We’re right in the middle of flu season. So, I made what seems to be my yearly visit to CVS and left the store with about three yards of CVS receipt. It might be the only paper trail that rivals what goes into a business acquisition. (How’s that for an opener?) We spoke with @redacted‌, an M&A lawyer based in Detroit, Michigan, about what goes into the legal process of buying a business. About three years ago, Hal left the big-law-firm life and recently started up 7th Street Legal, where he helps “entrepreneurs buy, grow, and sell main street businesses.” He gave us a look at what really happens behind the scenes during an M&A transaction for small businesses. Behind the scenes of a deal Hal and his team aim to support people at all stages in an M&A transaction. If everything in the deal goes smoothly, the actual transaction part of this should take about 90 days. That short, three-month window will include a flurry of documents including the letter of intent (LOI), due diligence (such as trusty QoE report), drafting and negotiating the purchase agreement, and finalizing with the lender. “We help them with the entirety of the legal process,” he said. “From the LOI to closing, we make sure the lender has all the information they need.” Fortunately for people new to buying a business, Hal and his team offer support after the transaction, either providing legal services on a subsequent deal or in terms of growing and running their business. Most new buyers underestimate how many steps there are between an LOI and actual ownership. Each stage brings more questions: What liabilities exist? What assets will transfer? What happens if the seller pulls out? Having a good lawyer in your corner will help slow that process down (in a good way) so you can catch what others miss. Mitigating risk Lawyers tend to be fairly risk-averse people. An M&A lawyer tends to have a second helping of this flavor because every acquisition has its own character. The risks that shape a certain deal will depend on everything from what type of business is being sold to how it’s actually being financed. In Hal’s experience, there are two common categories among small businesses that buyers are interested in. The first includes service-based, durable companies (think HVAC, landscaping, or cleaning services). These tend to be stable and long-standing, sometimes literally brick-and-mortar. The risk comes from how heavily they rely on people, process, and local reputation. There are also things like seasonality or licensing regulations to consider. The second group is made of the newer, internet-based businesses like digital marketing firms or lead-generation agencies. Typically, these can be boiled down to someone with a laptop who had a good idea that they could automate. The business will operate with low overhead and high margins, which makes it very appealing to buyers. But, at the same time, the entire revenue stream could be tied to changing algorithms and vulnerable client relationships that can disappear overnight. For both kinds of businesses, the legal work focuses on risk management. Hal spoke about different tools people can use to protect against unforeseen risks. For example, buyers can implement strategies like seller financing and transition service agreements to protect themselves. Seller financing keeps the former owner invested in the company’s performance such that if it were to collapse suddenly, they wouldn’t get the full purchase price. Having a transition agreement would make sure that person spends time teaching the new owner how the business runs. It’s all based on figuring out what is needed to ensure that the business will do well even after the sale and transition. Many of these purchases are powered by an SBA loan, which carries some of its own risks and ramifications. As we’ve written about before, an SBA loan can help buyers step into multimillion-dollar deals without having multimillion-dollar bank accounts. Still, the loan comes with a personal guarantee. While it’s not the same as the six-legged parlay you just set for this upcoming NFL Sunday, you’re still taking on risk, and you should know what you’re signing up for. Who’s willing to take the leap The people drawn to this world come from a range of backgrounds. When he first learned about the space, Hal heard that many of the searchers were business school grads looking to raise money from investors, set up a salary, and find them a business to purchase. This is what’s known as the traditional search method. What’s become more popular recently is what’s called self-funded search. In this model, you’ve got your equity, and you’re on your own. The people in this sphere come from all walks of life. In addition to the MBA people, you’ve got people in tech, engineers, or regular mid-career professionals who had left their corporate jobs in search of ownership. It’s an exciting environment because people are realizing that there is plenty of opportunity that goes hand-in-hand with autonomy. The combination is a rare one. Hal pointed out that “Outside of the big professions like banking or law, there aren’t many ways to make hundreds of thousands a year. ETA is one of them.” The richest people in your community probably own something really mundane, like a car dealership, and ETA is reflective of that. Regardless of their past, these buyers share a similar mindset. They want control over their work and believe they can improve upon what’s already been built. Most people tend to be driven by a combination of financial goals and by the appeal of owning something tangible. Everything there is to know Risk is always a part of the process, whether you’ve got your MBA or not. While there are things outside your control (such as the economy or the chance that AI will learn how to do HVAC), what you can control is how much you know. Don’t go into a transaction without knowing everything there is to know about the state of a business. Our quality of earnings reports will provide you with a thorough breakdown of whatever business you’re selling or buying. If you’d like to learn more about it, visit our website for a free quote or book some time with me to discuss what a QoE report can do for you.