Bill Barlow: Why Your Purchase Agreement Won't Save You

All right. Hello, Bill. Welcome to another episode of Still Searching with Jed Morris. Today, we have Bill. He is a lawyer who works exclusively with small business acquisitions out of North Carolina. How are you doing, Bill? I'm doing great. How are you doing? I'm fantastic. I'm really excited that you're here because I like having these conversations where, one, we can get to know you a little bit and a little bit about your firm and then dive into some details of what it's really like to work in M&A transactions, especially at the SBA level, at the lower middle market level, because we have a lot of searchers who have a lot of questions when it comes to not just do I need a lawyer, but what kinds of things I should be looking out for as I'm going through the search process and when's the best time to engage and what are the big red flags to watch out for? Great. Happy to do that. All right. Let's start at the beginning. As I understand, you got your law degree from Harvard Business School and somehow you now run your own practice in lower middle market. That's quite a pivot since most people who go to a top law school they end up in corporate.

How did this happen? Yeah. Yeah. I went to Harvard Law School and then afterwards was following the tried and true path. I did private equity mergers and acquisitions on Wall Street. Then about three and a half, four years in, I was walking home after an entire week where we were doing diligence until four o'clock in the morning, going to bed, getting three hours, coming back to the office. I think it was like the Thursday of that week. I slipped on a banana peel left by a homeless person on second and 59th Street. While I was sitting on my bum, I looked around and I realized that what am I doing here? All these promises about what type of life you would lead. I just had no time and I was not particularly happy. It just seemed like

I wasn't really getting very much out of the corporate life. I had no idea what I wanted to do. Then I started just realizing that I could freelance to do legal work to get some money coming in the door and then through that process I realized cold turkey, no plan. I came to stay with my sister and then I just started doing work on freelance diets like up work. When was this? Is this around like 2020? Okay. So you're like one of the COVID casualties. Then you slip on this banana peel in New York. You realize the suit's lifestyle was not what it was meant to be and you're like, "Oh God, there's got to be something else." Exactly. I made the decision to leave at the end of 2019. I had no idea that COVID and everything was about to pop off. I actually became a little prom with my lease because I couldn't really let it because of COVID.

Anyway, exactly. One of those casualties started my own firm and then, well, I just started doing freelancing and then I realized there's this whole market for M&A. I just started doing more and more of it and I obviously had all the tools I needed from my time on Wall Street and just started doing it for a lower portion of the market. I have to imagine when you were working in corporate, you come out of Harvard, so you're probably working at a top firm, working corporate law in New York and you must have been working on multi-million, multi-billion dollar deals. How does that translate to stumbling across like someone who wants to buy a plumbing company for $2 million? The funny thing about it is, and this is something I realized when we did a deal that we really probably shouldn't have done as Debo Voice, but we did a couple million dollar deal that I think the legal bill was like half a million dollars for that, for one of our private equity

clients. But the reality of the situation is that a lot of the core mechanics and fundamentals are the same. It's not as different as you might expect. The diligence questions are fundamentally a business as a business. What's driving revenue? What are the expenses? What threatens us out on a go forward basis? Whether you're buying a $5 million company or a $5 billion company, those are similar issues. Obviously, bigger teams, bigger stuff, but I was actually surprised. It really did translate. Yeah. When you left New York, did you move to North Carolina? You said you moved in with your sister. Was she down in North Carolina? Yeah, exactly. You're like, "I'm going to get away from the city. I'm going to go somewhere." I think you said you're in the Durham area, right? Yeah, exactly. So you're like, "Hey, I need to get away from the city. I need to find the outdoors, live in the trees." Yeah, and honestly, part of it too is that my sister had some young kids. She's my

only sister, and so I thought, "I could be anywhere. Why don't I just be close to family so that I can do that?" Now I've got married, just had my first kid. Hey, congratulations. Congratulations. Yeah, exactly. Now you're a local. The grandparents are within 15 minutes, so anyway, now I'm stuck here. It's good. That's amazing. Yeah, you're definitely stuck there now. It's home. All right, good. Well, that definitely sounds like it worked out really well. You moved to North Carolina. You started doing some ad hoc work, probably for a lot of the same PE clients you've done in the past. Not actually. It was no PE clients that you did in the past. It was all up work freelance type stuff, and so there are just random people coming in. I will tell you, you start doing legal work for random people that make postings online. You get like crazy people. It's fascinating. And then eventually, one of the people from that day, I still do business or I still do

deals with them now that I found in my first like two months. It's kind of crazy. So that answers my next question, which was like, "How you kind of stumbled on this small business scape?" And I imagine that's how, like doing these small deals on up work for random clients, it's like, "Okay, people want to buy these small home services companies or whatever else." Yeah, and honestly, I think one of the lessons I learned in terms of just business operations is go to where the market is and go to where your skill set is, because like, I had no idea there was a market for this, but as soon as I saw there was a market for it, I immediately kind of went in that direction and I'm like, "I want to do more of the thing that I can do better than other people," you know what I mean? So it was, I was just adapting to what I saw. I had no idea that this was like a thing. Yeah. And then so you realize, "Oh my goodness, this is the thing," and you start up your own firm to like be able to focus in on it. Exactly. Yeah. At what year did you basically go all in on this?

Well, I would say I left without a plan in 2020. I would say by 2021 is when I formed my partnership with James David. At that point, we were still doing kind of a mix of corporate work. Basically, by 2022, we realized that everything that wasn't M&A was just not as lucrative, like doing like company formations and other things, just wasn't as lucrative as the straight up M&A stuff. Okay. So you find that and you're like, "Hey, we're going to double down." And it was interesting because you and I were talking about this before, but I started off as a self-funded searcher in the 2021-22 timeline right alongside as you're getting set up. And I remember that it was the Wild West of small business acquisition because it doesn't seem like that long ago because it wasn't. But there were no dedicated legal firms. There were no dedicated Q&A firms. There were only three ETA conferences, Stanford, Chicago, and Harvard. And so there was none

of this infrastructure. There were no influencers online saying, "Hey, you can go buy a business because of the silver tsunami and all that stuff." So you very much just stumbled into it. Yeah, exactly. And I think everybody has their story of how it happened. But I think with a lot of us, it was just sort of luck that we did. Wow. And so now you've been doing this for about five years now? Yeah. Yeah, that's about right. Wow. Incredible. And you said you have your partner, James, and he joined you pretty early on. Yeah, he joined me in 2021. His background is the litigator. He wasn't even a corporate attorney, but he saw that we were starting to build up. And he's been incredible. I think it's actually a good thing of his strengths and my weaknesses are very complimentary. And he's really a systems guy. He wants to get processes down. He's very exacting and attention

to detail. And so if we're looking for big picture of things, at least for me, finding a compliment was extremely helpful in terms of the long term of the business. Yeah, fantastic. And now you guys have been growing together for five years or so. What's that process been like? Part of me is interested from the searcher perspective, what it's like to build a firm like that and what that growth looks like, what it means to work with a lot of first-time buyers who are very new to this space. Yeah. Well, in terms of like the firm's growth, it's been very good, very solid year-over-year. I think we were very fortunate in that Will reached out to us from acquiring minds asking us to be on the podcast. And that was a real accelerant for our growth. So that was very helpful for us. And we did other webinars and did other things in the space that I think were helpful. In terms of searchers, I think now that there's so much materials out there,

I do feel like a lot of the searchers come when they meet us, especially if they've looked at a bunch of materials online. They're sharp on a lot of the questions where we used to get kind of more basic fundamental questions. And now there's resources online to do that. And so they're kind of coming with a more kind of advanced questions usually. Okay. So yeah, so I guess the sophistication of a searcher has definitely improved. Exactly. Yeah. All right. And are you doing deals across the country or mostly on the East Coast? It's across the country. We have a list of certain jurisdictions you have to get local counsel or the other requirements. And so you can do it everywhere, but you just kind of have to follow the rules. And one of the questions sometimes people ask is, okay, when I'm looking to do, you know, to find a lawyer, what should I, what should I do? Should I look for a local lawyer? And the answer is when it comes to the M&A transaction is that experience

almost always trumps, well, I will say in M&A, it always trumps geographic location. And that's one thing I learned on Wall Street. I was like, well, we're doing deals across the country. I don't think I did a New York deal when I was on Wall Street. And the reality is that's how M&A functions in the legal field. The other thing I'd say is, you know, something, a thought people sometimes have when it comes to attorneys is they say like, well, I want this long-term partner who's also going to be my general counsel and all these other things. And, you know, at the beginning, we were, you know, open to that because we were like, oh yeah, that sounds great. We'd love to grow with you. We'd love to do all these things. We've found that it's actually hard to do general counsel work. And it's, you'll find that most of the dedicated M&A shops find that they're so busy with M&A, which is usually a high ticket, high margin bought

like process that doesn't necessarily make sense to have a GC. So if you want to have that type of relationship, that's fine. But just know that most of the people that are real dedicated M&A attorneys, they're probably not the best fit because it'll probably be a lot more expensive than you need for your kind of general counsel day to day. See, that actually makes a lot of sense. Like almost any other business, you want to find the couple of things that you're really good at and then double down on those as opposed to just, you know, spreading yourself thin. Yeah, exactly. And, you know, when you start a business, I feel like you do everything, you accept all work. But as you become busier, you start dropping the work that's less lucrative and you have to learn how to say no. And then just do the work that's most lucrative and just keep doing more of that and keep dropping the other work. And it's frankly, it's always scary because you're scared to drop the other work because you're like, oh my gosh, like that work might not come back. Like I don't know what it's like from a cash flow perspective

if I have like a week month, am I doing the wrong thing? Do I need to go back? And, you know, that's part of being a small business owner. Yeah, absolutely. You touched on experience being more important than geography. And so, you know, so like I'm a first time searcher and, you know, I'm like a lot of first time searchers, I'm thinking, you know, do I even need a lawyer? And so let's let's put that to the side. But if let's assume I assume that I do need a lawyer, you know, what's the advantage of going with someone, you know, like yourself or another firm that, you know, all you do is transactions. You're not trying to grow with me. You're not trying to do GC work. You're like, we're just doing transactions as opposed to me finding a local business lawyer in my community or someone I find online or so on and so forth. Yeah. So here's, here's your comments themselves. Because I actually want to even address the first one because I do think increasingly now with AI applications, people are like, well, I can just have the AI draft the documents, right? Yeah. Which you'll find that we use AI very extensively in our business. And here's here's a way of

thinking about it, right? Do you want the AI to use a template that's been battle hardened and tested by a bunch of attorneys? And those attorneys have also run it through AI literally hundreds of times and their clients have. And every single time there's an issue, it's been spotted and done. Or do you want to just go to AI and just say draft me a purchase agreement, right? Yeah. You're going to get a very, even though both are using AI, you're going to get a very different quality product between the two. And, you know, another issue is, and this is something that's happened on a live deal where a counterparty just used AI. There was a major issue that was going to cause them lots of problems down the line. AI spotted it, but it was number 14 on a 20 point issues list. And so we just like didn't, didn't fold on that issue. And he didn't pick up that that's actually like, almost one of the most significant issues in the deal, right? So I would say like, it's not a bad thing to, to use AI responsibly,

but again, I've seen people get in trouble if they do it. And honestly, if you try and draft it, maybe, maybe the drafting has gotten better. But when I tried to draft a purchase agreement from scratch, like two years ago, there were all a bunch of definitions wrong and cross references and like, it's just hard. Yeah. The second question is, and by the way, another thing is, is that part of the part of the value of a good attorney is they will be talking through a bunch of the main issues and spotting areas that you might not have thought of. And so, you know, you're bringing that to them and then you're like, Oh, wow, I didn't even think to ask this. Then you have a conversation about it. And then you arrive at something that makes sense given your, you know, given your transaction. In terms of what you should do in terms of local attorneys and or less experienced attorneys or whatever. You know, there are a lot of really good attorneys in the space that do this quite a lot. And I'd recommend you use somebody that kind of does

it quite a lot. The main difference is that the ones that have done it a lot, and I sometimes cringe at like the first times I did deals, you know, in this space. And I wasn't as sophisticated as I am today because I had Wall Street experience, but I didn't really necessarily have a main street experience. And what they bring is they just bring a knowing not only what the issues are, like, and not only to draft the agreements, but they they've actually like if you're dealing with a tough sellers council, they've dealt with a dozens of tough sellers council and they know how to navigate it, right? If there's a path forward on the deal that still protects you sufficiently, they'll know how they'll know that that path forward. I mean, I think it's very similar to the Sherpa analogy for doing Mount Everest, right? Like go with somebody who's who's just done it done it a bunch of times. Yeah, absolutely.

That way you don't have to run into the same problems over and over and over when you don't have to. They've already they've already done it. Yeah, exactly. Exactly. Yeah, you know, it's it's it's one of the hills that I die on, which is, you know, I made plenty of mistakes as a first time searcher. But the one one mistake I did not make is I found a M&A attorney who had done a lot of deals before I met them early on they helped me draft the L a y they knew everything going into it. And a lot of times when when everything goes well, that's great, you know, it can feel like, you know, this was easy, maybe I didn't need it, you know, you can be a little bit flat, you know, a little bit off with that. But what I found is like when things went south, that's where my attorneys showed like how much how much they were actually worth. Because they had they knew me from the beginning, they drafted all my documents, they knew all the context of my situation. And when things went south, within 24 hours, they had a game plan, like moving right into, you know, the next step and litigation and everything else. And it's saving, it really did save me. And I tell

people all the time, look, the time the amount of money and time you spend with your attorney who actually knows you and your your search and your process from the beginning. You know, when things go bad, you don't want to be spending that time calling 1012 different attorneys, filling them in on your context and trying to figure out the next step, you want somebody who actually has your back. Yeah, yeah. And I think that's that's definitely true because it's, you know, it's not the first time you want to be be figuring out that relationship. And frankly, even if so, like we don't do litigation, right, but we understand all the context, we can give you a first sense and we can help you navigate and be like, okay, you need to talk to a lawyer. This is the type of lawyer you need to talk to. Let me provide an introduction. And that is a lot better than like, ah, what's going on, you know, to be like, yeah, let's I'm now I'm now on Upwork again, and I have to like, you know, sue somebody that that I bought a business from. So I love it. I think I I've been really impressed with what you and your partner have built at Barlow and Williams over the last

couple of years. You've been doing this for a while now, you've definitely established yourself in the lower middle market. And now that you're working with searchers regularly all the time, what are some of the what are some of the big red flags that searchers need to be a pay attention to, especially right now, that you know, you keep seeing over and over and over in certain deals that, you know, are things that people need to watch out for. So it's it's a great question. And this is something that I can probably talk about for like an hour. But just go through every every single point. So I think that when you ask the question, you should think about a business as a money generating machine. And what are the things that clog up the management money generating machine? And I'm going to talk about this, even though it's not necessarily legal, I'm going to first kind of talk about some of the things we see there. And then I'm going to pivot to talk about specifically legal stuff that we see as as as doing that. So, you know, seller dependency customer concentration,

whether or not there's any sort of relationship, we had one deal where there was like a supplier relationship that was super key and the seller swore up and down that there was going to be no problem in post closing like it was a problem, right? So any other type of relationship where where the business is sort of dependent on that relationship, be wary of. I think with seller dependency, that can often be one of the trickier ones to to suss out because it feels like every single seller is like, Oh, I never work on the business. It's all super passive. And there are a lot of businesses that that really are a lot more. And I think actually, you know, a lot of sass and e-commerce, a lot of people got burned on that because there was a lot more seller dependency because it's actually really hard to run good marketing campaigns. And that was, you know, not not great. Kind of moving on to to other things. I think that, you know, some some other things just just a flag is there's a couple of types

of businesses that we consistently when we see them, we have kind of like a red flag conversation with sellers about. Okay. I'll just kind of go through a couple of them. Number one is businesses which are relying on some type of fleet of vehicles. So this is a non emergency medical transport. There's also, you know, some other transportation. It's not that these can't be great businesses. It's just that a lot of times people look at EBITDA and it's just really not the right metric because your vehicles are going to have to be refreshed. And when you do that, it's difficult disappear when you're doing all that cap X for investment. Exactly. That that depreciation and ever say it's actually doing a lot of work. And you're talking about businesses that are that are fleet heavy from a transportation perspective, not necessarily like, Hey, this is an HVAC business that has

a bunch of fleet. Although that's important. You're talking about more like, you know, medical transportation or logistics or things like that. Yeah, exactly. Exactly. Okay. We see that come up again and again. And each almost every time we see one of those things we see sellers trying to like sell for an EBITDA multiple that doesn't make sense giving their deal. And then as soon as you actually do the math, you present the seller with an offer and they're like no longer interested, you know, right? Another thing that we find difficult to do for financing reasons is there are some businesses that essentially sell like, call it things like tractors or big vehicles or equipment. And they actually are really good small businesses. Extremely difficult to finance because they're dealing with vehicle financing all the time. You know, we've seen a huge graveyard of people trying to buy those businesses going through the SBA process and failing at it. Do you see a lot of those? I don't I

don't know if you see it specifically, but I'd imagine a lot of those buyers who, you know, maybe they're really interested in that kind of that kind of deal, but then can't secure SBA financing. They probably in some cases work out deals with the seller doing some sort of seller financing because that might be like a hurdle that they just can't get over. Yeah. And that's the truth is that you're like, look, seller SBA is just not going to work. So either you have to work with their existing equipment finance person. Right. Whoever is providing the finance might be willing to provide some type of load or the seller or frankly, the seller might just end up, you know, waiting for somebody that has a bigger balance sheet. You know, it sucks. But, you know, I think marketing agencies and other type of consulting agencies where the professional service is really personal is difficult. We've seen examples where people have done it successfully. And one example, they were extremely successful. We were sell side actually in that, but they were extremely

successful. But, you know, the reality is, is that it's very seller dependent and you have to be really careful, careful about that. That's tough because the talent walks out the door when they sign the first agreement. Exactly. And like, what's hard is you, I think what happens is, is that people get really attracted to like, you know, what seemed to be low EBITDA multiples and they're like, well, I just have to make this work for a couple of years and then like the loan will be paid off. And the reality of the situation is you might not be able to make it work even for those couple of years. Like, I hate to tell it to you, but, but that's, that's, that's the reality of it. And, you know, high customer concentration, you, you know, you just have to demand a higher seller note. I'm sorry. Like, you know, and that might make you uncompetitive, but you're, I don't see ways, I see ways people get comfortable with high seller notes that are forgivable and high customer concentration, but I just, I don't see a way to get really comfortable with high seller concentration

and no, no, no type of backup. Yeah, absolutely. And then, and then there's other things that probably you've already talked about, right? If you get any indication of the seller lack of integrity, if there are any books or everything, just, just say no, just say no. And I tell people, I'm like, there's like, there's a big difference between sellers strengths and weaknesses and a lack of integrity. Like there's plenty of sellers out there who are wonderful salesmen and fantastic relationship people and are terrible at accounting. And they may not know where their numbers are, or their accounting systems are. They know where all their dollars are. That's for sure. But that doesn't mean that, you know, that they lack integrity. The problem I run into is like, if someone is actively trying to like, either hide something or make you think something isn't true, that's when you need to, you need to bail. Yeah. And, and, you know, some indications you can sometimes see for that, not always, but like, if their taxes don't, don't make any sense and they're trying to hide stuff off the books, if, if they're presenting

a number and then you get into QOE and it turns out you see stuff that obviously was off balance. Now, again, to your point, right? Sometimes that's the broker's fault. Sometimes the seller is, is not doing, you know, hasn't been properly prepared, but like, you know, it's, um, I kind of feel like it's, it's a little bit of a gut thing for me. It definitely is that that's an EQ thing where you have to really kind of figure out, you know, is this something with the seller just, you know, is it a mistake? Is it, you know, they've never done this before either. So you want to give them a lot of, a lot of leniency, but at the same time, there's a difference between like, this is an honest mistake or, uh, you know, they're actually trying to like tell me the SD is higher than it should be and like packing in a bunch of stuff that shouldn't be there. I saw somebody say this the other day, I forget who it was, but they're like, uh, I love when I, I look at the difference between the tax returns and they're stated SD and their sellers basically trying to convince me of all the tax fraud they've done recently. I'm like, no, no, it's fine.

Interesting. Interesting. Uh, yeah, exactly, exactly your point. Uh, and, you know, I think, I think the other thing is I, I at least feel like you can get a feeling from sellers, whether they take a very transactional relationship towards everything or whether they care about the company and you and, and, and doing all that stuff. And if they, if they don't, if they're very transactional, it's not, it's not to say you can't do those deals, right? But it means that you have to be extra careful as you're going into it. And then again, you know, if you do get a hint of impropriety, then you gotta, gotta appeal. You're right though. A lot of times it is a gut feeling. Um, I tell a story a lot where I was speaking with someone who, um, experienced a business failure and they were saying, Hey, you know, they were searching and they found a business that they weren't super excited about. Like later in their search, like month 17 to 19, they weren't super excited about it, but you know, they moved forward anyway and the numbers were fine. And he told me,

he's like, I remember when we were waiting for the QV to come back and I remember thinking, I hope the QV disqualifies the business and asked him why. And he's like, and he's like, I don't know. I just, I didn't feel comfortable with it. And then the next week he came back and the QV was fine. And it was like, yeah, you know, the numbers check out and he assumed that I understand why, but he assumed that maybe it was just cold feet and looking back on it, he was like, no, something was wrong. Something was actually wrong with this. Um, and sure enough, there was actual fraud in the business that tanked it three months post close. And so, um, sometimes all you have is that gut feeling and that can be very hard to determine. Is it my gut feeling or is it cold feet? Um, so having like an advisor in your corner, who, who's been there before is absolutely worth it. Yeah. And, and you know, here's another thing I think is helpful in terms of like the gut feeling is there's, there's an extent to which there's like, does this make sense? So as an example, like if I see really high margins, right? In a business that's kind of competitive,

there's part of me that's just like, huh? Are you really that good? Are you the superstar of your industry? You know, it's funny because people say like, well, I like seeing high margin businesses, but the truth is, is that there is a limit to that. Like in some ways I feel more comfortable if I see something that's, you know, 20% margin or whatever. I mean, I'm honestly, I'm not a professional. Maybe that's the wrong number, but something where it's like, I see that, right? Like I see you're making good money, you know, but you're not necessarily killing it, but that seems to be, and you look at the prices they're charging and you look at their costs and like, it's like, okay, that, that seems to make sense. If it's like, wow, this is like super profitable or, you know, wow, this has been growing a lot, you know, like anyway, those are times where you get that sort of tingly feeling of like something, something, I don't know. Yeah, it's a little counterintuitive and it really does depend on the industry. I'm always

impressed when I find a mom and pop commercial landscaping business that's running at like 10, 15 million top line. And like their margins are terrible. Like I mean, based on other interest margins are maybe 10%, maybe, right? But that's very good in commercial maintenance. And especially with the, since it's all headcount. And so, you know, they've got their operations must be dialed in like, they've got, they've got routes, they've got configurations, they've got so much going on. And I've always been just impressed. I don't want to run a business like that because it's like, it's so intensive. But I'm always kind of amazed when I see people who just grow that over 30 years, like, that's amazing. How'd you get there? Yeah. And like to your point, right? If you suddenly saw a landscaping company with 25% margins, you'd probably be like, hmm, you know, Yeah, doing, doing commercial landscaping. I'm like, oh, how'd that happen? Exactly. Exactly. Yeah. Yeah. I haven't seen it yet. Yeah, exactly. Okay. Those are really

good red flags. I imagine most of the buyers you work with are using the SBA program for their financing. Is that right? Yeah. Yeah, by volume. Although we do work with independent sponsors and who use different programs and kind of help with that as well. So, obviously, right now, we're seeing some changes to the SBA program coming up shortly. What's your take on it? In fact, for people who may not be aware, what are a couple of the changes that are coming up and what's your position on those? Yeah. So I think the biggest change that you're going to see is really the equity requirements. Especially that half of the equity check has to come from the searcher's pocket, right? Yeah. So it used to be the case that, you know, you see a $5 million deal that's a $500,000 equity check, you can source that entirely from an increasingly sophisticated institutional SBA equity financing. But now 50% of it has to come from you. So like $250,000 of that

check has to come from, you know, your own pocket. And that will make it difficult for some people. There's other things about, and, you know, I've gone through it. I haven't gone through it as extensively as I should yet, but there's other things about how you can't make any distributions to basically yourself or others until the SBA loan is repaid in full, which, again, will actually make it a little challenging for some investors who like to see that type of stuff. But, you know, I actually think it's kind of prudent. You know, you probably should be either reinvesting in the business or paying off the loan until, you know, you're ready to go. So I think, you know, the changes we had last time around, I felt like those were actually bigger changes. These changes are a little bit more at the margins. Yeah, but still very impactful if you're using investor, I would say.

Absolutely. Especially for first time buyers, because you're right. Up until now, there were creative ways to like, you know, sell our notes on full standby or bringing in just purely a lot of investor capital where you could cover those down payment portions and then use a larger amount of your personal funds to show that post closed liquidity. But now, like an example, you just showed, now I have to write my own check for 250 grand and then I can bring in investors and then I still have to show post closed liquidity as well. I can't just be, you know, paper rich and cash poor. And so it does tend to weed out the market a little bit. I've seen some discourse about how like, this is bad for first time buyers. I tend to think it's a good thing, especially when you're, you're levering up that high. There's no program in America that allows people with little more than a US citizenship and a credit score to borrow $5 million at 10%. So you probably should have to write a check for that. You're still getting incredible amounts of leverage and it's scary. Everybody I've, you know, I've worked with and talked to who has actually gone through the process

and operated business there. They come out of it and they're like, people really discount how important debt service coverage ratio is. And they're like, you know, a lot of times a bank will let you get by with a 1.5 and I wouldn't do anything lower than a two or a 2.5 or, you know, I'd bring on even more investor capital and it's a, you know, after you've been there, you realize just how important, how impactful it is when you have that level of debt. So I can definitely see where they're coming from. Yeah, it's kind of like when you're flying, like the more leverage is like just flying closer to the ground, you know, it's like, you, you, you could do it, but your margin of safety just, just gets really small really quickly and you don't appreciate it until, until you hit some turbulence. So yeah. And, and also maybe this is just me. I don't know if you've seen this as well. A lot of searchers, um, they're really, they really pay attention with the amount of money that they're using on their search and the amount of money that's going into the deal. And they tend to not pay attention to the larger sums of money in the deal that they don't see.

And so for instance, you know, I may notice 30 grand going out of my bank account to cover my Q of E or my, my legal fees or a quarter of a million dollars going out to cover my equity check. But because I don't see the 3.2 million dollars that I personally guaranteed when I signed the personal agreement, that part doesn't really trigger my risk tolerance. It's magic money. It just, it's magic money from a bank account. Yeah. And I, I think, you know, um, it's, it's real when you start making payments and you're like, Oh my gosh, like, uh, yeah. Um, and, and, and, and that to your earlier point, that's what sometimes can skew people's like decisions in terms of quality of earnings or legal expenses because they're so focused on that particular thing. But to your point, right, you know, when you compare the magnitude to, to the other, it's, it's kind of incredible. Wow. All right. So let me pivot just a little bit. What's one of, like, and I don't need to pick one, but what's one of the absolute craziest things you've seen working in this,

uh, lower middle market space? Cause it is the wild west. Yeah. I think probably the craziest thing I saw, it was, um, outright fraud on a small deal. Um, it was in, um, one of the businesses you should actually be, uh, really careful about is supplements. Um, and it was like, basically there was no, like they sold it as if it was making all this money and it turned out that like, you know, their main supplier was litigating, was basically saying, Hey, like all of your material is junk. I can't even like bottle stuff up. And like, uh, they actually, they, they had audited financials. The company they, they count, they had audited financials from was an accountant that actually, uh, was arrested for fraud. Um, like, surprise, surprise, you know, six, six, like a couple months afterwards. And so, um, it was a, yeah. So the supplements industry is, is actually

one of those other industries where you just have to be extremely careful about that. We, we actually just don't, don't, don't do it. Um, I think I might have mentioned to you like one where it was very dependent on a particular, um, uh, provider of certain technology that was effectively reused and resold. And then that, you know, six months afterwards they kind of pulled the plug and like you have these representations that say like you don't know of any problems. Um, and they, they made those representations, but you know, they, they, I'm, I'm 100% convinced that the seller actually knew what was going on and they were getting their exit liquidity before, before that happened. Um, and then, um, I think, uh, I'm trying to think of like other crazy things. Actually, a lot of the craziest things we see are things, reasons why deals die. You can see really rapid declines in performance

over just a couple of months. And then all of a sudden you're like the margins of a business that was going to be sold for $4 million disappear and like the deal just doesn't happen. Um, and you're like, how is it possible that a business that's supposedly making $750,000 like performance declines to the point where it's like not, not, you know, making anything in three months and supposedly it's been around for 20 years. Like weird stuff like that. Um, um, owner signs the L a Y and they punch out, right? Exactly. And then they're just like, well, I'm done. Um, and you know, then, then you're just, you know, you're like, well, no, like I have to buy this business still. Um, we've seen situations where we have sellers counsel that demand to rewrite the entirety of the agreement and basically try and do it on two page form and say, I'm not going to sell to you unless it's essentially a handshake deal. Um, so, uh, anyway, those are just kind of a couple of them. Yeah, that makes sense.

And you touched on something there and hopefully the supplement situation was avoided before the buyer bought. It was not. Well, here's the thing. This wasn't with SBA. This was with their own funds on the balance sheet. It was $500,000. So it wasn't that big and they didn't do a key. Well, they didn't do any analysis. They were just like, I trust these guys. Let's do it. And they did it. And you know, they shouldn't have. I actually see that a lot, you know, people who, uh, you know, they're like, I'm just going to do it on my own. It's like, like you said, the handshake agreements. Um, and a lot of times those come back to bite you later on. Um, but you mentioned something about the as an aside, like, I think a lot of people, unfortunately on smaller deals, there's a feeling that like, well, I can't pay a lot of money because like it's not a small deal. It's not worth it. Right. Which I, I understand. I totally get it. Just realize that actually in the smaller deals, it's often where it's, it's riskier. It's more likely that it's, it's more likely that you see a business that actually is a job or where like everything just kind of disappears.

So the smaller into the market counterintuitively you, you have to be even more careful of. It's exactly why multiples expand the bigger the business gets, you know, the lower they are, the higher the risk it's going to go away tomorrow. Um, you mentioned something there about, uh, the representations and warranties. And that's something I kind of want to touch on real fast because, uh, there's this misconception among first time buyers. I know I had it as a first time buyer, which is the purchase agreement and my legal documents are there and they will protect me, which is I go into the purchase agreement, you know, the seller signs off on all their stuff. I sign off on all my stuff. And if they're not telling the truth that I'm going to take this thing to court and I'm going to get my money back, I'm going to like be able to sue them, all this other stuff. And I found from personal experience that that is not exactly how the legal system works. So what, what have you seen, um, you know, when things don't go the way you'd expect, you know, what, what is the, what is the reality for, for buyers, um, when they have nothing more than like their purchase is going to fall back on? The reality is that litigation is very expensive and you're litigating and in

many ways it's, it's kind of a pay to play system in the United States, unfortunately, and the seller that you're litigating against is also the person that you just gave several million dollars, which they can easily use as capital to litigate against you. Whereas you now have a drowning business that you're trying to keep the lights on and, um, and you're in a much more difficult situation, right? So, you know, you can litigate, um, but by the time that the litigation would have actually gotten through, you're probably already dead. Um, and, and, you know, you could say like, well, what's, what's the point of doing, you know, a purchase agreement and paying all this money to lawyers? If that's, that's the case, I would say oftentimes the process of going through this ends up flushing out a lot of things and you'll find that, um, you know, the, the seller doesn't understand this concept either. So the seller often takes it really seriously and will not sign their name on things if, if there's, you know, a potential issue there because they're afraid,

they're still very afraid of being sued. And so it does, um, it does have a way of bringing issues to the surface. And, um, it, even though ultimately, you know, if you're asking the question, how can I do it? It's, it's, it is hard. Do not like, it's not a substitute for all the other sort of stuff that you, you do. And, and to be honest with 95% of deals, you sign the agreement and then you, you put it in a drawer and you never look at it again. And that's actually what you want. Um, but you know, you have to, you have to be there for, for the five percent. And, and the process itself is helpful, even though, you know, you might not think of it at the time. Yeah, it's exactly what I've seen as well, which is, you know, if you believe, uh, there's a fear of litigation, then nine times out of 10, the seller does too. And so you guys are able to work together. Um, but I've also

seen, unfortunately, I've, I've had a lot of these conversations that don't go well. And you know, a buyer is talking to me and they're saying, Hey, you know, should I sue? Should I move into litigation? I'm a first step. I'm always like, no, you should talk to a lawyer. Here's a few. I'm not one. But the same thing. The next thing I tell them is like, look guys, the reality is if, if this, if something has happened that has materially damaged the business in a way that you're considering litigation, then you're probably already screwed. Like, let's be honest. I mean, the business is failing. Um, you probably don't have the capital for litigation. Even if you win, the seller may not have the funds to actually recoup you. There may not be anything there to get. So it's, it's a lose, lose scenario in a lot of ways. The best way, a lot of times, the best thing you can do is, uh, figure out a way to like, how can we, how can we kind of wrap this up and find a way to move on as painlessly as possible? Yeah, exactly. And, and I hate to say that because it means good people get screwed. Um, but it's, you know, it's true. Um, and it's, it's the sad,

the sad reality of our, of our, um, what we do. Yeah, but to your point, it actually speaks to the importance of working with really good attorneys because like you said, the process helps weed out those problems, hopefully before you get there. And a lot of times these issues, you know, they happen from people doing their own handshake deals. And then there really, there really is no recourse. Right. Exactly. I think, I think that, I think that the, I think there's a couple of things. Number one, it's a signaling thing, right? If, if the seller is willing to put their name to a very extensive and protective purchase agreement, most of the time that's a signal, you know, it, it, that's a signal that they are confident to stand behind the, the, the representations and warranties, um, uh, which is a good sign. Um, and I think that, you know, we will often have frank discussions with people where we say like, look, I wouldn't do this deal. And this is why, you know, and, um, that, that

is a valuable conversation. No, not everybody follows it. And we're not always right, right? We're lawyers. We may, we may see a lot of deals, but that doesn't necessarily mean that we're right. But I do think that, um, I do think that if you have somebody that's seen hundreds of deals, look at your deal and say like, I, I'm getting, I'm getting this bad feeling, this bad gut feeling, that's a good, um, that's, that's an important data point. Yeah. And, and really that's what it is. It's just data points. I, I put out a post a while back, which was, uh, you know, one red flag, if the seller is arguing the, the, the re-compete or the competition zone, that's a red phone that they probably want to compete with you. Otherwise, why would they care? So they're taking the, yeah, they're taking the first agreement just as seriously as you are. And they're telling you something by what they're, you know, what they are and are not comfortable with doing. Yeah. Yeah. Yep. I, I just, just to another point, I had another deal where like there was, we had a representation

about the quality of the warranty work and the seller pushed back really hard on that. And, um, turns out after the business was bought, seller was actually kind of shoddy. There were a lot of disappointed customers that were calling up and, and you know, I guess in the past the seller was just like, yeah, well, you know, like that's your own fault. I'm not going to do anything. And like the buyer didn't want to run his business like that. So, um, yeah. Yeah. That actually reminds me of something else, which is, um, a lot of times buyers have this side, this misconception that an asset purchase will protect you from that kind of stuff. And in a lot of ways, yeah, it does because technically you're a different entity and all that, and all that kind of stuff, but you forget that we live in the real world where you may be a different entity, but a lot of times your suppliers and your customers are all still the same. Those, those people don't change. And so you still have to operate with the, within that ecosystem. And, uh, if you buy a business and you have the same name and the same location and the same trucks, but your entity is different.

He cares. So you got to figure that stuff out. Your Yelp reviews will not be like, well, thankfully this was under the, the old, old owner. And therefore I'm not going to give you a bad review. Like, no, yeah. If the owner stiffed your suppliers for 20 grand and I was, and then sold to you and then the suppliers like, yeah, you got to pay up this bill. I'm like, no, we're a different business. Like that's not going to fly. Yeah. Exactly. So it's good to, it's good to look at things from like the legal and the paper perspective. And at the same time realize, how is this actually going to function in the real world when people actually have to start doing business with each other? Yeah, exactly. And I think, you know, it's, it's a question we have in terms of our own value all the time and making sure we're providing it. And I think, you know, uh, this sounds terrible. This probably sounds terrible, but honestly, I feel like a lot of times I can just get a gut feeling about where the seller is coming in at. And even though I'll always fight for, you know, the best in market predictions, I also feel like I get a sense of like, okay,

this seller is basically a shoot still straight shooter. They might be unsophisticated and because of their lack of sophistication, they might ask for things that are kind of off market in terms of the actual paper purchase agreement. But your real risk as a buyer is the non straight shooter seller. So, you know, like, I might advise you to give on the, on the legal docs more if I get the feeling that this is a good counterparty who's just not as sophisticated, you know what I mean? Yeah, yeah, absolutely. And you kind of have to gauge that out. I've had sellers who they show up with very unrealistic and off market terms like, I'm going to sell the business, but I want to keep all the AR and we're not going to work it. We're not having a working capital discussion on keeping all they are. And it's because they have friends in business who got screwed on working capital when they sold. And they're like, this is how I'm going to protect myself. And so that doesn't really work out. But it's understanding like why they're making the request that they're making

and whether or not they make sense. And if it's something that you can actually have a conversation about or, or if this really is something you can't get around. Yeah, exactly. And like, sometimes the working capital discussion is hard, but you just say like, okay, well, my price is based on the providing of the working capital. So, you know, if you, if you want to keep all the working capital, you know, it would be a much lower price. And that's just the reality of the situation. And, you know, honestly, one of the hardest things is sometimes you have what is a good business, but an unrealistic seller. And, you know, you, you, because it's so rare to find, it says it's so hard to find a business to buy, like it, like you want to, you want to grab on, you want to keep holding on, you know, because it's so hard, you've worked so hard. And finally, you got something that you think is going to work. But I think, I think it's actually very helpful to kind of put a distance between yourself and that and just say, Hey, look, this, this is the

deal that makes sense for me. And what financially works, know that other buyers are going to have the exact same problem you are. And we've had situations where you made a fair offer, the seller was like, no, I'm not interested. Six months go by a year goes by, they tested the market, and then they come back and they're like, we had one situation where there was a 50% customer concentration, one client, we had a buyer that says, look, I can only buy this with a 50% forgivable seller note. And the seller was like, absolutely not, why would I do that? And then the seller went on to the market. And about a year later, guess what? Same seller came back and said, actually, are you interested in getting this done? You know what I mean? Yeah, yeah, it's happened a lot. And it's happened to me. And that's why I tell seller the buyer is the same thing where it's, you know, be clear with what your, you know, what your guidelines are, put forward a fair deal. And more than anything, you know, if when you want, if the time comes for you to walk away, walk away on a positive note, you never know the seller could come back to you. And you're never going to be able

to convince a seller that they're wrong on, on their number. And the only thing that can do that is the market. And sometimes they just need to go test it for themselves. And hopefully the business hasn't hasn't lost any strength during that testing period. Right. And I think the other thing is, I think to your point, like, I think a lot of times people get angry when they get that because they feel like they're being accused of being a cheapskate or they're being like, you know, like when, when they're asking for something that's off market. And I think just saying, look, I think we're, you know, there's no reason to be angry with the person. It's like, I just think we're too far apart on this and deal terms. I like you. I like your business. I think we're too far, far apart here. So I think, you know, maybe you got to find another buyer, but you know, it was really great to meet you, you know, having that conversation that preserves the relationship. And then, yeah, you never know. Yeah, absolutely. All right. So a lot of really great nuggets here. I'm going to wrap up on one more. And I know we all have like, we all have our soapbox.

If we've been here long enough, we have our soapbox that we stand on that we scream about. So I'm going to give you a moment here. Go ahead and stand on your soapbox. And if you can speak to first time buyers, what are you going to tell them? So I'm going to stand on the soapbox on one particular issue, which is that sometimes you are tempted by good business, bad process. And where this happens a lot is a broker who's just like, we have our form purchase agreement, we never change it. You're going to do this deal this way. And then you're going to buy the business. And that's just how it's going to be. I just think that's incredibly risky. I think it's incredibly risky. And what's so hard is sometimes you see a business that you are so interested in, but like doing that, it literally is Russian roulette, right? One out of six, one out of five chances, maybe

even one out of three, you commit financial suicide doing it that way. And you're like, but it could be the five out of six chance where everything ends up fine. And it's like, well, that's true. But is that the kind of risk that you're willing to take? And so I think this industry naturally attracts people that are risk tolerant, naturally attracts people that kind of are like, well, let's kind of break the rules a little bit. Let's do things our own way. But there's a limit to that. And when you see good business, bad process, sometimes you, I hate to say it, but sometimes you still have to walk away. Yeah, you're exactly right. I tell buyers, I'm like, you need to, it feels weird because if you're a first time buyer, you've never done this before. And so you feel a little hesitant. But you have to walk into these things as if you're the bell of the ball because you're the one showing up with the check. You know, if I'm showing up as an SBA backed buyer, that means I've got up to $5 million in debt. I bring some cash of my own. Maybe

I've got some investors. I can reasonably do a deal up to maybe 10 million enterprise value. And if that's, if that's the position I'm walking into the deal with, you better believe I'm bringing my own deal team. I'm having my own documents, my own purchase agreement. Like all my stuff is mine. And if that's not cool for you, then there's some other buyer out there who's going to make bad decisions. It's not going to be me. And so, yeah, I could not agree more. I've seen that a lot where, you know, they're like, Hey, this is how we do it. By the way, before the LOI, you need to, there's a purchase agreement that we've already pre-drafted. Like, I'm not your buyer. Sorry. Yeah. Exactly. Exactly. Awesome. Bill, thank you so much. I really appreciate your time has been this has been a wealth of knowledge for all the searchers out there, whether they're, you know, self-funded searchers or independent sponsors, if they're looking to get a deal done, how do they engage with with you and your firm? So you can go to Barlow and Williams. You could probably just Google us and ask AI and they'll point you in the right direction. We have

a site on our site. We'll have a free LOI template that you can give. Just so you know, when you reach out, some people like to have conversations really early on in the process. It's a little hard for us to do that because fortunately, we have so much volume right now that we're kind of dealing with clients with live deals. But we give you an LOI template. We give you a lot of resources. And if you do come across an issue on a live deal or live ish deal that's like Harry, you can reach out on an email and we can often provide some type of support. So I would say go to our website, get the LOI template and then, you know, reach out when reach out when things start start getting interesting. And, you know, you can always feel free to introduce ourselves via email and we're always happy to talk. Absolutely. I've had a chance to review your LOI template and it's fantastic. I refer a lot of people that direction. So really appreciate your time. Really appreciate the resources. And more than anything, I appreciate you and your partner bringing some professionalism

to this space because it didn't used to be here and it definitely helps us all out. We're taming the wild west. That's what we're doing. Yes. Yes. Yes. One area at a time. So thanks again, Bill. And I appreciate your time. All right. Thanks. Good. Bye.