started, you know, I had done billion dollar M& A transactions and now, so a $3 million deal should be no problem, right?

Except that it's, it's a fundamentally different transaction. You know, in mid market or up market M& A, very legal intensive, very negotiation heavy, very term heavy. Uh, on main street, yes, you got to get the paper right, you got to get the contracts right, but I always say like the LOI stage in a main street is relationship building.

Like you just said, you know, you're, you may be competing against private equity for some of these deals but these sellers want to sell their baby, their love of their life, next to their spouse, to somebody that they identify with. Oftentimes they've made plenty of money over the decades and they're exiting for what frankly is kind of a modest amount of money.

When you think about two to five times earnings. When you've been making that amount for decades in some cases. And so they're, they're looking more at the person and the relationship. And I watch a lot of really sophisticated people, not calibrate properly to Main Street. And so, you know, that would be something that I would encourage everybody that's listening that wants to buy a business that knows deals and thinks they're ready.

Remember that this is a little bit more relationship. You know, extracting better identity terms from a father of two, isn't going to win you the, the race. Um, so, you know, that's how you think about the LOI stage. People who have success with it though, are the ones that understand that relationship, keeping the, the, the relationship with the seller really strong, hiring the right advisors.

I know that's going to sound biased, but these transactions move incredibly fast, Ron. And there's so much to account for between financial diligence and making sure you've lifted the hood. You've uncovered as many skeletons as you conceivably can. You've pushed on ad backs. You've done a proof of cash. Even for the sophisticated investment banker types.

Now you're on main street dealing with books and sellers and accounting practices that, you know, are less than academic. Let's just put it like that. You also have the legal end of things where you are negotiating purchase agreements, whatever else. Lending, you're convincing a lender to give you millions of dollars.

You're convincing investors to give you millions of dollars, keeping the relationship warm with the seller. You're convincing your spouse and your kids, Hey, we're moving from Jacksonville, Florida to a middle of nowhere, Tennessee to run a HVAC company. Like what the, what the hell, you know? When are we moving dad?

Well, I don't know yet. You know, where am I going to school? Well, we're not sure yet. You know, it's, it's a lot. And so trying to, and you may be working a job during that period of time as well. So having a smart team of experienced financial diligent people, attorneys, a great bank, you know, one of these really high quality SBA lenders, cause not all SBA lenders are made equally. Really important to having a successful transaction.

But then it's grit, man. There's a lot of off ramps in these deals between LOI, the lending process, negotiation with seller, things are dragging on, they never go smoothly. And so having that grit, having that determination, sticking with it, and I said recently on another podcast that somebody can pull all of this off.

Who am I to tell them that they shouldn't, uh, buy a business or that they're not qualified. Some people push back on that. I think that that's fair to an extent, but I do think that if you've made it through this process, you're, you're an incredibly capable, confident, gritty human being. And not everybody's built for that, man.

Like some people are better off punching a clock and being an employee and having that security and having that W 2 and there's nothing wrong with that. But if you're going to be successful in this transaction at the very outset, you should ask yourself those tough questions. And decide if, if you are that person and maybe you will be at a later stage in life, maybe you were at an earlier stage in life and you're not now.

And that's, that's okay. Those are, and there's a lot more I could say about how to have a successful transaction, but those are, those are top of mind. 

[00:18:11] Ronald Skelton: I get that, you know, that takes fortitude to get through these deals. Uh, you gotta know what you're looking for too. That's one of the things that a lot of people start off, you know, ETA guys and stuff like that. They come to my networking meetings and want to hang out with us. And I'm cool. What are you looking for?

Anything in the United States doing 1 million. I was like, no, you're not right? You'll you think that until you've interviewed about a hundred businesses and you'll, you'll start eliminating, you're not looking for this one or that one. I mean, that's the process some of us go through. But, uh, knowing what somebody's looking for, I think is critical too. I don't know how you make it through this space without the fortitude and grit of going, I'm looking for X in, you know, in this area.

Here's the places I would live. Here's the places I wouldn't live. Here's the kind of businesses I'm interested in, or I think I'm interested in, until I dive into those industries and need to start talking to them. What do you see is definite, like this kills deals every time. There's got, I mean, there's gotta be some elements out there that just, day in and day out, if this pops up, it's going to kill the deal.

[00:19:11] Eric Pacifici: Deal killers. Um, it's a great question. You know, uh, and this may not be the exact answer that you're looking for, but one thing I encourage everybody is to buy a good business from a good person, right? With the focus being on the second half of that. And that's, you know, obviously you want to buy a good business.

So no, no kidding, Eric. But buying a business from a good person takes care of a lot of the issues that you could potentially have in the deal process. And the issues you're going to have after the fact also. Now how, you know, how possible is it to determine whether somebody is a good person or a bad person over the course of a 90 to 120 day transaction? You may not know, uh, but you also may know.

Things like, um, the treatment of the employees, the culture, um, the accounting practices. If you find things where they've, you know, lied on their tax returns or they're paying employees under the table and I'll, you know, and I'll be honest, like there's industries we're like, if you want to buy a landscaping business, like good luck finding one where they don't get paid under the table or they don't pay employees under the table sometimes.

But, you know, if you're dealing with a good person, that's going to take care of a lot of the, the potential for problems that will kill your deal because, you know, what's going to kill your deal? Um, quality of earnings, you know, that's where the vast majority of these deals are going to die. They're going to die after you lift the hood, you see the real financials, you get an opportunity to get familiar with the business and, you know, I get the emails every day.

A lot of deals go under, under LOI. Lot of deals falling out in quality of earnings. The lending process. If you go hire a shitty lender, excuse my language, Ron, I don't know if this is a, there are children. You go, if you go hire a tier two lender, they will kill your deal. They will make it a nightmare.

They will leave documents sitting on the desk for two months that they haven't reviewed. They will ask you to change terms late in the deal. They will deny your loan deep in the process after you have spent a ton of time and money and they'll leave you in a lurch and that will kill your deal. Um, whereas if you had gone with one of the high quality lenders, like Live Oak or First Bank of the Lake or Byline, you're probably not running into the same issue.

And then to having the right advisors to, to find issues early in the process, I know I'm being redundant cause I mentioned quality of earnings, but that's such an important one. The quality of earnings is such an important thing that everybody should be doing in these deals right now, because not only will you potentially find issues that will kill the deal early on.

But, you also could solve some of the accounting confusion, the working capital confusion early in your deal. So you're not fighting about it later in the transaction. I've had transactions where if we would have done quality earnings three months earlier, instead of doing it ourselves, we would have cleared up questions like, do checks clear when they go out? Or do they clear when they settle? Whatever. 

Now you're fighting about it at the three yard line. The seller is stressed, right? Everything's fine and well early on in the process. When you go under LOI, it's theoretical. When they start getting to the doorstep and they're thinking about life afterwards and they see their tax, right?

That's a big threshold that'll kill a deal. Seller thinks they're getting six and a half million bucks. They get the settlement statement. They see the tax withholding. They see the debt payoff, they see the broker commission and they're going, I thought I was getting six and a half million bucks. I'm getting 4. 2? 

That's, you know, this business makes a million and a quarter in earnings. I'll just keep working. That's a stage with which you want to have all the ducks in a row. You want to have a great relationship with them. You want to have them signed to a binding purchase agreement. And you want to be working with a bank who is marching aggressively towards closing. Because deal work to your point earlier is hard work.

It's stressful. Deal fatigue. I mean, look at me, Ron? I'm actually, I'm 23 years old. This is what I look like. Um, it's, it's deal work is not for the faint heart. You know, if there's complications late in the deal because you haven't run a good process, it's going to kill your deal. And the best buyers, the absolute best buyers, I mean, obviously the ones who have closed deals and you know, the micro PE guys have bought 15 businesses are great buyers.

Next to them, the best buyers, the ones that have gone through the process and have fallen out and had busted deal fees and had complications, had a seller walk away. They come back and they know exactly what to do. And they execute like a well oiled machine because they know the urgency. They know the value of hiring advisors.

They know the value of hiring a great bank and they get to closing fast as hell and they're yelling at me. They're yelling at me going, where's this? Where's that? Let's get this document. What are you doing? You know what? Let's move it along. You know? And I, and I'd love that. Like I, I don't mind that at all.

You know, you guys like client, you know, push your advisors to move fast because time kills deals. So anyways, a million reasons that deals die. But those are some of the biggest ones in my mind. 

[00:24:25] Ronald Skelton: I think on the seller side, it's the same thing. I prefer seller, if, uh, you know, I don't mind talking to seller anytime when they go, Hey, I, I tried to sell this once before and it didn't get financed. 

Because I know that 90 percent of the time, 80 percent of the time, that's because whoever negotiated it, didn't negotiate a financeable deal. Right. That's a, that's a big thing. Some of the S uh, SMB loan guys out there, all their favorite tweet is, uh, so you structured a deal that's not fundable. Now what? Or something like that.

[00:24:55] Eric Pacifici: That's Bruce Marks. Yeah. That's his, that's his, yeah. He's amazing guy.

[00:25:00] Ronald Skelton: Yeah. He's a good guy. He's been on here. But yeah, like, you know, that's great. You negotiated it. Not fundable. Um, not at least not, you know, financeable. I think that happens a lot. I think that the sellers who have seen, uh, a sheet that says what their, you know, exit is or had talked to the advisors.

I've lost a couple of deals where I said, before we go, you know, I tell, I tell sellers during due diligence, before we go any further, you need to go sit down with your tax advisor, your CPA. You know, take my LOI to them and, you know, and understand what this is going through. Cause I don't want to spend the money on due diligence and working with you for the next three months to get this, the finish line and then you get to see that sheet and go, wow. 

And then I always ask him, cause I like, you know, seller finance type of deals, I always say, and ask him how much seller finance would change the, uh, you know, restructure that tax liability, you know, and how you can drag that out.

So, cause a lot of times they'll come back to me. So we'll do it, but we have to, you know, seller financing had to be a big portion of it and that's what you want. At least what I want. But, uh, yeah,

[00:25:59] Eric Pacifici: Well, that's a, that's a, can I touch on that for just a second? Cause that is such a big deal killer.

And this is a contrarian opinion. It's a hot take, whatever the buzzword is for it. I say this constantly to first time buyers, the off market deal hunt. Everybody believes they want a really juicy, proprietary, located, off market deal. And if you're a savvy buyer and you're coming in with cash and you're going to get the deal done in 30 days by cramming it through, you could, you have at it.

If you're a first time buyer that's going through an SBA process, it's going to take a hundred days. And you're trying to source a deal with a seller who does not have an advisor. You are, that's 80 percent of our dead deals. Because, they need that advisor that's unbiased in their ear and as much as people talk badly about brokers, they serve an enormously important role in conditioning that seller and then clearing issues that you don't, as a buyer, you don't even know they popped up and that the broker is beating them down by explaining the expectations, explaining the tax bill, having a great relationship with a lawyer on the sell side also who is ironing out some of that, that stuff up front.

So if you're listening to this and you're thinking about buying a business for the first time, don't waste your time. I mean, do whatever you want, but I would highly encourage you not to go off market. Find a um, high quality broker, build a relationship with lots of them, and then they'll get to know you.

And when they've got a deal, they'll bring it to you when they know you're serious. And then they'll help you get the deal done because there are just a million things that can pop up in the seller's mind during the process. And if they haven't run a process, where they've gone out to the marketplace and really determine what their business is worth.

And they don't have that broker in their ear. The moment anything pops up, it's something will pop up, they're going to go screw you. I'll go to market and get the $23 million that my accountant said this business is worth. I think that's a big one. I think it's a very important point. 

[00:28:10] Ronald Skelton: Yeah, and I'm a I'm almost on the same page. The role you the hat you have to put on, is both the educator and the buyer cause you almost have to, there's certain roles of the broker that can't be overstepped and that's educating the seller on what the process is, what the documents are, why they're there and that takes a huge delve into rapport. 

Uh, that I think, I think the off market deals are 10 times harder if you're not really good at connecting with people, working with them and coming up with solutions together. I think that's where the, the balls dropped is a lot of these guys, they're coming through there with the, you know, uh, MBA approach.

I made an offer, you know, or, or they're trading baseball cards approach. You know, you ask for this, I, I offer you that that's close. Let's work something out and they don't have the rapport. And this, this thing is so complex, like you said, the first little thing that peaks the radar of seeming fishy, they want out.

One of the things inside of that realm that is very common is when you start passing contracts over. Cause the, you know, none of these sellers have seen anything that looked like, liability clauses, reps and warranties or whatever they're called. They start seeing that stuff and you don't have somebody on their side to explain it, it is a eye opener for them. 

And, uh, the other one is, is when they go get their attorney, I've actually had to tell more than one owner. And I've actually told at least two attorneys that they're, they're the wrong person for the job. Personally not in front of their client. But I call him after the thing went down south.

I was like, you're not helping this guy. You know nothing about M&A, you're going to hurt him, you're hurting his family. You need to step away from this deal and go find him an attorney that knows mergers and acquisitions. Because everything you balked at was standard in every contract I've ever seen.

[00:29:57] Eric Pacifici: Well, and, and that, that's a trap for the unwary, right? Not understanding the onions. The, the layer, I'm trying to use the food analogy here, but not understanding the depth of the transaction. Right. And even as a brand new attorney, I didn't realize how much the negotiation of the deal, you know, your term, my price, whatever people like to throw around, but you know, really is those terms.

And I tell buyers all the time, you'll get deep into the process, deep into the process. Here comes seller's lawyer. They don't know M& A at all, and they're balking at standard stuff. Like if they tell me, hey, no backstop or set off for the indemnification. Well, wait a second. You've just gutted the entire contractual dispute resolution mechanism.

That is a standard term. This may be dramatic given the, the, the particular example, but if you go do a hundred other deals, you're going to get these protections 99 times. And so I know we're 60 days into this, but you can't buy a small business because what people don't understand about the risk in these deals and why it's, you need to have somebody who gets it because the most sophisticated M& A attorney that's going to approach it like a mid market deal with, you know, indemnification, which is, you know, your contractual dispute resolution mechanism. The only thing that's coming to save you Ron after you close the deal is, is really is your indemnity. What you've contractually negotiated.

If that's filled with caps, baskets, deductibles, and all this fancy stuff, that's great, right? Those are the market terms. Wow. Your lawyer knows everything about M& A. That's amazing. Except, now we're talking about a $3 million business, not a $50 million business. And if you've got a, a 10 to 20 percent cap for ordinary reps, that covers off things like tax, environmental, um, litigation.

And, you know, with a $50 million business or a $3 million business, a $10 million tax bill, a $10 million lawsuit, $10 million environmental judgment, just as foreseeable. Problem is, if you've just gone and bought utilizing a stock deal or even with some sort of, you know, successor liability in an asset deal, a $3 million business.

Your lawyer, because he's such a great M&A attorney, has given you a 10 percent cap on environmental liability. And then your, you know, salvage yard related business gets a $10 million environmental hit. Guess what? You have $300, 000 of protection and a $10 million bill top pay. You're screwed. If, if it's a, if it's a $50 million business, Ron, and you have $5 million of protection because you have 10 percent, that makes a whole lot more sense. Um, so some of these things, even when they are market, you have to have an attorney or representative that understands the reason those market terms exist so that you can determine whether or not in the scenario, it still makes sense because in a lot of scenarios they don't.

So the terms are very, it's deep and it's super important because again, my buyers are 25 to 50 year old guys and gals with a couple of kids and a few hundred thousand dollars saved up. They're trying to do something special with their life. And the last thing that can happen is don't even do the deal.

If you're going to end up in a situation where that's even possible, because if it is, forget it. And I think about risk and I'm rambling. I'll stop. But I think about risk, um, I think about likelihood of risk and magnitude of risk. And I weigh those two things and things that are high likelihood, high magnitude, no. 

Things that are low likelihood, low magnitude, fine. Things that are high magnitude, low likelihood, you've got to stop and say, Hey, do I want to protect for this fringe case? Do I want, you know, and really be thoughtful about the risk that you're taking when you buy somebody else's business, uh, because the stakes are ultra high.

[00:33:54] Ronald Skelton: It's one of the reasons I, uh, I think that only the big guys right now are playing the roll up game with pest control. So I own a little pest control company. We didn't buy another company to do it. Like I say, we did, but what we really did is bought their customer list. We sunsetted their licenses and everything cause they weren't compliant.

And that was the, you know, they've never been in 20 years or whatever the number is, they've never been checked. Nothing's wrong, whatever. There's no pending anything. So, but that doesn't mean that there couldn't be, and they weren't following compliance on any of the, like the rules. They didn't have the records they're supposed to have.

They weren't storing chemicals the way they were supposed to. And I was like, I was new enough in the game to know, wait a second, I don't want any of the liability. And you said something a second ago, I'm gonna come back to, I didn't want any of the liability and I'm positive that, especially in small states like Oklahoma, had I used their brand, had I used their name, if I had just done an asset purchase, those people would still try to find me.

I still would have had to try to defend that. I'm using the logo. I might have been able to win that defense, right? But there's still, you know, when they write the fine because they, and they do, they'll go out and do soil samples and everything at a house and figure out you use more chemicals than you were supposed to or whatever.

If they decide to find that individual, those fines can be tens of thousands of dollars, right? In that realm, there's just a lot of these industries, you know, even if it's just an asset purchase, can you, can you defend when they see you using the brand you brought, that you bought the brand as an align item on an asset list, but when the fines come through and it's from the EPA or the, uh, uh, or somebody else, some other state agency, can you have the money to defend those?

[00:35:32] Eric Pacifici: Such an important point, Ron. It is such an important point because it goes beyond what, you know, again, I go back to my, my point about good business, good person, because it's good person. You know, hopefully you're not dealing with any of this, but it's a car accident analogy that my partner likes to use where it's teaching a 16 year old son how to drive. 

They come to a four way stop. He goes to, to, to go. The other car looks like they're going to come and my partner, Kevin says, what are you doing? Stop. And he says, well, dad, I had the right away. And Kevin's like, well, that's going to do us no good when they still hit us, we're still going to have to clean up the mess.

Right. And a lot of people don't realize that, yes, you've negotiated contractual liability protection. You've got done an asset deal. It's not your problem. Until somebody comes to you and says, Hey, I'm your biggest customer. I have this warranty claim from what the prior seller for however much, a lot of money. Pay me back. And you go, you can't go to them and go, well, no, I'm, I'm the new, what's the Saturday night live skit where she's, I'm the new, we're the new Ford.

That was the old Ford. You know, you don't, you can't do that. You got customers that massively important to your, your brand, community reputation. You still, you've got to honor that. But it gets worse than that too, right? Because there's a number of States and I worry about three core areas more than any other areas. Which is employment, environmental and tax. In those areas, particularly in some of these jurisdictions like California, Washington, Colorado, those laws and the successor liability that could come along with it, even in an asset deal, could be massive. Um, and so you can negotiate diligence, paper things up to the cows come home and there are still ways that you can end up in trouble. And that's not me telling people not to buy businesses because I am obsessed with this.

I think it's amazing. I think it's the best form of entrepreneurship. I really do. It's to make the point that you have to do it the right way to set yourself up for success. 

[00:37:39] Ronald Skelton: That's the, that's the term I was in a circle back around. We talk about, you know, stock purchases or buying a company through the corporate stock purchase or an asset purchase.

And on the simplest view, everything's well. If I do an asset purchase that eliminates all previous liability. But then you throw in this term earlier and you just brought it back up of success reliability. What is that? And when does it come in play? 

[00:38:01] Eric Pacifici: So it depends on the jurisdiction. State by state. Success reliability is a doctrine that, you know, will vary from jurisdiction to jurisdiction. But the idea being you are as the successor and interest responsible for the liability of the, the, previous organization and to, for your audience's benefit, just to back way up in an asset deal, you're, you're buying a cash machine, right?

A machine that has generated a certain amount of cash. And you're saying based on the amount of cash it's generated historically, I'm going to pay, you know, a multiple of that. And I'm going to buy the machine, but I'm just buying the stuff. Bring it over here, build my own machine. And so anything that was done with the prior machine is their problem.

And this is my new machine. So, nice clean line. That that takes care of about 90 percent of the issues. Stock deal, you buy the whole machine. And so you take all the historical liabilities with it. Buyers almost always want to do the, the asset deal and buy the stuff to sever off the historical liability. But it's also better for tax purposes.

I'm not a tax expert consult uh, CPA or a tax lawyer, but you know, purchase price allocation. Um, and the treatment of depreciation amortization and, um, your P and L post closing will look a little better with the asset deal. But just because you do the asset deal in a number of jurisdictions they say, under the law, we don't care. Something like employment or environmental or tax, those areas scare me. 

There are jurisdictions like California, Washington, Colorado, and I don't mean to pick on them, there's many of them, that are very concerned about these issues. They're very environmentally friendly. They're very, uh, employee friendly. You know, tax authorities are always aggressive. And dude, you don't want the IRS or the state, the department of revenue, the state of Colorado breathing down your neck post closing. 

Cause even if you're the new Ford and that was the old Ford, like you still have a not fun experience ahead of you. Um, so again, not to scare buyers, there are things that can happen that are bad in deals. 

[00:40:06] Ronald Skelton: Have you seen some of these reps, uh, reps and warranty, uh, insurance policies that were originally geared towards that mid market that are dipping down into this market?

Now there's one or two companies out there that I've interviewed and talked to that are, they're providing insurance policies to cover some of that seller's liability and some of the things we're talking about right this second. 

[00:40:28] Eric Pacifici: Yeah, there are a few that are introducing a rep and warranty product for main street.

We've worked with a few of those policies. There, it's still a little bit of an awkward duck on main street just because of the price point, the insurance. I think it's going to become more important and I think it's something if you're an insurer listening to this, really big opportunity for a volume play on main street.

Reason being is that, you know, as we entered the new, the new macro environment, there will be a lot more distressed M& A. And the difficulty with distressed M& A and why a lot of the classic entrepreneur through acquisition and enduringly profitable buyers don't want to touch it is, it's really hard.

Um, but also if I buy a distressed company and I negotiate the best conceivable indemnity protection for all of the stuff that the old company did. And then that old company goes kaputs because it was distressed. There's nobody to backstop that indemnity. So when that person shows up and you say, whatever, if, if they can nail you for it, success or liability or whatever, there's nowhere to go to recover. 

So if there was a product there, though, it was backed by an insurance company, you could go, um, recover from the insurer, you're, you're more inclined if you're sophisticated and you understand all this, you're more inclined to still to do that distressed deal than you would be in the absence of a indemnity back stop. 

[00:41:48] Ronald Skelton: I know we've, uh, we covered a bunch of different stuff here.

Uh, what are some questions that the, you know, first time business buyer, you guys have this course out there. What are some of the things they need to, to go, to get started? Like on there, before they come out and start talking to business owners, is there a foundation? I know that you have your course.

We'll talk about that at the end. We'll even share how people can get to it. That'd be a great idea at the end. What's the foundation that people need, uh, besides fortitude to make it through the deal?

[00:42:18] Eric Pacifici: Listen, if I knew nothing about small business M& A and I wasn't an M& A attorney, where would I start?

Here, here's what I would do. And I'll be very concrete. I would start by reading a couple of books, Buy Then Build, the HBR guide to buying a business, a lot of people listening are not going to be surprised by that advice. I would then move on to listening to a few of the podcasts. This podcast is terrific. Acquisitions anonymous with, with, uh, Michael Gurley and their team. He's incredible. Yeah, I would listen. 

[00:42:45] Ronald Skelton: I'm a Michael Gurley fan boy. I tweet on everything he does. He's brilliant. So 

[00:42:50] Eric Pacifici: Hard, he's a hard guy to dislike. I would listen to every single episode. I would. And by the end of it, you will have learned a tremendous amount about reading Sims, thinking about business risk. And then to my friend Reg Zeller's point, like you don't, you know, you don't learn about fishing by reading about it. You go fish. You don't learn about hunting by reading about it. You go hunt and you need to go read Sims.

You're going to build muscle by reading Sims, talking to brokers. Talking to lenders too, I think taking deals to lenders, it's going to be an iterative process. But again, this is a game that's built for people with great determination and confidence. It's not built for only for Harvard MBAs, it just isn't.

Um, and that the buyers that the banks love the most are, you know, the career tree trimmer that wants to now buy a tree trimming business. Like there's plenty of ways to get through the deal process without knowing anything about how to do a deal. That's a game where you've got great determination, confidence.

You go hire good advisors. At the end of the day the most important thing is you get out the backside of that deal. You got to go trim trees, man. And like, not everybody is built to trim trees, but if you are, that's the important part. So, and, uh, you know, Bruce Marks, you referenced earlier, you know, one of, the things that he says, I think is, is so true is you don't want to be in a position on day one after you've acquired a business where, where the employees come to you and ask questions and you don't know how to answer them. You'll be in a bad spot. Now the idea that you're going to be, you know, perfect on day one and able to answer every conceivable question is that's not true either.

And if that's the bar, then no one would ever buy a business. So, it's somewhere in between there. Um, but first time buyers need to hire good people to do a deal. They need to move fast. Um, they need to read Sims. They need to earn the respective brokers in the process. And, um, you're going to have foot faults, for sure.

But there's a lot of people who are doing deals that, you know, are not Harvard MBAs. So, 

[00:44:59] Ronald Skelton: Yeah, and I get it. And, um, I think I've never seen any of these go through faster than, especially SBA loan types. You know, 90, 180 days, right. That's typical. You can learn a lot in 90 to 180 days.

You get past LOI. You can dive into a, in a realm. If you use an SBA, they're still going to want to know, you know, you have industry experience. I get that. But, uh, showing up on day one and not knowing your industry and out, inside and out is in my mind, a sign of laziness too. Um, there are a ton of industry reports out there.

There's tons of knowledge that's available. There's podcasts talking about that industry. There's injury associations that put out those information about those industries. You could be fairly knowledgeable about any subject on this planet in the term of 90 days with the, in the, in the world we live in now. I'm not as worried about that as much as I am. Understanding the human reaction to cultural changes and stuff.

Walking into a new place as a new boss and the new CEO, uh, when there's other employees involved, especially when there's dozens of other employees, understanding what they're going through and able to be with that and deal with it. That's a different skill set. And I think that's one thing that's missing in the advisor pool, is an integration advisor or maybe it's some type of special CEO type coach that has been through multiple acquisitions.

It can be there with you on day one. Even a phone call away or a zoom call away to say, okay, walking into office day one. Now, um, what do I do and what do I not do? What do I say? And what do I not say?

[00:46:34] Eric Pacifici: Well, and another big cheat code to solve for that, that are not enough buyers take advantage of, and again, it goes back again to buy good business from a good person. 

Ask that seller to stay on board for a period of time. You know, there's a reluctance of first time buyers to want to ask for that thinking that that will maybe, you know, differentiate them from the competition. The seller will dislike it.

Seller again is choosing you more often than not because they're going, Hey, I like Ron. I want Ron to be the guy who runs this business for the next 30 years. I'll stick around. I'm not necessarily trying to leave tomorrow. In many cases like. I, I want this to be successful because I'm a good person.

I see buyers have a lot of success going to sellers and saying, Hey, I respect you. I respect what you've built. I would be honored and I will pay you if you will stick around for six months to a year and show me the ropes. And those types of situations, I had a buyer who bought a business and immediately went out on paternity leave.

He had his second child and took a couple months off and he was like, dude, the seller is, has been amazing. He's completely taking care of everything. He's taking care of me. He's holding the ship together. The business, it's a couple of years later, now the business is doing great. Um, so there's all kinds of situations.

And if you want to make sure that you don't fumble the transition, what better way than having the seller there right next to you when those employees come up and start asking questions. You got somebody to lean on. Now it's not always sunshine and rainbows. And I've had many instances where buyer calls me up three months after closing and goes, how do I get this man out of here?

You know? Case by case, but that is one thing that you can try to do. And there are ways contractually to then to put, hooks into the seller to make sure that they deliver on that as well. 

[00:48:14] Ronald Skelton: Where do you see the industry going? We've got a few minutes left. We keep hearing the word silver tsunami and you know, 

[00:48:21] Eric Pacifici: I have that trademarked Ron. So be careful with that. Please. 

[00:48:27] Ronald Skelton: Did you really?

[00:48:28] Eric Pacifici: I do. I really do. No, that's not. Oh, wow. Yeah, it's a joke. That's also serious. So, but I'm just, you know, it's a shtick. I have fun with that.

[00:48:35] Ronald Skelton: But so, so I better check. I've written articles about it a couple of years ago. There's a space where a ton of people are, they're out there. They're retiring. I guess what the, that phrase, what they're referring to is there's this huge wave of this. Do you, do you see that?

I mean, um, how many of these business owners are really going to actually go to market and how many of them are going to sit in that chair until the last day? That's the, the concern I,

[00:49:02] Eric Pacifici: So silver tsunami, what is it? Um, the, so-called Silver, the, the Great Wealth Transfer is happening. It's a economic term that's been coined where there's $70 trillion or some large amount of baby boomer assets.

You know, all kinds of things. Cash, stock, real estate, small businesses that need to be transitioned to the Generation X and the millennials over the next however many years, decade, whatever. Um, some portion of that, and that's open for debate, is small businesses that need to be sold or need to transition to non affiliated, non related parties.

Because a lot of these, these small business owners have done fantastic for decades. They've made millions in earnings and now here they are at 70 years old. Their kids are accountants, doctors, lawyers, whatever. And they don't want anything to do with dad's stained glass manufacturing business. And so dad's got to go sell that business to somebody.

And the theory is that there is trillions and, trillions of dollars in these businesses that need to be sold. Do I think that that's true? I absolutely 100 percent think it's true and I'm seeing it every day. I also am seeing a tremendous amount of buyer demand. I think it's a lot, as a result of that, but also, um, you know, desire for something different economically loosening of SBA guidelines to get the money.

And so a lot of supply, a lot of demand. Now the pushback on the notion of the silver tsunami is that many of those businesses are not very saleable, right? They're not, um, they're one man bands. There's you know, key man risk. They're not a business that a smart individual would want to go and buy. They don't make enough money, whatever.

My response to that, and I think that this is, unequivocally true. Is that even if those businesses are not saleable, they still represent an enormous amount of market share of customers, of value. And whether that business is ultimately sold to a third party or it's shut down, it presents tremendous opportunity for industrious, hardworking, clever entrepreneurial type people in our, in our economy right now.

So Silver Tsunami is, I believe that it is, uh, there are a few things that I believe are generational opportunities. I believe that this is one, if not one of the top three biggest generational opportunities for somebody who is, you know, under 50 years old right now to really cash in, in a meaningful way.

Now, it's not for everybody. Going out and taking, you know, millions of dollars of, SBA personally guaranteed debt is not going to be a good decision for everybody. Um, but for those of us that it is a good decision for, the opportunity is incredible. That's my synopsis, Ron. What do you think?

[00:51:59] Ronald Skelton: I think so. I think is a, it's a huge opportunity the statistics show. I think the market will correct anyway. A lot of those single operator businesses they don't sell. Those customers will need that service. They'll need their heat and air fixed. When George doesn't answer the phone anymore, they're going to call the next person in the phone book or whatever's. 

They're going to call their cell next thing they, you know, they see on Google or whatever. And, um, the market will adapt for in the most part. What I don't want to see is great businesses going by the wayside, right?

There's just a lot of opportunity. And, uh, my first knee jerk reaction in the last year and a half, everybody that teaches real estate is starting now to teach business buying. Like a lot of the, uh, guys who you know, we're, we're teachers and educators. When I was in the real estate game, we're now have a, a line item.

We'll teach how to buy businesses too. Two different things, two different worlds. It's part of it like when the, when the shoe shine started, guy starts giving you stock advice, maybe it's time to get out of the stock market. 

[00:53:00] Eric Pacifici: That's a concern. Yeah, for sure. I think, uh, well, that's a fair point. 

But uh, the question is, is it real? And my answer is 1000%. I know this for sure. We, we, as a firm have 60 transactions in process right now at varying stages of the business by. I have 25 names written on the board next to me of clients that I'm working with personally that are in various stages of the business buying process right now.

That is extraordinary. It is that's not and I would love to sit here Ron and go hey, that's a testament to how incredible we are. It's not. It's a testament to what's going on economically and how incredible the opportunity is and how much people are desperately trying to, the ones that realize, and here's the, the, I think the most interesting part about it.

And I always use this analogy. It's a mile to the starting line and it's an inch to the, to the, to the second one because these buyers take a long time to figure out, to learn about entrepreneurship, get through the process, acquire that first business. Within the next year, many of these buyers have gone on, bought businesses two, sometimes three. Once they figure it out and go, Oh shit, this works.

They're not calling me up three months in going, Hey, Eric, I'm struggling because the employees, and you know, every, every situation is different. But the calls I'm getting, and maybe this is self selection, but the calls I'm getting are not, Hey, I'm really struggling here, Eric. This is going terribly. The calls I'm getting are like, Hey man, I'm clearing 40 to $60, 000 of free cash flow a month.

What the hell was I doing for the last decade before I decided to buy a business? Now that's going to sound a little bit of prosperity gospel. Cause it's not always that way, right? I'm not suggesting that, but those are the calls that I'm getting Ron. So yes, it is a thousand percent happening. And for many people that are doing, it's working out extraordinarily well.

[00:54:53] Ronald Skelton: Well, I want to thank you for being here. I do. And, uh, you're putting out great content out there. I'll keep following you online. Keep following you on Twitter and on LinkedIn. Um, I'll keep trolling you and your guys cause it's fun to pick on you sometimes. Uh, but it's all out of just an all out of love.

When I troll you, you get the, you know, I've got a decent audience built up too. So my audience gets to say, who's Ron picking on now? 

[00:55:15] Eric Pacifici: I love it. No, I think it's fantastic, Ron. And, um, you know, one of the things that I love most about SMB just for, just to ramble for one last second here is how incredible the community is.

And I'm one of these guys to, you can, as long as you're not being mean, you're trying to, you know, you say whatever you want to be, man. Like we're like, we're all kindred spirits in this, in this little community. And so, uh, a lot of love for you and for everybody else who's crazy enough, you know, a bunch of nerds on the internet talking about small business and entrepreneurship. So. A lot of fun. 

[00:55:44] Ronald Skelton: It's a blast. So how do people, before we get jump off here, how do people reach out to you? And how did they get on that email course thing you've got going on? 

[00:55:52] Eric Pacifici: Yeah. Well, like Deon Sanders says, I'm not hard to find. Uh, I'm, I'm on Twitter at, as at SMB under, uh, small medium sized business, SMB underscore attorney.

I am on LinkedIn again. My name is Eric Pacifici. Easy to find there as well. In the link tree on my Twitter, we've got linked to our, we have a podcast called Monday Millionaires as well, which is a lot of fun. We interview people who are on main street, making money in different capacities and just, you know, normal everyday guys and gals that are doing extraordinary things with their businesses and with their families.

And that's a lot of fun. We also have a free business buying masterclass that we're running, where we're taking everybody from start to finish, soup to nuts, on how a deal works. The diligence, the specialists, we're bringing in some incredible guests. Maybe you'll be kind enough, Ron, to, to contribute as well.

Um, and we're doing it because it's a lot of fun and we're nerds on the internet talking about small business. So, I think that's it, man. Otherwise, you know, pizza pictures, um, and just a whole lot of fun. And, and I tell everybody this, man, I mean it sincerely. I love entrepreneurship through acquisition.

I love the small business community. I care so deeply about my clients and about people who are trying to do something different with their life. I will help anybody. I will help you. Come to me, ask me to find a polar bear expert in the Sahara desert, and I will go find that person with my social media because I care deeply about the community and what people are working on. So feel free to reach out to me for, for anything. I'm here. 

[00:57:22] Ronald Skelton: Awesome. Awesome. And well, with that, we'll call it a show. Thank you for being here, Eric. 

[00:57:27] Eric Pacifici: Thanks for having me, Ron.