Startup Acquisition Stories With Eric Pacifici of SMB Law Group

All right, super excited for this. I'm with Eric from SMB Law Group. Eric, how you doing today?

I'm good, Andrew. How are you? Thanks for having me on.

Yeah. Hey, so for those that may not know you, I obviously know you and I've been following you for a bit now. Do you want to give a brief introduction of yourself?

Sure, yeah. Happy to do it. My name is Eric Pasafici. I'm the founder of SMB Law Group, Small and medium sized business law. We're primarily a mergers and acquisitions Main street boutique. We help people buy, sell and operate small businesses. We were founded in 2022. We're comprised of primarily former Big Law top 14 educated attorneys who decided to come down to Main street and do lower middle market Main Street M and A and in 2022, or sorry, 2023, last calendar year we did about 950 million in transactions.

Dang, those are some big numbers. Eric. It's been fun watching your journey. So I'm, I'm excited to potentially work with you on more acquisitions. But how did you get into this? How did you get into Main street acquisitions in just general, let's call them small business lower market acquisitions?

Yeah, Well, I, I love the space. I'm super passionate about entrepreneurship through acquisition, about business buying. Oddly enough, I, I was working way up market at Kirkland and Ellis doing large cap, mid market, you know, $100 million billion M and A transactions and then fell in love with a concept called entrepreneurship through acquisition which is driven by many of the elite schools. But in a nutshell, it's just a glorified term for people going out there and buying small businesses. Became enchanted with the space. Started kind of posting some content around legal M and A and how to buy a business in a legally effective and efficient way. And then had a lot of people start coming to me saying, hey Eric, thanks for the content. I need help with my 2, 4, 6, 8, 10 million doll. Do you know somebody good? I was billing at 1500 bucks an hour at the time. So way too expensive to do a Main street deal. And then, and I didn't know, I candidly did not know that there aren't very many M and A focused Main street attorneys. Most folks who do M and a in the 2 to 15 million or 2 to $25 million enterprise value space are either general lawyers who don't know M and A at all do a really bad job for their clients. We see that a ton on the sell side, or they're really good M and A attorneys that are built for 50 $100 million deals. They bill by the hour. They're really expensive. They're fr. Just not a very good fit for, you know, a guy who's selling a $5 million family plumbing business. So in 2022, we got, you know, excited about the opportunity around just the sheer amount of people who had a need for this and so decided to build a firm, and the rest is history.

Love it. Yeah, you guys have been blowing up. Like I said earlier, it's been fun watching. I think I remember you when you started and just watched. In the past two, three years, it's been. It's been awesome, man. But yeah, likewise. Moving into some tips for entrepreneurs, you see a lot. You've been through. How many acquisitions did you say? 500 plus?

Well, last year we closed about 950 million in enterprise value. The amount that we. Those were closings. The amount that we worked on is in the several billion. And then in terms of sheer number, maybe a couple hundred transactions that we've worked on.

Nice. So in terms of, like, common pitfalls that you see entrepreneurs going through an M and A process, what are, like, the top, like, two or three that really stand out to you?

Yeah, the number one thing is not understanding the M and A process. And when you don't understand what's supposed to happen, you're at the mercy of the intermediaries, the brokers and the other folks, the bankers who frankly, have, you know, their desired process, which is not geared to protect you as a buyer, it's geared to protect them as a broker and make sure they get their commission as fast as possible. So, you know, when you don't know that, you know, earnest money deposits, for example, is not an M and A concept. Very common in real estate. Obviously, if you ever bought a house, put down some earnest money, and it makes a lot of sense there. It doesn't make sense in small business M and A, but you've got a lot of brokers who either know that and are seeking to take advantage of you, knowing you don't know that, or they. They're, you know, more accustomed to real estate themselves that don't even know it. And so not having, you know, experienced M and A representation, you put yourself in a position of weakness with all kinds of things like that, because it starts with earnest money. Then you get into the leg legal document negotiation, the protections that you. You receive, the risk allocation that you receive, and it gets. It gets pretty ugly pretty fast. So we don't come in, we don't seek to you know, be a big headache in the process. But when you're buying a multi million dollar business, Andrew, you know, you don't need to walk on eggshells and you should be entitled to the, the customary process to protect yourself and your family. So that's probably number one. Number two is just a grab bag of just misses with important terms. You know, working capital's the, the probably the most prominent example. People forget that when you buy a business, it needs money, it needs inventory, it needs you know, gas in the gas tank or wheels on the car to, to drive and they forget to negotiate this stuff up front or you know, they're just not familiar enough with, with the SBA process. Many of these buyers are SBA buyers and you know, has a unique set of rules. You get very deep into the transaction, you find out, you know, all that stuff, I promise the seller actually can't do and then you got to go back and renegotiate. So there's a whole host of, of mistakes that we see first time buyers make nice.

And then in terms of your representation, do you focus primarily on the buy side or the sell side? Are you, are you exclusive on one or the other?

We're not exclusive on one or the other, but 90%, 85 to 90% of our clients happen to be buy side just based on the place that we happen to be receiving work from, which is the entrepreneurship through acquisition community, the social media community, which happens to skew a little bit younger. But we do represent a number of sellers and what we're seeing is there's, there's a relatively fast life cycle. You know, guys at gals will go out and buy businesses when they're 35 and fresh out of business school or whatever, and then 18 to 24 to 36 to 4, 48 months later, they're oftentimes looking to sell. So we do have a number of, of sell side clients as well.

Nice. And then in terms of, I'd love to hear just, you know, tell me about a case study that where things just went exceptionally well. A story that maybe stands out to you, maybe it warms your heart in terms of the way it closed or there was a big issue and you resolved it. Is there a case that kind of comes in mind that you helped with that went really, really well.

Well, you know, by and large buying small businesses goes well. It goes okay, right? Like you know, running a business as you know, Andrew, being a, you know, very successful entrepreneur yourself in multiple ventures, you know that running businesses is hard, right? Guess I'm hesitant to say it ever goes great when you buy a business, but it goes well, right? And it's a great way if you look at the economics of it. You know, you buy a million dollar cash flowing business, you know, and if you're able to, to, you know, even just maintain the status quo, pay your debt off, all of a sudden you're a, you know, seven figure cash flowing person in your early 30s, you know, that's why it's such an attractive proposition. I've had a lot of buyers who.

That's got to feel good though. I mean I get, you know, I, I can't think of the word off the top of my head, but when an acquisition closes and it's life changing for the buyer or the seller, it feels good. You know what I mean? You get that?

100. Yeah. And I care deeply about my people. I mean it's, it's really like the, the people who are buying business, Andrew, are a lot like you and I. Like they're guys and gals that want something different for their life. They're not the corporate, you know, robot that they were told they're supposed to be. They're looking to be able to have a little bit more control over their life. Obviously entrepreneurship, you know, is hard work, but you know, when you run your own, have a little bit more control than when somebody else is dictating what you do. They've got kids more often than not. These are family people and they're 25 to 45 year old. Like it's really important. And so, you know, we, we oftentimes say like, you know, don't celebrate the loi, don't celebrate the closing. You know, now it's going in three to five years. But no, but you got to celebrate at some point in life. So I think I'm with you on that. Like it's a hard process to buy a business. So I do get excited for them when they close and kind of fulfill that dream. It's fun to watch.

Yeah, I love what you just said right there though. In terms of, you know, not celebrating loi, I always say do not celebrate until the money is in the bank because we represent, sell side mainly obviously excited to have you represent the buy side. But yeah, there's you know, moments where I think you should still celebrate, but obviously it's not, it's not over until the money hits the bank, in my opinion. Next question. Okay, so on the flip side, are you comfortable sharing maybe a story where a deal fell through for Certain reasons and just sharing, you know, how that can be avoided. Maybe the seller overstated some things. You caught it. Maybe the buyer you mentioned promising with the SBA loan and isn't able to cover that. What's like one that comes to mind?

Yeah, deals die. Generally speaking, your deal is going to die really in one of two stages. It's either going to die in the lending process, in the quality earnings process. You, your financial diligence, you've gone under loi, you've now lifted the hood and you're seeing things that are a problem, you know, or you're realizing that, hey, you know, it was represented that these were two customers, but really they're actually one. And so, you know, customer concentration isn't 20%, it's more like 45%, you know, and now I've got to, you know, think more seriously about walking away. We see a lot of that. We also see a lot of really spectacular failures, right? Where you people hold on for way too long, desperately trying to get the deal done, sellers desperately trying to get the deal across the finish line. But they're getting cold feet, they're getting emotional, emotional. They've got deal fatigue. They're sick of compromising. Many of them are 60 or 70 years old. And so they're very difficult people. Just given that demographic, that's maybe not an unfair thing to say. But, you know, and so we see a lot of deals that die in a spectacular way. There a couple of really good examples of traps for the unwary in terms of deal failure is, you know, I see a lot of really sophisticated people financially struggle with the financial diligence piece of it because they come in, you know, they've got 10 years of experience at Goldman Sachs, right? And they're like, I don't need a higher quality of earnings provider to, to look at these books. Like, I can do it, right? But they're not appreciating the fact that a deal process moves incredibly fast. You're managing the business, your business diligence, the legal diligence, the financial diligence, the lending process, your day job, potentially your kids, your family, like your wife's, like, where are we moving? What school are the kids going with you? What's going on? And you're trying to look at the books of small business. And a lot of them, you know, it's Cheryl, who just had hip surgery, going to get a box of documents out of the attic. Like, it's not a great process. And so we see a lot of, you know, overconfidence when they should have just gone out and hired a, you know, a high quality, quality of earnings provider three months ago. And they would have realized that they had a, you know, big working capital shortfall that was threatening the deal.

Right.

90 days ago. So they're wasting everybody's time. So we see a lot of that. But one really important thing about business buying for the first time buyer is that it's very different than buying a home. Right. We, everybody conflates this with the home buying process. But in the home buying process, you go in, you do an inspection, you look at the foundation, you look at a couple things. You know, guy picks and pokes for eight hours and he's identified, you know, the vast majority of the issues with the property. And maybe in a commercial context, you've got to do some phase ones or whatever for environmental stuff, but it's not, there's not a whole lot there. You got a box with a business, you got a really dynamic organization with skeletons in the closet. We see, you know, really crazy stuff. We had a, a deal that had been processed for, you know, six months and then they realized that, you know, we had a six million dollar purchase price, but when they were selling inventory, they weren't crediting that against cost of goods sold, whatever, yada yada. So, you know, P L was overstated, like a million and a half dollars. You got to slice that price from 6 million to 4.5 and it's a huge mess. And so it's a very dynamic, difficult process. And that's why there are so many little idiosyncrasies that have to tie out. Because if you find yourself in that situation, you've also put up, you know, 100 grand of non refundable earnest money. Like you're in a bad position. You found yourself in a really poor spot. So you know, there are a lot of ways to screw up a transaction.

I would agree with that. I've seen a lot myself and those surprisingly, on let's say the, the SAS side, we, we rarely see earnings, earnest money deposits and then also quality of earnings are typically easier because everything's online, everything's digital. So definitely I have a lot of respect for the work that you do or the work that Main street buyers do. Yeah. So next question. In terms of, you know, there's a lot of different attorneys out there. As an entrepreneur, what should you in your opinion look for in an MA attorney?

Yeah, yeah. Well, for number one, they need to know m a right demonstrable experience doing deals. Right. Like I went to a small business mixer in town here a few weeks ago. I don't know why I did, but I was there at a brewery and they had two other lawyers there. One's personal injury and then there's the other guy, Doug. And the personal injury guys like, yeah, I do whatever, you know, personal injury. And then they get to Doug and Doug goes, anything that he can't do, you come to me for, you know, the general guy. And I just like screaming in my seat. I'm like, if you go to that guy to do your M A deal, like you're in for a world of hurting. So make sure they know M A because the terms are very specific and like you'll get your ass kicked. We're talking about millions of dollars of risk protection in those contracts that after you buy or you sell, you could either be at risk as a seller of having to give back millions of dollars or as a buyer, you could buy a business that has big problems and have no recourse seller for it. So it's really important that they know the market terms. But then, you know, we're in, we're not doing, you know, acquire.com, you guys aren't doing 500 million dollar transactions. So you don't need a big, expensive, big law attorney who's going to bill by the hour and is going to drive everybody crazy in the transaction. And we see those oftentimes on the other side and they're just, the incentives are built to bill, right? And so it's a lot of make work. I get on a call, it's me, my client, you know, the broker, and then they've got three lawyers that are yelling at me, you know, like that's not a good person to have on your team in a small business deal. Particularly since many of the players in small business that Acquire is going to deal with are not sophisticated buyers and sellers. They've never been through an M and A process. They just want a fair transaction. They want everybody to be represented, they want everybody to be polite. They want us to tell us what they need to know and then they need, need us to get out of the way. Right? So having a high powered corporate law firm on your side, it's like bringing a bazooka to a knife fight. It doesn't make a ton of sense. And then I, I love to work with people who are entrepreneurial. I think in this space like there's just a lot of appreciation around people who understand more than just legal, academic, you know, here's what the you know, there's a lot of negotiating and figuring out that you need to do in small business that goes well beyond just, you know, here's what the deal point study says is supposed to be in agreements like so entrepreneurial, reasonably priced with the appropriate price structure. Flat fee is great and then demonstrable M and A experience.

I like that. I definitely wish I I knew the last point. When I sold my first business. I remember I hired Pillsbury if you're familiar with them. Yeah. And I remember they sent me an email and they said, Andrew, like you've been emailing us a lot. And just so you know, we charge 15 minutes for every email. Then I responded with thank you. Thank you very much. As a joke, I think that cost like a thousand bucks. I don't know. Don't do that. All right, Eric, this has been awesome. Again, super excited to be working with you on some. Some acquisitions in the near future. If people want to get a hold of you, where should they go?

Yeah. So we're smblaw.group is our email address. Obviously SMB law, you know, here in the background. Many ways to find me. My email is ericmblaw.group and you know, happy to to work with anybody and really thank you for for doing this. Really impressed with acquire. You guys have done incredible things over the last couple years of growing like crazy. Your leadership is really obviously pretty extraordinary, Andrew. So thank you for the opportunity to work with you guys.

Yeah. Excited. And I'll put all that in the show notes. All right, Eric, Appreciate it. Thanks for coming on.

Cool. Thank you.

Cheers.