Ep 333: 7+ Reasons You Need An M&A Lawyer When Acquiring or Exiting A Business with Katarina Strandberg

The scariest thing about buying a business is buying a lemon. This is why you need the right lawyer. Hi, I'm Jarrod Krauss. I'm the host of the Buying Online Businesses podcast, and today I'm speaking with Katarina Strandberg, who is a Swedish business lawyer specializing in venture capital, scale-ups, and M&A.

She advises small, medium enterprise leaders and investors, drawing on her experience in deal structuring, fund law, and legislative work. And she's also a published author and an angel investor, and she's taught at Swedish universities and served on international advisory boards.

And in this pod, Kat and I talk about the risks of buying a business and how to remove those risks, and what lawyers do for you to remove those risks. What are some of the things they do throughout Legal DD?

We also talk about what happens when deal fatigue sets in and whose job it is, and how either the advisor or the lawyer manages those emotions and prevents deal fatigue from having a deal collapse.

Katarina shares some examples of some deals that have gone wrong, some deals that have gone right. We talk about deal structures, we talk about how to fund these businesses, we talk about how to lock in a price with the lawyer, and lock in your fee prices when you're acquiring a business.

And so many things about buying a business with minimal risk, not buying a job, and making sure that you're not put up for a very, very expensive mistake. Now this is such a valuable podcast. Of course, we talk about due diligence.

If you haven't got my Judons framework, make sure you get it. There'll be a link to that in the description. It helps people make millions of dollars and save people millions of dollars. It's free. Check it out. Let's dive into the pod.

Welcome to the pod. Thank you for your time.

Thank you.

We had a brief chat last week to get this pod set up, and I heard all about your adventures and what you used to do, and how you got into this, and now angel investing. Congrats on your journey and what you've achieved.

Thank you, and I do have the best job in the world.

That's good. That's amazing. There aren't many people who love what they do, and it's a rarity. So I'm very happy for you. Now let's just dive straight in. What's the latest sort of online business that you helped somebody acquire? Like, what size are we looking at? What was the business model? Where did it come from? Yeah. Give us the goss.

Well, as a lawyer, I can't say any details, but I can give you details as regards mistakes I've seen, how you can work with them, and things. I, of course, watch your show, and I love, I love that it's so niche and so helpful because you're always very concrete.

So I've been thinking, like, how can I, as a business lawyer, what have I seen, what mistakes? So happy to share that. But as regards the latest deal, I think it was 7 million euros.

Okay. Yeah. So I'm not sure exactly the ratio to the dollar today.

That's probably like nine, oh, probably, sorry, 12 million-ish USD, I guess. Yeah. Yeah. Yeah. What was the business model?

It was online, but it had some physical presence also, which is something I found very interesting. And I thought perhaps we could touch on that. And I was thinking, you are new to that. What's the difference between having an online-only business and having an online business that also has a physical presence?

And why do we draw the line? It might not be, in particular, when you're buying, you might think that, wow, it's online and so digital, so scalable. But then when you look at it through, you realize, well, you need to have your feet on the ground in various ways, and you cannot always be global just because you're digital, because you can be legal issues that come up, etc, or practical issues or tariffs or what have you, right?

Yeah, exactly.

So it's kind of an interesting perspective, where do you draw the line from being exclusively online?

Yeah, I mean, it's very open to interpretation, of course, because online doesn't exclusively mean that you can sell everywhere in the world because of restrictions, and like you said, there are legal issues and all of these things. So where I started is I started helping people make an income online so that they could work from their laptop or work from home and sort of travel and have the freedom to spend more time with their family and do what they love with the people they love. That's what I mean by being online and running most of it online.

Yeah, talk to us about issues and things to avoid and mistakes people have made through acquisitions where you've helped them get out of some sticky situations or…

Yeah. Yeah. Cause I heard on another one of your episodes, you also mentioned that the smaller the business you buy, the bigger the risk. Cause they haven't had this huge accounting firm or they don't have a CFO having checks and balances in place, et cetera. And typically, the smaller businesses, less likely to use an expert like you, right?

Yeah, absolutely. I mean, it's a very general statement because when you compare one business to another business, there are different risks involved with single source dependency on one supplier, revenue source, traffic source, key person dependency versus another business that might be a bit smaller, has some diversification in those areas.

But typically in terms of size, how much the business is earning, and what its value is, what it's worth in the marketplace today. Typically a smaller business under the 500k range is a lot more susceptible to outside risks and environment and their competitors because they ask more and they have less resources to reinvest into problems that need to be solved along the way when we're in business versus say you've got a, you know, this business you just mentioned before, maybe it's a $12 million business, probably making anywhere from two, three mil to seven million a year in profit and depending on the business model.

And they can throw money at issues and resolve certain things that pop up. For example, if the Facebook ads stop being as profitable, they can change the ads, manipulate them, put more ad budget into testing them, to get the ads profitable again.

Yeah. Because I mean, of course, one risk if you're buying a business that's perhaps, I mean, it's natural if you're an entrepreneur that you focus on running the business, not everything around. But of course, one thing is if you do buy the shares, not an asset purchase, it's of course that you buy all of the liabilities. So I'm sure we've both seen that happen. You assume the baggage as well, right?

It's like dating, right? As well. I mean, we're all humans. We've all got to like stuff, and so do businesses. And when we're investing in a business, we need to understand that it's a risk. Anything we do in life is a risk. And so what level of risk is worth taking for the potential reward?

Completely agree. So one huge mistake that I've seen is when you do not have advisors doing proper due diligence, you think you're buying this lovely revenue stream, and you have this exclusivity, right? Online. Buy the business, and the next day the buyer gets a letter, a notice from the supplier, when you have this exclusivity, that was the complete business model.

Profitability was in being exclusive in that goods and then saying, " Sorry, you know what, we have a change of control here in the contractwhicht means that we do not need to stick with you anymore. We're gonna tear that contract up, and the buyer didn't even know what the change of control was…

Yeah. You mean as an exclusive agreement to purchase wholesale products to sell in that jurisdiction.

Okay, yeah.

So was an exclusivity to sell the product in that jurisdiction. The product was in high demand, a really good brand, not something huge. It wasn't Nike or anything. It was still a small business, but it was still brilliant.

And they did not know what the change of control was, so they didn't check for it, they didn't ask for it. And the sellers had no obligation to tell them. They didn't have any warranties or anything, no. So was, sure, you didn't ask, it's your problem.

So they threw money down the drain because the change of control says that if the business changes owner, then the buyer or supplier, the other party to the contract, can just walk away.

The supplier said, We're walking away. If you want to keep, I mean, we know it's going good, but if you want to keep being the one selling, we're going to double the price. So the margins were gone.

And this is when you're doing due diligence, you do legal DD into the business, which is a spectrum of different things. And one of them is checking contracts and reading through contracts and making sure they're either above board or understanding what risks are within those certain contracts, which if they had have engaged you, they would have seen, you would have seen and mentioned that to them, which can either cause the deal to fail and then pull out completely, which is probably the best move. Or if it's not as much of a risk, it can help decrease the price and aid in negotiation strategies.

A third way is to try to solve it before closing. So when we sign, signing on the Shepherd of Purchase Agreement, in the agreement we say, a condition to closing, we will only go to close, that is handing over the keys and the money, if you, the seller, procure a waiver from the change of control from the supplier.

So we say, we're not gonna go through, we agree on everything, but a condition to closing is that you make sure that we keep the contract.

So we remove the risk. Yes.

That's what a great lawyer does, right? It is where you can help remove the risk. So obviously, there are contracts that you go and check. What are some of the other legal DD parts that you run through typically?

Good question. And you already mentioned like key man risk and some of the smaller businesses, even online, can be very dependent sometimes on the seller as a person, right? Yes.

And also, that can be in the valuation, you might if you said say you do a multiple on EBIT, and then the seller hasn't taken any salary, and he does the marketing, the sales, the CEO, the COO, everything, right?

Yeah, and you plan to work from home and have somebody else running the show. But that means that the EBIT hasn't considered the salary for three or five people worst-case scenario.

So then you need to, before you set the price for the shares, the price for the business, you need to do an add-back. So you need to add that back so that the EBIT ain't that positive anymore. So you pay less. So anything that's also a mistake that you need to do a normalization of the value, the EBIT.

So you make sure that if the seller works in a certain way, perhaps hasn't taken a salary so that it's not reflected in the earning capabilities, you need to make sure to adjust that. Otherwise, you will be hit with thinking you bought at this value, and the earning capabilities are fantastic.

And then you need, my gosh, I didn't think about working capital, I needed to put in more money for inventory, I didn't think about needing to hire people, I need to put in more money. So that's also something that financial, slash legal. Like your review, really.

Yeah, when you do a quality of earnings, you get a quality of earnings report from a due diligence specialist, they should showcase all of these things and help you foresee what ad backs are there and not fair and where, whether the business is being valued on SDE, seller discretionary earnings or EBITDA and what that looks like. Are you buying? This is a part of my job as a buy-side advisor; nobody that I work with wants to buy a job. No. They get out of it. I love that. That's so good. That's exactly what it is, that's what they're doing is you buy a glorified job. And that's what most people do when they are maybe sold into purchasing a franchise that might be like a McDonald's or a chicken shop or whatever it is.

The business can be making $200,000 a year, and it can be more than their wage of $100,000 a year, but they're going from $100,000 a year, maybe 40 hours per week, to 60 hours per week and $200,000 per year. And their goal was maybe just replacing the rent cover at 100K when you could buy a business for that and work five hours a week on that.

Exactly. Completely agree. And one thing you can do, again like technical, how can we help you out so you don't overpay, is of course if you're uncertain about the earning capabilities, about the value, let's say that the sellers say that they want to sell at one million dollars and you feel like well I mean if it is that profitable, if the earning capabilities are for real I'm good but I don't want to buy a job and I don't want to buy a rat hole or something like that you can always work with an earn-out.

So, you can say, okay, I hear you, but you get 500k now, and then, in the next three years, we'll portion out the rest of the share purchase price. But that will depend on your prognosis, the things you are promising me, you as the seller, you're selling this business with a specific earning capability. If that takes out, I will pay you the rest. I will be happy to pay you the rest. For that, you are telling me. So then, put your money where your mouth is, right?

So that's something, an earn-out is something you can work with.

Absolutely, and I think what's misconstrued through a lot of media online is that you can buy businesses with a lot less of your cash, and you can do these sorts of earn-out things.

Now, I just want people to be aware of that, like if you're gonna find a seller that's gonna do an earn out of 50%, be prepared to pay a lot more for the business rather than paying like a low multiple, be prepared to pay maybe a slightly higher multiple because they're showing that the business is worth them holding 50% and meeting those certain metrics within that three to five year example that you mentioned for the earn out versus having an earn out where the business doesn't have to meet certain metrics and it's just terrible for the seller.

Like that's a very important one for people to understand is because a lot of people are telling me that people can buy a business with no money down. Yeah, you can, there are ways it can be done, but what sort of businesses do those typically work with when they work on the bigger, more conventional MA deals, then we often work with our earner.

So the bigger the more professional the more typical it is because they have to take some balance, and the point with the earner should always be, like you said, that it pays itself. You get more profit than you give to the seller, of course, otherwise it wouldn't be worth it, right?

Which is a great thing to mention, is like on the larger deals, why are they doing earn-outs on larger deals versus smaller deals? And why is it more normal? Because, like we said before, larger businesses are more stable, and the sellers can understand that the business is solid. It's a larger deal, and the earn-out is going to work for them.

I think it is because the negotiations are so tough. They are heavily negotiated. It is kind of, I mean, if you do it right, I know that it can be subject to this dispute, so of course, but if you do it right, it's a brilliant mechanism to create more comfort for the buyer and the seller, still getting what they want.

So it's kind of, you shift the risk from the buyer to the seller, but then you need to, like you said, pay a higher price. I mean, another solution if you think that an earn-out is too complex or the seller doesn't want to, you can at least work with an Escrow account so you don't send all of the money across to the buyer on day one, because then you have to chase him down.

He will be in the Bahamas, somebody, he's done, he's out, right? So, instead, you put it in a trusted third party, like a bank, so that the seller gets 50 % of the money now and 50 % within 12 months.

But only if all of those warranties that you asked him for, because you're gonna ask him for warranties if you want to protect yourself. That is that everything he says is true. So if something doesn't check it out, he promises, I paid all of my taxes, I have no litigations.

And then you get the keys, and you get a notice from the tax office that, then you can turn to that third party and get money back, get damages, or a price reduction. So that's much easier than trying to litigate and trying to find the seller. So that can also be a way to protect yourself.

The sellers can see that the money is there. It's not something that the new owner needs to come up with. You've got that assurance there. What are some structures that you have seen or sellers have tried to make work which is diabolical for one of your clients as a buyer?

Well, one thing I, of course, if the seller is still hungry, if he was a key man, he had key relationships perhaps with the supplier or with key customers or even the employees is then you do not use a non-compete.

So what happens is he sells for a fair amount and then he starts a competing business, and he's already up and running, but you don't have any protection, you didn't even think about that.

So he can call up his former employees, that top seller or that top logistics guy, and say,

I mean, know, wholesaler, everything.

Exactly. So suddenly you're competing with a seller, you paid him, and then he is using all of the relationships that he might have had for 15 years and outrunning you. And I mean, that's a nightmare. So that's really, you should make sure, even if you think the seller is over now, make sure that he will not start a competing business.

I believe that every sort of buyer should have a non-compete agreement for at least two years for every acquisition, and if a seller can't sign one of those, then you don't want the business.

Love it. Exactly. Yeah. That's why they need you.

Well, both of us, right? Like I work as a buy-side advisor, but I also work with the legal counsel that goes and does that checking of the contracts, the legal DDP part, because that's pretty, that's very, very imperative.

It's my job to get all that information, understand it, advise on the information with legal counsel, and my counsel. People are far more protected, especially when they're buying a seven to eight-figure asset. Like we're talking about. When it comes to funding in Europe, I'm fascinated.

SBA loans up to 5 million are very common in America. And you can also get them up to $8 million as well. How are people funding these acquisitions in Europe? Is there a main sort of way that our bank provides acquisition finance, or yeah, how are these? It's a cash roll. Yeah, how's it funded typically over there?

Yeah, I work a lot with venture capital and business angels. So the network, the ecosystem here in Europe, is kind of close. You have only a phone call away. So if you're looking to buy something, you typically call and say, Do you want 10 % of this? I will need X amount to acquire it.

Or it's a buy-and-build situation, et cetera. So I usually work with private funding where you find some kind of investors supporting the structure, supporting the deal. And then you also get more contacts.

You typically get some kind of competence, also. So I'm mostly not looking at acquiring as a sole acquirer. Rather, you're getting a team with you. So the cap table becomes a bit longer.

Yeah, absolutely. Who's on the team? Like, so it's a team of investors, but who else is like on the team for operations if it is their own operated business or something like that?

But hopefully, like you said, nobody wants to buy a job. In ideal situations, you have a sufficient team in place, either in-house or it's only consultants that depending on how the structure is right.

So typically you don't really have a team, but when you look at the angels, you would want, if you're going into e-commerce, you look at what business angels have succeeded in and are doing well in e-commerce. And that doesn't mean you have to run for a huge exit.

It can mean that you're only looking for a nice revenue stream for the next 10, 15, or 20 years. And you can split that. Sometimes I feel that when we talk about investors, we always talk about the startups and the great exits. And know what? Many investors just like revenue. Just like you and I. Just something tripping in every year like a safer, solid business.

Yeah, I think it's mostly glorified in America that acquisitions mean just buy something, scale it up, and sell it because it's pretty, pretty common. But the way I think about it plays long-term games with long-term people, and the compounding effect of buying something once and holding onto it and growing it over time adds far more income. And rest and revenue, and everything into the deal.

Completely agree. But you said in your case, so it's not privately funding, it's more that you use bank finance. That's the most typical in America. In America, it's typically that if you're buying a seven-figure asset, you need a couple of hundred thousand dollars, and then you go away and buy a seven-figure asset, depending on what funding is.

I've had a lot of finance brokers, experts talk about that. So everybody who is listening wants more about that. Just go through and type in financing and SBA into my pod search, and you'll find that as you get to larger deals, like if you get into the eight-figure range, then typically, like you said, it's like the money is coming from other investors or larger banks and different sources to acquire.

I'm thinking, what else can we share that's like good to know? Of course, sorry.

What would you say to yourself as an M&A lawyer? What's the hardest part of the deal? What is typically the hardest part of the deal, and the easiest part of the deal?

Think that when they start talking, or even at the LOI stage, they're so sure that it's gonna happen.

Is this the seller or the buyer, or both?

They agree. Everything's fine. They agree. They can't. They're super happy. And then you start the D-Day process. And then the seller might be a bit annoyed because he gets questioned, it's a bit about somebody calling your baby ugly. You have to be careful how you communicate if you find something that's wrong, right?

So it doesn't come off as defensive. Because if the seller becomes defensive, you won't find out as much. Two, you will have a much harder time negotiating those reps and warranties or pushing down the price, whatever it might be.

So I would say when you do the diligence and find issues, make sure you have good communication with the seller. So it's still positive, even though it might mean that he won't get as much as he envisioned. Because in his head, he has those figures out already, right?

Right, right. And this is very, very critical. And in one of my courses, I teach how to become an attractive buyer. And a part of that is because if you're a more attractive buyer compared to other competitors bidding for the business, you can likely acquire the business for less than, say, somebody who's not so attractive. They're just full steam ahead. Here's the price. I'll pay more, but I don't care what you have to say and do it my way or the highway, but I'll give you more money.

It's very important, like you said, not to call somebody's baby ugly. And the way that you can do that is not to say what's wrong with this. It's how you frame your conversation and ask, Hey, can I want to understand what's happening here a little bit more? Don't quite understand it.

Can you help me? And what they're doing is they're like, yeah, of course. Like we're, we're humans. What we are here to do is to serve. Of course, of course I want to help and serve and help you understand what's wrong. You're not saying this is wrong. Fix it or tell me how we can fix it, or I'm out. It's like I just want to understand this.

Yeah. I couldn't agree more. That's super, super, super important. Mean, you want to reach the end goal. You don't want to prove being right on an issue, right? So I completely agree with your approach. Take it slow, take it nicely, be curious, ask questions. So yeah. Yeah. And when you help buyers, does the seller…

Does he have an expert, or is he typically alone in the process?

If they don't have an expert, I tell them to get an expert because it can, I mean, I have a lot of trust in the marketplace and people do trust me if they're, even though if they're a seller without counsel, but it makes my job easier and everybody else's job easier if they understand the process and it's not just me and the buyer side educating them and them going, is he just trying to get the best terms and price and deal structure for them, for his client? And the answer is yes.

I am, but I'm not going to just be unfair and lead you or misconstrue you down a path that's not right for you. I think every person in the transaction should do what's right for them and what's fair for them.

And the only way they can know that is by having counsel on their side. For example, if we get to a contract of sale, an asset purchase agreement, whatever you want to call it, and they don't have an e-comm lawyer.

Right? And they've got some other lawyers, like a litigation lawyer or something like that. Like, then they're going to fumble, and then it's going to make it too hard for us to come to a middle ground to agree on price.

So the answer is yes. Some people were happy to just do it without legal counsel, but I suggest, like, look, you don't do it yourself. It's a seven-figure, eight-figure deal, like get some help doing the same. Completely agree. Much better than being professional, so they understand where you're coming from, why you're presenting this, and what consequences it has, etc. Completely agree.

Yeah.

Have you ever gotten to a point in a transaction or an acquisition where one side was a bit frustrated in the sense that it's either taking too long or just deal fatigue has started to set in, and emotions have gone, well, stuff this buyer, stuff this seller.

I'm not going to proceed in the business, butalonge the deal is really good. What are some of the things that, because this is what my job is, managing those emotions and helping people see whether it's worth hanging in there or it's worth leaving? What are, I want to ask you is, what are some of the things that you have helped clients work through to either decide to leave or to stay?

Gosh, yeah. Neal fatigue is such a huge problem. In particular, if the DD takes long, you ask more and more questions, need more information, or if you need some kind of authorization from the authorities, or you know.

Right? Yeah, it's every…

We're going through that now. Like, we're just like, there's this one thing we need, and then it's like, okay, we need another thing now. And then we need, it's both sides, like we're working on getting it.

It's just like, but you just, the trust needs to be there. And that's where your mind is, that's my job, and your job is to showcase it. The trust is there. What are some of the things you do?

Yeah, one thing I think is important is if you can work with your expert financial, legal, etc., and ask for a fixed price. Because one thing that's a concern when you think, in the beginning, you think we're going to close in four weeks. We know it. Mean, we agree. Mean, no problem, Kathrine. I'm so happy.

Yeah, already thinking about the money. Spending it. Yeah. Yeah.

So, a concern after four months can be like, wow, I don't know how much the cost will be. I'm starting to get nervous. I have all of these experts. We're not moving forward. And now he's back, reneged on that. I feel very uncomfortable. I'm getting annoyed.

So I think one thing is knowing your budget for the process, and feeling assured of what it is going to cost me. Yeah. Because then it's easier. And then another thing is too early on for you and me to tell them that I know it feels really like a clear cut and we have this aggressive timeline, but what I typically see is that things take longer than you think.

So early on, and that's not normal, and when things take longer, you're gonna feel very frustrated, you're gonna be concerned that you're not focusing on your day job or your business, because this just takes hours and hours, and it's gonna cost you so much with the lawyers and the financial experts. So, explain early on.

How can we control it, and why will it most likely happen? So they know.

I love that. When you think about legal fees, not having a fixed price for either side is crazy, I think when they're so small, these real sizes, mean, it's different if you are this huge institutional buyer, but yeah mean, even if you're buying, you know, somebody that's buying a million dollar business and say we're looking at, you know, 10 grand for legal, so say 20 grand for legal.

If you're starting at five grand, you think, oh, good, that's cheaper. And it ends up blowing out to $15,000 because the deal's gone from a three-month process to an eight-month process. It's just, it's not fun. That's the financial pressure. Like when you could just say rather lock in like something that might be slightly higher and not need it, but not have to, like, yeah.

And that's what our goal is, I think, in investing and life is to, well, my main goal is to have less stress and have a more fun life. And if I'm going through this period, that's gonna just be such a terrible experience, then that terrible experience of the acquisition and the stress and the frustration is gonna pour over into the business life, purchase, just tarnish the whole thing. So why not set ourselves up to win versus possibly fail?

Good conversation with your experts, ask questions early on, and we as experts make sure we explain, and explain why. Why are you recommending fixed fees, etc? So I completely…

I'm glad that you mentioned that because some lawyers, it's more beneficial for lawyers to just say, like, I can just do it for this price per hour, and he is roughly.

If I only wanted to be willing, hourly is better for the lawyer.

Yeah, I've been through a deal where we had a fixed price with a lawyer, and things went a little bit longer, and the lawyer had dropped the ball on so many things, like not even reading things very well. And then we needed to go through another stage through the business for the acquisition, and they asked for more money, and it was already a price.

They're like, well, we can't continue unless we go this route. And we had to remove that lawyer from the deal and hire another lawyer in because it was unfortunate that the lawyer was the way that it happened that way.

And there might be some things that I don't know that's going on behind the scenes between my client and the lawyer wasn't exactly sure, but the actions sort of showcase that like something happened. Thank you so much for coming on, Kat. Where can we send people to check out more about what you're up to?

Well, I also have a YouTube channel, Business Law Toolbox. So, please drop the link below. Yeah. Zero cost, general knowledge about business law tools from negotiations to contracts to privacy laws, et cetera, even financial crimes, which is a bit fun.

So, and then I have my law firm, STD Corporate and Commercial Law. So I can easily be reached at Kat at STD Corporate and Commercial Law.com.

Perfect, guys, there'll be links to all of that in the show notes. Check it out.

Kat, thank you so much for your time, and I look forward to speaking to you again soon.

Thank you. Your channel is amazing. So, so happy to join. Thank you so much.

Appreciate it.