M&A Lawyer And Enterprise Value Creator Nick San Filippo On Proven M&A Strategies For Getting The Best Deal (#46)

Steve Wells: [00:00:05] I'm Steve Wells.

Jeffrey Feldberg: [00:00:06] And I'm Jeffrey Feldberg. Welcome to the Sell My Business Podcast.

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Jeffrey Feldberg: [00:01:39] Welcome to episode 46 of the Sell My Business Podcast. Nick Sanfilippo is a partner and member of Lowenstein Sandler's Transactions and Advisory Group. Lowenstein is a national full-service law firm with over 375 lawyers based in New York City, Palo Alto, New Jersey, Utah, and Washington, DC. The firm represents leaders in virtually every sector of the global economy.

Nick has over 25 years of experience working on behalf of high-stakes entrepreneurs and corporate clients. He combines his specialized legal knowledge with strategic thinking, creative solutions, and a deep understanding of the makings and monetization of a successful business. He works side by side with the C-suite as both legal and business advisor at every stage of a company's life cycle, helping clients leverage business opportunities, minimize risk, and create a culture focused on maximizing enterprise value.

By integrating his role as outside general counsel with his extensive M&A experience, Nick is uniquely qualified to guide companies from successful operations to a successful exit. Nick brings the same passion to client service as he does to his golf and paddle tennis game. He is focused, leaves nothing on the table, and takes every reasonable action to succeed.

A different type of attorney, Nick dedicates, two full days a month to personal and professional growth as a member of both Vistage and Tiger21. A constant learner, Nick regularly places himself in rooms where he can gain a deeper understanding of the mind of the entrepreneur. These experiences make Nick a true trusted advisor and business and legal counselor, whether he's working on behalf of his clients or on behalf of the firm as Chair of Lowenstein Sandler's Strategic Planning Committee, or as a member of the Firm's Executive Board.

Please note that the information provided is intended for a general audience and is not legal advice or a substitute for the advice of competent counsel, the content reflects the personal views and opinions of the participants.

Nick welcome to the Sell my Business, Podcast. Absolutely delighted and excited to have you here. You and I, we've been having a number of offline conversations and you've just opened up your world as an M&A lawyer of both the art and the science when it comes to a liquidity event from an M&A lawyer side of things.

But before we get into that, Nick, why don't you tell us, how did you become an M&A lawyer in the first place? What's your story?

Nick San Filippo: [00:03:59] My story of becoming an M&A lawyer probably starts junior year at Villanova University where I was an accounting undergrad major. And I applied for an internship with accounting firms. Now this internship process was only open, I think, to the top 20 or 25 kids in the class. And I was not one of them.

But I pushed and pushed hard to be a part of the program. And I knew the teacher that was running the program and he let me in. And I thought I was the luckiest guy in the world when I got an internship at the local accounting firm that audited all of the posh golf courses up and down the main line of Philadelphia, having been an avid golfer in college and still today.

I couldn't think of anything better than to be auditing some of the most famous golf courses in the United States.  But what I've come to learn is that when you're the most junior person on an audit team in January and February at a golf course, you're counting sides of beef in the refrigerator, bottles of champagne in the refrigerator, and silverware, I quickly got turned off to accounting and I was looking for something else to do.

And at that point in time, I started taking a look at law school, but always having a love for accounting, tax, and all things business. So, having graduated law school, I went simply into corporate law and worked on a whole different variety of corporate matters. But it quickly caught my eye that working on sell-side transactions for family-owned businesses, middle-market, upper middle-market businesses were truly exciting because I was able to be right there at the flashpoint of where entrepreneurs and family businesses went from what I would call paper wealth to actual liquid wealth. And being a part of that process was always instilled, remains to be, very exhilarating and to be there to represent them in their moment of need in the most significant transaction of their life and to make sure we leave nothing on the table and we protect them in every way we can. I feel like there's an element of Superman when I come in and I'm able to do that.

Jeffrey Feldberg: [00:06:09] For the listeners who can't see you, but I have the privilege of seeing you, I see you're all charged up and passionate, and I can just see you with your Superman cape coming to save the day for the deal. And, you know, it's so true for just about every business owner this is the largest financial transaction in their life that they're going to be doing.

And you're there to not only make it happen but to save the day. So, that's the good news side of things. Let me ask you this. Oftentimes I would imagine you're pulled into a situation perhaps at the last minute. What are some of the common mistakes that business owners make when you're pulled into these situations where there wasn't a lot of thinking or planning going into it?

Nick San Filippo: [00:06:48] I think the mistakes are many. And I think the biggest mistake if the listeners could walk away with one thing is to get your M&A counsel involved as early as possible years in advance, if possible because there are so many not only mistakes to avoid, but ways to increase enterprise value when you have the time.

And then also when you also have the time to do things there are so many things you can do on a tax and estate planning basis that you could do. But in the event, you don't have that time where you haven't had the forethought in terms of areas in which I've come in and had to be the person bringing the bad news.

There are many examples, unfortunately. One example was where a client brought me in, who was just starting a sell-side process. And they had a number of what they call distributors throughout the United States for their products. But what, in fact, they did have was franchisees. So, they had built an incredible business calling these satellite offices distributors when they were in fact classified properly under multiple State laws as franchisees.

And they were not compliant with the various franchise laws in the various States. And as a result, we had to pull the process because you would just, obviously couldn't, sell being non-compliant with state law in so many different States.  Other examples range from environmental issues are very common, particularly in the United States where the clients always thought they had an issue, but they never really wanted to take a hard look at the issue. They go to the market and then in various States there are mandatory requirements to do environmental investigations and those environmental when investigations, when they yield truly negative results can truly upset the sale of the business.

Jeffrey Feldberg: [00:08:35] Nick you're really preaching to the choir here because at Deep Wealth and in the Deep Wealth Experience with our nine-step roadmap, we're all about preparation. And the key take away from us is the best time to prepare your company was 10 years ago. The next best time is starting today. And for our listeners, you're hearing Nick who is an in the trenches M&A superhero, lawyer, getting things done, having deals, cross the finish line.

You're hearing him just give a few examples of why it's so important that you start your preparation as early as you possibly can. Now, Nick, I know when I speak to business owners, one of the common things that I hear them say is Jeffrey, you know what, when I'm going to have my liquidity event, I will reach out to you maybe a few months before.

What I'm hearing you say is don't do that. Start as, quickly as you can. I'm wondering Nick when a business owner brings you on early enough in the process, does that make a difference in terms of you weighing in on the other advisory team members that they should be bringing on and what to look for?

Nick San Filippo: [00:09:34] Without a doubt.  I serve as general outside counsel to a lot of middle-market and upper middle-market businesses. And whether or not they currently have thought about selling, they're always looking to upgrade their other advisors and, most people who do what I do are going to have a deep Rolodex of different advisors, whether it's accountants, consultants, insurance, brokers or investment bankers.

So, being able to reach out to a trusted counsel and dip into the Rolodex has a lot of different benefits. Not only are you going to get someone who has some experience with your attorney, but when your attorney brings somebody in. Your attorney's vouching for that person. And that person knows that they're there not only to make the client look good and make themselves look good but also make the referring attorney look good so that they get future referrals. So, there's always an additional benefit, I would say by having one advisor bring in another advisor because the second advisor coming in is always going to want to make sure that they do A-plus work.

Otherwise, they're not going to get the next referral from the first referring advisor.

Jeffrey Feldberg: [00:10:41] You bring up a really interesting point. Step number six in our nine-step roadmap is all about the advisory team and how you select the advisory team. And what you're saying is spot on. If you go to somebody that you trust, someone like yourself, perhaps you're working with a business owner on a number of issues, and they asked you for some referrals with what I'm hearing you say is if I recommend somebody, whoever I recommend, and that business owner brings on board, there's going to be some peer pressure there because I brought that person on board.

They want to make themselves look good. They want to make you look good and vice versa. So, it sounds like you have some peer pressure in a positive way. That's going to be working for the advantage of the business owner.

Nick San Filippo: [00:11:20] Absolutely. And sometimes those recommendations can be very difficult to push. Particularly in my role as outside general counsel, oftentimes when we're contemplating a sale process, I might have to make a push to upgrade the accountant. In fact, that happens a lot. And the reason for that is that in today's M&A marketplace, you're invariably, before going to market going to want to do what's called a sell-side Quality of Earnings.

And while most accounting firms will tell you that they could do a sell-side Quality of Earnings of Earnings, the most important part of that is having someone at the accounting firm who regularly defends the sell-side Quality of Earnings when the big four accounting firm from the private equity buyer or the high-end strategic buyer comes in and tries to throw darts at it.

So, it's not a question of whether someone has done one or two or three before on the accounting side. You really have to find someone that's what they do. And they're regularly up against the big four fighting for every nickel of EBITDA that they put down on the Quality of Earnings and going to someone and suggest their trusted accountant for 10 or 20 years might not be the right person to do that job.

Despite the fact that the accountant is telling him that they are, those are some of the more difficult conversations we have and putting the team together.

Jeffrey Feldberg: [00:12:36] I hear this time and time again from business owners. You're absolutely right. Hey, I've been working with my accountant or I've been working with my business lawyer for decades. They were with me from the start of the business. They know the business. I'm going to save some time. I'm going to save some money, but what you're hearing and for our listeners, this is a key takeaway point.

Don't do what's the easy thing to do what the right thing is. And that's to find a specialist in that particular area who knows it inside and out. Whatever you pay is a rounding error. It's going to work out in your favor and it's going to make a difference when it comes to the liquidity event itself.

So, Nick, in your experience, if you could wave your magic wand, how early would a business owner bring you on board before the liquidity event?

Nick San Filippo: [00:13:19] Minimum two years. I think the common logic is five years. You always hear people say five years, but a minimum of two years, because that allows you to do some tax and estate planning prior to the year in which you're going to transact. Ideally, it also provides you with enough time, to the extent that there are going to be environmental issues that you can get ahead of them and start addressing them and quantifying them.

It also allows you some extra time to build in and what I call employee protections, making sure that your key employees are locked up with a restrictive covenants package that is assignable to a buyer, and maybe even coupling that with a stay bonus program so that you're not losing key employees in the interim.

Then also taking a hard look at your customer contracts, that your key contracts that you're using time and time again, and taking a look at their assignability to a buyer. And if you have to make changes so that you're reducing friction in the sale process you're doing things like that.

So, what we do, we typically do. If we have two years, it's almost go through a mini sales process internally. Do a due diligence internally and see what issues are there. And until you go through that mini due diligence process, you're probably never going to know what issues are out there.

And some of them are simply not having your shareholder records or your owner records up to par and thinking that you know who all the owners are, but you don't have all the documents. And that could take a considerable amount of time to go back and read a document. So, you want to have a dry run way before you go to market.

So, that you could really address things and get everything up and running and have enough time to have implemented your upgrades, what I would say. So, that the year prior to the sale, you're clean.

Jeffrey Feldberg: [00:15:01] It's a page right of our book, and it's almost like you wrote the book itself here at Deep Wealth because that's exactly what we say when it comes to due diligence you absolutely want to do it first on yourself. Find all those skeletons in the closet, remove them. So, you're showing up with a clean slate and it just helps the deal process.

And as you say, reduces the friction. I'm wondering Nick when it comes to due diligence, what are your thoughts on the kind of mindset that a business owner is going to need to be successful getting through the due diligence side of things because it can be quite lengthy as well as painful of process itself.

Nick San Filippo: [00:15:37] I'll answer it two ways. If you're doing the dry diligence run it could be a little bit easier on the business owner because when you're doing a dry diligence run you could simply tell to your executive team, I went through a business course, like the Deep Wealth Experience and they told me to do this, and this is why I'm doing it.

So, it allows you to really under a cover of, don't worry about losing your job, because we might be selling the business to actually do a thorough diligence and allow the business owner to bring in. Key executives that he or she might not otherwise bring in, if it was truly a sale process because you might spook them and you might not want to spook them.

If you're not going to do that ahead of time and you're going to wait until you get that offer, what I tell people is you now have a second job. Congratulations. You must continue to run the company. We don't want to see EBITDA fall. In fact, EBITDA has got to continue to go up on the hockey stick.

So, you can't lose any traction there. And in addition to that, I'm going to start asking you a whole bunch of questions and needing a whole bunch of documents. And it's really going to be a function of who you're going to bring into the knowledge group that's going to allow you to leverage yourself and invariably until you really have a solid offer, you're probably not going to want to tell too many people.

So, congratulations, Mr. Or Mrs. Business owner, you and I are going to be spending a lot of time dealing with a lot of details that are not that fun, sexy, or interesting.

Jeffrey Feldberg: [00:16:54] It's such a valuable point, Nick, that you bring up and for all of our listeners, please take note of this. We often say here at Deep Wealth what Nick was saying, and that is when you do the preparation well in advance, you're saving your health, you're saving your time and you're saving your money. You're saving your health because as Nick was pointing out, you're not running the business and being on these crazy timelines and schedules.

Try now to get the diligence done, running the business, keeping the EBITDA up, and onwards. You're actually able to do it at your time at your convenience in a way that actually suits your lifestyle. And you're not having that stress that comes along, that's going to just nip away at your health. And then you're saving money because it's you and your team, which it actually should be.

And you're minimizing at that point in time, the need to bring in outside advisors who might be on the expensive side on helping to get prepared and find those documents and getting all that ready for diligence.

Nick San Filippo: [00:17:49] I always want to emphasize deal certainty.  There's nothing worse than a busted deal. So, doing that diligence in advance, finding where those skeletons are addressing those issues. What you're also doing is you're increasing deal certainty, and it's very difficult for a privately held business to go through the rigor of diligence, negotiations, and a sale process only to find that a deal can't be made because an issue has arisen and now some of your employees might know, the market might know, there could be negative reverberations throughout the business world as a result of this process. All of these issues of which could have been addressed and deal certainly could have been greatly increased, if it was done two years, a year ahead of time.

Jeffrey Feldberg: [00:18:37] Absolutely agreed. And so, on that point, Nick, I'd love to ask you a question. And I know being a business owner myself and speaking to business owners when I was going through that process, there's always that temptation, you know what I'm going to find an M&A lawyer. Who's just the lowest price.

They're all the same. These M&A lawyers. Let me go for the best price and life will be good. I'll save some money and I'll just put that in my pocket and move forward. And that's actually the worst possible thing that you can do because it's not about price. It's about value. What would you say to the business owners who are thinking, Oh, I'm just going to find the low-cost provider in regards to an M&A lawyer or for all my advisors for that matter and go in that direction?

 What have you seen go on in the past with that kind of thinking?

Nick San Filippo: [00:19:21] If I have permission to be a little snarky what I would say is that those that have that attitude they're probably not all that interested in what I have to say because typically those that have that attitude are going to do exactly that. And there's very little you can do to convince them otherwise.

But what I would say is just, as I mentioned before about finding the accountant who's going to do the Quality of Earnings who could defend that Quality of Earnings against the big four, because the big four is going to be representing the private equity firm or the strategic buyer.

It's very similar on the M&A side. We're talking about sizable transactions, 50 million, a hundred million, 200 million, $500 million transactions in particular, it's going to be done by a private equity firm. The private equity firms all basically use the same five high-end New York law firms.

They're completely price insensitive. And they're going to use those high-end law firms that have a methodology of doing business and are dripping with expertise in every fashion of the transaction, whether it's tax, real estate, litigation, intellectual property, employment, benefits, environmental, the list goes on and on.

And they're going to put up a team of 20 or 30, very experienced lawyers with deep experience in their little vertical of the transaction. And if you don't have a law firm, that regularly goes up against those big law firms, you're either going to be leaving money on the table. You're going to be taking incremental risk on the deal.

You're going to be a greater risk of having to give some of the money back after the deal. And ultimately, you're just putting yourself in a position where you're asking to be taken advantage from either a large or small, and when you get to a certain transaction size, it just doesn't make any sense to try to save some money on the legal fees or the accounting fees when there's so much more at risk.

Jeffrey Feldberg: [00:21:24] Well said is the risk-reward is not about how much money you actually get from the deal. It's how much you keep. And that goes to your indemnities, to your earn-out, or your escrow. Hopefully, there's an earnout. And so, Nick I'm wondering because I know in different circles there are really two kinds of camps. And one camp says, go for the boutique M&A lawyer or law firm. And there's another camp that says go with a large law firm that has an M&A practice within it. Where is your law firm and what's your view overall on how a business owner should think that through?

Nick San Filippo: [00:21:58] There's a magazine called the American Lawyer that ranks law firms in terms of size and they call it the AmLaw 200, which is the 200 largest law firms in the United States. And my law firms generally right in the middle, around a hundred. We have about 375 attorneys.

And we are very much a transactional law firm. And my bankruptcy partners and my litigation partners might take a little umbrage with that statement. But I would say the majority of our firm is a transactional law firm serving all different industries and all different types of buyers and sellers.

So, it would be wrong of me to suggest that I would recommend smaller boutique law firms for many of the issues that I just went over in terms of really needing to have expertise that matches up. So, it's very difficult for a smaller law firm or a boutique law firm to really have a transactional tax expert. To have an employee benefits expert, to have an employment expert, environmental experts, and an intellectual property, depending on the type of business. In our firm, the attorneys that do patents don't do trademarks. There are sub-specialties within all of these things. There's environmental compliance and then there's environmental transactional. So, I always want to bring to bear for my clients, the expert that they do what they do, 24 hours a day. It's not like they're doing real estate on a Monday, environmental on a Tuesday.

No, when we bring environmental attorneys onto the matter, that's what they do 24 hours a day, seven days a week, they're all environmental. And for the most part on the larger size deals, these are what you're dealing with on the buy-side attorneys. They're bringing their team of 20 or 30 experts. And I really feel that you really need to do the same.

You need to do with people that they work on transactions all the time because working on a transaction as an employment lawyer, I would say it was very different than doing employee handbooks. It's just a different skillset. And you want to have a team that this is a transactional team. And the other one thing that I'll say, and this doesn't necessarily always apply to larger law firms and boutiques, but you're going to want to make sure that certainly your lead attorney but hopefully everybody on the team brings a 24/7 mentality, particularly as a seller. Speed, always favors the seller. You don't want to be the side of the transaction that's slowing things down and you want to associate with a law firm that knows what it is to work throughout the night.

Work Saturday and Sunday, whatever the client wants, whatever the client needs they are rising to the occasion because they understand that they're in a client service business and you service the needs of the clients. And on a sell-side, transaction speed always favors the seller. So, let's get it done yesterday.

Jeffrey Feldberg: [00:24:45] Wow. What an amazing service kind of attitude and mindset that you bring to the table. And for our listeners, please take note of that. Nick is saying, Hey, when it comes to crunch time, I'm there for you. Weekends, weekdays, weeknights doesn't make a difference. I'm there because speed wins ultimately when it comes to selling a business.

And that is terrific to hear. So, Nick, let me ask you this before we dive into some more of the technical sides of what you take a look at as an M&A lawyer, knowing what you know, and having gone through this now, for as long as you have, what advice would you give for a business owner of how to become the world's best client for an M&A lawyer like yourself?

Nick San Filippo: [00:25:26] It's going to sound a little cliché, but the first thing is honesty. I don't want to suggest that my clients are dishonest, but I need to know where the problems are. The earlier I know where the problems are. The more we could fix them or at least present them in the most positive manner possible.

A transaction process between a buyer and a seller. It sounds a little funny, but it's about trust. You're building trust. And when the buyer and the seller trust each other, a transaction can move swimmingly. And you can actually address bumps in the road because there's trust there. And the way you build that trust is by being forthright with whatever concerns or negative issues you know are there and you present them to the buyer.

Ideally, you could present them to the buyer before you have an LOI because if you present them to the buyer before you have an LOI, you can get creative in the LOI on how they're going to be addressed before the negotiation power changes at the signing of the LOI. So, be honest with me. Tell me where the problems are. And if I ask you about something and I'm hitting a sore point, elaborate on it, I need to know, and that's how we're going to get the best for you. The other point is you have to be available. I feel that I do a really great job of explaining the sell-side risks to a business owner who's never done it before. In fact, so one of my most favorite things is to represent a first-time seller and educate them and guide them through the process. But ultimately the decision A or B on any particular issue, it really has to be yours.

I need you to want to get educated, want to understand the risks, and then make that educated decision. All too often I hear Nick, what would you do? And I get a little shuttered and I'm always happy to give my opinion, but I don't want my opinion to rule the day. I really want to make sure that you're educated and you're feeling like you're making an educated decision after I've explained the risks to you.

So, be honest, be willing to get educated. And the last thing I would say, be available. I'm going to be there 24/7. I need you to be there 24/7 as well. And I need you to understand that I might need you at awkward times, and it might be the littlest question in the world that you didn't think was that important.

But sometimes getting an answer to that little question allows my people to work through the night and be more efficient for you and be able to get the document out at 9:00 AM instead of 8:00 PM the next day, which depending on where the buyer is in the world, it can be very meaningful in terms of time differences.

Jeffrey Feldberg: [00:27:55] I hope you're listening because that was incredibly valuable. And again, it's all about trust. In the world of mergers and acquisitions, the currency isn't money. It's trust. Can your M&A lawyer, in this case, Nick, can he trust you? And can you trust Nick? And when you have that trust going between both parties, that's where the magic begins to happen.

But when you don't have that, that's where we can get into some troubled areas. And so Nick gave some wonderful advice on how you can become the world's best client for an M&A lawyer. Now, Nick let's circle back to something. You mentioned the letter of intent. And it's a key area because I know for many business owners, they get excited, they get this letter of intent and they think terrific.

The deal's done. I'm riding off into the sunset with all this money and there's not much left to do. And I know you're going to tell me it's just the beginning, not the end and a lot can happen. So, what goes on with the letter of intent, and what's so important about just nailing that when it's being created.

Nick San Filippo: [00:28:55] The letter of intent is always the most interesting part of the transaction. On the same side of the transaction, you have people with different goals. The investment banker typically, and I know I'm speaking broadly and I love investment bankers. So, if there are investment bankers listening to this, I'm not trying to cast too broad a brush, but for the most part investment bankers view the LOI as momentum building, get past the LOI, get to the transaction, keep up the momentum. They want to keep up the momentum because the momentum will get the deal closed.

Which is perfectly logical. The business owner sees the LOI for the most part as an opportunity to take that deep sigh of relief and justification of the enterprise value. Look what I have. I have a piece of paper evidencing that a really smart party on the other side believes the business that I built is worth 100, 200, 500, a billion dollars. Whatever the number is.

And that's an exciting thing to get in writing and sign off on. The sell-side attorney views the LOI as perhaps one of the most strategic points in time in the deal to negotiate big-ticket items to increase the value of the transaction to your client and minimize closing risk.

So, you have the investment banker saying go. You have the client saying, oh, I can't wait to get this justification on all my hard work for many years. And you have the sell-side attorney saying, wait guys, as soon as we sign this and we give this party exclusivity, they're no longer dating us.

They're married to us. And we've lost an opportunity to get some value from the willingness for us to stay out of the market for 60 or 90 days. Let's get that value. We know because we've been working for the last two years that we have this issue and this issue. And then, even the non-company specific issues, there are four or five, key legal issues that you'd love to get out of the way at the LOI stage because the buyer's going to be much quicker to say yes at the LOI stage than later on in the negotiations.

So, you have different mindsets on people working on the same side of the transaction at the LOI stage.

Jeffrey Feldberg: [00:31:05] It sounds like a dance between the buyer and the seller and leverage, and who's going to be doing what, but I absolutely agree Nick you're so spot on with that. Let me ask you something, Nick, and this is not pointing to you. This is more the trade of lawyers in general. When you speak to people about any advisor, the one advisor that usually gets separated out from the crowd is a lawyer because you either have a lawyer who has great intentions, but ends up being a deal killer.

Or a lawyer who has great intentions and is a deal closer. So, how do you deal with that particularly when it comes to the LOI because the LOI is going to be really setting the tone and the shape of what the ultimate deal is going to look like? What's the balance between the two and what's happened in the past as you've navigated between that tight rope that you walk?

 Nick San Filippo: [00:31:55] Experience is key. Knowing what is market is key and even knowing what is a little off-market, but you could probably get is also key. And then being able to read the room. I like to say that you have to push particularly on the sell-side for things that you want. Otherwise, the buyer will walk all over you, a particularly an experienced buyer.

But it's always up to the attorney to go back into the conversation I had before about educating the client. The attorney should never be in a position where they're killing a deal because the only person that should really be able to kill the deal is a client after the client's been educated by the attorney.

And potentially the accountant and the investment banker, if they're experienced, certainly bring them into the room over important issues that might otherwise kill the deal. But it's really up to the educated client to make those go-forward or kill decisions. So, does that mean that you can't have an attorney or you might have an attorney that's looking to kill a deal?

Yes, but I find that the attorneys that are looking to kill deals tend to be ones that are not really deal attorneys. They don't really understand the process. And they're a little bit concerned about being outside of their element, perhaps being over lawyered because they don't understand the process.

They haven't done enough deals. There's also been attorneys where I've been on the buy side, where it's absolutely clear that the sell-side attorney doesn't want to lose a client vis-à-vis a sale. And they're going to do everything they can to communicate to the seller. That it's a bad deal. When we're talking about middle market and upper middle-market transactions, where you're dealing with a sophisticated sell-side attorney, a sophisticated buy-side attorney, I don't really come across experiences where there are attorneys that are looking to kill deals.

We understand the process. We understand what's market. We understand what might be different about this particular sell-side target in terms of market and we're really looking to find a way to get the deal done because ultimately the clients are coming to me to sell the company and the buy-side client is going to the other attorney to buy the company.

Jeffrey Feldberg: [00:34:00] So, Nick, what you're sharing there, it's just paramount in a business owner, knowing not believing, but knowing that they selected the right M&A lawyer. So, let me ask you a question. Imagine just for a moment that knowing all that you know, as an M&A lawyer, again wave that magic wand and you're now a business owner and you're going to be having a liquidity event, but you're a smart business owner.

You're preparing years in advance. What are you looking for and what are you not looking for when you're finding an M&A lawyer?

Nick San Filippo: [00:34:29] So, what you're looking for is someone who is regularly doing deals. They should be able to explain to you the last three or four deals that they've done over the last 12 or 18 months, because if they haven't done deals over the last 12 or 18 months at levels, similar to what your company is selling for, then they're probably truly not a deal lawyer.

So, one, you got to look for what we would call deal sheet experience. And I know a lot of attorneys will present a deal sheet. A lot of attorneys present deal sheets without dates on them. And in terms of when did the transactions close and a lot of attorneys present deal sheets without dollar values in them.

Now, a lot of private company transactions, you can't put the dollar values, but you could ask about where these dollar values are.  After that, you have to talk to the clients for whom they sold businesses for. And in the best of all worlds, you could actually talk to someone who had a busted deal, where they represented someone and they had a busted deal because you're probably never going to get a better representation over an attorney other than from someone who started a process and for whatever reason, you didn't go through. Yeah, it's quite possible that an attorney might not have someone to say that I had a busted deal for in the last 12 or 18 months, but I think it's a question certainly worth asking. And then there's the business community that you should be asking about.

If you're dealing with a sizable accountant in the area, they should be familiar with the firms in the geographic area that do this. They should be familiar with the attorneys. You and I got connected through Tiger21. That's a business community that you can reach out to if someone has a Tiger, you could certainly reach out to those in the community who know this person. I'm also a member of Vistage and you mentioned YPO before in one of our prior conversations. These are tremendous business communities that have a wealth of information on advisers and everybody should be tapping into them and seeing what kind of input they can get.

Jeffrey Feldberg: [00:36:19] And for our listeners, Nick and I have had a number of offline conversations, and early on Nick you said something to me that resonated. And you said Jeffrey, whether it's Vistage or Tiger21 when I'm doing work for a fellow member, I'm not just doing work for that fellow member, I'm actually doing work for the entire community.

So, there's added pressure on me to make sure that I do the best possible effort and job on that deal. And now you didn't quite say it this way, but if I drop the ball with that one member it's as though I'm dropping the ball with the entire community. And again, it just goes back to positive peer pressure and going to trusted resources who can recommend people to you that is not just a cold call or a cold email or an internet search, it's from a trusted resource or a trusted advisor. So, well said, Nick. So, Nick, as we're doing this interview the Coronavirus is still with us. We're still figuring our way around it. There is light at the end of the tunnel, but we're not quite there yet.

How has the pandemic changed or maybe it hasn't changed the world of M&A law? What's that looking like for you?

Nick San Filippo: [00:37:27] So, I think the pandemic has brought at least two very interesting concepts into the M&A world. One is the representations and warranties that buyers are asking about how COVID has impacted the business. And there, again having experience on the sell side, buyers would love a rep that the pandemic has not impacted your business or alternatively, they would love a rep please tell us how the pandemic has affected your business. Now I would have to imagine that there's no business owner in the world that could identify every way that the pandemic has impacted the business. And that's where you need some experience counsel to say, come on this is not a real rep.

This is not a rep that you're ever going to get. If you're looking for something particularly specific. Did we lose a customer? Do we absolutely have full knowledge that an employee was ill or contracted the virus at work? You know, we can give you some very specific reps, but these big blanket reps over COVID-19, you're just not going to get, and they're not fair to ask for it.

So, that's how you deal with the COVID rep. The second I already thought of a third, but the second it has to do with the PPP loans. The forgiveness of the PPP loans upon a change of control is there's a lot of nuance to it. And you have to go through a particular process. And sometimes that depends on who the lender is to make sure that you can close a transaction and still be applicable to have the loan forgiven.

That's a very bespoke process that you actually, you know when I was listing all the other expertise that you need, we actually have someone at our firm who spent a considerable amount of time in the SBA, and she really runs our entire PPP process in terms of how to deal with it in the transactional structure.

And then the third element that really comes to mind is the MAC laws and material adverse change clauses in contracts. And how when you define a material adverse change how COVID is defined within that or how pandemics are now defined in it and how those clauses are now typically getting broader to say if there's another pandemic and defining actually what pandemic really means now. It used to be just a word in a whole bunch of words in a clause.

And now it has so much more meaning than it ever did before.

Jeffrey Feldberg: [00:39:39] So, it sounds like the pandemic has forever made an imprint in regards to mergers and acquisitions, not just for right now, but also when we get beyond this on a go-forward basis, would that be a fair statement?

 Nick San Filippo: [00:39:51] Certainly with respect to material adverse change permissions I think we'll get through the PPP people won't be asking for COVID reps anymore. But how we define material adverse change is forever going to be changed now.

Jeffrey Feldberg: [00:40:02] So, Nick let's circle back around to fees, and I know fees with business owners with every advisor can be a sensitive topic. And I also realize that a fee, particularly with an M&A lawyer, the deal size, the kind of firm that the M&A lawyer is at the kind of business.  Is there a general rule of thumb, some kind of back-of-the-envelope calculation of what a fee with an M&A lawyer at a larger firm would be like?

Nick San Filippo: [00:40:30] I don't know that I'm going to be able to provide you a calculus. I don't think deal size necessarily impacts the fee structure. There are very complex smaller deals that could certainly incur more legal fees than less complex larger deals.

I think when you're taking a look at fee structure, certainly from the client perspective it's rational to get an estimate from your M&A counsel and compare that estimate to the overall deal value without a doubt. For example, if you're doing a $20 million deal, does it really make sense to have a $2 million legal fee?

Not at all. Even if the deal is incredibly complex, it's even very difficult to justify spending 10% of the deal value on legal. What I would say is that most law firms will be able to provide you a range at the onset of discussions of the fees. Now that might be a very wide range.

So, I can just give you for example what I do. If you said Nick, I'm selling my business for a hundred million dollars what do you think the fee would be for something like that? And now I know nothing else about your business, other than perhaps you're selling to a private equity firm.

I might know that the range. I would give you for something like that. So, I'm really not sure. I think on the low end would probably be about $500,000 and on the high end would be maybe $1.5. Now, ultimately, when I get to know your business, it could be less than $500,000 or it could be more than $1.5.

I'll know a lot more after asking you some questions about your company, what the issues with your company could be and who the buyer is, and so on and so forth. It's a wide range that as I learn more and more about the business, I could bring into a tighter range.

Jeffrey Feldberg: [00:42:11] And it sounds like when you're at a larger law firm and as you referenced earlier, you have all kinds of in-house experts that you're going to be bringing into the mix to make sure that it's the right deal and that the business owner is protected. So, as a business owner, it would be important to compare apples to apples and to make sure that when you're getting quotes, if you're getting quotes from different size law firms, to make sure that it's an equal comparison of what's provided and what's not.

And so really to look under the hood to see what's there as the case may be.

Nick San Filippo: [00:42:42] I think I disagree with that. Actually. There's a very, there's a very logical element to what you're saying. But on the presumption, you're selling your business, let's just say for north of $50 million. I'll use your words that the delta between attorney A's firm and attorney's B firm is likely going to be a rounding error in the deal value.

And by going with the person, you have comfort with the person who you have experienced with, the person who's going to take a deep dive into your business who's going to be at 24 seven and bring a 24/7. These are all things that are going to accrete tremendous value. And I would suggest to you that a more experienced M&A attorney, you're going to see that attorney actually putting incremental dollars into your pocket as a result of the expertise he or she has.

And some can be as simple as trying not to get too technical. But negotiating the working capital peg, you know, negotiating how much working capital you're really should be leaving in the business. If an attorney can be an effective advocate on what should be included in working capital?

What shouldn't be included in working capital, what the right amount of working capital is because the business was cyclical and you should look at it, not on an average of the last 12 months, but some other things in getting involved in that level of detail, very easy, I've done it many times, picked up half a million or a million dollars of more real dollar value to the client.

And that in itself would cover all if not a substantial amount of my fee.

Jeffrey Feldberg: [00:44:10] It's terrific Nick, because really what you're talking about is this is more the art of a liquidity event than the science because some of these attributes don't show up on paper. When you have?? Two competent, qualified, successful M&A lawyers who have that track record, who have that experience.

It is going to be a rounding error from one to the other. And it's now up to you as a business owner, what's that chemistry like what's that culture like? Do get each other? What's the mentality like on both sides of the table of working together as a team and getting this across the finish line and there's no right or wrong, it's really personal preference.

And what works. But your point when you get the right advisor, in your case, as an M&A attorney who's fighting your behalf, the savings that you can bring to the table can more than cover the legal expenses when all is said and done.

Nick San Filippo: [00:45:03] Absolutely. We had a discussion on the letter of intent. For example, if there's going to be an anti-trust filing, and you're representing the sell side. To get into the letter of intent that the buyer's going to pick up the seat. It's $125,000 in the United States.

If you have an experienced attorney who looking out at every turn for you, that attorney just picked up at least half of that fee. In the United States, most deals of size at this point in time are done with what's called representations and warranties insurance. If you have an experienced counsel that experience counsel could push the cost of that insurance policy onto the buyer and have a negotiation over where your exposure is happening and who picks up the first part of the exposure. There are all little things that when you're dealing with the right person who is bringing the right attitude of fighting for you and trying to protect every nickel and every dollar.

At the end of the day, when you have that right person, the difference you're going to pay in fees really shouldn't matter. And I think anybody who's built their business up to the size of $50, $100, $200, $300, $400 million, they're all going to know in their gut when they meet the person, is this the right attorney for me?

Can I connect with him or her? Are they going to be there when I need them? What are their references saying? And they're going to know, and I’d recommend everybody spend the time, go with your gut.

Jeffrey Feldberg: [00:46:12] Nick as has been the case, this entire interview, you are spot on with what you're saying and so many examples of how the right person, how that expertise pays. It pays back in spades. It pays back in dividends, all the savings that you're going to be picking up along the way because you have somebody who knows who's your advocate.

Who's looking out for. You have that experience to really make that difference. So, Nick, as we begin to wrap up the interview, there's one question I'd like to ask every guest. So, imagine it's the movie Back to the Future and you walk outside your door and what do you see?

You see that magical DeLorean car is sitting in your driveway that Nick you can hop into and you can go back to any point in your lifetime. And whatever that is, whether that's you as Nick, a young child or a teenager, or a young man or into adulthood that you can go back at any point in time and share some lessons, learned, some wisdom, some words of advice. What would that be?

Nick San Filippo: [00:47:09] Be your own entrepreneur. I often tell my clients that I'm a frustrated entrepreneur. One of the best things about my business is that I get deep insights into so many different entrepreneurs into so many different businesses. And I find them all so fascinating. And I love learning the intricacies of these businesses. Learning their revenue cycle, learning their secret sauce, seeing what makes them tick and absorbing all of that, and using that for their benefit.

And then ultimately leveraging that while maintaining all confidences for my other clients, but having done that now for 25 plus years, it's hard for me not to think back, Nick, why didn't you when you were 25 or so coming out of law school, or maybe not have gone to law school, start your own business, be your own entrepreneur and build that business so you could be one of these one of these serial entrepreneurs going from business to business. So, that would be my advice to myself.

Jeffrey Feldberg: [00:48:01] What a terrific story. What I love about that though, is your fascination with being an entrepreneur. I don't want to put words in your mouth, but I would say you've channeled that. You've channeled that into your law practice. You're like an entrepreneurial M&A lawyer bringing that to the liquidity event, to make it that much better and stronger, and to get across the finish line with even a higher enterprise value, so well done.

Nick San Filippo: [00:48:25] I think the greatest compliment I ever receive is when clients for whom I've worked with for a period of time and help them sell their business. When I have them as a referral source, they say almost exactly what you just said about me to my prospective clients. And to me, that's always humbling.

Jeffrey Feldberg: [00:48:43] It’s well-earned Nick and something to be very proud of. So, Nick, I'm going to put this into our show notes. Where can somebody find you online?

 Nick San Filippo: [00:48:50] The best place is to go to our website at loewenstein.com or email me at nsanfilippo[at]lowenstein.com. I think you're going to find that I live what I say about 24/7. So, if you reach out to me, I promise you I'm going to get back to you probably quicker than you ever thought.

Jeffrey Feldberg: [00:49:08] Terrific. Sounds like a bit of a challenge going on there and I'll make sure to put that in our show notes, Nick, I really appreciate your generosity with your time, your insights, and your wisdom today. Thank you so much for being a guest on the Sell My Business Podcast.

Nick San Filippo: [00:49:23] It was a real joy. And I'm really enjoying my time with you and looking forward to getting to know you even better.

Jeffrey Feldberg: [00:49:28] Thanks, Nick. Please stay healthy and safe.

Nick San Filippo: [00:49:30] You too.