South Florida M&A Advisors Podcast

EP #14: Navigating the M&A Maze with Attorney Marc Solomon

• Russell Cohen • Season 1 • Episode 14

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The mysterious world of mergers and acquisitions can feel like navigating a labyrinth blindfolded for business owners facing their first exit. This eye-opening conversation with veteran M&A attorney Marc Solomon pulls back the curtain on what really happens when selling your business to sophisticated buyers.

Marc brings a rare perspective most attorneys lack – having personally built, sold, and managed a business before returning to legal practice. "I've been a small business owner, I've been through an exit transaction, I've been a corporate executive, and I've been a business attorney," he explains, allowing him to understand client objectives from multiple angles.

The discussion reveals critical details many sellers overlook until it's too late. When that attractive purchase price appears in a letter of intent, few business owners recognize how much of it might be tied up in promissory notes, rollover equity, or future earn-outs. As Solomon pointedly observes, "It's not necessarily what the price is at closing – how much of that money do you really collect several years down the road when you look back at the deal?"

From the psychological pressure of due diligence (humorously described as "the colonoscopy" of business deals) to the technical complexities of working capital adjustments, disclosure schedules, and tax reorganizations, the podcast illuminates why having the right advisory team is non-negotiable. Private equity firms approach acquisitions with armies of professionals who do this work daily, while most sellers are experiencing it for the first time.

Perhaps most valuable are the practical insights on escrow holdbacks (typically 5-10% for 12-18 months), representation and warranty insurance for larger deals, and ensuring rollover equity doesn't come with hidden disadvantages. Solomon's explanation of how seemingly standard contract language about GAAP compliance can create massive post-closing liabilities shows why expert review matters.

Ready to navigate your business sale with confidence? Connect with Marc Solomon and the South Florida M&A Advisors team to build your transaction support system before entering negotiations with sophisticated buyers.

Speaker 1:

Welcome to the South Florida M&A Advisors podcast, your trusted M&A team. Here's your host, Russell Cohen.

Speaker 2:

All right, good morning. I'm Russell Cohen, the owner of South Florida M&A Advisors, and this morning we have Mark Solomon from YSAROTA. Mark is a M&A attorney, is my go-to M&A attorney, so I thought it would be great to, instead of just Jeremy interviewing myself, to expand the podcast and bring in guests and for my clients to see my deal team and Mark Solomon and I have known each other over 20 years, so I'm so happy to have you, mark. Thanks for joining me and, you know, welcome to the podcast.

Speaker 3:

Thank you, Russell. Appreciate being on the podcast. It's a pleasure to be here.

Speaker 2:

Awesome, awesome and first time doing the interview, so excuse me if not really experienced that, but we're going to give it a try. Like I said, mark and I have known each other for over 20 years. Mark has done many, many transactions in my career and I could tell you, incredible attorney. He has an incredible niche in mergers and acquisitions and he's been on one of my largest deals and I could vouch that Mark is a great M&A attorney that could help any of our clients get to the closing table. But let's learn a little bit about Mark. That's what we hear. We want to see how you know, share a little bit about your background and why you decided to focus on mergers and acquisitions.

Speaker 3:

Yeah, Thank you, Russ. Yeah, I've been living in South Florida since I graduated from law school in 1985. And I came down here. I practiced law for a few years and then I went into business with a partner and got involved in a trucking transportation business, left the practice of law for about 10 years and grew a small business and we sold it to a large public company in a roll-up and I then stayed on in the company that bought our business and managed a division of this public company.

Speaker 3:

So I like to think that as a business attorney Russ, I've been a small business owner, I've been through an exit transaction, I've been a corporate executive and I've been a business attorney, so hopefully I can understand the objectives of our clients when we get involved in one of these M&A transactions. So I have a great respect for business owners and enjoy the kind of work that I'm doing.

Speaker 2:

Thank you, mark. The M&A process is extremely complex. You're dealing with other attorneys on the other side this is the largest asset of a business owner on their balance sheet and they're putting emotional time for a business owner. So, as their attorney, how do you juggle the psychological side of it? And while trying to move the deal process as it goes through the, as I say, the colonoscopy of all these? There's a diligence list. You know so many different phases. You know how do you juggle it. It's tremendous pressure. I can't imagine.

Speaker 3:

you know, I never thought about the colonoscopy part of it, but that is. There is something to be said for that, because it's a complete diagnostic, taking a look at every potential possible aspect of the business and trying to find some faults with it. Uh, if, uh, you know, if you're the buyer, uh, so, uh, a lot of times my clients say to me you know, I'm a professional in my industry, but I don't understand this M&A process.

Speaker 3:

I need you to educate and communicate with me. So communication is really important to explain why something is happening, why it may be necessary for the buyer to have this due diligence, how we can properly respond to requests, uh, but also just educating on the process. How does this work, uh, how do we uh respond, how do we go ahead and conduct ourselves during this process?

Speaker 2:

so that we're going to get the kind of result that the business owner wants you know, a lot of times in the in the m, you know a lot of times in the M&A process there's a lot of curveballs, a lot of unknown expenses that pop up in the deal with holdbacks and insurances. And are you guiding outside of the M&A advisor like myself, where I try to be proactive Are you kind of telling them in advance? You know, be on the lookout for certain things, especially when the contract comes in. It lays down what's coming. So you know from a proactive standpoint. Are you trying to say expect this, this and this?

Speaker 3:

I think a lot of it is. A lot of times clients you know, particularly if you're selling a business and you see a purchase price number and you like the number. Clients you know, particularly if you're selling a business and you see a purchase price number and you like the number, but you know, as you're suggesting, russ, what is behind that number. How is the purchase price going to be allocated between cash proceeds and non-cash proceeds?

Speaker 3:

Non-cash proceeds could be a promissory note payable over a number of years. It could be could be a promissory note payable over a number of years. It could be the seller taking equity what we call rollover equity in the buyer's entity. A portion of the purchase price could be based upon what we call an earn out, which is the performance of the business after the closing. So we always tell the client you know it's not necessarily what the price is at closing how much of that money do you really collect several years down the road when you look back at the deal and say whether this was very successful or not so successful? Because a lot of the money is not going to be paid at closing, it's going to be earned over time and obviously the business owner is looking to receive as much of those funds as possible.

Speaker 2:

So explain in the M&A process how you know when that you know you're getting involved with a client pro in the process where you are involved in when, then you know where you, where you're not involved in, and then along the process of that 90 to you know 90 days, six months typically if we're working with a, uh, an, m, a intermediary like yourself for us, uh, you know you're going to get us involved, presumably once you take the business to market, once you have one or more LOIs, and we're going to get involved and work together to try to put together the best letter of intent we can for the client and we're going to negotiate that.

Speaker 3:

We're going to negotiate the price. We're going to negotiate that. We're going to negotiate the price. We're going to negotiate the terms. We're going to negotiate not only the the financial terms but some of the boilerplate language that is in there, because a letter of intent, even though it's not binding, it really sets the precedent for what's going to be in the purchase rate. So a lot of times you have to live for the most part with what's in the letter of intent if you want to move forward with the deal, because many times if you sign a letter of intent and you want to change terms later on, the buyer is going to say that's not what was agreed to in the letter of intent, I don't want to change those terms. You should have negotiated that earlier on when you signed the letter of intent. Once the letter of intent is signed, then, as you know, there's going to be a period of due diligence.

Speaker 3:

The buyer is going to have an exclusive period to look at all of the records, financial, operational sales and they're going to do a thorough vetting of every aspect of the seller's business. Once that is pretty much accomplished and they do what they call a quality of earnings, where they're scrubbing the P&L and making sure that the actual profits of what's been represented, they will turn a first draft of a purchase agreement. That's when most of the heavy lifting for the attorney occurs, because that purchase agreement could be 50, 60, 70 pages and there's also going to be a number of disclosure schedules that have to be prepared by the seller and the seller's attorney and the M&A advisor with respect to that purchase agreement. So a lot of our heavy lifting comes in when we start to get the initial draft of the purchase agreement. Then we know we're on a course toward the closing.

Speaker 2:

Yeah, thank you. You know we've done quite a number of deals together and, you know, with success and when we got into that quality of earnings, there are always that legal side of the quality of earnings where you get pulled in. And with the other, you know, the buy side, the private equity attorneys, and there's a pretty significant list of documents that need to be provided. You know, if you're representing, if you're helping the seller, then there's a lot of documentation that you have to put into the portal for the buy side attorney to review. So, yeah, you're instrumental in the quality of earnings. So the legal side is a big part of it, as there's probably many, many different parts of the quality of earnings. So maybe give an example of maybe a challenge that you had on the legal side, without giving names and you know where maybe it was in the quality of earnings or in the negotiations that maybe that you were able to overcome and able to get the M&A process continue on. You know, because of your skills as a M&A attorney.

Speaker 3:

Yeah, there's a lot of issues that come up and sometimes you know they are lot of issues that come up and sometimes you know they are fairly standard issues that come up in most deals and other times they are specific to the seller's business Could be tax issues, could be regulatory issues, could be litigation issues, licensing issues. But you know, we have certain things that we know we have to deal with. For instance, if there is some kind of an earn out, that there's a sell, a note generally when these deals are put together and they capitalize, is going to be the, the buyer putting in a certain amount of equity and they're also going to borrow a certain amount of money and they're going to have a senior lender and any money that is distributed from the company in the form of an earn out or promissory note payments has to be approved by the senior lender. And the difficulty is is that our client expects to receive those monies, yet there are loan covenants and other restrictions placed upon the buyer in terms of paying out those monies in accordance with the structure set up by the senior lender. So we have to work on that. If you recall, you and I worked on one deal. We were able to get the buyer to put aside funds that were not restricted by the senior lender to pay our client monies that were due in the future, because we did not want to have a situation where, if monies were earned and due, they would not be paid because of the restrictions involved with the senior lender. So sometimes you can work around those things.

Speaker 3:

But one of the things that's important is and we explain this to clients is that there are certain standard procedures that take place in these deals. Not to say that you can't negotiate, but there's certain things. There's always going to be a holdback of some sort, usually Okay, an escrow, which is going to secure the indemnification obligations of the seller under the purchase agreement. So to say, I don't want to have an escrow or I don't want to have this.

Speaker 3:

You know we have to work with the client to say, listen, you know there's a lot of potential liability and we're doing everything we can to avoid having the buyer being able to claw back any funds. But some things are standard, okay, and we negotiate the amount, we negotiate the time that the escrow is being held. We negotiate a lot of things, but the business owner and I try to explain this is standard or this is not standard Okay, this is not something that we want to agree to at all. Or this is something that the principle is okay, but we need to negotiate the specific terms of this. So, understanding what is, you know, customary and ordinary in these types of transactions and what is not, is certainly helpful in guiding clients through this process.

Speaker 2:

You know you talked about the escrow holdback and most business owners really are not expecting it because they're not in this type of environment on a daily basis. So I guess over the years I've been doing I've been noticing it's typically about 18 months and maybe 8% of the actual enterprise value. So does that kind of feel like? Is that standard?

Speaker 3:

That's pretty standard. I would say, Russ, you're pretty much there, because most private equity and other buyers they want a full year, they want a full audit cycle. So sometimes we can get it down to 12 months. Sometimes we can release a certain amount of the escrow after 12 and release the balance after 18. Generally, you're right, the escrow is going to fall somewhere between 5% and 10 percent of the cash portion of the purchase price. So those are pretty standard.

Speaker 3:

And listen, we negotiate the best that we can. You know. The one thing is is that we want to work hard and negotiate on behalf of our clients. I think we do a good job of that. On the other hand, we don't want to negotiate a point that is typical and customary and cause that to disrupt the entire transaction. So we want to be smart about what we're going about negotiating and what perhaps is not so important. So I'm always looking at what is important to the client and what is not, the stuff that is not important. We don't want to go out and heavily negotiate it. What we want to do is we want to pick our spots and we want to negotiate the most important issues.

Speaker 2:

Now you know, going back to the escrow holdback, there's insurance companies that offer reps and warranties insurance and it seems like it's going down to smaller, smaller M&A M&A deal. So have you had clients actually take on the reps and warranties on a, let's say, a five, five million plus enterprise value, or it's really on the larger, larger enterprise value deals that it's really taking advantage of the reps and warranties and it's the way the that escrow hold back yet eliminate the s, the holdback, and it also provides coverage for the vast majority of any claims.

Speaker 3:

Now there's going to be claims that are going to be excluded on the insurance policy. Nobody is going to go ahead and pay insurance proceeds out if there's a fraudulent claim Okay, so we've got to be. But it's going to cover most of the representations that are made, most of the potential liability obligations, and it's going to be a flat fee up front that's going to be paid and you don't have to worry about having money tied up in escrow. Uh, it's a good thing for the most part generally. Uh, it has been available only on larger transactions, but, as you suggested, it's changing.

Speaker 3:

You know, I don't know that you're going to get around a five or ten million dollar deal, but today you're seeing it on 20 25 million dollar deals, where before it would have to be almost like 50 or 75 million, you know. So it's coming down. It's more affordable, uh, when it can get done. I like it because it's a very good hedge for the business owner. Okay, they, uh they're going to pay a. Usually the fee is split between the buyer and the seller in terms of the premium under the policy. There is a deductible under the policy, but, all things considered, uh, there's a lot less exposure, uh with regard to indemnification obligations when you have the insurance, versus putting a large amount of money in escrow.

Speaker 2:

Now there's a lot of work being done by an M&A attorney where a seller may not realize what's going on behind the scenes. When we were doing our platform deal for that large roofer, those disclosure schedules at the end of the contract was extremely daunting and very time consuming. Can you explain to the audience because it might be a seller watching the podcast what is the disclosure schedules? Why is it so incredibly overwhelming for the seller and for the legal side?

Speaker 3:

Yeah, the disclosure schedules are attached to the purchase agreement and those are. They intertwine with the different representations that are made. We're going to have to disclose the financial statements, the tax returns, any potential litigation. We're going to have to disclose the financial statements and tax returns any potential litigation. We're going to list all licensing. We're going to list all owners and capitalization. Uh, we're going to list the largest clients. We're going to list the largest vendors. Uh, we're going to deal with any regulatory actions. We're going to deal with any ip that is owned, any ip that is leased. We're going to get into every aspect of this business and we're going to deal with any IP that is owned, any IP that is leased. We're going to get into every aspect of this business and we're going to list what is owned, what has occurred, and that is what the buyer is going to rely upon.

Speaker 3:

So if something was not disclosed that should have been disclosed, or something was disclosed in an improper fashion, was not accurate, then there could be a basis for an indemnification claim. So they're very, very important in that we're communicating all this information through these disclosure schedules and if it is inaccurate, if it is not complete, that could, under certain circumstances give the buyer a right to seek indemnification. That's what they're relying upon in purchasing the business. So those schedules need to be complete, they need to be accurate and obviously we want to disclose what's necessary. We want to limit these representations and not disclose things that we're not aware of or we may or may not know about. So there's a little game that's being played here. The buyer wants to broaden the information disclose as much as possible. We want to narrow it as much as possible. So when we go through and we negotiate all these reps and warranties, that's a lot of what the attorneys are spending their time on.

Speaker 1:

It's not the fancy stuff.

Speaker 3:

It's not the sexy stuff about purchase agreements and prices and payments. It's all the legalese that goes into what could represent an indemnification claim. So that's something. Again, my job is to make sure that the client gets paid to the best of my ability and to make sure that they retain those payments and they're not subject to being clawed back.

Speaker 2:

Perfect. So when a private equity is acquiring a client, a lot of these clients are S-Corps right, a lot of people set up as S-Corps. They typically are buying the stock of the corporation and I always see in our M&A deals that they are like an F-Re or the private equity group has to do something called an F-Re organization, so we're completely unknown to the seller. So maybe you can explain why does a private equity have to what is an F-Re organization and why does the private equity have to what is an f reorganization and why does the private equity group the the purchaser?

Speaker 3:

there is a reorganization when you have an s corporation. Generally, you need to reorganize the company in order to go ahead and if the equity is being bought to stock, you want to make it an asset purchase for tax purposes. That's one of the reasons you do it. Secondly, there is some deferred compensation benefits that you get. If you do an F? Reorg and the buyer, the seller, for instance, is going to take rollover equity in the new entity that's being formed.

Speaker 3:

if you do an F reorg that rollover equity will only be taxed at the time that that equity is sold, not at the time of the closing when that equity is acquired.

Speaker 3:

So there's tax benefits to this A good amount of this is tax driven as well, because you know, we want the sellers to get capital gains, the buyer wants to treat it as an asset sale so they can depreciate the assets. They want to get a step up in basis. So there's a number of different things that are going on. So we're always dealing with CPAs and tax attorneys and trying to structure the transaction that's most efficient and tax effective for both parties.

Speaker 2:

Perfect. Are they utilizing the 338H tax advantage?

Speaker 3:

Yeah, usually when you do an F reorg you don't need to use a 338. You can use a 338. Generally we do on smaller deals and this is a section of the tax code which allows you to treat an equity purchase as an asset purchase for tax purposes not the liability purposes of the tax purposes. But when you want the full benefits of deferring the rollover equity and other tax advantages and you're dealing with an S-corp, that's when you're going to do an FOE organization.

Speaker 2:

Perfect, perfect. So a lot of times the business owners are getting offered the rollover equity and we had that scenario with our roofing deal that you were championing to the closing table. So there's preferred stock and common stock and maybe you can explain to the closing table so you know there's preferred stock and common stock and maybe you can explain to the business owner why, if you're doing some rollover equity and you're getting common stock, that's a red flag for you. Maybe you can explain to the people listening why you should not be taking common stock and why should it be preferred.

Speaker 3:

Well, it really depends. I think what you want to do is if you're going to take stock or membership interest in a newly formed entity by the buyer. So, for instance, let's say we have a deal where it's going to be 20% of the equity in the buyer is going to be contributed to rollover stock of the seller. Therefore, the seller really is putting in 20% of the equity and the buyer is putting in 80% of the equity. The debt shouldn't be included when you're determining the percentages of ownership, only the equity, because both the 80% owner and the 20% owner, the company is going to be responsible for that debt. It's going to have to be paid out of the future% owner and the 20% owner the company is going to be responsible for that debt. It's going to have to be paid out of the future cash proceeds of the company, so it shouldn't be credited to the buyer. So you look at that and the equity.

Speaker 3:

If the client is going to take 20% of the equity in the newly formed buying entity, they want it to be of the same class. Okay, that the buyer is getting their 80%. In other words, they don't want to have the buyer get preferential distributions. They don't want the buyer to get excess management fees up front. They want to have 20% of the profit distributions and 20% of the distributions upon what we call a liquidity event once the buying entity is sold. So we want it to upon what we call a liquidity event once the buying entity is sold. So we want it to be what we call Paris-Pisou, which means each party has the same rights and liabilities under the operating agreement or under the shareholder agreement. So that's important, because rollover equity, if it's subordinate, if the other party has priorities or preferences, that's going to affect not only the distributions during the life of that buying entity but also what may happen upon a liquidity event of that buying entity. Mm-hmm.

Speaker 2:

Thank you.

Speaker 3:

Yeah.

Speaker 2:

If you're not getting the right legal advice, you could be in a, in a, in a common stock ownership and and the private equity group has the preferred and and so yeah, like you mentioned, they're taking dividends, they're taking management expenses. That could be something that would be a surprise to the uh, to the business owner who rolled over equity. So it's important, obviously, to have the right uh legal team and the right advisor that understands that, that they can coach you through that uh. Now, a lot of, a lot of business owners do not expect a background check, right, they, you know they're checking out the private equity group. They're, you know, they're really concerned about you know their abouts. But there are background checks done on the business owner and which is very common. So so have you. How do you? How do you comfort a seller? That you know obviously it's part of my job, but I'm sure you're involved in it too, so you know it's a standard procedure, but has there been a scenario where you had a seller didn't want to do that?

Speaker 3:

Well, if that's an area where you know, of course, the clients have said there's nothing, that I always ask is there anything that's going to come up on the background? Check that? Uh, because let's assume the buyer finds out everything. Okay, so there are no secrets and these m a transactions, it's it's very difficult to hide anything and you don't want to hide anything. This is going to come back later on and cost you a lot of money, uh, so you got to be forthright. So if there's any information that is concerning, okay, let's know what it is, let's talk to the buyer beforehand, let's frame it in a certain way, let's see how we can deal with it or at least explain it, because when things come up later on and they haven't been disclosed, there's either two things about it.

Speaker 3:

Number one, that feeling that the seller has not been honest or the seller is not smart enough to really know that there's a problem. Neither one is good, okay. So we want to deal with these up front and I've had situations, probably like you, russ, where you know a client says everything's fine and then we get a report back with 20 items, 20 items, 20 items. How could all this be fine? Well, this happened 15 years ago. This happened 12 years ago. This, I thought, was taken care of. This I didn't think was a big deal.

Speaker 3:

You know all kinds of excuses, so you know this kind of thing does happen and in that one deal it caused significant problems because all of this was unexpected. Yes, some of it was not all. In that one deal, it caused significant problems because all of this was unexpected. Yes, some of it was not all that relevant, some of it was very old, but some of it wasn't, and none of it was disclosed and that was part of the problem. And so we've seen this before and sometimes, listen, something happened a long time ago. We do forget sometimes, you know, or we think it's been expunged from the record and nobody's going to find it, that sort of thing, or you know it happened so long ago. It was another part of my life. It wasn't important. I'm not that person anymore. Whatever it is so, but we need to know about it.

Speaker 2:

Know not about it.

Speaker 3:

full disclosure Based on it that we can.

Speaker 2:

I agree, I agree and I think if the advisor sets the expectation early on talking to the seller that they're going to have that background check, then maybe you know, maybe as the advisor, I could, you know, find out if there are skeletons in the closet. One of the biggest challenges in our world, our world, in your world, is this networking capital shows up on the loi uh. It shows uh. Shows up in the in the quality of earnings uh. It shows up in the in the purchase agreement. It's done as a calculation towards the closing and it's calculated towards the closing and it's calculated 90 days after closing. So probably one of the biggest differences you know from an M&A M&A deal compared to selling a smaller business is the networking capital. So have you run into a situation where you're working with a seller and they had no clue about the networking capital? That's kind of the one of the, it's like a game stopper. So networking capital adjustment is vital to the success of the M&A deal. So have you had some good experiences or you had some crazy experiences?

Speaker 3:

Well, I think one of the things when an LOI comes in and before it's signed, we need to describe all these different aspects to the seller. What is indemnification? What do they mean by this? What is 12 months? What is this? What is a fundamental representation? What is a non-fundamental representation? Because they're treated differently in terms of the time of the escrow and how much money can be claimed and so forth. So there's a lot of uh details that go on, uh. But working capital is important because in an m a transaction, the buyer is buying a company and they expect it to be able to cash flow on day one.

Speaker 3:

In other words, they're buying a business and they don't want to have to put working capital in. That's different than a smaller main street transaction where the buyer if they're getting an SBA- loan they're going to get a working capital line of credit and that type of thing.

Speaker 3:

So how you calculate the working capital, we try to put a formula into the LOI and generally it's something like you know you take the balance sheet of the company for the last 12 months. You take current assets minus cash, minus current liabilities, and that's your working capital requirements. It's the average of the last 12 months and that's what needs to be left in the business and given to the buyer at close. Typically that's. But how that's calculated is sometime in question. And I tell clients that you know, if you have a good CPA, have your CPA calculated first. Give them our number, because they're going to have a large CPA from the buyer and they're going to come up with a number that many times is higher than what it should be, and that's something that we negotiate.

Speaker 3:

We bring in our own experts, we get our clients' accountants and sometimes we end up pushing back on that. Business may be seasonal, the revenue may be increasing or decreasing. We have to specifically look at the time of the measurement of the 12-month period. So there's a lot of different variables that come into play. But you don't want to just accept the buyers number for what is working capital? This is something that needs to be calculated independently by the client, the seller, and if there is a disconnect, then we need to negotiate that. So many times there is a negotiation to figure out a working capital number that is satisfactory to both parties.

Speaker 2:

Yeah, very well explained. I'm a firm believer that if your CPA is not going to jump into the networking capital, we have fractional CFOs that you and I have worked with incredible experience. Fractional CFOs and what I try to do is have the CFO calculated while the LOI is being negotiated or prior, so they're aware, and then it's calculated again during the quality of earnings and then calculated towards the end of the deal, so end of the acquisition, so the seller is aware of of of that number, as that can change throughout the six to nine months timeframe that can take to close on this acquisition. For one of our last, the roofing company that we worked on, the business was growing incredibly so the networking capital was increasing as the acquisition was happening and we had a major negotiation as the private equity group was like $5 million off on the networking capital, which created an incredible challenge and we were, you know, between Mark and the fractional CFO and we were able to work it out and it was just a balance sheet item. That was an issue.

Speaker 2:

So networking capital is very, very important to the business owner, to the private equity group, and it cannot be ignored. It has to be handled up front. So you know, I know we're jumping around, but is there anything in the agreement where you typically find challenging to the seller? You know we talked about networking capital, we talked about reps and warranties. You know we covered, we covered a lot of. Is there something where every M&A legal review that comes up that is like a common, common issue, where you have to go to the seller and explain to them and and explain what is what is normal? Is there something that I missed in that negotiation?

Speaker 3:

the contract no, I think that a lot of times, when we're looking at some of these reps and warranties, particularly when it comes to privacy policies, when it comes to, uh, onboarding employees with i9s, when it comes to IT, uh, today you know privacy, you know IP type stuff, intellectual property, the systems that the company is running in terms of their software and so forth very, very important and the security that is behind those systems. A lot of times you know the private equity and the buyers. They're looking for sellers to make representations that they were in compliance with every potential possible regulation and law relating to this type of an area. And small companies cannot be in compliance with every regulation and law because there's so many and you know it's one thing if you're dealing with a Fortune 500 company, but our clients that are running small businesses- yes they've got processes and procedures.

Speaker 3:

Yes they do protect their data. Yes, they do register their IP. Yes, they do, in most cases, properly enroll their employees, but there's a point where you have to push back and say, listen, we're not in compliance with this law. Ok, because either we don't believe it applies to us or we believe that our process of procedures, you know, safeguard our data and do what is necessary, and some of these laws require actions to be taken that are beyond the capacity of our client and therefore we need to push back and say, listen, you know, we'll tell you that we have proper procedures, but we're not going to tell you that we're compliant with all eight of these different laws, okay, of which our client is unfamiliar with, okay.

Speaker 3:

So part of this is language. You know what is reasonable, what is not. How do we give you assurances that we're not going to be in breach? We're not going to be sued over the way we're handling data privacy information, whatever it is. We've got good firewalls, we're protecting all of our data, but we're not doing it to a point that a Fortune 500 company would do. So we're always negotiating what language can be acceptable to our client without making representations that are either not true or they don't know whether they're true or not, and also satisfy the buyer that we have the systems, the procedures in place that are going to protect the uh, the company and their clients going forward and you know there's another point that is, uh, very important when you get the agreement and you're negotiating the agreement, the private equity group is running on GAAP accounting right and the small business owner is not.

Speaker 2:

Sometimes they might have reviewed financial statements, they might have compiled financial statements and all throughout the contract you see that they want to, that the seller's running through generally accepted accounting principles and they're nowhere close to it. So I noticed that it's a very common that the attorneys will strike that out and protect their client. Can you add anything to that?

Speaker 3:

Because private equity groups are held to a very different standard compared to the small business that's a very significant point because in almost every agreement you know they're saying that the financials are gap compliant and most of the time they're not, because unless you have ordered or reviewed financials, you're likely not to be gap compliant. Certainly, if you're on a cash basis and not an accrual basis, you're not going to be gap compliant. So what ends up happening? We try to change the language and say that the financial statements are true and accurate and they've been compiled in accordance with the past historical practices of the company. We haven't changed anything recently. They're accurate. This is the way we've always done it. It's consistent, based upon historical precedent and that type of thing. Sometimes that works, sometimes it doesn't.

Speaker 3:

Sometimes what the buyer will ask for is some kind of a schedule that shows a gap deviation, and we do this where we say listen, you know, this is how we're compiling our financial statements. They are different than GAAP in the following ways Recognition of income, recognition of expenses, things of that nature. That is okay. But sometimes it's taken to, and we did that on a recent deal that I closed only, uh, only last week. We did that but, uh, our position was we'll do the deviation, we'll work with the accountants, we'll put it on the schedule, but we're not going to give you a special indemnity for this. Okay, we're not going to indemnify you if our financials in any way, any respect, are different than what they would have been if they were GAAP compliant. We're not going to do that.

Speaker 3:

Okay, you know, we don't have GAAP and we don't want an analysis later on saying that, listen, on the GAAP, your, you know, your EBITDA would have been X rather than Y, okay, and we want to go ahead and bring the suit that. We want to go ahead and get the difference based upon the difference times the multiple. We don't want to have that kind of a situation. So a lot of it is in the detail, russell, whether they want to list this as a special indemnity or not. A special indemnity is something that is not specifically set forth in the basic reps but is put forth as a special indemnity which is going to be fundamental, which therefore is going to last for a long period of time and which there probably is going to be no limitation on the amount that can be pursued with regard to a breach of that special indemnity. So you know again, details.

Speaker 2:

Yeah, I mean, like I said, the small business owner is nowhere near gap accounting and the private equity is, so you got to have your M&A attorney like Mark you know go through that agreement and protect you, right? That could really backfire with the reps and warranties you know post-closing. So one of the last questions I want to talk about is the, because we've been on the call a good amount of time and I'm sure you need to go back to work, make some money. So the funds flow statement is a lot different than a typical Main Street transaction. Can you maybe explain the differences between what you would typically see in a Main Street closing statement versus what a funds flow statement is? Because it is a little different, right.

Speaker 3:

Funds flow statement is very in-depth and generally put together by the private equity group and it lists the purchase price. It lists the cash at closing. It lists all debts that are being paid. It lists all transaction expenses. It lists all debts that are being paid. It was all transaction expenses, it was all working capital adjustments. It breaks things down in a very fine way and also puts together the so-called capital stack. It talks about what money is being raised to buy the company and who's that coming from. How much is equity, how much is debt, how much is rollover debt, and it also talks about how that money is being dispersed. How much is going to the sellers, how much is going to the transaction folks like you and I? How much is being used to pay off debts? How much is being kept in the company for working capital purposes? So there's an awful lot of information. It's very detailed. There's spreadsheets and there's several different tabs on the spreadsheet that deal with different aspects of that funds flow statement.

Speaker 2:

Yeah, great explanation. You know. So you know you have to put together a very strong team an M&A advisor, fractional CFO, m&a attorney. The team that you put together will get you to the finish line. And there's more team members, there's consultants, there's benefits. The CPA will get involved from a tax standpoint, of course. The CPA will get involved from a tax standpoint, of course. So, putting together the right team to work with the private equity group Remember, the private equity group does it for a living. These are professional buyers and they have very large attorney firms and accounting firms that they're paying hundreds of thousands of dollars for to get to, uh, hopefully to a great uh finish right. So, mark, how can, uh, how can my viewers reach you, uh, your website, your contact, uh, how does someone get, uh, you know, reach out to you and get to know you a little bit better and, hopefully, can use your services?

Speaker 3:

you know I, I think emailing me at m solomon s-o-l-o-m-o-n at w-s-h-l-a-wcom. So that's m solomon at w as in william s is in san h is in harry dash, c-o-m dash, excuse me, l-a-w dot c-o-m. And also, of course, they can ask, they can reach out to you, russ, and you can funnel any questions and if folks have questions you know whether they're going to engage us or not. Happy to try to answer some general questions for people.

Speaker 3:

You know sellers of businesses, as you mentioned. The buyers are very professional. They have the biggest firms working on their behalf. Seller has to have a good deal team because otherwise they're going to be eaten up. You got to be able to combat some of this and listen, everybody is trying to get a better deal for themselves. So the buyer is going to try to go ahead and you know, reduce the purchase price, reduce the cash at closing, ask for a larger amount of working capital, ask for a larger escrow. And you know we need to make sure that the sellers are properly protected and represented so they can stand up to the kind of professionals that the buyer team has. And the sellers have never been through this before. The buyers are very experienced and they understand the process. So you really get playing on their home turf and they have an advantage. Okay, what we're trying to do is even the playing field to some degree.

Speaker 2:

Yeah, it's a draining process. I can tell you many sellers don't want to go through it two or three times. They get drained through this because you're running your business. And two or three times, uh they, they get drained through this because you're running your business and working this. You're trying to maintain the business, while this m a process that is asking for so much information and volumes of information that you got to dig out from many, many years ago and and it's all, it's really overwhelming to the business owner.

Speaker 2:

So the better team that you have, like having mark solomon on your team that can explain the whole legal side of the process and we all work together, you put together a strong team and get you to the finish line. So I want to thank you for coming on to the first podcast guest. So that's awesome and I'm looking forward to many more years of bringing great clients to you and hopefully my clients can watch this podcast and learn how so important to have someone like Mark Solomon on your team, because he will go the extra mile. I've seen it in person and great rapport with the client. So thank you again for coming on the podcast.

Speaker 3:

Mark, thank you for inviting me, and it's great to work with professionals like you, Russell. So again very appreciative of being on the program Awesome.

Speaker 2:

So, yeah, so, thank you, thank you and we'll see you on the next South Florida M&A Advisors podcast. Have a great week.

Speaker 3:

Very good, terrific. Have a good day, take care.

Speaker 1:

Thanks for listening to the South Florida M&A Advisors Podcast. For more information, visit SouthFloridaMAcom or contact 954-646-7651.