Feb. 3, 2023

E94: Hans Sperling Discusses Mergers And Acquisitions Transactions And Provisions - How2Exit

E94: Hans Sperling Discusses Mergers And Acquisitions Transactions And Provisions - How2Exit

Hans is the Founder and Principal of Sperling Law Corporation, a leading law firm that helps businesses close the best deals while also protecting their legal interests. They've represented hundreds of small and billion-dollar companies in a wide...

Hans is the Founder and Principal of Sperling Law Corporation, a leading law firm that helps businesses close the best deals while also protecting their legal interests. They've represented hundreds of small and billion-dollar companies in a wide range of business transactions, including M&A and joint ventures, intellectual property protection, and general corporate matters.

Hans has 20+ years experience in corporate law and spent his first seven years as an attorney in Japan, working on large and complex international business deals. He graduated with honors from Tulane Law School, where he was Senior Managing Editor of the Tulane Maritime Law Journal. Before law school, he worked at the Organization for Economic Cooperation and Development's (OECD) Environment Directorate in Paris, helping implement a major multilateral treaty.

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Email: hans.sperling@sperlinglawcorp.com
Website: http://sperlinglawcorp.com/SLC_Website/SLC_Home.html
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Hans Sperling

[00:00:00] Ron Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with Hans Sperling. He is the founder and principal at Sperling Law Corporation. Thank you for being on the show today. 

[00:00:10] Hans Sperling: Thank you. Great to be here. 

[00:00:11] Ron Skelton: Awesome. So let's just start off with your origin story, man. What got you into business law and how did you get into doing mergers and acquisitions transactions? 

[00:00:20] Hans Sperling: Yeah. So I was, in law school, kind of thought I might be doing be a liter cuz. That's what you kind of assume most lawyers are gonna do. I was very interested in maritime all, especially cause international. But got outta law school, I was able to get a job at a firm here, Japan.

[00:00:36] So I was able to do international, which is great. But of course I wasn't doing litigation cuz I can't go into court as a lawyer in Japan. I don't have that kind of license and I can't read Japanese, much less Japanese law. I was doing a lot of business law kind of work, reviewing contracts, drafting contracts, a lot of different kinds, and very quickly start to get, m and a ish kind of things.

[00:00:58] Shareholders are [00:01:00] shifting around shares and it's getting out, new investors coming in, whatever it is. And so in that pretty quickly, and then the deals got bigger and more comprehensive. And, I just enjoy it. I think a lot of time you can be on the building side, so the deal side or on the tearing downside, the litigation side.

[00:01:19] And I don't think the tearing downside is that much fun. I'd rather be on the deal side. It's a lot more positive. Everyone is really, excited about getting the deal done and moving forward and, so I just find it a lot more positive and very interest. Cause every deal is different.

[00:01:36] Ron Skelton: How long have you been in this space? 

[00:01:38] Hans Sperling: About 20 years. A little more. 

[00:01:41] Ron Skelton: In 20 years you've seen probably a full range of deals from small ones to, to mega deals and stuff. 

[00:01:48] Hans Sperling: Yeah, absolutely. I mean, everything from, in terms of a whole business purchase, everything from six figures to [00:02:00] hundreds of millions. Mostly in green, obviously. 

[00:02:04] Ron Skelton: Are there more similarities between the six figure deals and the hundreds of million dollars deal than we would imagine there'd be? I would assume, like you'd assume they're just like vastly different. But there's probably a lot in common. The contracts, there's gonna be contracts on both sides.

[00:02:17] The due diligence, might take a little longer than something that's a hundred million dollar deal just cuz they might have been in business longer and they got more at risk. Are the steps close to the same like for you guys?

[00:02:29] Hans Sperling: Yeah, it's very much the same. You're right. The contracts tend to be the same, just because we tend to start with the same contract, example, cause that's actually faster.

[00:02:39] If we sit in, if you try to draft a shorter one for a smaller, it might make sense, but then you're maybe draft drafting from scratch, which yeah, would build a client for that. Sometimes have shorter form agreements that I'll use on a smaller deal. So the contracts are pretty similar.

[00:02:54] But you're absolutely right. The due diligence, it can be very, very different. I had one really small deal [00:03:00] where, essentially no diligence. The client who was the buyer set up, he said, I got their tax returns for those few years. And he said, I figure those should be accurate. If those are not accurate, those bigger problems, and they tell me what I need to know.

[00:03:13] It was pretty, as these things go simple bus. So he could pretty much observe a lot also and talk to the present owners. Up to ones where we had maybe 10, 15 lawyers around the table go through documents for, a few weeks. Pretty much strange, but definitely the big difference. But a lot of ways, 

[00:03:35] Ron Skelton: Yeah, I forgot the name of the, the deal, but I guess one of the tech companies just sold to one of the big, big buyers. Like I think it was JP Morgan or something, bought a company. Now they're in a big lawsuit because they claim to have four and a half million users, and like they have like 200,000.

[00:03:50] They missed something in due diligence in that deal. I don't wanna butcher the story, so I'm not gonna go into too detail, but due diligence is important. What are some of the things as a business owner inside a [00:04:00] contracts, inside of the process that, as a buyer we should look out for?

[00:04:03] Are these of 'em as business owner, when you're looking at a contract and somebody's expecting you to sign it. Are there things we can look forward to say, yeah, I probably have to have an attorney review this first. 

[00:04:14] Hans Sperling: Yeah. Of course as a lawyer, I think they all should be reviewed. Of course, business people have to look at the costs of all that and how big is really worth it.

[00:04:22] There's all kinds of things, the temptation is to look at the, kind of, the upfront part. I think of a contract as having three part parts. The first part is where the basic deal is. This is what you're buying, this is what I'm paying, right up front usually. And then you have the kind of lawyer part. The part that the lawyers love, reps and warranty, all that kind of stuff. Indemnity provisions, high technical, and then you have the end part that's fairly standard. It's oftentimes labeled miscellaneous. 

[00:04:54] Ron Skelton: It's valid in this state and if something's thrown out, then the whole contract's not thrown [00:05:00] out. It's like, the rest of it's still good. Those type of clauses. 

[00:05:03] Hans Sperling: Exactly. Exactly. So it's that middle part that is probably what, but where people should be a little leery. The main part, they're like, the terms are fair. Sometimes there can be funny little wording that can make a bigger difference. The bigger that middle part is, is the more I would say you have a lawyer look at it. If there's a big, middle part and you don't quite understand what it means to you, kind of reading over it quickly or this is legalese. Those are not kind of standard, but written in other words. If I was representing a buyer or a seller, I might, if I'm generating first draft, use a different starting point on that favors the seller or when it favors the buyer.

[00:05:51] And that's gonna be throughout, I mean, that's gonna be, virtually and provisionist. It's gonna be a little bit more towards one. In ways that are not necessarily [00:06:00] obvious, like little tweaks and language and so on. So I think that should be, a bit of a red flag, yellow flag. Those things can make a big difference.

[00:06:09] Ron Skelton: So he just validated all the years of, I've been paying for real estate attorneys cuz my real estate attorney's like, use this one you buy and use this one you're selling. And I'm like, why don't he choose the same one? But I listened, I did what they said and I was like, am I really, like, did they really do?

[00:06:22] Was that really important or did they just charge me for two sets of docs type of thing. But I get it. I read 'em over and over again and I can see the difference between the two. So yeah, one of 'em is, if you're the buyer, I think the moral of that story is no matter your buyer, the seller, you want your attorney doing the docs if you can.

[00:06:38] Hans Sperling: Yeah. Sometimes you can't. It's too small of a deal to make it worth it, but generally, I think it's worth it. Yeah. 

[00:06:46] Ron Skelton: What are some of the common oversights that business owners can make? The result in the owner, like the buyer backing off. Like if a business owner's trying to sell his business, what can a business owner do to make sure the deal gets done?

[00:06:58] Hans Sperling: If you're the seller, [00:07:00] the more clean, I guess everything is, the less you tend to spook the buyer. An ideal situation, I would call a lawyer. I don't know, a year before you think you're gonna sell. And just say, Hey, through all of our corporate documents, our contracts do kind of a mini due diligence to see if there's something we could be doing that we're not.

[00:07:24] And start kind of getting everything in order, way in advance. I think that'd relatively deeply, again, not for real small deals. So that when you get into the due diligence and the buyer's going through everything, them finding problems or finding raising issues, or even in seeing that there was an issue or something three months ago, six ago, they look at it and if there is anything, it's old, it was a year ago, how everything's been all cleaned up for a year.

[00:07:54] I think spooking. I use that word because I feel like that's what, certainly if I'm on [00:08:00] the buyer side, if I find one thing, you're like, okay, it's a business. No one expects it to be pristine, real world. Two, three things. Things, little things. Especially things that maybe they could about to you and they didn't, or that they didn't even know about.

[00:08:15] But that really spooks me cuz then I'm saying they don't really even know what's in here. So then I'm thinking, I'm telling my client, if I'm the buyer, we better really look at this. Cuz if they don't know, then the only way you're gonna find out is for us going through everything. And the converse of that is that if you're doing due diligence, you're going through yourself. Everything's really clean, you're the buyer. There's no problems. I hate to say you let your guard down cuz we can never really do that, as a lawyer. But you start to assume like anyone does that if this is clean, probably the rest of a pretty good shape. Probably the business is in pretty good shape.

[00:08:53] Even the finances are probably, in pretty good shape and the buyer just gets more comfortable, rather than less comfortable the deeper you get [00:09:00] into it. 

[00:09:02] Ron Skelton: I can get that if, if you start seeing issues early on. I mean, I've actually walked from a few things, like really early on the process point, even got into the legal side of it, like when the finances are really messed up. I was like, if, this guy just lacks on their financials and their financial accounting, and especially things that could be had a lot of liabilities. Like I own a pest control company in Oklahoma. I was looking at other pest control and his books were a mess. I was like, if you can't keep records like this, then all the federal records he has to keep for what pesticides he use on what sites and stuff, that's probably a mess too, and that's a liability I can't cross.

[00:09:38] I ended up, buying the equipment and that type of stuff instead of buying the company. What are the other things inside of there, like, I get that, and a business owner can prepare, it's the same way with the financials, right? A business owner normally talks to a broker when he starts prepared to sell and the broker says, Hey, I, you're gonna take a little while to get you to sell.

[00:09:55] We need to change the way you do your financials to maximize your value. It seems like at the [00:10:00] same time they should say, Hey, and talk to your attorney to make sure your corporate minutes are right. Your like, goes out, do a financials, do a legal search. Make sure there's no pending lawsuits, no issues. Look at your contracts and make sure they're written well. Like there's not a, any weird language and it keeps 'em from being transferrable to the new buyer, that type of stuff. 

[00:10:19] Hans Sperling: I think that's exactly right. I wish, I think the thing is people know, generally they'd have to understand the finances that they have to pay taxes.

[00:10:28] Like they, they know they need an accountant. Numbers people, and the numbers need to be clean. But yeah, maybe even this brokers don't necessarily, but at the same time, yeah, the legal stuff is also, kind of similar issues and it's kind of like anything else. If there's something not great and it can't be fixed, maybe you can just disclose it up front that's better than them finding it and then wondering if you were hiding it from them or if you don't even know, like you said, what's kind of going on in your own book. Or books, [00:11:00] number books or legal books, whatever.

[00:11:02] So yeah, I think that's, Heads off a certain amount of risk, and at the end of the day, you're kind of gonna have to do that work anyway or have it done. So I don't know that would necessarily cost much more.

[00:11:15] Ron Skelton: So, how does a business owner protect himself from some of those liabilities? I know the, during your due diligence, you probably looked at things like, pacer and uccs and local lawsuits and local, court date.

[00:11:27] But don't you have, you almost have to go and look at the local court for every place they've ever done business with or something. How do you figure out if, in Billings, Montana, somewhere they've got a lawsuit pending because they did it one transaction there last year and it didn't go well. I mean, how do you know that that stuff exists and how do you protect it from it? 

[00:11:43] Hans Sperling: Yeah, it's tricky. There's four, four cases that actually exist and have been filed. There's Westlaw databases, that you can search. It's getting better and better as born or stock gets put into big databases.

[00:11:58] Still sometimes there are [00:12:00] local courts, that are not on any, big database. You can hire services they call attorney services that'll go to that local court house and go in to pull up the papers actually on paper. Even if it's, really trickier part are that they haven't been filed yet. The little disputes, or I don't know, the employee who's been, at least argue maybe harassing in some way, employees. So you have these employees who are. Aggravated or the surface, but they haven't done anything that would show up on a computer search. That kind of thing is a lot harder to get to.

[00:12:37] And there's, a limit to what we can do about that. We can ask for information. Have there been any, to the extent they have an HR against, to any manager, some of that information you can get a lot of is protected, employee information or whatever. So that can maybe depend on jurisdiction.

[00:12:57] That thing, that part of it, that component, [00:13:00] there's always gonna be with a little risk that you just kind of take on. And that's in a way what drafting the documents is for, to allocate that risk. 

[00:13:08] Ron Skelton: Is that what that reps and warranties, is that what that reps and warranties is? Is like, basically you're making statements at certain things. You're representing and warranting certain statements. 

[00:13:17] Hans Sperling: Right, exactly. And also the improvision, which you're saying, who's gonna have to reimburse whom, if there's a, if there is a loss that's out of it. Yeah. The reps and warranties on reason why lawyers focus on those so much. And they're so important because, a lot of times you're presenting things that actually if you're dis seller that you don't know for a fact. You can't check it either really.

[00:13:40] Maybe you do a lot of things, kind of know where the bodies are buried, but some things even you don't really know. So what those provisions are doing is just allocating the risk. It's saying, okay, the seller is taking the risk cuz they're a seller or the buyer in this case, the buyer is gonna take it. That's where that little language, those little [00:14:00] differences between the buyer side draft and the seller side draft can really make a big difference.

[00:14:06] Ron Skelton: And it's a problem when there's insurance policies for those type of products, right? You can actually go out and get a reps and warranties insurance policy on a mergers and acquisitions transaction and cover, cover the risk.

[00:14:17] There's even a couple, I've talked to a couple people where they're starting to do smaller deals, right? There's, one or two, not very many, there's one or two agencies out there, insurance companies out there that will cover. Transactions into the smaller space. I used to, I think it used to be like 500 million, a million dollar deal above. Now they're there, there's a couple out there that do the smaller ones. 

[00:14:37] Hans Sperling: That's, uh, a good idea if it makes sense, financially. Yeah. 

[00:14:41] Ron Skelton: We're going through the process. As a buyer, myself and a lot of the guys that are on the show. We're looking at companies, we're looking at buy thing companies.

[00:14:49] What would be things that would indicate like that we, what should we ask or tell our attorneys? Like as we're, as we were having, because we talked to the a buyer or the seller way before we bring you guys in. Right. [00:15:00] So most of the time we built a rapport. What are some red flags? Like, Hey, I probably should tell the attorney they said this or that.

[00:15:05] What are some things that you as the attorney want to know? If there's been conversations concerning certain topics during the earlier parts of the, buying the company? 

[00:15:15] Hans Sperling: I would say maybe a lot of it is as much as what, the dog didn't bark what's not said. If you find started like maybe you build a rapport, you luxury, you're having drinks or something. And then they start to say something. It sounds like they were gonna talk about a problem that they have or that they had a few years ago, or a potential problem. And then they stop talking about it. Suddenly they realize, see they're talking to remember who they're talking to. Something like that or something that they avoided. Obviously if they do talk about something that's been a kind of a perennial problem. High turnover of, employees could indicate that there's, maybe some kind of harassment from, or even more likely some kind of management issue.

[00:15:56] A problem that employees are seeing after they're there for [00:16:00] a while and they don't wanna deal with they leave. Those are the things that would, those there's things would jump out at me. Anything kind of hedgie about finances. Or, risk or lawsuits obviously. On the other hand, and I think a lot of it, you say poor, a lot of it is that feeling.

[00:16:15] Is this person, do they seem upfront? Like for sometimes if you're the seller, I would think you, you might be better off. Again, it's kinda like I was saying about disclosing things and at the beginning of due diligence. It might be better if you're over lunch or at that bar and just say, yeah, you had problems with that in the past.

[00:16:33] This is what we did and we fixed it. And you'll see when your lawyers get into the documents, how we build this so that they kind of expect it. And if I were the buyer, that would make me more comfortable, rather than kind of like, they're dodging you. Yeah. I would say, even just a person.

[00:16:50] Feeling like this person feels dodgy to me or, it might be worth telling your lawyer. I mean, the lawyer, I hate to say we're all cynical, but we kind of [00:17:00] start premise that we're trying to protect client from touchiness and others, if they're not intentional. I wanna assume that the seller is dishonest.

[00:17:09] We kind of start from the premise, we're looking for that. Our antenna should be up in. But yeah, anything that kind of gives you that, that bity sense would probably useful. But certainly if there's something more specific, it's really worth mentioning. And, it's sort of like going to the doctor. If it's not important, like I was at the doctor recently and I was, what about this?

[00:17:27] What about this? And the doctor like, yeah, you're fine. Like, I'm looking at the dead, you're good. That kind of thing doesn't hurt to tell the lawyer and have them say, yeah, okay. 

[00:17:36] Ron Skelton: Here's a good one. I actually, one of the deals I was looking at, they had some issues, right? They had an employee's, fast family member that embezzled a ton of cash from them and got them into trouble. They shut that down and then it looked like to us that one of the current employees, their books were a mess. One of the current employees [00:18:00] being a family member, may be doing the same thing. Like we gotta be careful cuz I don't know if they listen to the show or not. And I don't want to like stir the pot and cause any type of like, well you said that about us on the show and now we're gonna come after you. But at a high level, where there's a, where there's an incident, there could be a trend, right? So when you see something that like, yeah, that happened in the past, is it something you really gotta dive into? Cuz if one person's done it and they didn't go to jail, right? The family let 'em off the hook. It's a possibility that somebody might, else, might be doing it at a less, at a lesser, rate.

[00:18:35] But it's still happen. You get this. That's the vibe I got. Is that's something that's you're finding in these deals too, if you, if they've got a history of something happening and there's a potential at some level, it's still occurring?

[00:18:46] Hans Sperling: Yeah. I mean, especially if it's the same people who are there or, there's a certain amount of stuff that you see often, especially in smaller businesses. Like maybe there'll be a vehicle. That's really being made used, my personal use, but it's on [00:19:00] the books, little things like that, or losses and income that are sort of moved to different if there's more one legal company. Basically they're trying to lower their taxes, right? Put match the losses to the, to the income or to the revenues. Anything like that? Yeah. Patterns. I have a concept that I recently sort of thought, I've seen it before, but I kind of gave a name more recently, which you have financial due diligence and you have legal due diligence.

[00:19:29] I think there's kind of a third one to the extent you can pull it off. I call optional due diligence. I have a, had, I was working with y'all back and he went to the seller, his buyer, he went to the seller, I think on a weekend, and he took some of his staff with him and the seller, let him go through some of their administrative books. And this isn't contracts or corporate or their financial books. It was really kind of the day to day, day routine stuff that in that business they have to [00:20:00] do. And that those, that employee or took with them would be doing, which I thought was very smart. Cuz those employees know better than anyone if something is done right or if something looks a little dodgy cuz they do it every day.

[00:20:12] The deal was called off. Apparently the employees both told him after. Like, don't buy the company. We don't want to have to inherit that mess. And then of course, those to what we were saying before, if that most basic routine thing is such a mess, then you know, what are finances gonna look like? So, yeah. But I think you're right that there tend to be patterns, or, take certain amount of care or are concerned about not creating future legal problems. Probably do that fairly consistently. People who just don't take things seriously or, figure they'll find out when they get served papers for lawsuit.

[00:20:49] You know that when to start worrying about it consistently. Not a hundred percent. I think, naturally business people, prioritized business. Making [00:21:00] revenue, keeping the business going, solving problems that are coming enough, dealing with a vendor or a customer that's, not working out or whatever, over, making sure they had their work meeting, exactly the date that it says, in the bylaws or whatever. Fine. There's a little slack in those kinds of, legal things. People aren't necessarily perfectly consistent, pretty consistent. Yeah. 

[00:21:24] Ron Skelton: What's interesting is, I've interviewed at this point probably a hundred, 110, people, in this space. And you are the second, maybe third person that's ever brought up operational due diligence. And the other one I know is a solid second is two weeks ago when ChatPT was really popular, right? Everybody was talking about ChatGPT. I interviewed ChatGPT as if it was a guest. So I wrote, I prompted it over and over a bunch of questions and then sent it to Deepfake to voice it over, and it one of the most thorough interviews I've ever done. When I asked it about due diligence, it gave me like [00:22:00] five areas and it brought up operational due diligence. And I asked it what it was and what it meant. I'd heard about it, it was logical, it made sense and some of the ones we got far down on the deal. We looked at that stuff, but we never labeled as operational due diligence.

[00:22:11] You're the, it's probably the second or third time I've even heard that phrase used. The other one it brought up was cultural due diligence. Like how do the cultures match up, how do you align it and how do you, what is your plan to merge the cultures, right? I knew that, I knew that to compare that, I didn't ever like put a checklist of due diligence, like, this is important to me, especially on a merger, this is important to me as our company and how our culture works. But yeah, it's interesting when you brought that up, I kind of smiled cuz it's, it'll, I'm sure it'll come up a million times now that I've heard it, but I'm positive in the a hundred other images that hadn't come up.

[00:22:44] That's an impressive, compliment. You're as intelligent or, as the, as an AI that the world's saying the most is the most intelligent thing on the planet. I'm impressed with it. I mean, I'm really impressed with the interview.

[00:22:56] Hans Sperling: I'll assume it's not posted yet, right? It'll be posted in the future. 

[00:22:58] Ron Skelton: No, it's live. [00:23:00] I actually made it go live. Right. Pretty well cause it was a hot topic. I gave it a pin name for fun. So it's Ali, a l i and it's Penman, so it like a pin name. I'm interviewing a, the, ChatGPT bot, and I gave him a, I even used AI to generate a fake face. So the image of the individual is, so it's a voiceover. I didn't do the, I didn't go through the whole video side of it, but it's a voiceover you can listen to on YouTube too. But, everything's fake, including my voice. I trained a deep fake tool, an overdub tool on my voice. I gave it a, a few recordings and had it act as if it was me also. It's scary what AI can do at this point, right? What's gotta get people in trouble. And I, I'll have you on here, you're an attorney, I'll have you on here and answer this. What's scary is I, can I have it open, it's on one of my screens, or I tell you have a four monitor workstation I can go over and say, write me a LOI for a purchasing company.

[00:23:52] I can give it the perimeters and I'll write one. And I don't think that's a great idea. Number one I can even say it's for the state of Oklahoma or state of Cal, I mean [00:24:00] California, state of California. You can give it certain things, but when I read it, it's like, okay, where's the indemnity clauses? Right. It's missing cause I've done it for fun and I've read enough contracts from the real estate world and this said, no. There's certain things that should be in every contract. And some of that stuff's just not there quite yet. My concern is people are gonna use this cuz it answers the question. It seems confident in its answer so that people are gonna assume it's a good answer.

[00:24:22] And maybe we're a non-disclosure agreement. That's fine cuz it's really broiler plate and generic and doesn't matter. But it doesn't hurt as much, if something goes wrong. But for everything else, I don't think that's a great idea. What's your thought process on that? 

[00:24:38] Hans Sperling: Yeah, no, I agree. It scares me for the same reason that, and I've already had that happen years ago, before all this AI just with people go on the internet, they do do a search. They pull up a few DFs, like that one looks pretty good. How do we, but they may have made a mistake. Like they, they pulled up a buyer's one seller one. [00:25:00] Or like you say, they're just incomplete. I would go even further. The LOI is particularly bad, I think, because it's very, there's not so much legalese as in other con, regular contract, but it's, there's a lot of things that are very specific to that deal. So I would be concerned if the AI really captured, I go further.

[00:25:22] I found with non-disclosure agreements. When I was first starting out, they would, I was an employee, lawyer and associate at a firm and they would give you those cuz it's a short, small contract and you can you can do it pretty, pretty quickly. I think actually can be a big difference between one that's well, well crafted from the point of that party. I've had people say, oh, it's okay, it's, I have a non-disclosure agreement. And I'd say, in that particular incident, cover this. Cuz that's something that oftentimes there's an exception in an nondisclosure agreement. And a lot of times the ones that they pulled off, the don't, it's like two [00:26:00] paragraphs or something like that.

[00:26:01] That's probably the simplest contract. And there can be differences that, so for example, there's five typical exceptions to the non-disclosure obligation. And it's stuff like, let's say a court orders you to turn over to disclose what's covered by the non-disclosure agreement. So we put inception. So you know, you don't, the situation where the court is saying you have to disclose it and the contract says you can't disclose it. Another exception would be from things that are already in public domain. So yeah, it would be covered, but it turns out it's out somewhere and we found it through that channel.

[00:26:40] Most honest loader situations, those are never gonna come up and become an issue. But if it's that much, it's that bad for, that risky for small, simple contract that could be one five pages. Yeah. Imagine like for a, an asset purchase agreement or a share purchase agreement. So yeah, that's what [00:27:00] really scares me is that people will go out and it looks so confident with it. Obviously, gonna save them a lot of money, time. I think a lot of people really set themselves up, for a problem that way. 

[00:27:13] Ron Skelton: If it fired back and said, okay, in order for me to do that, I need these elements from you and gave you a list of stuff it needed, then maybe it could become more, like, what state are you in, what state are they in? What's the name of the, if it gave you a kind of same thing, you would ask for. If it did the lawyer side of it and go, Hey, in order to do this, I need to know what's the structure of the deal? What's this, what's this, what's this? But it, you an, you prompt it, ask a question, it answers it. That's the biggest problem I see in it.

[00:27:38] It's only as accurate as how accurate you can ask the question. Right? So there's theoretically, could you produce something that would mirror what an attorney would do? Absolutely. If you're an attorney and you know what that, what you would ask anyway, you could probably sit down and prompt the thing to write a decent one. Because you'd say, okay, include this, this, and this. The name of the businesses that this for the, here's the terms. Make [00:28:00] sure you have this clause, this clause, this clause, this clause. And you just gave it a really long prompt, you'd probably do a pretty good job, but the power in AI would, was, and I hate to, we're off on a tangent on AI here, but the power inside of that is, who's asking the questions and knowing what to ask it. That's, and I explained that to somebody asked, well, if it does such a great job, why do we need mentors, for them, I did it on mentoring and buying and selling businesses. I said, you gotta remember, I've interviewed over a hundred people, 105 people. That means I've spent 105, 110 hours talking to professionals, asking questions. And then it's probably the equivalent of my time listening to my own shows and listening to the content. So yeah, I've got 200 hours into 300 hours into this, like from listening and editing it, working with the writers or write the stories on it. I knew what to ask it.

[00:28:45] I knew what the logical question was, so it flowed like a really inter, like an interview, but it wasn't, because, if somebody sit down and goes, okay, AI showed me how to buy a business, I think they would've got different results. Because I knew what, like, I knew that it was missing [00:29:00] something, so I asked it the right question.

[00:29:01] So I, that's my big concern is there's a risk that's out there in that. So let's go back to, something more in your normal day-to-day wheelhouse. You, I'm sure you're gonna get the message with the AI before long cuz it's, I think it's gonna be in the next, I'd say in the next 12 or 18 months.

[00:29:14] If you're not paying attention to this, it could hurt you as an attorney. There's already one out there that has been around for years. I think it's by IBM Watson. That's a really good paralegal. Have you heard of the, like it's, I think it's called Watson or something like that. It's been around for years, but attorneys use it and it's a better paralegal than most paralegal services cuz you can just plug into it and ask it for.

[00:29:34] For cases and case, what is it called? Preferences, or I forgot what it's called. And it does better research than, a team of paralegals would. And it does it in 55 seconds as opposed to three weeks.

[00:29:43] Hans Sperling: Yeah. Right. And there's more services coming out recently. Yeah.

[00:29:47] Ron Skelton: Let's go back to we're buying a business or we're selling a business. We talked about the early indicators that, we got, we probably ought to have an attorney really dive into us or, hey, this is an indicator that we put the attorney on higher alert. What are some [00:30:00] things that you look for, like when do you come into the deal? Is it after financial due diligence?

[00:30:06] Do financial, when should somebody employ? And think about the cost of it too. When should somebody call the attorney and say, okay, we're at this stage now. We really need to know if they'll, if it passes legal, because I think more companies will fail the financial due diligence than the legal side of it, right? More often than not, the money's not where it's supposed to be, not managed correctly. It's not big enough, not as big as they say it are, and it's gonna fail financial due diligence. So in my gut, I'm saying that once I'm comfortable with the finances, I'll probably contact the attorney, but correct me. Is that right? Wrong? Is that good, bad? 

[00:30:41] Hans Sperling: I think that's the right idea. Yeah. I think just as a practical matter, the low hanging fruit start with the due diligence that's easy at best. Which might be the operational, even if you're doing that, in the financial, especially if you're hiring an, accountant to go through everything you know and illegal.

[00:30:57] That makes sense. The only issue that I would get into there is [00:31:00] that what tends to happen is, everything takes longer than anybody thinks it's going to. And so if you're the guy at the end of the line, in that case, the lawyer doing the legal due diligence and everything else takes longer and longer than the amount of time you're left to do what you're supposed to get squeezed.

[00:31:16] And you can end up, where you almost don't want to do it as lawyer, not given enough time. You're afraid of, you don't wanna do it inadequately, but not to a good job. So if you have the time, That's probably a good way, do the cheapest one. Let's say operational, if you're doing something like that. Financial and then legal, but otherwise, I start to compress them. Like you start to get an idea about the finances, it look okay, then start to pull in lawyer to the legal books.

[00:31:47] Ron Skelton: You see me laugh in the middle of that. I honestly think I related to you as I was and when I was in the IT. Everybody wants the 5 9 69 s, like high availability, no outages, but nobody wants to pay for the time and [00:32:00] energy it takes to get an ironclad computer system. I bet it's the same way inside of this. Everybody wants an ironclad deal. But when I hand it to you, they want it done cuz they think it's already a good deal, right? So all of a sudden they don't wanna pay a bunch of legal fees and have you spend two weeks, three weeks, five weeks, a month, two months to do your job and create an ironclad deal.

[00:32:20] They automatically think they have it. And it's one of those I'm glad I'm out of the IT world. I was in it for quite a while, but I used to call it a thinkless job. Nobody wants to give you the funding to get it done right. And everybody just wants to scream at you when it went wrong. 

[00:32:32] Hans Sperling: Yeah. Exactly. And it's understandable in a way because if by the time it comes to us, the deal's often kind of been alive. Form for a long time, like ideals come that they've been working on 'em for two years, from when they first made the contact and started negotiating. And they've gone through those other phases and they're happy with that. So yeah, they're, they just get it done at that point. And that is, that's kind of one of the normal tensions of work probably kind of like [00:33:00] it work that, they want it quick and you want all the time, that you can, to do it as thorough as you can.

[00:33:06] And there's always a kind of tension there. Sometimes you just have to tell people, I need more. I can't do a good job in that amount of time. I think if they end that, that you're saying, look, it's, I can't do a sloppy job. Like there you might as well not have me there. 

[00:33:19] Ron Skelton: What I was gonna go here is the majority of our audience are probably that SBA level where they're buying a deal that they can purchase outright, for 5 million or less. The constraints of the SBA loan, there's a few, I've got a decent percentage of the listeners that are playing above that. But not a whole lot. And even there, they're playing under the p and e game cuz our whole thing is small to medium business. So I'd say I think probably 30 million and below is the biggest deal that we would see inside of that if a deals 30 million or smaller, as far as an acquisition cost, what is a reasonable timeline in most industries?

[00:33:54] I know it depends if it's, if you're buying somebody, if you're a lawyer, you're buying somebody else's law firm that's gonna take a walk, cuz [00:34:00] you, everything you do is legal. And I, and you're buying a pit bull from a pit pools, right? There's a chance, there's a bigger chance for a fight. But, that said, like in most industries and stuff. What do you think if I came to you and what set the expectation of how that timeline works and how much time you need to do your job legitimately and thoroughly ? 

[00:34:20] Hans Sperling: Yeah. It depends on a lot of things, like you said. I guess comfortably on a typical deal, I would say a month may, maybe more or less would be average. You kind of do have to bear in mind that even if I'm focusing, lawyers focusing on that deal, mainly there's something else that they gotta do. There's gonna be some existing client who calls and asks questions, so they can't necessarily focus a hundred percent on that. Now if you're doing a big enough deal, they can pull in, get a larger firm. We'd pull in associates and they would be doing nothing but that deal for that time period. So a month is usually good, but that. Month of actually doing. Cuz what happens a lot, is that, a business person will tell me, [00:35:00] I'm gonna, I'm gonna do this deal. And they gimme plenty of lead time, which it's really nice with three months lead time cuz then I can clear my schedule and make sure that I'm available.

[00:35:10] But then let's say I get three month time from the time they really want to close. But the first two months, nothing happens. They're not ready to do the legal diligence or I'm asking for documents and they're just not coming yet. People are focusing on other things. So the actual time I have to do it gets more and more compressed. But, a really nice cleaning lot of deals. If I know two to three months in advance, like, oh, this is coming, and I can start to, maybe pull up some examples I have and start doing a draft and then have a solid month. Again, the due diligence can vary A lot depends on what. Times a business doesn't really have that many contracts, or the contracts they have are, they're using the same form over and over again for our clients or whatever.

[00:35:59] So [00:36:00] those are, can be pretty quick. Other times, they have a lot of custom contracts, different deals with different, vendors or whatever. And those can take a long, and then if there's things that need to be cleaned up, then that takes more time if everything is in pretty good shape. But, yeah, a month of actually, mainly focusing on that is usually good. It could be less if it's a simpler deal. Could be more if it's, that's kind of, I get park. 

[00:36:29] Ron Skelton: Is there anything that the buyer and or seller could do to speed that up? Like have a set certain set of data available for you. I don't, I know what it would be, but like, here's the name, here's the business, n a t, here's d e i n number, here's every state they've ever done business in. Here's their corporate docs. Here's the meeting minutes. Like, here's the deal room. I mean, I don't like, I don't know what amongst not that big of a deal. Right. But if you're looking a process that you've been already negotiating, working with them for 60 days. The financial due diligence is getting close to being [00:37:00] done in the seller's mind. Often, especially small businesses, they think they're a lot ready to get a check and you go, okay, now I'm gonna hand it over to my attorneys.

[00:37:08] And the problem you have with that and there's a reason why a lot of these small business guys and the guys teaching small business acquisitions and say, just make, don't use debt. If you can get the owner to finance 50% or more of it. Have the attorney lessen the due diligence thing, cuz you can put clauses in where the, you protect yourself because there's a big seller, carryback or a seller, finance, right? Is, and I just talked to, interviews with somebody earlier today, and that's all he does. Like we put a big chunk down, we make sure the, the owner has got skin in the game. Our due diligence is fairly simple. We've done a bunch of these deals because if something goes wrong, it's in our contract, it, it comes out of the what we owe 'em left, and I was like, yeah that works until it doesn't.

[00:37:49] Hans Sperling: When you say that is, it all comes down to how that provision is drafted and negoti negotiated in the agreement. Which if they haven't put the time and, had the lawyer get into that, maybe find out that [00:38:00] one of those funny little fes in there was actually, an exemption to, an exception to a, and actually that thing isn't covered. In fairness, a business person who's doing that's to kind of weigh all those things. I'm a lawyer, I'm always more comfortable the more that I'm gonna get into it. The smaller the deal, the less they can afford, legal services and like you say, people are kind of ready to go. So it's already been a long time and I think people are also afraid that lawyers are gonna raise a lot of issue and argue about things that maybe don't need to be argued about. And I'll be honest with you, I mean, from the point of view of a transactional lawyer, a deals lawyer. Litigation lawyers often look that way to me.

[00:38:43] Like they're looking for stuff to fight about. And in a way they are the more issues you can raise in your litigation, especially if you're the one suing, in a way that better, it gives you bargaining chips if nothing else. Even if they don't pan out absolutely at the end. You can have a little bit of that kind of [00:39:00] thing. Create bargaining chips, raise a little issue that's maybe not as serious as you're making it out to be so you have something to trade the other guy. But Jen, fine. Those tactic tactics, don't work that well. It's not really a clever little sneaky thing. It's more of a big strategic thing and you know what the deal is, and the lawyer and on the other side know what the deal is.

[00:39:21] So the straightforward I think is better. There's plenty of real focus on. There's no need to really invent stuff. But how can you, your , how can you maybe compress that? Cuz a month will feel like a long time. Yeah. The more that you have stuff set up already, one thing you can do is usually have a due diligence checklist, which is what we go into it and we're going through. You could, let's say you get your people's financial due diligence. You don't wanna get the lawyers moon yet, but ask the lawyer, you have a due diligence checklist that you can give me now and I'll go through data room. If there is a data room. Cause sometimes the seller will have a really organized data room and it's [00:40:00] all great.

[00:40:00] It's actually really easy. Maybe there's a lot of stuff, but it's well organized and other times there's like nothing. And in that time you can begin us together. Because what company that could be frustrating for all the parties is, if none of that has been done, goes in at the end and they have to be going through files and, but a lot of other people who charge, a lot less money or don't charge because they're the staff of the seller or the buyer, whatever could have done, earlier, quicker, sooner, I mean, and, at way less expense. So yeah, anything that you can do to get that set up in advance so that you're kind of giving the lawyer a package, definitely could save a lot of time and legal fees. And you might think the lawyer might be, disappointed. Oh, too bad. I'm not gonna make all the money. Actually will be. At least I would be.

[00:40:53] I'd like great, I don't have to do all this other stuff. And they'd worry about if the client is gonna say, Hey, I didn't really need you to, just go [00:41:00] through files and pull stuff out. Do I really, really have to pay for that? Anyone could have done, a lot of people could have done that. I'd much rather have to come to me in a nice, neat package that I can work with and the client's gonna be here, with the result. 

[00:41:16] Ron Skelton: A lot of the sellers I come across, they don't have an attorney yet. Like they have an attorney that maybe set up their LLC and stuff, but he is not an m and a attorney. What's the recommendation that cuz the, my biggest fear is I, a good mergers and acquisition attorney. Working with an attorney that doesn't know mergers and acquisitions is problematic. I'm new in this space, is the reason I'm interviewing everybody is I'm learning and stuff. Right? And the once or twice we got close enough with attorneys to start getting involved. The one thing I, the one, the biggest one I can remember, the attorneys started getting involved, it killed the deal because the attorney that I was working with is really good in this space, know this space.

[00:41:54] Started talking to another guy and like they just, he just said, this guy's a family attorney that set up their LLC. He has [00:42:00] no space in this and he's trying to throw out all the reps and warranty, like all the stuff that's normal in this. It's standard provisions in every contract I've ever done for the 20 years I've been doing it, and he is trying to throw 'em out. This isn't gonna work. He's never gonna sell that business. And how do you, what do you say to the sellers out there about picking their attorney?

[00:42:19] Hans Sperling: Yeah. Yeah. That's a really tough situ situation to be in because, if you're the seller and the buyer comes to you and hey, my attorney and I were talking, guy just doesn't seem to know, like, why should he listen to you? Like, why should he trust you over his lawyer in a way. Especially maybe if it's family lawyer who's done a lot of other sperm, like Ida knows a lot of his personal, private, information. So there's a trust there. I mean, I guess you can try to mention it to him, I doubt that'll work really well. Maybe they'll listen or maybe they've no noticed it themselves and didn't say anything cuz who are they gonna say it to? Either I have to say it to the lawyer or say it to you. [00:43:00] Neither of which is a comfortable conversation. I have seen, situations like that. It's, again, it's one of those situations where you might think, that, oh, I'm the buyer side attorney. This is great. This seller doesn't have an attorney who kind of knows this stuff, so we'll be able to walk all over. They'll give us everything we want, but usually it goes the opposite. Usually it's what you're saying is they get, they know that they have to do something.

[00:43:26] They can see that these provisions have some potential downside for their client. If they don't know that those are standard or they don't know how to tweak that, Kind of lang out exactly what they do. It can really slow things down. I can remember a couple instance, I remember one instance where an attorney had referred something to me. It was a contract negotiation. It wasn't m and a, but it was a contract negotiation. And, I led a provision in the first draft that I prepared that was in a way favorable to the [00:44:00] another side, like we're giving the nights. And this attorney who is a litigator who kind of switched to transactional law, which is a whole nother conversation, but, but that attorney wrote me, why are we giving him that?

[00:44:13] Wish shouldn't giving him anything like, yeah, maybe in litigation do it, but it's not really costing us anything. Okay. We could have held it back as argument, but usually that kind of thing we just give it to him, especially cuz it was a, wasn't a deal. And again, I don't really see a huge benefit in creating issues that aren't that important. Just focus on the ones that exist that are important. Get it done as quickly as you can. Doing a, a good job of course. But, yeah, I guess set out all you could do, talk with your lawyer. Again, if you're the seller side and if that's what's happening and see, if the lawyer can do anything, like I'm thinking if I'm in that situation too, I guess you just don't like to be embarrassed and they especially don't like to be embarrassed in front of their [00:45:00] clients.

[00:45:00] I guess what I would try to do if I were this seller, or sorry, of the buyer side, is maybe try to, start to hint in oral negotiations that, so say something. Well, this is standard provision. I'm sure you've seen it, many times. Or well, I'm sure in the years you've been doing this, you've, seen that's normal. Or something they're starting to get the hint maybe, and hopefully, starting to feel like I better back off here. I'm gonna be made, I'm gonna be exposed. Like my client's gonna say, I don't really know this very well. That's probably the most sensitive touchpoint that I could think of in that kind of situation. 

[00:45:34] Ron Skelton: So this thing that scares me is I am really blunt and straightforward. It wouldn't phase me a bit to call the seller's attorney and go, look, you're playing outside of your game here. I appreciate you. You're a family attorney. You set up LLCs and stuff, but you're hurting your client more than you're helping them. Do you have any friends or do you have any people that you would like, you could reach out to that's been in this space, right? And all you can do is hang up on [00:46:00] me. Right. Because at this point, at that point, you're at the, you're at the stage where is my, is the attorney I acquire as the buyer gonna be able to work with the, at the seller's attorney. When the seller's attorney is, what's the word I'm looking for? It's not incompetent. They're an attorney, but they're in proficient in that space. And they're causing, that's also, I was gonna say they're, go ahead. 

[00:46:21] Hans Sperling: Sorry. 

[00:46:21] Ron Skelton: Go ahead. No, I was gonna say they're causing more problems than they're creating. I mean, they're creating more problems than they're solving.

[00:46:26] Hans Sperling: Solving, yeah. That's also something that if you're the buyer, your lawyer isn't, doesn't do that or suggesting it health. You could ask like, why should I have to confront the lawyer? Why don't you call him and tell him that? Or they might even your lawyer volunteer, to do that. And Yeah, and I way it's fair because, I've had situation, I've been asked by a client to do something and maybe a new client, like someone I haven't worked with before. And on one hand I'd like to take the business, but it's just kind of far enough outside of my, this happened actually recently.[00:47:00] This was actually fairly far outside of what I do, although there was overlap.

[00:47:04] And honestly, I think a lot of lawyers would say, eh, the part that I'm not so experienced at, I'll kind be fine. To me that's an uncomfortable position to be in. And I don't think it, I mean, maybe it could add well for you, but if that lawyer you're talking about doesn't, he does not experienced in that leaves the situation, he's got a client who's lost confidence in him and he's got, the other side's lost confidence in him, him and the lawyer table is lost confidence. It hasn't really done himself for great big favor. One way that you get clients sometimes, is the other guy at the table. So the other side, not in that deal obviously, but if they're impressed with the other side's lawyer, I don't know if I've ever had that happen. Maybe I've certainly heard of other lawyers who have had that happen and, and X deal, that guy comes to you. The next deal, it doesn't involve the same client. There's no conflict of interest, but they come to you and they become a client. 

[00:47:59] Ron Skelton: That's [00:48:00] interesting cause one of the, one of the times I, I had an issue, if I was in real estate before this, if you're real in real estate, long enough, you're gonna need an attorney. You're gonna get sued. Right. And didn't not, there was nothing I did wrong. As a matter of fact, I was actually counters suing somebody for something they did to me. So anyway, I reached out online and said, Hey, I, I'm looking for an attorney. Here's the skills set I'm looking for. And somebody I knew in real estate sent me some somebody.

[00:48:22] And when I contacted the guy, he was absolutely attorney. He was absolutely shocked that, that guy referred him to me and I said, why are you so shocked? And he goes, well, I want a huge case against him. I'm the one, he had to go through bankruptcy two years ago and had to start over, right? Like, yeah, I'm the one that won that. And I was like, well then he is a good friend cuz if you can get past him and like, shut him down and, and the guy anyway, won't go into that story cuz it's a longer story than I have time for. But the point is like, that's a good referral. It's like, this guy tore my attorney apart.

[00:48:53] If you need an attorney, call him, right? That's the kind of guy you want. So I get that. That's the best referral you can get is somebody across the table goes, [00:49:00] man. Went across path with the immigrant in this case. Man, that guy really knew his stuff, really knew how to get this thing done. He was proficient. Got it. A to Z, everything was, amendable. Like if, and say, say it's like a across state kind of transaction. Like if you're ever doing business in Nevada, that's the guy you wanna call. Cuz I, we did one few years ago and he just knew his stuff. So that said, we're gonna run out of time here. What's a, what is the, what states are you licensed in? How do people reach out to you and what's your ideal client? 

[00:49:26] Hans Sperling: License of California. You can reach out to me, hans.sperling@sperlinglawcorp, like corporate corporation.com. Website, sperlinglawcorp.com. Go on LinkedIn. Right now, that's pretty much the only select presence I have. Although I might have some in a few. Those are the best ways to get in touch. Best is email and I check it all the time. 

[00:49:48] Ron Skelton: Okay. 

[00:49:49] Hans Sperling: Ideal client, is a, small, medium size company. Maybe they're doing a purchase, like that position deal. Maybe they're doing something else. They have a contract they need reviewed, negotiated the [00:50:00] business contract. Also, employed law the kind of issues that business people have for myself as deals lawyer. And I've done a very wide range of different kinds of deals. Also, this is something I should mention cause I often forget to mention it.

[00:50:13] Spent seven years in Japan, was doing all international businesses cause it's, I can't do Japanese law and I was there to do the international stuff. So I have a lot of experience with international stuff and that's the kind of thing a few years ago, only bigger companies had, international deals. Now lots of people have them. And it's not just the huge law firms that handle it. Smaller clients need a smaller law firm to help 'em with that idea. That as well. 

[00:50:39] Ron Skelton: Okay, cool. Well, I think we've covered a thing really well. Maybe one of these days I'll bring you back on, we'll just spend an hour talking about doing international deals. Cause I have a pretty decent, not Japan, maybe two guys I know that are in Japan that listen to us on a regular basis. But I have a pretty good Europe and Australia listening base just because I know people on those spaces. International deals are [00:51:00] part of this conversation, so there might be a time where you and I just sat down and we talk about international deals for a bit. I wanna thank you for having you on the show and, let's call that, a show for the day. 

[00:51:10] Hans Sperling: All right, great. Thanks for having me.