Ep 313: Understanding M&A Legal Due Diligence & Fees When Acquiring An Online Business with Eric Hsu

Do you want to buy an online business but aren't quite sure what you need to pay in legal fees or if you should be paying legal fees, or what sort of things are involved with legal fees and buying a business or legal due diligence?

Hi, I'm Jaryd Krause. I'm the host of the Buying Online Businesses podcast and today I'm speaking with Eric Xu, who is a business attorney committed to helping individual searches escape corporate life and dive into entrepreneurship through acquisition.

He specializes in the intricacies of business buying and provides strategic advice on deal structures and market trends. And as an active content creator, Eric shares a lot of valuable insights across platforms like X, LinkedIn, and his blog, aiding corporate professionals in their journey to becoming successful business owners. And he's strictly on the buy side, which is really, really cool. He does offline acquisitions, but he also does online acquisitions, e-commerce and many different types of online businesses.

And he has some great resources in this podcast episode; we talk about legal due diligence. We talk about when do you need legal due diligence? What size deal do you need to start using legal due diligence on? What size deal typically is legal DD not really done on? What sort of work looks like? What's involved?

What sort of legal work is done with a letter of intent? Legal work done with an asset purchase agreement or just a contract of sale, also work done in between an LOI and legal due diligence, what sort of searches they do to protect their buyers and what work goes into creating a contract or an asset purchase agreement, how all of this legal work ties into using lending like SBA and how your legal fees can be covered or be a part of your loan, technically. And we talk all about that.

We talk about how much legal fees can cost for different sizes of different deals. What looks like we talk about what kills deals and then how to prevent deals from dying and also how to protect yourself as a buyer as well. So there's so much value in this podcast episode. I know that you guys are going to absolutely love it. I did; I really enjoy connecting with Eric. Obviously, before we dive in, it's not the only way I can help you for free. If you are buying a business and you want to take the guesswork out of buying a business, make sure you get my due diligence framework.

Buyingonlinebusiness.com to ask for free resources. It's what I use and it's what my clients use to do DD on deals. Now let's dive into the pod and enjoy.

Eric, hey, thanks for your time. Thanks for jumping on the pod. Welcome to the Buying Online Business podcast.

Thanks, Sheriff. Thanks for having me.

Yeah, you're welcome.

Yeah, absolutely.

So many questions. We've had a great little catch-up off-air quickly, and I'm sure we're to go down multiple avenues. So let's just get stuck in, I guess. For people looking at acquiring, as you know, we're mostly helping people acquire online businesses. Well, that's basically what we do.

And there's a certain range that most people don't usually use a lawyer for contracts, typically I find under a certain range. What's the smallest deal that you've done and worked on in terms of either drafting LOIs and APAs and contractor sales and maybe doing legal DD? What's the smallest one that you've done? I've done deals as small as half a million. I think even one was like 205,000. It happened to be where my client had just closed the deal and he said, Hey, here's another one. Can you work on this one?

So I did the whole thing and I think it was beneficial. We were working with a larger holding company as the sell side. And so they're very professionalized, but they were also very corporate. So by having counsel on the buy side, I think we're able to get things going pretty smoothly. I got it done quite well, quite quickly, but yeah, I've done deals of all sorts of sizes.

Yeah, cool. In the online space, we see that as well. Specifically, people aren't going to be using a lawyer for anything under the half-million range. And then you start to get your APA written up because it costs money for legal fees and legal DD and everything when it comes to acquiring and it can really dig into the purchase price if you're going for something low six figures really.

Absolutely. The next thing is, when you do get into that range of half a million plus, what sort of legal and you know, in seven figures into the eight, what sort of legal work do most buyers usually need for online businesses? Most buyers don't have an idea, right? And we need to sort of share, like, hey, well, like, does it just help with an LOI or does the people that you're using with SBA help you with an LOI?

Typically that can be the case, right? And maybe it's just a contract of sale or a little bit of legal DD. What sort of legal is you looking into? Is it entity searches and whatnot? So what's the typical amount of or type of legal work that you would do or people would need?

I get involved as early as pre-LOI when someone's looking at a deal, or they're interested, and they're thinking, How do I structure this? How do I fund it? How do I allocate risk appropriately? How do I price it? How do I present it in a way that the seller is going to be interested?

At the same time, being fair to themselves and making sure to protect their own interests. And then, at the same time, making sure that they're compliant with, as you mentioned, many of them are SBA-backed buyers.

There are lots of competing interests there. So I start as early as pre-LOI and help them review the deal, help them talk through risks, how to mitigate, help them talk through what the seller is likely thinking, and then different permutations of deal structure. For example, even a basic question like, Are we going to do an asset purchase or are we going to do a stock purchase?

And if we're doing a stock purchase, are we going to use one of those tax elections that gets us to treat it as an asset purchase? And then there's also something called an F-REOR-ing that's also complicated, often needed when it's a stock purchase. And we're talking through some of these things early so that we can memorialize them in the LOI, because I find that LOIs that have a lot of these deal points figured out and written down mean the deal is more likely to close because there's fewer things that are going to be hiccups or they're going to be points of contention later.

I absolutely love that because the more in-depth you have the LOI, the ease with which you can go through more of the revisions therein. And then when it comes to the APA or the contract of sale, there's less amendments typically, right? It's like sharpening the axe to chop down the tree. You want to do most of the preparation work of sharpening the ax before you just get the contract of sale written up and get the deal done. what are some? I'm going to ask you in a second about asset purchase versus stock purchase.

You park that one.

Sure. When it comes to LOI, what are some of the most typical things that you'd like to include outside the difference of if it's going to be an asset purchase or a stock purchase? Do you like to include typically the deal structure as well and what are maybe some other things that you like?

Sure. The deal structure. Yeah. We want to make sure the seller knows exactly what the structure is going to look like because ideally we'd like them to go to their CPA and say, Hey, if I sold my company using this deal structure.

What am I going to walk away with at the end? How much money am I going to get? How big of a tax bill am I going to get? What am I going to net? And then for anything that's deferred, any sort of seller note, any sort of indemnity escrow, any kind of stuff, we want the seller to have some understanding as to how likely they're going to get it and how long it's going to take before they get it.

Because for most of them, they have this time window. It depends on what their age is. A lot of these sellers are in their 60s. Some of them are in their 70s. And if we say, we just want you to take a seller note and they're like, well, how certain am I going to get paid? And when am I going to get paid? A 70-year-old might say, Well, listen, I have things for my lifestyle that I need now.

Yeah. And I can't wait 10 years to get paid for it, for example. So we want all those things really set out clearly. We also want to let them know that certain things are required before we're going to buy. So we would like to list out any contingencies, loan contingencies. A lot of times there's a lease.

We want them to know, Hey, SBA, for example, has requirements on this lease so that we need those met before we'll close. Maybe we want to make sure key people are still there with the business before we close. anything that will take out, A, give the seller certainty about things that they need and then B, address any of these potential deal killers early. If they think, Whoa, that landlord is horrible to deal with, we'll never get over the line with the landlord.

Well, then we'd better put our heads together and think about whether there's an alternative or not because the last thing we want to do is get to the 11th and the landlord can't be reached and we can't close the deal even though everybody spent $100,000 on diligence and lawyers.

Yeah, it's so important to really sort of set the scene and set the groundwork before you go in and decide to spend a whole lot of money on BD because you could save yourself so much with just having a couple of good heart-to-heart conversations about open conversations about the business before you go and uncover so much before you go into proper DD, right?

Absolutely. Yeah, think LOI is like the first test. If anything's going to fall apart, let's let it fall apart then, or if it's going to be some serious, tough discussions, let's have it then. I mean, it's going to happen sometime, like pain now or pain later; pain later is more expensive.

Absolutely. And it's also good to be able to take the LOI to your lender and sort of see, well, this will be able to get lending doing it this way with this structure for the buy side too, because you've yet to think that's very wise of a seller to make sure the LOI is set up in a way that they're going to be able to get the finances in, especially if they're retiring in a way that is structured, that can be fair for them and for them to just even communicate that pre-LOI and the buyer be aware of that so the buyer can be like, okay, cool.

I want to give you what you want. And I want to have that in the parameters of how we need to do it for lending as well. Those conversations really are the setup, right? Absolutely. You make a really good point there. I usually try to get through one of my SBA broker contacts; that is one I do a lot of work with and he's able to get it preflighted by a lender, which means they can sign off on the terms of the structure, the terms of the seller note, because the last thing we want is for the seller to think they're going to start getting paid on their note right away.

And then we bring it to the bank and the bank says, No, you seller, you got an interest only for five years or full standby for 10 years. And that changes everything. And we never liked having that type of disappointing discussion after we brought it to the lender. We like to get all those things early. And so they know exactly what the deal looks like. For sure. Now, when it comes to online businesses, what sort of legal DD do you do outside of just contracts?

in terms of like LOI and contract of sale. Yes. So after the LOI has been signed, we do quite a bit of legal DD, whether it's an online business or an offline business. So online businesses are unique because, of course, a lot of things are based on contracts based on IP. That's not tangible.

It's not a location usually where you are going to go and look at machinery, do an appraisal, an inventory account, or anything like that. A lot of it is intangible, as you know. So we'll be looking at things like whether they comply with various laws on how they present themselves to the public?

We'll dig into their website and make sure that's in compliance with the CAN Spam Act, with FTC rules on advertising, and with COPPA, the Children's Online Privacy Protection Act. Do they get information from people? Do they properly store that? We'll also do very deep diligence on their reputation. So we'll be looking at their social media posts.

We'll be looking at background checks on the owners and any of the key people in the business, just like we would for an offline business, just as important. We run the company through a diligence and reputation check to see what's out there in the news about the company, about the key people. We run their credit. We look for lien checks because that's just the same as any offline business.

What are the pieces with an online business that are not as critical with an offline business as we usually will recommend doing a tax diligence as well? A lot of times, online businesses that sell throughout the country have tax exposure in other states other than the ones where they're farmed.

And it's surprising how many online businesses aren't in compliance with tax rules. And that can be a problem that needs to be managed—a risk, that is. How do you manage that for risk if there is, you know, they're not above board in other states for tax for legal? So typically we would get a tax diligence review to get an analysis of the amount of likely exposure.

If it's a small amount, we might just have them do what they call the amnesty filings, which is to the states where you can say, Hey, state, I've been doing business, sold to your residence. How much do I owe you today to be in your good graces, guaranteed? If it's easy to do that, we might do that. Otherwise, sometimes we might need to do an indemnity escrow for a period of time and say, okay, it looks like we could have an exposure up to $100,000. Let's put that in escrow.

We're going to wait a certain period of time. Or maybe the buyer does the amnesty filings to see how many states can get cleared. And then if they get any claims or demands by states to pay sales tax, they've got a pool to draw it from. Or sometimes it's just a matter of offsets against the seller notes. Sometimes we just might need a bigger seller note because we have more indemnity claim potential because of the tax problems.

But it starts with attack diligence. Yeah, it's awesome. It's two great ways to have a tied into the note or have just an indemnity escrow and the seller would just leave that portion of those funds in the escrow to draw from, right? How typical is it that you see it in terms of seller notes where you see a lot of the note being left in escrow or do you see it not being a part of escrow and what does that look like with SBA as well?

Because sometimes, depending on how much funding people can get, the note will have a different structure. What are your two typical scenarios that you normally see? So we always have the note separate from the escrow. So it's either one or the other or both. sometimes if we have a note of a certain amount, say a typical deal is about 10 % seller note. If we have more risk than usual, we might say we need a 15 % seller note.

And then we're going to agree that we can offset that note account for any indemnity exposure or other losses. If there's an additional desire to, or they don't want to take a note, and the buyer is okay, we can switch to an indemnity escrow structure. And that's a separate structure because the note just starts paying. And then we would just like say, Okay, the principle of the note is less because we need to offset it for indemnity escrow.

We actually have to take money from either the buyer or the bank and we'll park it with an escrow agent for a set period of time, say 18 months, and then anything that shakes out as far as indemnity problems or losses, then the buyer would go claim from the escrow agent, say, Hey, I suffered a loss of $50,000, so I had to pay some tax bill, and then it would come back out as a reimbursement. And the SBA is fine with either of those structures.

The only thing that they can't, sometimes they do have a requirement that indemnity escrow proceeds get paid back to the bank to pay down the loan, because they can't have any of that going to the buyer, but other than that, there's no issue with SBA loans.

I don't, yeah. Cool. Cool. Yeah. It's nice to know because sometimes for people that like to want outside of risk as well, sometimes people that want to purchase a business that may be more than what they can afford in terms of lending could have a 10 % or maybe max 15 % note that's outside of SBA. Maxing out their borrowing capacity would say maybe they can get two mil and the business is two mil and they're putting in 300 or 400 K maybe, maybe a bit less, but they can pay up to two mil for the business, but it works out being the business more valuable and maybe it's like a $2.3 million deal and they need to have a note of 100 K outside the SBA, right?

Outside that contract of sale. To be clear, the SBA always wants to know about it because it needs to figure into their debt service calculation, but it's outside of what they're lending for sure.

And I've seen, and especially with online businesses, I've actually seen even larger notes. I've seen as high as 20%. Sometimes because it's a little harder for them to find funding. I've found that sometimes buyers can command an even higher note to leverage even better based on my observations. Yeah. And we're going through one now that's more than 10%. And because it can allow us to maximize purchasing price as well.

yeah, absolutely.

Sometimes that's win-win because you can offer the seller what they're thinking it's worth and then even have it be a forgivable note so that parts of it get forgiven if the performance doesn't actually meet what the seller says it should meet and what it's historically met. So that can be a tool for that too.

Yeah, absolutely.

Now, how do you work with, because I'm sure there's going to be a bunch of people thinking, Right, cool, this is great. Like when I need a lawyer to acquire an online business, what capacity do I start working with Eric? It depends. I've noticed different lawyers do different things. Sometimes they can do flat fees. Sometimes they can do things like alley rate. What do you normally do?

How do you normally structure it? Do you prefer to look at the deal and see what they want and then do a flat fee so people know and then, or do you just do an alley rate and take it as it goes? The next part of this question is going to be a difficult one to answer because it's going to be well, it depends on the size of the business and it depends on how much legal work the person does.

It'd be cool to also speak to how much buyers and/or sellers put aside for legal fees too. But yeah, first, how do you normally structure? Do you do hourly or flat fees? Or what does it look like for you? hate hourly fees with a vengeance. I will not do anything hourly. I personally, as a lawyer, hate it.

I hate tracking my hours. I know clients hate it as well. No client should be worried about calling their lawyer to ask a question or should be stressing out over their lawyer's bill and wondering how big that's going to be with all the other stresses of closings. Every single thing I do, since I'm a buy-side only lawyer, &A is all I do. I know how much deals are going to take as far as my work. So I flat-fee every single deal that I work on, depending on how much diligence they want.

I have two levels of diligence. have like full diligence and light kind of like quality of earnings, having a full and a light version. And then I just give them a quote on a flat fee for the entire deal handled from beginning to end. That's how I do them. Cool. I love that. I've only said that even when I work with contractors for my business, I don't like to do hourly rates because you also don't know, like you can't track it, right?

And you just don't know. And for a lawyer fee, you guys charge well and so you should. You've done a lot of study to be able to get there and you don't know it can't be tracked. So it's so nice, like you said, but the stress of, like, how much is it going to cost at the end of the day?

Yup. Yeah. Also, there's opportunity as well. I don't think a lot of people realize that, like with lending and SBA, you can have your legal fees put under that as well. How does that work?

I'd love for you to speak to people about that so they can know. I can have this set aside if I need, but can I put it under the SBA? And what does that look like, why and how does that work? So the SBA will always require a certain amount of cash equity injection from the buyer slash borrower. So let's take a million-dollar deal for example. SBA might say, Go get a seller note for 10%.

We'll lend you 80 % and we want you to bring in 10%. And of course, on top of that, there's guarantee fees and closing costs and all that. So let's set that aside and just say that those will be added at the end. you've got the put in, so it's a million-dollar deal and they put in $100,000, and then what was the other $100,000 for?

The seller note was going to be 10%. So 100K and the bank was going to provide 80%. So 800K. Cool. There's going to be closing costs, but we'll leave that alone for now. We'll just talk about the basic structure. The way the bank regards legal fees and financial diligence fees is that it's part of the $100,000 that the borrower has to bring in. So let's say the legal fees end up being, let's just say, 18 grand and the financial diligence ends up being another 12.

So you have 30 grand on diligence and legal fees. Then the borrower only needs to come in with 70 grand. They just need to show the 30 grand in receipts and then the 70 grand at closing for their equity direction.

So that's how the SBA considers those as part of your costs. Or you can write in a check for a hundred grand and then they'll pay you back whatever they were going to give you as far as working capital. That'll come back to you too, because most deals have a built-in amount of working capital as well.

Yeah, absolutely. It's a really good way to explain it is that whatever your deposit is, say it's okay and you've got fees or you got your receipts that you can take that as kind of like a deduction from your deposit, right?

You've got your legal fees that can be deducted from your deposit; your DD fees and &A advisor fees, even at times, can be deducted from your deposit with SBA. Yep. Absolutely. Have you noticed that possible with other sort of lending as well outside of just SBA? Like as SBA goes up to like five mil, maybe max eight mil sometimes, have you seen other lenders allow that to be the case too at all?

I haven't seen more than a couple of conventional loans. And I haven't been privy as to whether my client had to come up with the full amount of the injection otherwise. But just to answer your question on that, when it goes up to 8 million, it's actually 5 million still in the maximum. But the same bank is offering a conventional loan.

And they're saying you'll pay off the two at the same time, pari-poussus, as they call it. So with that, it would still be perfectly acceptable to use your advisor fees to work your down payment.

Yeah, absolutely. That's a specific SBA rule. So I don't know how it works with other lenders. Yeah, that's why I was just asking. I know SBA is pretty; it's pretty standard. In terms of fees, you mentioned a million-dollar deal; maybe it's 18k DD and also 12k legal. What's the typical range? What sort of prices should people know that they might need to contribute to legals for different ranges of business sizes, maybe like one to three mil?

Yeah, 1 to 3 mil, I'd say for everything; I'm talking about legal DD and the transaction itself, anywhere from 20 to 30. And then a rule of thumb is somewhere at or slightly below 1 % of the purchase price for deals above; that is what the industry standard is. I know there's a lot of firms that are more competitive than that, but that's kind of how they should probably be budgeting and 20 is about the minimum to get any deals done with full legal diligence and full representation on the transaction, handling all the agreements, negotiating with the seller council, working with the bank, and getting it closed.

Yeah. Also guys, we say this with that's very, very general. It's going to be dependent on the deal, how much DD you want, how full stack you want to go and, like, how much risk is involved. Right. So it could be more as well or it could be sometimes a little less if you want a very, very little DD. I'm comfortable with this. Just draft me up the documents and go. Sometimes it can be done with less too. Yeah. Yeah. Cool. Cool. a lot of businesses that are pretty straightforward.

I do know that, like, they like to go with that is, let's do it light, especially with the people that I work with being an advisor and me doing the DD and knowing a lot about the business and the risk, I can sort of explain that to them and give them the option, Hey, you can be super sure and do more DD, legal DD if you want, or this is pretty standard and this is the level of risk that you would be taking on whether you want to do more DD or not in terms of legals. Yeah, have that conversation all the time. Yeah, yeah. What do you see that causes most deals to fail?

The number one thing that causes deals to fail, you know, is a combination of lack of respect or anytime a seller feels disrespected. And I don't mean that in kind of like a seller's fragile kind of thing, but anytime they expected one thing and then you come back with something else, they feel disrespected.

If they think their business is worth it. In terms of, like, the seller expected a certain price and it came back with something completely different. Is that what you mean? It could be that, or it could be we agreed on certain terms of networking capital and then now you need more; they may feel disrespected and if there's not a good reason, your deal is probably going to die.

Or if you want them to, sometimes, like I said earlier, with terms of notes, if they expect, Hey, I'm going to get this note paid off in three years because I'm lending you money to buy my business and then you come back and say, Sorry, but the bank wants you to not take any payments for 10 years, something they feel disrespected about because they expected one thing and you agreed on it. Now you're coming back and you're reneging on that. Disrespected.

Your deal is probably going to die. So those are the things that are killing deals that I've seen. number, going back to that first one, I probably saw 10 deals die in the last quarter of last year because of earnings not meeting requirements. And then the buyer needed to come back and say, Sorry, we can't pay that. Let's talk about pricing. And then the seller says, Are you kidding me?

No way.

We agreed on a price; now you're changing it. That's it. Yeah. Doesn't mean that they're not going to come back later and say, Well, we thought things through, but that to me seems to be the most. The biggest deal killer is anything that disrespects one side or the other. But you know, primarily we're talking about the fact that a lot of times the seller is one walking away. That's what causes it.

Yeah. That's the one thing. And I've spoken to a bunch of people about that on the podcast before: that when you're selling a business and you're getting close to the deal being done, still not a done deal. And as the owner, you still need to run the business and still need to make sure that you're doing everything you can to ensure the business is going to be successful for the long term because you might not sell it, right?

Don't drop the ball. And also, selling can be a marathon at times, depending on how big your business is and how much work is involved in you presenting information for due diligence. It can be, it can take time and it can be a slog. And you also still need to, at the same time, focus on your business growth and making sure the business stays stable.

So one bad month doesn't cause somebody to go. Whoa, hang on. I don't need to buy this. We haven't signed any contracts. can walk away. And in terms of working capital, will you be able to explain that just so people can understand what working capital actually looks like?

What it looks like, what it means and how you sort of calculate it in the raw version for people, most basic. Absolutely. So working capital is, and I'm glad you brought that up because it's often misunderstood on smaller deals. It's hard for the seller to understand what networking capital is and why the buyer is expecting it. And at the same time, it's often overlooked by the buyer. And let me explain. The best way to explain that is once you buy the business on day one, between day one and say day 45, you've got the business.

How are you going to pay your bills? That's the question. And having networking capital on hand is how the bills are going to be paid. Say you're a widget maker and it takes 30 days for your customers to pay you after you ship out a widget. If you don't have any networking capital on board, you bought the business at day zero.

Day 15, you just finished making something for someone, maybe. And then day 30, you've got bills to pay—payroll, rent—where does that money come from? Out of your pocket if you don't have networking capital because you just sent the stuff out and it's going to take 30 days for you to get paid. So you just bought the business and you got an SBA loan to make payments on.

If you don't remember, I mean, for buyers who don't consider networking capital, they are dead in the water from day one. So the nice thing about having an SBA lender is they will build in guardrails for you; they will not lend to you unless you've shown where the networking capital is going to come from. And there's three places it can come from. One is from the lender.

So a lot of times lenders, especially for smaller deals, will just say, Don't bother trying to get it from the seller because they're going to just look at you with a weird look, like, Why are you having me leave money for you when you just bought my business? We'll give you networking capital, lower the price a little bit, and then we'll fund you. So that's number one.

Number two, some people provide it themselves, not very frequently. Someone just saved up $300 to buy a business. It's not like they have another 200 grand sitting around to fund networking capital, but that is a possibility. And then number three, for larger businesses, it's common to have the seller provide networking capital. And networking capital can be cash or it could be AR too. So it could be AR for a business. Again, going back to the widget manufacturer for widgets that they shipped pre-closing.

If they say all that AR is yours, then you'll start getting money coming in the door from day one for things that were shipped out 30 days ago. And that's what's going to keep the business running. AR for people, accrued revenue, right? Yeah. So I will just say you're right. The bigger the business, the bigger the business, and the more working capital, the higher the stock standard. Businesses in the low six-figure range and under, they don't; it's not really even a thing. Even below a million, two million.

So how do you, just for calculations for those 45 days or 30 days, calculate it? I know people are probably thinking in their heads about how it makes sense to do it, but just to say, how would you calculate it?

Yeah, usually I'm not the one calculating it. Usually I will rely on whoever's doing the quality of earnings or the financial diligence. And they will usually calculate it as follows: they'll take the balance sheet over the last 12 months and look at current assets, which are typically going to be accounts receivables and inventory minus current liabilities and then average it out for the year.

And then they'll say, That's what you typically have, as a difference between the two is what's running the business. And that's what we'll use to say: we want this much in networking capital on hand at the time of closing so we can actually run the business. Yeah. And it can be 30 to, so you'll have that whole year worth and then you can divide it down to monthly or daily. and then work out what you would need for those 30 to 40 days of that working capital.

And this can also be done with SBA as well, like the business plan. When you're getting SBA lending, you have to do a business plan and it can be done under that too with your lender as well. I will caution you that it's not always as accurate as it should be, I've seen because the bank underwrites it based on just the basic information they have and they're just protecting themselves and all they need to do is check the boxes and the SBA is guaranteeing 80 % of the loan.

So they're just doing the basics needed to make sure they have that SBA guarantee. At the end of the day, it's the buyer slash borrower who has to make those payments or go bankrupt. So I always tell people, especially for a larger deal, when someone's signing a personal guarantee, get the networking capital assessment from your financial diligence provider who will do the deep dive, who will look at everything from very minute detail all the way to the bigger balance sheet and give you a definitive networking capital down to the dollar.

That's what you should rely on so that you know you have enough. If you're the one on the hook, that's why I always tell my clients. Yeah, you've got like, when you're at the end of the day, you're buying the business, you're taking the risk and it's the risk of the business and the loan and everything. And that's why you want to have.

DD done and lawyers on your side to protect yourself from that. Yeah, it can, yeah, it can get ugly if you don't know what you're getting yourself into. Absolutely. What about communication in terms of, like, deals failing? Where do you see communication? breaking down and how and why? Because what I've noticed is that, like, why deals can fail is because, like, it can take too long, and that can be because we're waiting on certain parties to do certain roles.

Right. For example, it might be legally legal but just needs a certain amount of time to do the legal DD or finance needs. And we need to do financial DD. We need to do all these other types of DD or we're waiting on documents from other people once DD is done and all that sort of stuff. And what I see is that if there's just waiting happening and the buyer and seller aren't communicating, you can clearly see that that's what kills deals because people are waiting; we're in our heads about it.

Do you see that as well? And when, what other reasons do you see that communication can break down and why deals can sort of die like this way? Yeah, you got to bring up a really good point. communication helps move deals along and deal momentum helps kind of blunt a lot of these other problems. If buyer and seller are regularly communicating, usually it means they're on friendly terms. There's a lot of mutual respect and they're willing to solve problems.

So deals where they're like weekly informal check-ins between buyer and seller usually go through the smoothest. If there's an issue, they raise it, deal with it, and they move on. I should say that a lot of times when there's silence for a long time, it's a bad sign. It's never really good when you can't reach the seller and they're kind of just ghosting you or you can't reach their advisors and they're like, No, wait, wait, we don't know what the seller has been doing. We haven't been getting instructions yet.

That's never a good sign. that can lead, as you point out, some of that's inadvertent. Whether people are too busy or the seller doesn't have a good team together,. Believe it or not, sometimes they'll hire the wrong people, who maybe are litigators and they get to be in court for a few weeks. And then they do this deal in their spare time. Yeah. Bad sign. And they can drag things out and then deal fatigue sets in, which is a real problem.

And everybody's like, It's been four months, five months. Why isn't this deal closing and everybody gets tired of it and every little thing annoys them? And then finally they're at each other's throats and things go south. Regular communication, I think, is a fantastic tool. It sounds like you're a fan of it as well. I always recommend to my clients that if you're able to check in regularly and solve all the problems, brokers and intermediaries who will facilitate that, I think, are worth their weight in gold.

I mean, they're the ones who are making sure this deal closes. This is why those guys get paid. Right? Well, number one, yes, for due diligence and due diligence help and all that sort of stuff, but they drive the deal. And if you don't have somebody driving the deal, because then it can just like so many deals don't happen when the deal is with or without an advisor or a broker, so many deals don't happen because of this.

If it's not being driven, if the broker's lazy, and there are so many lazy brokers out there, the deals don't happen, right? Because you need somebody to drive it. And if you think about the seller and the buyer, the buyer's interested, but they're also like, when you're getting into a relationship with somebody, it's like, Is this something that I want to do? They're interested, but they're not a hundred percent sure. And so they should be because they need more information.

So they're kind of like, yes, but no, yes, but no. And the seller's like, Well, I want to sell my business. Yes, yes, yes. And the pressure of that and then the pressure from the sell side can be like, Hey, let's move this along and this and that can cause the buyer to sort of pull back a little bit. Like, why are they rushing this? And so you have this dance and if you don't have somebody in the middle, that's like sort of holding space and navigating that energy and the communication can push one another one side away.

And it can also, if you don't have like a seller's just doesn't want to seem too desperate as well, work the opposite way. If the seller doesn't want to seem too desperate, so they're not trying to push the deal, and the buyers like just seeing, how like, this is interesting, but do I want to buy this or not? And do I need to spend money on legals and then DD and all that sort of stuff? You can have both sides be like not too interested in the deal, but they could be very compatible.

Like the two parties could be, it could be an amazing deal for both of them, especially if it's a strategic acquisition. That's why those brokers, the right advisors, are worth it; like, that's why they get paid. Right. They make deals happen if they're right. Yep. Absolutely. Yeah. Yeah. you get, yeah, that's exactly it.

If you don't have someone who is basically captaining the ship, making sure things are moving forward, and that's trusted. No, you don't want the lawyer doing it because usually they think you're totally working for the other side. We don't want you in the equation. But the broker can usually pretty well play a neutral party. A lot of my clients will just call up the broker and say, Hey, here's what's going on.

Can you help me figure this thing out? Or what's the seller thinking on this? Everybody can usually look to the broker, the intermediary, whoever is quarterbacking the deal and someone of a neutral party. So if they're going to do their work and get everybody checking in and communicating on a regular basis and keeping that deal momentum going, that deal will resolve. I think that's absolutely key. Yeah. And you bring up a really good point around lawyers.

Lawyers are so good and your job is to be heavily on the buyer's side or the seller's side, whoever your client side. So both parties need to understand that and my role as an advisor is to make sure you have your client protected, but at the same time, it's realistic for the other side to accept. Because if it's not, then you've just got like lawyers that are just like, this is why flat fees are so good, right?

Because you're like, you're not going to want to drag it out. hourly rates where a lawyer is super aggressive to their client, hourly rate's awesome be as aggressive as possible, right? And cause multiple amendments in contracts and stuff like that because they're getting paid a bigger paycheck.

Which is why I think it's such a great way to do flat fees because you go, right, I'm getting; I don't want to add hours. I'm playing a flat fee. Let's do this in the quickest possible timeframe. That's great for everybody. The least amount of hours you do for the flat fee that you get is great. And the client wants that for you too because they want the deal to work faster, right?

That's the quam with lawyers if they're doing hourly rates. It's like, well, let's not do too many amendments. You're paid to be inefficient. Yeah. It's incentivized to be inefficient. put it that way. incentive is wrong.

Absolutely. Yeah. Eric, it's been such a pleasure having you on. Thank you so much for coming on and chatting and just being open and sharing so much that you have shared.

Yeah. Thanks, Jaryd. I really appreciate you having me. Anytime I can be of assistance. Love being a resource. I do a lot of teaching. on social and my newsletter. That's my next question. You've got your newsletter and you do a lot on social. What links can we send people to?

We've got your website, Eric. How do I pronounce your last name?

Yeah, ericshuu.me. I'll link to that. I've also got your ex here as well, your ex link too. And you guys can check out his newsletter on his website too, right? You can get to the newsletter from his site, isn't it?

Yeah, for my site, from my ex-profile to where most people find it. I try to share a lot of information to help buyers pre-LOI and then kind of like how to work with lawyers, that kind of stuff to make them more sophisticated buyers. That's what I'm trying to do in the newsletter. There's only so much I can do on a one-to-one basis when I'm working with buyers, just trying to educate folks. You're more so by side, aren't you? I'm a hundred percent by side.

Okay. Cool. Love it. Awesome. Well, thank you so much.

All right. Thanks Jaryd. I appreciate you having me.

Yeah, welcome. You're welcome. So welcome. Thanks for coming on. Everybody is listening. Thank you for listening and I'll see you on the next one.