#306 - Eric Pacifici - Partner @ SMB Law Group - Expert Insights in SMB M&A
Sep 5, 2023
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Eric Pacifici, trusted deal lawyer with extensive M&A experience, discusses starting a social media-driven law firm, the process of closing on a business, realities of SMB searching, types of businesses and business brokers he works on, what makes a great buyer, installing a new CEO post-acquisition, management buy-outs, holdcos vs. rollups, ChatGPT's impact on the legal profession, and reps, warranties, and insurance in SMBs.
The negotiation of the letter of intent (L.O.I.) is a significant threshold in the business buying process, involving trust, rapport, and commitment.
Financial diligence is crucial for successful acquisitions, requiring analysis of financial statements and expertise in profit and loss statements.
Securing financing from lenders is a complex process, involving preparation of a business plan, personal financial statements, and credit evaluation.
Deep dives
The L.O.I. negotiation and its importance in the buying process
The negotiation of the letter of intent (L.O.I.) is a significant threshold in the business buying process. It involves building trust and rapport with the seller, discussing personal matters, and demonstrating commitment to the acquisition. Terms such as purchase price, percentage of financing, and non-compete agreements are essential elements of the negotiation. The seller's emotional investment in their business adds complexity to the process. However, with effective communication and negotiations, the majority of deals proceed past this stage.
Challenges and off-ramps in financial diligence
Financial diligence is a crucial step after the L.O.I. where the buyer evaluates the accuracy of the seller's financial claims. This involves analyzing financial statements and conducting a quality of earnings (Q.O.E.) review, usually done by a specialized partner. For buyers without financial expertise, diligence becomes more challenging. Overconfidence in financial understanding can lead to difficulties, as the process moves quickly, and potential issues may be missed. Lenders play a role in providing financial guidance, and unsophisticated buyers can also benefit from their expertise. Developing a good understanding of profit and loss statements and working with skilled partners is crucial for successful financial diligence.
Navigating lender requirements and commitments
The next stage involves securing financing from lenders, which includes preparing a business plan, providing personal financial statements, and going through credit evaluation. The buyer may engage with multiple lenders, taking into account the bankability of the business. This process can result in changing terms, renegotiations, or even the realization that securing the required funds may not be possible. Once the lender provides a commitment, a substantial deposit is required as a significant milestone in the buying process. Lenders help navigate the complexities of financial requirements and offer guidance throughout the process.
Final hurdles and successful deal closure
The final hurdle lies in negotiating and finalizing financial terms based on the outcome of the financial diligence. Adjustments to the purchase price or deal structure may be necessary due to discrepancies or unforeseen financial issues discovered. These negotiations can sometimes lead to delays or tense discussions. However, with effective communication and a shared goal of closing the deal, buyers and sellers can usually reach a resolution. Once these issues are addressed, the chances of successfully closing the deal become higher, typically exceeding 80%. However, it is crucial for buyers to take ownership of the process and be well-versed in financial accounting to ensure a smooth and successful acquisition.
Importance of Working Capital in Business Acquisitions
Working capital is a crucial yet often overlooked aspect of business acquisitions. When purchasing a business, buyers must consider the working capital needed to sustain operations and meet financial obligations. This includes inventory, accounts receivable, and cash required to run the business smoothly. Failing to account for working capital can lead to cash shortages and increased costs for the buyer. It is common in M&A deals to negotiate a normalized level of working capital based on the business's ordinary course of operations.
Asset Purchase vs. Stock Purchase and Legal Considerations
Buyers must carefully choose between an asset purchase and a stock purchase when acquiring a business. An asset purchase allows the buyer to acquire the business's assets without assuming historical liabilities, providing more protection. However, there can be challenges when transferring certain assets, such as contracts or licenses. In some cases, a stock purchase might be necessary to avoid contractual restrictions on asset transfers. It is important to consult legal counsel to navigate these complexities and protect the buyer's interests. Additionally, the process leading up to closing involves drafting purchase agreements, promissory notes, and other relevant documents, as well as working with lenders for financing and managing negotiations with sellers' attorneys.
Eric is a trusted deal lawyer with extensive M&A and capital markets experience. Having worked for elite law firms such as Kirkland & Ellis LLP and Gibson, Dunn & Crutcher LLP, Eric has worked on high-stakes transactions for clients such as Amazon.com, Jerry Jones, Banc of America Securities LLC, Palantir and Greenlane Holdings.
On this episode, Eric and Chris discuss:
Starting the SMB Attorney Twitter account and launching the first Social Media-driven law firm
A walkthrough of the process of closing on a business
