#306 - Eric Pacifici - Partner @ SMB Law Group - Expert Insights in SMB M&A

Chris Powers: Eric, welcome to the show today.

Eric Pacifici: Thanks for having me, Chris. Massive fan of the show. I'm a huge fan of yours. So what a fun way to spend a Friday morning. 

Chris Powers: I appreciate it. The same goes for you.

All right. We're going to start the story of you two years ago. You're at a big firm, and we're going to talk about big firms, but you decided to start a Twitter account that changed your life, and today you are running an SMB law, which you said is like the first social media-driven law firm, or you say something like that.

We have to tell this story because I get asked all the time by people like, Hey, should I start an anonymous account? What would it do for me? You have an incredible story. And so I want to tell it. 

Eric Pacifici: It's a wild story. It's one of those, but I don't know how I'd feel about it if it hadn't happened to me.

Some people are vocal opponents of the anonymous account, like Nick Huber. Vocal opponents of many things, particularly the anonymous account, believe you'll get more traction if you are on social media.

And that's true. It went well when I flipped from anonymous to public. People increased their engagement. I think more people were interested, but there's a lot of folks out there, Chris, that can't be anonymous on social media or, sorry, can't be public on social media because of day jobs and whatever else investors, you know how it is.

But yeah, the long story short is I was at Kirkland and Ellis, a significant global transactional law firm, arguably, depending on who you ask, the best corporate law firm on the planet in Dallas was working remotely. I fell in love with entrepreneurship through acquisition, a cool economic trend because of the silver tsunami, or the excellent wealth transfer, which we can discuss.

There are a lot of businesses that need to be sold that need someone to sell them to. And so they must go out to the market to sell them. And many brilliant folks, the Seminal piece book in the space was the Harvard Business Review guide to buying a small business, written in 2017.

And now what you're seeing is a trend of elite MBAs that typically would go to work McKinsey Wall Street that is saying forget that. I will buy an enduringly profitable quote-unquote small business with clients and a brand. It's been around for 20 years in a very dull space, and buy a million dollars in earnings for two and a half to four times, pay the SBA debt off as quickly as possible, and be a debt-free cash-flowing millionaire.

Typically, most of them are 27 when they graduate from these MBA programs by their early thirties. So it's massively popular, but they're just the tip of the spear, right? Economically, there are a ton of people across the country who are looking to buy these businesses. Everybody from the blue-collar man who trimmed trees for 15 years and now wants to buy a tree-trimming business or the business he worked for up to these elite MBAs that are saying, Hey, I'm going to forego going to Goldman Sachs on Wall Street and move to, middle of nowhere, Tennessee to buy a commercial cleaning business.

So it's fascinating, and it all started with social media, and then, I'm rambling here. Still, it culminated in an incredible moment for us at our firm, our quarter Q2, and We didn't exist 12 months ago. In quarter two, we launched this firm to do small business and did 25 transactions for 142 million. It's so awesome, and it all started from social media, so very interesting.

Chris Powers: Okay. There's a lot to unpack there, but you were at K and E Kirkland and Ellis, which, by the way, why are they considered the best? What makes them great? 

Eric Pacifici: Private equity M and A. So they get a lot of at-bats because they do a ton of private equity M and A, and private equity M and A, they're repeat buyers.

And so it drives a ton of fees. And when you drive a ton of revenue, you get good at what you do when you do it repeatedly. And then two, they've been aggressive in growing that firm, and they've changed a lot of things in big law. We can talk about big law; for a long time, the large elite, big law firms like Cravath, like the most storied firms in the world, had these very honorable and noble systems of, each year lockstep you make.

A certain amount more and over time, you're going to do fantastic, and everybody played by the rules. And then, about a half-decade ago, Kirkland changed that among other firms, but primarily Kirkland said, No, we're just going to pay boatloads of money for the best lawyers and finally broke Cravath even after two centuries of lockstep compensation.

So very interesting and evolving. Corporate, but Kirkland's kind of the, everybody hates, loves to hate Kirkland. 

Chris Powers: I've heard great things, and I've heard that they're tough. That's what makes them. That's why you pay them the big bucks. I don't want to be on the other side of them, or if I want them to represent me one day.

We'll see; maybe that'll happen. All right. So you get 15,000 followers on Twitter. You started this account, answering SMB questions and providing great content and education to folks. And then you were met with a crossroads, which is what will I do with this?

And how did you decide what to do? 

Eric Pacifici: For me, it was easy, right? Because you're always looking in your career to find that thing that you're good at, a thing that you like, and the thing that you're passionate about, and it was right there in the middle of those things, right?

I had done corporate transactional work like small business M and A's, not its niche, and you need to know what you're doing in M and A, but it's very elementary comparatively. I love the client. I'm so passionate about the group of business buyers; most are the same person.

They're a 25 to 45-year-old guy or gal, a couple of kids like me, a couple hundred thousand bucks saved up from corporate. They're trying to do something different with their life. That's a group of people that, like, I'll stay up till three in the morning talking to them about their transaction for free. TI is very passionate about them as individuals.

But the real reason is that so much work was coming to us, right? Like person after person, I had networked because I was trying to leave the law and buy a business. And then person after person started coming to me, saying, Hey, I need a good lawyer for my two, four, six, eight, 10 million deal.

They need to know M&A and be entrepreneurial and reasonably priced. And I didn't know that essentially doesn't exist. Some folks will take those deals, but they're one of two things. They're either mid-market lawyers who want to do fifty hundred billion dollar deals that aren't built for something different, so they make a big mess out of the small business transaction.

Or they're the main street guy that's I'll do anything that walks through the door. I won't tell you I don't know what I'm doing, and you'll get your ass kicked. If you're selling a business, I'll do the deal. And so that's what existed in the marketplace.

And once we figured that out, we said, oh shit, these are people we care about deeply. We're trying to refer them to good lawyers, and it doesn't exist. Let's consider going and building it. And it was cool because we had the benefit of letting the community take the wheel and say, Hey, here's what we want from a lawyer.

Here's how we want you to price. Here's what we want to pay. Here's what we want you to do. And we just took that playbook and went and implemented it, and it's been fun. 

Chris Powers: That's awesome. Okay. The silver tsunami is coming. It would be interesting to get your take on it. What if we call them the professional MBA buyers and then your blue-collar school of hard knocks learned lessons from the streets?

How do they approach buying businesses similarly but also differently? 

Eric Pacifici: Yeah, that's a good question. The elite MBA has had a lot of Excellent textbook learning, right? And so they search for a very long time, right? There are two different themes in business buying.

There's a traditional search, which is your actual elite MBA. And a group of investors sponsors these people. And the economics are vastly different than the self-funded searcher who goes off and buys a business on their own. And in traditional search, there are a lot of statistics around the success and the metrics and the timing of those individuals.

It takes the elite MBA, and their economics are different. So that's part of the equation. You've got a lot of people on your cap table; the investment, the business has to be more significant. You're looking for something different than taking your capital and buying a business, but they take much longer.

There's a lot of analysis and paralysis. You've seen things in a casebook, and you're trying to go out then and apply that in the real world. And it only sometimes, as that's different from how it goes. The blue-collar got our clients coming to us, saying, Hey man, I've been trimming trees for 15 years.

Now I'm buying a tree trimming business like typically, they're buying the business that they work for. The lenders love those guys and gals. They love the people with the in-the-trenches industry experience Because you're just handing off one enduringly profitable business to the same type of guy or gal. They know how to show up and talk to the crew on day one because that's the biggest thing, right? A business is a Group of individuals in most cases, particularly service businesses, and you look at it on paper in the marketing department, the sales department, whatever the operations, and you think about the nuts and bolts of that's just a composite of individuals.

Suppose you have been one of those individuals within the business. You're more likely to be an excellent fit to lead that business into the next generation than somebody from the outside who knows much about business. Now, that being said, there's a concept in business about being promoted to the level with which you eventually reach incompetence.

And I worry about some of those folks who have been in the business for a long time. And now we're like, okay, because I've been inside the business, I'm necessarily qualified. That's not always the case, so it's case by case, but I had a great interview recently with a guy named John Mahoney and John's fascinating, great interview on our podcast called Monday and Millionaires.

Sorry for the shameless self-plug here, but it's an excellent interview. You're interested in business because John is a Wharton MBA who was in the Marine Corps as an officer for a decade. I asked him which skill sets were more beneficial to him in the first six months of running his commercial HVAC business.

The McKinsey spreadsheets or the Leading people in the Middle East, and so he's got an excellent answer for that. And so I'll defer to those guys. 

Chris Powers: What's the answer?

Eric Pacifici: The answer is it depends, right? There are circumstances with which you've got to know how to lead a business, right?

You've got to be able to prepare a strategy and think about how you grow a business. Cause often the thesis is like, yeah, this is a high-quality business with 800,000 in earnings. But now I will put three or 4 million of SBA debt on it. To hit some of my targets and do what I want, I have to grow it.

So you've got to have that strategic component. But you also have to show up on day one, Chris, stand in the room with These guys, and I'll say guys, because a lot of these businesses are adamant, our clientele, they go out and buy roofing, HVAC, tree trimming, commercial cleaning it's a lot of guys, it's a lot of tough, blue-collar guys.

Josh Schultz, if you know Josh, he's excellent. he runs Cane Cast, Rig Zeller, and Josh posted a picture of him standing up in a foundry in South Carolina in front of a group of gritty, blue-collar guys, and I retweeted. If you buy a business, you have to be prepared on day one to go in that room, stand in front of these people, and communicate to them in a way that will make them believe.

That at least you won't blow the place up, right? We'll give this guy a chance. You're not going to blow him away, right? These are a group of guys that are, hell yeah, Chris is the guy, man. Like we're going to the moon, No, they're going to go. Do I need to go today?

Because you'll do it on a Monday, they need the weekend to consider it. Do I need to actively hit the market this week, follow up on this, or find another gig to keep feeding my family? So you've got to have that skill set, too. And, if you've only ever worked at Goldman Sachs and gone to HBS, you need it. 

Chris Powers: You probably know Rich Jordan. 

Eric Pacifici: Yeah. 

Chris Powers: I did an episode with Rich. It's one of the best episodes. What a just world-class guy. But I'm like, what happened the minute you showed up to the property, and it's not what you think. The textbook would say something else. We went out to the parking lot.

I will get this like 70% right, but it went to the parking lot. They sat on the back of where they pulled down the hood of a truck, and they all sat there and just talked out what had just happened; it was this discussion.

And then those first few days were just a lot of, Hey, like I'm not here to change the world. I'm in this with you. It was not this. Hey, I'm your new boss. And everybody gets back to work. It's building trust, and sometimes that happens in, like, the parking lot on the hood of a truck.

It doesn't happen in a big, fancy corporate boardroom.

Eric Pacifici: Yeah, Rich is a great guy. If you're considering buying a business, talk to Rich, the Sam Leslie's, the red sellers, the Josh Schultz, and many good female buyers.

But those are the ones that come to mind that have had to stand in those rooms and have those tough. Conversations. 

Chris Powers: Okay. So then you could also describe just like the dichotomy of it seems to me. Again, this is a Twitter take. Warren Buffett created this whole generation of people who think you can buy businesses and own them and Play gin most of the day, and they're just going to run each other, and everything will be good. 

The rise of the HoldCo. So you find these people that may have never even run a business, and hey who keep buying businesses, but they don't want to run those either versus, Hey, I'm going to buy this and run it.

When buying a business, can you explain how both actors behave when looking for businesses to buy? Maybe the person who knows they will be in it wants to own it. 

Eric Pacifici: Yeah, it's a good philosophical question, right? And it's something that, I don't know if Mike Bakkin, but something that Mike and I have talked about a lot because when Mike started Benchmark Group, he bought a pretty small business, like a 300 EBITDA business, like the type of business that a lot of the typical s and b Twitter folklore would say, don't buy, you're buying a job.

But the reality is you're buying a business in an industry. If you're coming from the outside, you need to know how to run that business, particularly if you're going to lead a group of people, but that being said, I think that the traditional wisdom is probably the better wisdom, which is by a substantial business that has a layer of management.

So you have some help. You retain some knowledge because often, what will happen is you buy like a 500 to 700 K. Even our business and the owner are going to transition out. He doesn't have anybody yet. He's been keeping that thing afloat, right? So you'll negotiate transitional services with him for the SBA, allowing them to stay for 12 months.

We had the prospect of a rollover with SBA changes, but that's going away because it will require a personal guarantee. So suffice it to say, you've got the best-case scenario: you buy a business that doesn't have existing management.

You've got six to 12 months with that person and varying levels of sincerity in their commitment to the business because they're on their way out. There are ways to put some teeth to it, but much of the institutional knowledge will overwhelm you.

If you can buy a business with a manager in place or somebody with long-term incentives that have been part of the business's history, that's great. And you're probably getting a better business and a better investment, a better return by buying a more significant business, but you still have the notion of passive income.

I wouldn't like it. Nothing in life is passive. The real estate's about as close as possible to passivity, but you must pay for it. If you look at the returns on a piece of real estate, comparable purchase price, piece of real estate cap rates at three, four, whatever they are.

I don't even know what a cap rate is, Chris, but I'm making it up as we go. But, at a low cap rate, like you, you're looking at a 30% IRR return on the exact purchase price with a business, right? But it reflects the level of words it will take and the risk of things.

Chris Powers: So what do you tell the people? Because I'm trying to think of the best way. I'm listening to people think. I'm about to buy this business and do nothing like you've seen this happen enough. How viable is that model of buying small businesses and staying as detached as possible?

As you've seen this play out enough, what eventually happens, as I've talked to many of these folks, is that they think they will do much less and quickly find out a year into it. They're way more involved. It might be called a HoldCo, but they're damn involved in these businesses.

It's like running many businesses, which is what it sounds like to me. 

Eric Pacifici: Totally. You're reading a lot of stuff on social media, and a lot of the business stuff on social media is just total content engagement. In my course, I will teach you how to prepare and create a commercial cleaning business, which will be great.

You're going to use Jabra, and it will be so easy. You're going to buy a business, and all you're going to do is take the fax machine and put up a website, and you're going to be good. That's not the case. Like you're going to be actively involved.

If you want a good business, right? It's plausible to buy. Somebody bought a roofing company within about six months and could scale down to 10 to 15 hours a week in that business because of management. But the buck stops with you, and you're just not going to find it. The biggest fallacy is that I will go out and find an operator.

That's going to care about the business to the same level that I'm going to care about the business. That will want to go, and I've got a delivery that didn't show up. That's two hours away. It's Friday at 5 p.m. The customer's calling crying because it's for the daughter's wedding.

And who's getting in the car and driving that down to them? It's not your operator, and it's you. You're in those businesses. There's a point at which you can scale an organization, have a trustworthy holding company, and have different investment terms. If you don't want to hold a hundred percent of these businesses, right?

You could take minority interests and have that. One of the things that's interesting about business buying right now, Chris, is that there's this entire generation of really incredible jockeys that, instead of wanting to do typical elite jockey stuff. They want to run a commercial cleaning business in the middle of nowhere.

And I'd instead give that man my money and have them run that business with me supporting them than run that business myself, me personally. So, those opportunities exist. If you want something close to being a limited partner versus being the operator, the general partner in your world.

Chris Powers: How do you describe the Silver Tsunami? What does that mean? 

Eric Pacifici: Oh, I love it. No, it's such an interesting. First of all, I have a trademark on that. So be careful. I don't want to have my lawyers reach out to you. 

Chris Powers: Okay. 

Eric Pacifici: I'm kidding. I'm not kidding about owning the trademark, 

Chris Powers: But no kidding. 

Eric Pacifici: The whole thing is just this shit to have some fun. But the nuts and bolts of it is that The excellent wealth transfer is going on. Seventy trillion of baby boomer assets have to be transitioned in the next however many years to their children, the Xers, and the millennials. And the idea is that some portion of that, and who knows how much, and the value of things change on any given day.

But they've said somewhere in the neighborhood of seven to 10 trillion of it is small businesses that have to be sold. Now we have this fight all the time, right? It's happening. Unquestionably, this is a period with which there's more supply or soon to be more supply than ever before.

Now, the quality of that supply is the debate. A lot of these businesses should be sold elsewhere. They should be shut down. Because a lot of them we just talked about our glorified jobs. But that's missing the forest from the trees, right? My argument is yes, many of these businesses are not necessarily saleable, but that's a lot of economic activity and customers and work that needs to be done.

That's going to go somewhere. You may want to avoid buying a business in that space, but young, dynamic people should look at some of these aging and fragmented industries and ask, How can I get in now? Because in the coming years, many of these competitors will either shut down or, if I build a platform, I'll have an opportunity to roll up several of them.

That's my take on the silver tsunami. 

Chris Powers: Okay. What is the fastball size of the businesses you all work with? Because it's essential. You're not selling these buttoned-up a hundred million dollars EBITDA huge management team.

I assume you are, but describe the general types of businesses you are all working on now. 

Eric Pacifici: 2 to 15 million enterprise-value businesses are the sweet spot, right? There's a lot of interest below that economically, and buying a business like that gets challenging.

You're buying a job. A lot of folks want to do it. And I don't discourage anybody from buying a job, but two to 15 million enterprise value is a meaningful organization, right? You've got employees, and it's hard to put it in a box because they'll vary so much. Some of these businesses are digital, and they still need employees. Some are heavy service businesses with many employees, but that's two to 15 million.

Chris Powers: Okay. And of those two to fifth on that size, what's the percentage of sellers you come across saying these people have done the things they need to do to prepare to sell a business? Because I meet a lot of these people and think. Look, they're just like heads down year after year of building a business.

They need to learn all the fancy terms and jargon. They're just trying to put food on the table, treat their customers well, and move on. So I'll start this conversation with how many walk into your door, and you're like, man. They're ready to sell. 

Eric Pacifici: So we're rarely on the sell side. 90% of our clients are buy side, small business buyers.

So I only have a little visibility to that, except we do some sell-side work, but it's the business broker leading the spear on that. And there are two different types. There's a big push for finding the off-market business. And I caution buyers, particularly first-time buyers, heavily against that because of the deals we see die.

A high percentage of those are off-market proprietary searches. I found you through whatever means, and now you've decided to sell to me. Buying from a business broker as much as business brokers is horrible, and the industry needs to be revitalized. Sorry, Clint.

They serve a vital role, right? A business broker recently told me that by the time a business sells, a broker will have put somewhere in the neighborhood of 700 hours into the transaction. And a lot of that is getting that business ready to be sold. If it's a good broker and if it's a good business. But even then, like, we run into it all the time where it's like, Hey, we'd love to conclude financial diligence for this business, but like the seller having a hip replacement in the box of papers is in the attic and she doesn't want to get them.

She'll get them in 3 weeks. We're waiting in every deal. So you're buying a small business and the idea that they'll have audited financials or any digital system. It's a process. 

Chris Powers: What shocks the elite MBA is that situation you just described with the documents in the attic. That lady's business is making 5 million of free cash flow a year.

Eric Pacifici: Yeah. It's a great opportunity but also part of the thesis. The buyer goes, I've got an opportunity to get in there. You don't have a website. You're not marketing. You have no CRM. You're sending trucks down the road that you're not tracking.

If there's no efficiency in your process, you're making two and a half million dollars. And while this is how you're making a million and a half dollars in earnings, I can quickly come in. Hopefully, assuming I can do the blue-collar stuff and communicate with the workers, I can implement some systems to bring tech to the table, including cat bags.

We can scale this thing. So workers are like, now I'm going to build a hold, go Chris. 

Chris Powers: All right. I'm not letting you off the hook. Why are business brokers terrible? And what is your idea for how to make that industry better? 

Eric Pacifici: So I am trying to figure out how to improve it.

It's not in my wheelhouse. I love to tease the brokers. They say the same things about us, and they're not wrong. Small business attorneys are primarily terrible and stand in the way of getting these deals done, and they're terrible because they have a hard job. They're down market.

So they're not. They're south of investment bankers. They're dealing with a different level of sophistication with clients. And then they get blown up. You go to market with a decent business and get 600 emails; everybody wants to talk to you, and you can only conceivably talk to some of those people.

And over time, the good ones are like, I know when someone's wasting my time before I even bother talking to them, and some of them take it too far, and they're rude, and they're whatever short-sighted. And so they have a terrible reputation. But it's an enormously tricky industry. I know Mr. Huber is trying to get into that space, and Godspeed to him.

Chris Powers: And what's the difference between an investment banker and a business? Broker's size of deal? 

Eric Pacifici: Size of deal. Yeah. Sophistication of the institution. They're not going to play around, and anything like the historical or the customer cutoff that I hear is like a 2 million EBITDA business that would sell the private equity.

And if it sells the private equity, you can invest a bit, and they charge a pretty hefty premium. I don't know their scale, but 10% of the sale price is in the neighborhood. So pretty lucrative. 

Chris Powers: You must have seen one good business broker before.

How would you describe somebody great at what they do in that space? 

Eric Pacifici: Yeah, several niche business brokers are good. And we get some, and I get surprised from time to time. In most deals, it feels like the broker puts the sign in the dirt in front of the house, much like a real estate deal.

And then they go away. And then miraculously, they show up at the three-yard line. When you're arguing about whether or not it's this or that, and they throw something out that makes no sense. It needs to be more constructive and advance the conversation at all. And we all have to go. Anyways, redirect back.

That's the typical business broker experience. But from time to time, I had one a few months ago for a business in California where I had heard nothing. And then the buyer was like, we're closing in a few days. And I was like, no, you're not. He was like, no, we are like Live Oak. Everything's lined up.

The broker's been coordinating everything and was incredibly organized and on top of the details. And those are typically there,e are some for the accounting space and different niche spaces that have their own and then work with the lender in a lockstep way—worked with a perfect one here in Orlando recently as well.

So they, they exist. It's an industry of having "haves" and "have nots." So there are a lot of bad business brokers because they need to do more work, much like real estate. 

Chris Powers: Since you've represented a bunch of buyers, if, let's say, you were a seller, what would you require of a business broker if you were going to hire them?

That's the way I'm going to ask the question. 

Eric Pacifici: The trick is, if I were to take my business for sale by owner and put it on biz by sale, I'd get an enormous amount of inquiries, right? So, how do you bridge the gap? The distribution will be the easy part. 

It's managing that relationship because if I'm a seller, I'm running a business, right? I'm busy. Like most of these guys are in the weeds, they're not passive. I'm running this business, and I need somebody who will grease the wheels, get the deal done, and deal with vetting buyers, right?

Because there are a lot of buyers, some better than others, getting a good buyer in front of me would be the most significant thing. 

Chris Powers: All right. Let's talk about the buy side. Let's move over to the buy side. First off, again, You do work with a lot of buyers. Is there something that you can tell almost the minute you meet somebody whether or not they're going to be a good buyer?

Eric Pacifici: Not really. No, I try not to prejudge. Before law school, I spent some time in sales, so I'm careful about judging people until you see what they can do, right? And most of our clients are also bringing us LOIs, right? We typically get engaged once they're under LOI or they're approaching LOI, so they're serious, right?

They've done the legwork. The best buyers, in my opinion, are the ones with experience and deals under their belts, but the ones that have had a failure, that has had a deal fall out, that have had that concrete experience to see the process, but have had some busted deal fees, they come back imposing.

But otherwise, beyond that, the business buying process is a long winding road with many off-ramps, and we take a lot of crap on social media about you encouraging people to buy businesses that shouldn't be buying businesses. The good news is the people who shouldn't buy businesses never will because it's a long, winding road with many off-ramps.

And the wrong people will get off the bus. Most of the wrong people will get off the bus because it takes grit. You're managing financial diligence. So you've got to understand the business from a financial perspective. Make sure that what's being asserted to you is correct. You're managing the business diligence, so you're trying to understand the business model, the workings of things, and how you will improve it.

What's your business plan for it? The legal elements of things, you're running the lawyer in the negotiation process, and you're making legal decisions there. You're convincing a lender to give you millions of dollars. You're sometimes convincing investors to give you millions of dollars.

And so it's a long, complicated process that takes grit, and often you're working a job too, and you've got a family. You got kids and whatever else, and like dad's wanting to move us from the suburbs of Virginia to Breckenridge, Colorado to run a fencing business, like what the hell? Like we got to school, it takes grit to get through it.

And so my thesis is that a person that can pull that off, Chris. It's good. It's going to be successful in business. It's a gritty, determined, confident human being who will be as successful as anybody else if they can do all that and get to the end of the process. Who am I to tell them they need to be qualified to run or buy a business?

Chris Powers: There are no shortcuts to buying a business for the most part. That's a great framework. We'll call this part of the conversation then off-ramps. Let's go from the start when I'm going to pretend I'm buying a business, and I start with a yellow eye, and then let's talk about how hard it is to get to closing.

Brent Beshore calls it the knife fight, and you mentioned this off-ramp. So, how often will I get an opportunity to kill this deal by the time we close? Let's start with LOI. What are things? Is it LOI or IOI?

Eric Pacifici: Yeah. So, for the audience's benefit, IOI indicates interest.

LOI stands for a letter of intent. It's semantics, but the way it works in practice, the indication of interest is usually very preliminary. Here's what I'll pay. Here are some very rudimentary things about the acquisition. The letter of intent is here's the purchase price.

Here's what it's going to be composed of. Transition services, due diligence, and exclusivity are essential parts of it, where you agree as the seller to take the business off the market for some time so that the buyer can exclusively pursue it, which is essential for the buyer because If you don't have that, then, you're, you got to go, pay money with the bank.

You have to pay money to the lawyer. You have to pay money with the financial diligence partner. You can only do all that if you know the business is still being shopped. So, it's an essential part of the letter of intent, but more broadly, it's scarce that an indication of interest is used in small business.

Typically, we go to the LOI, but the LOI is not just, Hey, Chris, I think you've got a great business. I want to buy Fort Capitol, so here's a piece of paper. And what I would pay, you and I have spent, this is your baby. You've built Fort for several years. It's next to your wife, the love of your life, and you want to ensure that the person acquiring it is the right person to take the business, or you may not even sell it.

We've spent a lot of time together. You've met with me, and you've met with private equity buyers. I am waiting in the lobby while the private equity people are in the office, showing you spreadsheets and talking about how this and that have been a whole process. And then I get in there, Chris and I'm just some guy that has never run a real estate, private equity firm before.

And I got to convince you to sell me your baby, right? So we're looking at pictures of my kids like you got a four and a six-year-old. I've got a two and a four-year-old. We're like talking about our kids. We're talking about business. We're talking about life, and so that's challenging.

And the funny part about the LOI negotiation is in big law, you're doing a 1,500,000 deal, whatever. You'll go back and forth on that for weeks. It's a very legal intensive and red line in small business. You finally have that conversation. 

Chris, I like Eric. I want him to be the guy. Let's get the deal done, but I'm going to Cabo. I'll be back on Monday. So tell him to change these three things, and then maybe we have a deal or a deal. So then the broker returns and says, " Hey, we need to change this and this. And then Chris will be back from Cabo on Monday, and you may have a deal.

And so then we go under LOI, right? And that is a dance. And that is the most significant threshold in the business buying process. Can you get that business under LOI? The second biggest is now you're under LOI, and feel free to I'll pause there if you want to.

Chris Powers: Let me ask you one thing before moving on.

That's because if this is the most significant threshold, are specific terms in an LOI that tend to leave price out of it? Let's assume the price is reasonable. What are the deal killers in an LOI that people tend to have the most trouble getting on the same page with?

Eric Pacifici: I don't think that there's a singular deal killer necessarily.

The purchase price is everything. What's the composition of the purchase price? How much is going to be paid in cash at closing? How much is in the form of a seller? No, because in almost every deal in a small business, you will ask the seller to finance 10% of the proceeds at the sale. And when they do that, they're taking risks alongside you.

So, do they believe in you enough to do that? Non-compete comes into play. How long do you want me to sit out? If you're 70, you're retiring—no big deal. But if you're 45, you sell ice cream and frozen yogurt businesses. I need to find out the slicing and dicing of that.

How long do you want me to stick around? I'm 70 years old. I got a cruise around the world planned. Do you want me to be in the business for 12 months? Or can I give you six weeks, and then I'm out of here? Those types of tricky-tack things, but really, it's the purchase price. 

Chris Powers: Dude, you have said so many things that are so verbatim I'm going to Cabo.

I'll see you on Monday. I can't tell you how often I've heard of a buddy selling a significant asset or something. And it's the seller's on vacation for two weeks. And you would think, does the seller even care about selling? It's like they do, but they go on vacation and talk to you when they return. That's interesting. 

Okay. We're under LOI. Now, what's the next set of off-ramps? I'm going to be gifted. 

Eric Pacifici: Yeah.  So now you're under a loan. Now, you have to convince a lender, and hopefully, you've been working with that lender during the LOI process. But, often, you won't have been. You can take the LOI you go to the lender. Hey, will you give me 5 million bucks to do this deal?

And they take you through credit. There's a long process with them. They ask for a business plan. They ask for a bunch of stuff, personal financial statements. You're talking to a bunch of lenders. When you're trying to figure out if the business is bankable, many of these small businesses need help.

If it's a construction business, it's one example and has a lot of project-based work. Some lenders won't take that on. And you find out after entering into LOI that you need more money to buy the business. And that happens. It's rare, but it does happen.

There's also a more protracted process with the lender where you've worked with the business development officer and the BDO upfront. Dave runs their models and whatever their underwriting standards. Yes, this looks good, But now we are six weeks later, and it's got to go through. The Credit committee comes back and says Yeah, we like the deal, but actually, the debt service coverage ratio is because of this ad back. You have to go back and renegotiate. You'll have to put more in the form of a note, or that note needs to be on standby So it gets paid back when we get paid back. Whatever, they monkey with the deal, So that's tough. And then once you get to the commitment from them, the last for deposit of whatever, 10,000 bucks or somewhere in that neighborhood, that's a big hurdle.

The other big hurdle, and probably the second biggest next to the LOI, is the financial diligence. Now you're under LOI, you understand the initial representations around the business, but you've got to open the hood. And you've got to do all the exciting things accountants do to figure out, is it true that they make 850K in earnings?

Often, and I highly recommend that people work with a quality earnings partner who's an experienced financial diligence partner who can help you review those financials because it's complicated and moves fast. They're good at finding things. But in almost every deal, Chris, and it's not an exaggeration when I say almost every deal, you'll see a softening against the marketed EBITDA.

Either there's something with an ad back or, the biggest, Fiori had a fantastic post recently about how brokers will overstate values, and he laid out 10 of the most common things. They don't factor in; they own the real estate or have a lease, but it's not a market rent.

And so they're paying under market. And so there hasn't been a proper adjustment to earnings for adjusting that, rent, etc. You almost always get to the financial D process and have to go back to them and say, Hey, you need clarification. You said it was 850, and it's 750 or seven. The market price for this is three times earnings.

So instead of paying you 2.4, I'm, or whatever, it's, forgive my math, instead of paying you x, I am going to pay you x minus whatever to compensate for the earnings if you survive that. The vast majority of the time you do, you do because the sellers, at that point, are emotionally invested, right?

It's the first time they've ever sold a business, often. So, the LOI is a significant psychological threshold. They've had those. You and I've had those conversations about our kids. You're like, Eric's going to lead for now. We have to figure it out more often, and we can get past that. And if you do, then you've got an 80% chance of getting to closing.

I'll pause there because that's the biggest hurdle.

Chris Powers: Okay. Yeah. I want to stay on financial diligence for a second. So again, I'm just generalizing here, so this could not be true. It could be a part of the transaction when I think of a professional MBA.

They're going to be a little more, and this is what they've studied up on this, the financial side. When I think of a blue-collar guy who's just good at the trade, and he's handed a bunch of documents and saying, Hope you can figure out if I'm making eight fifty. It gets fuzzier.

I'd be more in that camp than the MBA camp myself. So you said the Q of E, so that's hiring a firm that you'll pay, what, 20, 30, 40,000 bucks to go through every document and confirm what earnings are?

Eric Pacifici: It depends. The price is somewhere in the neighborhood of 10 to 30k for an SMB deal.

And some of these guys will do Q of E lights, but that's generally right. 

Chris Powers: And so if we're talking about the blue-collar guy, it's not a financial wizard, doesn't know all the terms, probably doesn't even know what EBITDA means. They're just like, look, I know how to trim trees. I want to make more money.

I want to do this thing. I'm simplifying it too much. Besides the Q of E, and maybe you can speak from your role, who else is helping them get through this phase? This phase has lots of jargon; my buddy calls it jargon monoxide.

What are you telling people so that they make sure they're getting the answer, and or the answer is, yeah, you get a Q of E and listen to that? 

Eric Pacifici: Understanding how P & L works is good. And the SBA lender, by the way, is accustomed to working with unsophisticated and underrepresented individuals.

And so they're good at forcing you to create P & Ls, business models. They're pushing you. You'll know by the end if you don't know at the beginning. About the financial workings of this business, the people who get in the most trouble, Chris, and this is the exciting part, are the more sophisticated people because they tend to be overconfident, right?

I've been on Wall Street. I've been in investment banking. Like I can look at small businesses. P& L and do a proof of cash myself, and I'll be fine. The problem is that everything I mentioned before is moving super fast. And you're trying to prove cash while managing legal, working with the bank, hanging out with your kids, and maybe working a job. It's too much. And so they get it over their heads. And there are things I've had deals where if they would have had For really sophisticated people. Sophisticated, intelligent people, if they had done a Q of E three months earlier, their deal would have closed or died three months prior, and we would have all moved on.

But instead, we're having a knockdown, drag-out fight in the three-yard line about whether or not checks cash checks clear when they go out or they clear when they are cashed. I recommend always bringing in that brilliant second set of eyes, but it's your deal. Like you're buying this business, Chris.

And like the moment I close in Fort, which, by the way, I'm going to send you an LOI. The moment I closed on Fort, it was like Nobody was coming to save me, man. Like you did, my quality of earnings. Like you're not coming to save me. My lawyer's not coming to save me. I've negotiated some contractual solid protections, and I've got indemnity and cover-off specific reps and things like that.

But Nobody's coming to save me. So you have to take ownership of it as well. You should only buy a business if you know the basics of financial accounting. It would help if you were working in a business first. We're starting a business even with less risk before you take a couple of million dollars in personally guaranteed debt.

Chris Powers: Okay. And one question, and then we'll move to the next set of off-ramps, but is working capital? In many of these conversations, that's always the lightning rod. Is that your experience with adjustments for working capital? 

Eric Pacifici: It's an important thing that's often forgotten. It's the most essential thing that's often forgotten, rig. You buy a business of many things for the audience's benefit. The goal of the business is to produce cash. And then you're essentially the cash produced in the past. And you're saying it's because it made A million bucks last year. I will pay two to four million bucks to buy that cash.

One of the components, so you're buying all the stuff that creates the cash you're buying the machine, right? The machine only operates if it has the working capital, inventory accounts receivables, and actual cash to run the business. The concern is you buy a business, And then you're two weeks after closing, you have to make payroll, but you don't have any cash to make payroll, right?

So buyers must understand that's just another asset of the business that was used to create that cash, much like any machine or anything else if it's not there. That means you'll have to go out and replace it on day one. If you have to go out and replace it on day one, that means your purchase price has indirectly been increased.

So, it's customary in M& A to acquire working capital. We say the normalized level of working capital subject to seasonality, whatever else, meaning how much cash and AR and inventory, whatever does this business need to run in the ordinary course? Now, not how much did it have, not how much does it need now because I've got this debt to service, but how much did it need in the ordinary course?

And then you negotiate that for that. The problem is you're in SMP land. You're down market. You've got very unsophisticated sellers. They don't give a shit, Chris, about your need for cash. And they go, Hey, that sounds nice, Chris, but it sounds like a you problem. When I started this business, I had to bring my capital.

It would help if you had to bring your own as well. So you're back to that LOI negotiation. Do you complicate the situation and say, Hey, I want working capital in the steel, not knowing how much a normalized level of working capital even is? Or do you simplify it and say either I'm just going to adjust the purchase price for the working capital, or I'll get debt for my SBA lender to support whatever it is? Where it gets complicated in the lightning rod issue, the problem is that some businesses are more working capital intensive than others to buy a pool installation business that needs Millions of working capital to build pools. That's a massive problem in your acquisition.

So, something that you've got to be aware of as a buyer that only a few folks are.

Chris Powers: Okay. At this point in our journey, have we decided whether this is an asset or stock purchase? And as an attorney, do you have opinions on I'll leave it open? Do you have opinions on what they should be or shouldn't be?

Eric Pacifici: For our friends on YouTube, I'm drinking water. I just came from the gym like a frat guy here.

Chris Powers: You look great. Did you get your creatinine this morning?

Eric Pacifici: I did. I was pumping iron and did my Cross Fit. It's good. It's a good day. It's Friday. 

So you decide early on asset purchase versus stock deal. You almost always want to go asset purchase, Chris, because when you buy assets of a business, you don't acquire any of the historical liabilities. I'm buying the machine and going to buy the stuff, right? So anything you did with the stuff before I bought it, it's your problem.

Anything after the fact is my problem. Sometimes that doesn't work. Because the stuff in the machine, like contracts, licenses, and assets, won't be transferable as assets. And so to circumvent that, like a good example, we had a physical therapy clinic. A few months ago, it had a bunch of contracts with insurance payors.

You go in as a physical therapy patient, and you're referred to this clinic because you have Blue Cross Blue Shield, right? The contract between the clinic and Blue Cross Blue Shield is a vital asset of the business because these clients need to come through the door without that.

The problem is the contract with Blue Cross Blue Shield, which is hypothetical, but the contract with the insurance payor says. If there's a change of control, an assignment of the assets, or an assignment of that contract, you must come to me for permission. I don't want to do that.

YOU WON'T GO TO THEM BEFOREHAND because I don't want to upset the apple cart with Blue Cross Blue Shield and the seller's going. You can buy it and see what happens. I don't care about that. You're going to wait to do it before we close and risk. Upsetting the apple cart with that contract for me, you walk away, and I've lost Blue Cross Blue Shield.

I haven't sold my business, right? So instead of buying the assets and triggering that, you'll go, buy the whole business, and buy the stock, which under the contract may be permissible. So there are times that you've got to get cute. But the problem is if you do that. Now you've bought the business and all of the historical stuff that the business has done.

And so you have to solve for, hey, Chris is running for capital as he ran, he was drunk in 2014 and ran some lady down with this car. It is getting too specific. 

Chris Powers: Yeah, you've been digging through the news or something. 

Eric Pacifici: So I've been googling you, Chris. And now, he was on for a capital time when he did it.

Here we are, and she will sue me because Chris did it. That's a dumb example, but you guys get the point. You have to slice and dice a little bit with that.

Chris Powers: All right. So we're through financial diligence. You have come to me and said your earnings actually, we found 500,000 more in earnings than you represented.

I'm going to pay you more. And I said, all right, deal. Now, what's the next set of on-ramps? 

Eric Pacifici: Yeah, for sure. 

Chris Powers: That's how it always happens, right? You find more earnings.

Eric Pacifici: Yeah, for sure. Ensure that the QA report only goes to the client if it has to, so now you're through quality verdicts and financial diligence, you go, okay, the business is what it was represented as being financial.

It's producing as much cash as it suggested it did. I've got the lender lined up. They've committed to give me the money. I've got my investors in line. They're committed to giving me the money. Let's buy the business. So now the lawyer steps in, and we draft the purchase agreement, promissory notes, and various documents.

We help out with the capital raise. If you have investors, there's securities regulation stuff that has to happen. Subscription agreements, investor questionnaires, and most capital raised in small businesses are Rag D and Form D filings with the SEC. And then, we're drafting the operating agreement for the acquisition vehicle.

We are working with your lender because SBA debt is good, Chris. It's a fantastic product. Acquisition SBA debt is the 7a product. It requires 10% down. It's got no covenants, and they're not watching you. It's outstanding debt. It has to be personally guaranteed by you.

That sucks, but other than that, it's fantastic debt. But getting that debt is a gigantic pain in the ass. And the lenders, some lenders are better than others. There are four; if I were to buy a business, I would only work with those four. They do the very most, and they've got good processes, but there's a lot that does it and a lot that have relationships with brokers that want to do it.

And I always say it's like getting a mortgage from the DMV. It's a gigantic pain in the ass. We get sucked down that rabbit hole as your lawyer into those conversations. And they'll negotiate crazy stuff, too, and I sympathize with them because they're dealing with this. The way SBA debt works is a bank originates it, but the SBA, similar to your conforming product in residential mortgages, guarantees it.

If the buyer defaults and you've met the guidelines as a lender, they guarantee 85% of her, where 75% is somewhere in that range. Still, the lenders are looking at this extensive set of standard operating procedures put out by the SBA that often need to be more specific and need help.

And so we've run into crazy stuff where we had a cosmetics brand that a buyer would buy. And then the SBA lender and their attorney returned and said, You can't buy this business with SBA debt because it violates the Civil Rights Act. After all, it's a female market, similar to what you would expect. Suppose I was trying to buy Augusta National, and they didn't let women into the locker room, yeah. In that case, that's a civil rights violation, like the federal government can't lend money to that institution.

But this was different from the way anybody could buy this product. It is pink, which was the upshot. So you run into stupid stuff like that. So those are the hurdles. You're overcoming many very odd hurdles when you get into SBA debt, the investors, the purchase agreement, and then the final boss you'll fight, Chris.

Is the seller's attorney because now, in the thesis for our firm, we aren't reasonable attorneys in the space. And that's true. And now, we have to fight them to finish, and they will take forever to draft documents. They'll take forever to review documents. Some of them don't emanate at all and make big deals out of little things.

And then you've got some that are just plain old assholes. And so that's your final hurdle before you get to closing.

Chris Powers: Shout out to a few of your lenders. Let's get, let's give them some business right here. Who are some lenders that do this stuff? 

Eric Pacifici: Yeah. So, the very best lenders, I tell everybody this: Bruce Marks at First Bank of the Lake is an extraordinary letter.

He's been in search of finance for a long time. It is in no particular order. It's been in search of finance for a long time. Bruce has a ton of clout within the first bank of the lake and runs a great team. Lisa Forest at Live Oak Bank does a ton of SBA lending. Matt Dolsky at Byline Bank and Tom Lyons at Byline Bank are excellent lenders.

Matthias Smith is an outstanding business broker at Pioneer Capital. The brokers are, hey, I can't get through one of these good banks, so I will work with an expert to help me finish. Matthias is excellent; Heather Enderson of Viso is an outstanding broker who just started her shop.

We keep a list if folks are interested and reach out anytime; we are happy to share that list. But those are the people I go to. 

Chris Powers: All right. We've made it through, and we're headed to closing. The question is, once all the boxes are checked, what do you tell your clients?

We talked about what will happen after they close, but what do you tell them the week before they're about to make? It is arguably the most significant investment of their life for some folks, maybe others. It's just another business. They're buying like, how, what does a couple of weeks look like before closing?

One kind of green light has been given. 

Eric Pacifici: One of the things that happens a lot, it doesn't always happen, but it happens a lot is they'll call me two to three weeks before closing and go. Should I do this? And my answer is always the same. It's like you do it if you want to do it.

If you don't want to do it, don't do it. My uncle Tom pulled me aside two days before my wedding, and he said, " Hey, man, I want to say if you don't want to do this, if you want to do this, I support you. If you don't, I also support you, and I'll have a car running and ready to get out of here, and he was, but it's the same thing with this, right?

When you, anybody who's making these big life decisions. They've got, it's got to be their own decision. It doesn't matter what you've done, escalation of commitment, who cares? Try to be objective and unemotional about it, and once you close, as you live with it, and we're humans, man, we're adaptable.

Most of these people are successful people, and they're going to be successful. It may not, even if it's not this acquisition like I'm not betting against a 27-year-old Wharton Grad over a 30-year time frame. If it's not, they're not all working guys, but you get the point. 

Chris Powers: Yeah, If you are a buyer of a business that doesn't plan to be active, but you're also maybe the current CEO or the owner, whatever we're calling them to roll over.

But you're putting a CEO in. What do you do? Because you're buying a business, you're also putting in a CEO who may have little ownership. I'm assuming you're going to push for them to get it. Either some ownership or some upside, but is there anything you can try and get done from a legal perspective to help out?

How do you help get the new CEO in place throughout this process? 

Eric Pacifici: So that's pretty uncommon, right? The idea that, like, I'm a buyer, and I'm bringing an operator with me, sometimes there's only a few asks from us like, Hey, what should I do with this guy or gal? Because presumably, if they're coming with you and fresh to the organization, you know where their heart and head are.

The tricky part is I'm buying a business, and I'm buying the Fort Pod. Chris is out. I'm the new host. I'm keeping Johnny, the producer. Johnny, you and I got to sit down. I have to make sure that you've bought into this. You're integral to ensuring that the podcast continues humming like it has.

And you've done 300 episodes of this, and I'll be doing my first. What can we do contractually to ensure you've got an incentive to be with me for at least 12 months? Is that money? Is it just having that heart-to-heart and feeling like we've got a meeting of the minds? Or is it something contractual?

So That's a more common scenario. 

Chris Powers: Okay. If the new CEO is coming in, it's usually post-acquisition after some time. 

Eric Pacifici: Yeah, for sure. And I've only truthfully done 250 million in deals in 12 months or somewhere in the neighborhood. And that's rare, and you're just not buying a sub-15 million EV business and installing an operator very early on. 

Chris Powers: Okay. That's good to know. I wanted to gossip about the note management buyouts you do. Can you talk about what is a management buyout? Is it the same as buying a business, or is it different? 

Eric Pacifici: So it's a type of M&A where you can sell the business to the managers, or there's a similar concept called an ESOP, an Employee Stock Option Purchase, or whatever the acronym stands for.

The point is you're selling the business to the existing management, or you're selling it to the existing employees, which is even more complicated. Those are, you know, those are mid-market M& A concepts. We don't see that a ton in SMB. And it may happen, but we don't see it because of the nature of our clientele.

Our clientele is out, external third-party buyers. And maybe there is a lot of, and that was what we were concerned about with the partial guarantee, or sorry, the partial rollover SBA rules that made a lot of news in the last couple of months where they, the SBA was saying, instead of having to buy 100% of a business, you can now buy less than 100%.

It is a significant change and has a lot of implications; they fumbled the bag by making the Rollover equity holder, whether it's the existing owner, own one percent or fifty percent. They must have a personal guarantee on your SBA debt, and Nobody will do that. So it went away, But we were more concerned about if that would become a reality, anyway.

Chris Powers: This is more around the rollup. So you got a guy or gal that's bought a business. They're running it and now just acquiring other businesses like that. So it could be plumbing, and now they're just buying more plumbing business, but it's all going into one business.

It's just one more significant business that keeps buying. Is there anything from a legal standpoint that changes where the scenario we discussed earlier is that you're just buying a one-off business and going to own it? Now you're buying businesses that are going into another business. Is there anything to consider there?

Eric Pacifici: So now you're talking Holdco, right? And this is where everybody that's driving, it's listening. It will turn up the radio going. I can't wait to build my Holdco.

Chris Powers: Realquick. Is it a Holdco, though? So let's say you own Fort Capital now, and now you're going to buy ABC Industrial Buyer LLC, and they're just going to become part of Fort Capital.

Are you just calling Fort Capital a Holdco or buying and merging the company into the existing operation? 

Eric Pacifici: So you wouldn't want to do that, right? And that's why it would become a Holdco because the moment you merge those two entities, all of a sudden, any dumb thing that this business has done or any dumb thing that, or any liability, I guess they should characterize it more professionally, any liability of the two gets commingled.

And I would hate to have a 15 million Evie, fantastic cash cow business. I bought a 1 million tack, and I've smashed them together. And then the tack-on gets sued for something in the plaintiff gets access to all of the assets of the 15 million cash cow disaster. So you create the holding company, have a parent entity, and The Enduring Ventures guys have talked about this ad nauseam.

It's a great subject, the mini Berkshire Hathaway. It's a prevalent concept, but you'll have a mothership, and your portfolio companies will be off the mothership. And so you would create that holding company to hold Ford Capital, which would be Chris Powers, whatever, LLC, holding LLC, and then you would buy that other company off of that.

The beauty of the way that tax works is now you can offset P& Ls as long as you own more than 80% of each and consult a tax lawyer, but in broad strokes, as long as you own more than 80% of both, then losses from this one can be, offset earnings from this one. And so it creates the tax incentives.

You can also implement shared services where you've got employees in a sub-entity shared throughout the organization. You want to be careful. You want to keep them at arm's length to protect that legal liability, but you would never smoosh them together.

That's your typical holding company. Even if they're diversified, they're in different businesses, but the same people own them. That's your classic hold co, and there really wouldn't be a good reason to keep them. I don't know; consult a tax lawyer, co and less, out of the same hold.

Chris Powers: But if I bought that company and wanted them to wear Fort Capitol, they work there and are out in the market. They're saying I work for Fort Capitol. You're just talking about how it legally shows up on paper, but not how the outer-facing world sees the business. 

Eric Pacifici: Yeah. And if you wanted to brand them universally, the Sammy, that's how pretty much every multinational corporation works.

Coca-Cola is an example; like Coca-Cola is a conglomerate, they probably have hundreds of entities under the Coca-Cola parent public company. And they all say, when they show up places, all have Coca-Cola polo's, and all work for Coca-Cola, but they all work for different Coca-Cola entities legally. 

Chris Powers: All right. I have a few fun ones real quick. What's your take on chat GPT? Is it going to happen? Are you out of a job soon, and you're going to be looking to buy a business, or what's going to happen to lawyers? 

Eric Pacifici: Chat GPT is good. AI is going to rock the legal profession.

And anybody who says otherwise is just burying their head in the sand. And you're talking about, like, the phone booth repair guy in 1980 that was like, there will be phone booths forever. It's there; you have to learn to leverage technology, whether AI or anything else; it will get smoked.

But yeah, I got a lot of attention because I posted this, like very hilarious hyperbolic. I was trying to be funny. It was like a Saturday night; I threw it up randomly. And it was like, Chat GPT is going to, I don't even know what I said, but I had the Elmo meme with the fire. It was like it would destroy the legal professional team by 30 million people.

Oh my God, I would have edited that a little more if I had known it was going to go so far, but it's a real thing, and there are intelligent people like Goldman Sachs who put out a report saying that of all the professions that AI will hit the hardest. Administrative support is one, but they were saying somewhere in the neighborhood that AI will make 46% of legal jobs obsolete.

And if you've been inside the legal profession, it's a lot of copying and pasting, correspondence, and administrative-related stuff. So I don't know, but it sucks. Some days it sucks, Chris, as you get on chat GPT, expecting magic, and then you just don't get it. And Especially with content creation.

There's no way Chris Powers and your voice, personality, business experience, or somebody else will come along with just a bland AI-driven text and do more than you. It just isn't going to happen. 

Chris Powers: I agree. Do you have any stories of salvaging businesses out of bankruptcy?

Eric Pacifici: We've worked on a lot. So even my big law days were working out like distressed work in energy I worked on, like debtor side things and all that of businesses that were struggling in Texas.

Chris Powers: In oilfield services?

Eric Pacifici: Yeah, I worked on a few bankruptcies and restructurings, mainly because I started in Texas in 2015, right when commodities had crashed; they were struggling then, and then in my time at Kirkland that's one of the Elite debtor side bankruptcy groups in the country.

And so there's a lot of that. Buying distressed assets is different from what we do in SMB. We don't buy distressed assets. We buy like enduringly profitable 30-year-old companies, and I encourage anybody out there. I had somebody come to me, an intelligent guy from NYU Business School.

And they were like, we're going to buy, we're going to do SMB, but for distress. And I was like, that's brain damage, man. Do have at it. You'll add a ton of value and make a ton of money, but that will be hard work. 

Chris Powers: All right. One more. We should have noticed this.

I should have asked this earlier, but do you recommend reps, warranties, and insurance on most deals? 

Eric Pacifici: So that product doesn't work well in SMB because of the pricing and a lot of, there's one. One product, CSC, offers SMB-style rapid warranty insurance. I recommend that Chris be dumb like a fox when you know M& A.

Suppose you know what rep and warranty insurance is as a small business buyer. In that case, you probably know all the mid-market terms for indemnification—12 to 24 months for ordinary reps, purchase price, caps, baskets, and deductibles. I would encourage people to be dumb like a fox when they enter the SMB space because the sellers don't know what that is.

The brokers need to find out what that is. And if they go out and hire the wrong lawyer, they sure as hell don't know what that is. And so you're able to get significantly better indemnity terms that would be considered crazy in the mid-market in S& B. So long as you don't go out and pre-bake your LOI with all that mid-market stuff, you got to make the big grandiose ask the first time in S& B and then test the waters and see what you're dealing with.

That's my recommendation. 

Chris Powers: Eric, you are the man. Thank you for today.

Eric Pacifici: This was fun. I can't wait to own both your podcast and yours. 

Chris Powers: I was going to say, I don't know, after this podcast, I don't own anything anymore. I hope you've enjoyed this episode of the Fort podcasts. Follow us on your favorite podcast platform or hop over to YouTube to watch full video episodes.

Suppose that's what you prefer. For more information, you can check out @thefortpod.com.