Summary

In this conversation, Eric Hsu, an M&A lawyer, shares his journey from a diverse legal background to specializing in mergers and acquisitions for small to medium-sized businesses. He discusses the importance of legal due diligence, identifying red flags in potential deals, and the complexities of ownership and licensing issues. Eric emphasizes the need for stakeholder involvement and the challenges posed by landlords during negotiations. His insights provide valuable guidance for entrepreneurs looking to navigate the M&A landscape successfully. In this conversation, Eric Hsu discusses various aspects of mergers and acquisitions (M&A), focusing on deal risks, marketing compliance, due diligence, and the importance of understanding the backgrounds of business owners. He emphasizes the need for thorough due diligence to identify potential red flags and the role of insurance in larger deals. Eric also shares insights on the impact of AI on legal practices, his preference for flat fee billing, and the importance of work-life balance as he navigates his career while living in an RV with his family. He concludes by discussing his content marketing strategy and the launch of his new newsletter aimed at educating aspiring business owners.

Takeaways

Eric has always had an entrepreneurial bent.
He transitioned to focusing on M&A after building a runway.
M&A deals provide a win-win for buyers and sellers.
The energy in the SMB acquisition world is high and entrepreneurial.
Legal due diligence is crucial to identify red flags.
Ownership issues can complicate deals significantly.
Licensing requirements can dictate the structure of acquisitions.
Stakeholder involvement is essential in negotiations.
Landlords can pose significant challenges in deal closures.
Understanding financial liabilities is key to successful acquisitions. Due diligence is crucial in identifying deal risks.
Marketing compliance is often overlooked but essential.
Reps and warranty insurance can protect buyers in larger deals.
Financial due diligence should be handled by experts.
Investigating the owner's background is vital for informed decisions.
Red flags in deals can include tax liens and inflated earnings.
Hourly billing is unpopular; flat fees are preferred.
AI tools like Chat GPT can enhance legal research and writing.
Balancing work and family life is a priority for solo practitioners.
Content marketing is an effective way to educate potential clients.

 

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Transcript:

JON STODDARD (00:01.126)
Welcome to the top M&A entrepreneurs. Today, my guest is Eric Xu from Oregon. Eric is an attorney, M&A lawyer, focused on buy side SMB entrepreneurs at Clear Focus Law. Welcome Eric to the show.

Eric Hsu (00:16.77)
Thanks John appreciate you having me on. I'm actually from Washington. I'm also admitted in Oregon, which is probably where you got that from, but Washington's where I'm based out of.

JON STODDARD (00:24.578)
Oh yeah, yeah, yeah. I looked at where you graduated college from and it was like Oregon. Yeah. Yeah. Uh, cool. So look, I was looking at your, uh, LinkedIn profile and you did some work for the public defender, prosecuting attorney, trial advocacy instructor. So that was a little bit different. How did you get into this, uh, SMB side and why?

Eric Hsu (00:47.774)
Well, good question. I've always been an entrepreneur at heart. And so even when I was kind of having a what you'd almost call a simultaneous journey down a different legal path, and I was a police officer, I was a prosecutor, and like you say, I did a lot of training and trial work, I always had an entrepreneurial bent. And so as early as 2011, I had a side hustle, and I did business law on the side.

So I'd wake up early every morning, starting at five in the morning, kind of before my day job. And on weekends, I was working with startups, working with small business owners in the area. And that's what I love doing. That's what kind of got me excited. And the more I did it, the more I liked it, the more I liked it, the more I grew my side hustle until I ultimately said, all right, that's it. I'm all in. And about five years ago, I started focusing really hard on M&A. And then this last year...

focused exclusively on the buy side and actually left my day job last year and this is all I do now.

JON STODDARD (01:52.314)
Yeah. So this solo entrepreneur is where, you know, ideally a lot of people want to go because you have more control of your life. When did you make the jump? Or did you completely replace your salary or, you know, was it kind of comparable or what happened there?

Eric Hsu (02:01.619)
Sure.

Eric Hsu (02:12.822)
Well, it was kind of one of those I built up a runway. I knew there was a date that it was a do or die. The day job was getting kind of, things are getting kind of interesting in the criminal justice world in Washington state. Couldn't stick around, had the opportunities, had some general counsel clients that I'd been working with for years that would keep me afloat. And I said, that's it, we're gonna go. And my wife and I had been planning that for a long time. And so that's a big part of it. My wife is-

been my partner from day one and it was our idea. I think a lot of people who do this, sometimes it's their idea that they've got to sell to their spouse or whatnot. It was 100% our idea. And so last year, our do or die date came, we jumped and never looked back.

JON STODDARD (02:58.95)
Yeah. And what do you, how did you pick an M and A? I mean, what, what was that about? Was it, you found some entrepreneurs early on that wanted to buy companies that didn't have companies or they did have companies and want to go through acquisition.

Eric Hsu (03:13.75)
Well, interesting you should ask. I started getting some M&A deals that just came to me. When I'm a business lawyer, I'm pretty much a generalist, if you can imagine. I do everything under the sun from cradle to grave, from startup to shutdown of a business. But these deals started coming to me just because of the network of clients I work with. And I really loved working on those because it was such a win-win. Buyer buys the business.

And the seller gets to walk away with a nice exit. The buyer's excited about running this new business that they didn't have to start from scratch. I was fascinated by that after a few deals. And the more I did, the more I enjoyed it. And then when I started really delving into the buy side and working with a lot of self-funded searchers, what I really love about this space is that the energy is really high and it's really entrepreneurial, kind of the energy that I remember from my work with startups in the...

in my early days as a business lawyer, they accepted it and kind of say, somewhat jokingly, chances of success are a lot higher when I'm one of the SMB acquisition world, where you're buying a successful cash flowing business with good funding and good capital backing. There are a lot of great ideas, a lot of great entrepreneurs, and a lot of energy back then too, when I was working with startups, but not a lot of them got anywhere. So it's exciting to work in this space now.

where I get to help people acquire, help people really fulfill their entrepreneurial DNA with much higher chances than success. I talk to a lot of people that I help close deals for, you know, a year out and checking on how they're doing and just love hearing about the stories of how it went and to a person that all excited and happy about the fact that they did it. Some of them are pretty weary.

JON STODDARD (05:03.002)
Yeah. So what, what, what do you, what do you exactly do for them? And I mean, how do they find you and say, okay, I need you to write up an asset purchase agreement or check over my LOI or, or do what, what do you do for them?

Eric Hsu (05:11.742)
Eh?

Eric Hsu (05:18.743)
Sure, yeah. I do everything from working with them on evaluating deals and specific deals. And so sometimes people come to me and say, I'd like to buy a business. How do I start? Unfortunately, I'm not that. I'm a lawyer and that's primarily the service that I offer to the public. And what I do is I work with clients as early as finding a deal and they come to me and say, hey, can you help me strategize on negotiations, on funding, on...

How do I mitigate my downside risk on this type of a deal? What structure is gonna use? So I'll help them negotiate, help them draft the LOI, and then if the LOI is accepted, I'll work with them on the legal due diligence. So reviewing everything about the target company to make sure we have our risks covered. We can actually buy the company as anticipated. And then of course, what you anticipate the attorney doing is drafting up all the agreements, negotiating with the other side.

helping make sure the deal gets to close.

JON STODDARD (06:16.518)
Yeah. So tell me about, okay, they, they, you get an LOI, it's out and they accept it. And you start this legal due diligence. What's, what's the first thing you do look for the next thing, next thing, and next thing to look for these red flags. Cause you kind of want to check mark them off before you go, okay, man, it's cool. You should get it. Yeah.

Eric Hsu (06:22.734)
Mm-hmm. Mm-hmm. Right.

Yeah, yeah, so I send out a questionnaire. So it's a legal due diligence questionnaire, as well as a request for records. And so we send a pretty extensive request for records ranging from the articles of incorporation or articles of formation, their bylaws or operating agreements, any sort of agreements that give other people rights over the company or give rights to other equity holders. So for example, sometimes we'll be talking to one seller.

And there might be when we start requesting documents like that, we find out another seller has the veto rights over the agreement or the sale of the company. And so we ask for documents, including those contracts with their current clients and lists of clients. We ask for information about their current insurance, insurance claims, whatever IP they have that's registered or unregistered. So it's...

brief overview of what we ask for and then we also ask them, like I said, to fill out this question there. And so we, I usually, the philosophy I have is I start with the biggest red flag issues first, I front load the biggest problems first so that I can advise my client that if this deal is going to break up, I can let them know as soon as possible. So, I'm just going to answer your question.

JON STODDARD (07:55.206)
Yeah, so we'll name a couple examples of those, like big red flags that you see. Yeah.

Eric Hsu (08:00.846)
Sure, big red flags would be company wasn't properly formed. They say, hey, I'm selling the company. We find out, hey, there's no entity under that name. And they're like, oh, well, wait, we thought someone filed that. Maybe I'm a sole proprietorship. I'm not really an LLC. It gets really difficult to buy the assets of this person. That really doesn't happen as much on a professionalized deal where it's listed with a broker.

That's one of those where I've seen them in the past, where I've worked with clients that are just more like the, hey, you know, so and so wants to sell me their business. Can you help me? So that's a big red flag. Sometimes it's, we find out.

JON STODDARD (08:40.206)
Does that, let me ask you about that. Does that kill the deal or can you fix that to an eventual sale?

Eric Hsu (08:45.654)
Sometimes that can be fixed. Sometimes, I mean, if it needed to be a stock purchase, in other words, they needed to actually step into the shoes of this person for licensing purposes or for contract purposes. If there was no entity in the first place, we couldn't step into the shoes of an individual person. So we couldn't fix that. But if it's an asset purchase and we really wanted to just buy the assets, that's probably something we could fix, but we would wanna make sure that other pieces of that weren't broken as well.

JON STODDARD (09:02.844)
Right.

Eric Hsu (09:14.394)
of surprising how many business owners know very little about how their business is structured. So that can be a problem.

JON STODDARD (09:21.018)
Yeah. Let me ask you about that stock purchase. How often do you see that in SMB? Because normally we say, Hey, we're just buying the assets, right? Yeah.

Eric Hsu (09:32.264)
It's probably maybe one in five deals and there's got to be a specific reason why you want to do it as a stock purchase and you hit it on the head there. Oh sure, sure. This wasn't five years but like I'd say maybe one in five deals is what I've seen that need it and primarily it's going to be for licensing purposes. So sometimes.

JON STODDARD (09:41.414)
Well, what are those five reasons? Yeah.

JON STODDARD (09:50.307)
Oh, okay.

Eric Hsu (09:56.89)
Sometimes the acquisition target has special licenses in place that are easier to assume than to start over again. So for example Sometimes it's you know special certifications under federal law for contracting. They might be a for example a minority owned business or Certified small business and going through that process from scratch as opposed to assuming it could be easier in certain circumstances. Sometimes there's

state equivalents to that as well. Other times it's professional licensing. So it could be, for example, it could be a licensed private school. It could be a, sometimes it's the contractor's license. And so licensing is one bit, one piece that would push it toward.

JON STODDARD (10:41.726)
Yeah. That's a, that's a great point. You bring up a question and area because I have a lot of students that want to buy an HVAC company and a contractor's license is required, or I had a couple of students that wanted to buy a medical practice that required a doctor. And you know, there's just not a lot of supply of doctors, but there's other things like that and I've got another students that's looking at school. So that's.

Eric Hsu (10:54.134)
Thank you.

Eric Hsu (11:03.15)
Amen.

Eric Hsu (11:06.958)
Thank you.

JON STODDARD (11:08.078)
requirement there. How do you get around that? Can somebody that doesn't have those credentials purchase that company?

Eric Hsu (11:18.072)
It depends on the industry and the licensing. So there are certain industries. Law is one of them that's the most stringent. You can't have any equity holders, period, that aren't attorneys. And so I think maybe there might be one or two states that are exceptions. But minor. Okay, that might be the one I'm thinking of. And I think someone might have pointed out another one.

JON STODDARD (11:34.514)
I think Arizona actually changed that law, Arizona. Yeah.

Eric Hsu (11:42.758)
Other ones are kind of more on the, you know, you've got to have one person as the designated person that supervises. For example, a lot of HVAC or plumbing or electrical, a lot of states will allow you to have non-licensed owners as long as one, sometimes it's even one employee serves as the licensee for purposes of state licensing.

professions such as engineering might have that as well. There needs to be a majority owner in some states that is licensed, but the minority owners can be non-licensed. And then sometimes there's also a way to get around that by in some industries, having the acquirers be the ones that provide all the ancillary services. So for example, there's a structure in medical practice acquisition where

The acquirers might set up an entity to provide all the administration, all the building, every little piece of managing that practice except for the legal services. And then they have veto power or absolute power of appointing a medical director. So basically they manage the whole business, but they get to install their licensed medical director as...

the one that manages the medical part of things. And then all the money for all the administration goes to the, basically the management firm that is owned by the non-licensed people. And so there's ways to get around a lot of that, except for a small number of professions, like I said, with legal part at the top of that, where it's almost impossible in almost every state.

JON STODDARD (13:28.058)
Yeah. And how do you bring that up? Like the broker first ask, Oh, hey, you need a engineer with the, this credentials or you need a contractor's license. You say there's a way to do that. Are you helping them on the call or are you just coaching them to say this to the broker and to the owner seller?

Eric Hsu (13:48.814)
Oh, honestly, I don't ever see this come up with a broker. It might come up, but I don't see it. I'm usually the one coaching my client as to here's how we do it. Usually my client will come to me and say, hey, I wanna buy a roofing company. I wanna buy a medical practice, but it looks like this and that is an issue. Can we do it this way or that way? And I'll give them options on how to do it. We might do some legal research to make sure that it complies with the...

state requirements if it's not one that I'm familiar with and then they'll go and make the offer based on that. So we'll try to get all that done ahead of time obviously because you don't want to get too far into a deal and then realize that you can't do it because of a licensing issue.

JON STODDARD (14:32.434)
Yeah, it's just a waste of time to do that. So let's talk about that. That was one of the red flags. What's another big red flag that you look for when you're peeling off the onion?

Eric Hsu (14:34.793)
Oh yeah.

Eric Hsu (14:43.106)
Sure, owners that aren't at the table are another big one. Or sometimes they're not even known as owners. They might just even be like equity holders that have veto rights or people who aren't equity holders that have veto rights over a deal. And so that's why we always ask the person who we are negotiating with, the purported seller, how much of the company do you own? Who else owns the company? Who else has any rights whatsoever?

over the sale of the company? Is there anyone that needs to give consent? I'll give you an example with the deal where it wasn't an equity holder but it was a note holder. So someone who lent money to this company in the startup basis of the company, they're holding a, it was a convertible promissory note. So they have no equity holding rights in the company whatsoever but part of that promissory note said that the company needed to go to them.

and get their permission if they ever wanted to sell either their assets or their equity. And so that was one thing that we had to do a lot of digging before we could figure that out and that could really stop a deal in its tracks because sometimes a seller doesn't even think about that, right? They signed a promissory note five years ago when they were forming the company. They didn't look at the fine print and realize, wait, I needed to go to this guy for permission or this company for permission. And that would be a violation of that agreement and allow that company to try to come in and unravel it.

JON STODDARD (16:08.774)
Yeah, that's interesting. It was a convertible note, but does he have like some trigger event where you can convert that to equity? Yeah.

Eric Hsu (16:17.782)
Sure, sometimes it's depending on how the convertible notes written sometimes they get to convert to equity on a certain event. Sometimes it's convertible at exit or sometimes it's in this case they needed to be consulted and they needed to give consent for the exit. And then I don't even think in this case they got to participate in the exit, but they needed to give consent before they the exit could be done.

JON STODDARD (16:40.05)
Right. But the note was, it was an asset, it was an asset purchase agreement. And the note was paid off to the proceeds of the sale by the seller. Yeah. Yeah. Let me, let me ask you about that. Uh, bringing the wife today, should the wife always be at the table? If it's a community property state, the wife owns half of it. Does she have a, you know, could be either way. I'm not being gender specific on this. I'm just saying.

Eric Hsu (16:45.886)
Mm-hmm. Right. Yeah.

Eric Hsu (17:01.678)
Thank you.

JON STODDARD (17:05.495)
If you own a $5 million business and it's a community property state, your wife has veto power or not has veto power.

Eric Hsu (17:14.312)
Right, yeah, that's definitely a good point there. And they should be in, I don't see that they're necessarily always involved in the negotiations, but we need to make sure that if it's a community property state that they agree to the transaction as well. You got a good point there.

JON STODDARD (17:31.538)
Yeah. What about, what's the next big red flag that you look for when you start unpeeling that onion?

Eric Hsu (17:38.961)
Ownership of assets is another big piece. So I usually run UCC searches and use public records to double check them. UCC is a term used to describe the financing statements that give creditors basically the security interest over the assets. So a lot of times these security interests can be very broad.

even if they say it's a manufacturing company and they bought a piece of equipment, that creditor, and then they bought it on credit, that creditor might actually have a lien on more than just that piece of equipment. They might have a lien on all of their current receivables or sometimes they write those very broadly. And if we don't see and address all those, then that could be a serious impediment to closing the deal. And so.

JON STODDARD (18:28.638)
Yeah.

Eric Hsu (18:28.874)
we want to make sure that they don't have any restrictions on their ability to sell their assets. And that comes up very often.

JON STODDARD (18:34.434)
Yeah. Well, how do you, how do you fix that deal? That deal. Let's say if the node holder has some kind of rights to the receivables, it's just not the, the equipment itself, but it's a million dollar equipment. It's like a crane or something like that. But how would he get, I mean, it's just kind of broad that he has a claim on the receivables, but maybe he does in the lieu of something going south.

Eric Hsu (18:44.174)
Mm-hmm.

Eric Hsu (18:56.388)
Mm-hmm.

Eric Hsu (19:02.914)
Sure, yeah, there's three ways to deal with something like that. One of them, especially with bigger companies, a lot of times they already have the cash flow or the cash in the bank to pay this off. And they'll just say, don't worry, we'll pay it off before closing, and then it'll be a closing contingency, no problem. They'll pull it off, and then we require that the UCC, it's called the UCC3B file that cancels the UCC. And the bank will check, and we will check before it closes. So that's one. Number two, sometimes those will be closed or they'll be paid off with the...

proceeds from the funding. So if it doesn't get paid off the foreclosing, then the bank will require all the time and we will require as well that it just be paid off through the escrowed funds for the closing. And so when the bank funds the escrow company or the escrow agent for the deal, they will pay off the creditors and then they'll take the balance and pay off the seller. So that's number two. And then a lot of times the third option is you mentioned a piece of equipment like a crane.

If it's fundamental to the operation of the business, a lot of times my buyer will actually assume that contract. Sometimes they'll assume it, sometimes they'll contact the company and say, we need this, will you write a new contract for us? And if they'll say, no, you can't assume the old one, but we'll write a new one for you, then that takes care of it as well.

JON STODDARD (20:19.494)
Yeah, I do have a question that I was going to side bar on that one. If there will write a new contract for you, how do you get the same terms that the previous, uh, the seller had? You know, how do you do that?

Eric Hsu (20:36.324)
Sometimes you don't and that's one of those things where in the case of equipment heavy currently financed businesses it's an issue. So sometimes they'll say fine go ahead we want the business to continue as usual we'll honor the terms. Sometimes they'll yank the rug out from under you and say no we want to.

We want market terms from today. And you saw that the interest rates have gone up. So we want a higher interest rate and that could, that could be a significant deal problem and that actually comes up quite often with landlords, um, which. I sometimes think of as kind of a dark horse that can appear out of nowhere at the end and kill a deal. I've had landlords get very, very close to killing deals because unfortunately they're the one. Player in the whole.

game that has absolutely no incentive for you to close your deal. They just want to get paid. They don't care by who. And we've actually had landlords sometimes say, hey, that was a very, very under market lease. I won't let you assume this lease. I'll write you a new one, but I'm going to write it to current standards with the market. And it's going to be significantly higher. And it could kill the deal.

JON STODDARD (21:46.298)
Yeah. And what do you say to the buyer? Can you renegotiate with the seller? Hey, look, we're not getting the same terms. I'd like to get a discount.

Eric Hsu (21:58.09)
We can try that. And usually, when I reference the lease, usually in the purchase agreement, we'll write in that one of the contingencies of closing is that we get a lease agreement on comparable terms. And so if that's the case, then we have some leverage to go back to the seller and say, hey, this is incomparable terms. We're willing to waive that contingency, but we're going to need some concessions on the price because we can't swallow.

both the existing price as well as a much higher lease payment just won't work.

JON STODDARD (22:32.102)
Yeah. More often do you see that kill in the deals or...

Eric Hsu (22:37.674)
More often I see that either the landlord at the end like an 11th hour conceding, which is very common They'll a lot of times they'll they'll huff and puff and say we don't care. We'll rent it to the next guy We'll redevelop the property but Thankfully a lot of times they'll come to their senses and go wait, you know, you got a pretty good business over there You know, it's not like it's something we can in a lot of these businesses are you know specific

or properties are designed specifically for that business. For example, a manufacturing business. It's not like you can just say, we'll find someone else to come in and fill this manufacturing business shoes and pay me rent, or I've had a deal that it was a tow truck business. It's like, it's not like there's another tow truck. It's, right, exactly, exactly. But if it's commercial office space in San Francisco, it might very well be. They say, sorry, we'll just give it to the next guy. But.

JON STODDARD (23:18.778)
Yeah, it's not like commercial office space in San Francisco. Yeah. Yeah.

JON STODDARD (23:30.886)
Yeah, there is no next guy.

Eric Hsu (23:33.222)
Yeah, yeah, maybe not in San Francisco. But that far into the deal. If the landlord is being contacted late, and I always recommend that they be contacted early, but more often than not, they don't that far into the deal. If we say, hey, the landlord really wants to jack up the rent. Can we figure something out? The seller usually is willing to work with us.

JON STODDARD (23:36.062)
Yeah.

JON STODDARD (23:54.226)
Who's making those calls? Are you making those calls? Are you just telling the seller to make those calls? Are you making those calls?

Eric Hsu (24:00.234)
It's 50-50. Sometimes I get involved, sometimes the landlord balks at me getting involved. They, you know, why is a lawyer involved in this conversation? Do I have to go get mine? And so I'm like, no, no, no. I'm a friendly lawyer. I'm not one of those litigious guys. The shark, sorry, but they don't get that. And I've very often had clients say, hey, they don't want you in on the call. Can you just tell me what I should be thinking about? And so I'll have to coach my client.

JON STODDARD (24:10.474)
Oh my god, I don't want to talk to a lawyer. Yeah, yeah, yeah.

JON STODDARD (24:30.066)
He says, that lawyer's gonna mess up the call and everybody's gonna, yeah. So, okay, that's, yeah, so that's three. How about the fourth red flag that you'd normally see? Yeah.

Eric Hsu (24:30.067)
and kind of do the huddle. Yeah, we got a bad day.

Eric Hsu (24:42.358)
Boy, four-threads lags starting to get into things that are just deal risks. And so, for example, non-transferable contracts or marketing practices that are substandard are things that I see very often that I advise my clients on fixing. They're not going to kill the deal. They just need to be things that we need to address. And so what I mean by.

JON STODDARD (25:02.458)
Well, let's talk about the marketing one. That one sounds like it can unpack to a complete different story. What is it? Tell me about that.

Eric Hsu (25:10.466)
Sure, yeah, and it's part of due diligence. I review their website, I ask them how they do their marketing, whether they have an email list, and things like that. And so a lot of times when we get to their website, a lot of businesses will, for example, do things like collect emails, but don't have the requisite.

opt out information or the language that you need to comply with the CAN SPAM Act and the California Digital Privacy Act or they don't have terms and conditions on their website but they do a fair amount of back and forth with clients and we want to make sure that people who show up on the website understand who owns the website, the terms and conditions by which they're allowed to view material there, who owns all the...

the intellectual property on the website. Sometimes if it's a professional services company, for example, the fact that by viewing the information on the website, they're not establishing a professional client relationship. So a lot of disclaimers should be in there. A lot of times they're not. Or there could be ways that they're doing marketing that might be not fully in compliance with marketing.

rules. The FTC, for example, has roles on sponsorships and who may talk about reviews on products where they're provided the products for free. So we want to make sure that to the extent they do any of these things online, it's in compliance with federal law, in some cases, like for example, California is very strict email collections.

JON STODDARD (26:53.382)
Yeah. So what's a good story on that where it was not only an experience that closely killed the deal, let's say.

Eric Hsu (27:03.53)
Well, fortunately these don't kill deals. These are usually are things where we just, yep.

JON STODDARD (27:07.902)
So this is kind of a, just like, hey, it's there. You need to fix it before we move on or it needs to be fixed at some point in the future.

Eric Hsu (27:14.93)
Right. Yeah, we've had them fix it before closing just because it's easier to like, for example, in situations where we see that they're collecting email addresses, everything's out of compliance. We're like, hey, get this in compliance before we'll close. Or if they don't want to, sometimes I talk to my client, it's just easier to move the deal along and they know that that's something they need to fix in the first 30 to 90 days of owning the business.

And so I always leave my client with a punch list of, hey, here are all the things I found that I recommend you fix right after you own this new business.

JON STODDARD (27:51.61)
Yeah. Yeah. Do you, when you get to the asset purchase agreement and reps and warranty insurance is coming, it's getting bigger now for SMBs. There's a number of insurers do that. Do you recommend that? They put that in the asset purchase agreement?

Eric Hsu (28:10.351)
I do if it reaches a certain size. Usually business acquisitions of let's say four to five million up we start looking at whether that's feasible or not. Below that I still haven't found anybody that's quoting it for pricing that's acceptable to my clients. And so I do know there's a couple of products out there right now that are making themselves available for

more reasonable price points. And I do recommend that. That's a great alternative to just basically, you know, either having an indemnity that's not covered, but you're just hoping their interest covers or having an indemnity escrow. So especially on my larger deals, six plus million, for example, I see that very often and I do recommend that. It's definitely a good thing to do.

JON STODDARD (28:58.122)
Yeah. How much you get involved with, let's say, due diligence on the accounting side where they're bringing a problem with, look, we can't figure out why these books don't match. I'll give you an example. We looked at a veterinary practice. It's doing a million and a half, but on the balance sheet, they put the owner earnings.

was accumulative over the 15 years that they owned it. Like, why are we seeing this? It's, you know, it's $5 million. Is it, what do you say about that if you ever come across an accounting issue?

Eric Hsu (29:41.686)
I say zero. I get completely, yeah, I know nothing about numbers. I do know a few things about numbers, but I don't abide at all in numbers. I do have a number of Quality of Earnings slash Financial Due Diligence partners that I do quite a bit of deals with. And so when a client works with me, I usually recommend that they have someone very well versed in M&A on the financial side. And if they need someone.

JON STODDARD (29:42.85)
legally. You stay out of that, huh?

Eric Hsu (30:08.662)
I'm always happy to connect them with one of the people in my network. But I don't get involved in that at all.

JON STODDARD (30:13.158)
Yeah. Well, what about, okay, let's go back to the, let's say you look in all the background, all these red flags, but what about the individual themselves? If, you know, from having flexible ethics or maybe a criminal record at some point in the past or, uh, uh, complaints with the state on how he treats employees, kind of like.

Eric Hsu (30:22.809)
Okay. Good.

Eric Hsu (30:29.662)
Mm hmm. Yes, good good question and I always run. I use a investigative database that allows me to do very powerful searches both on the company as well as the owners and the correctives.

JON STODDARD (30:44.754)
Is that coming from your work from working in law enforcement? Do you still have access to the FBI database?

Eric Hsu (30:51.194)
It's actually similar to WebPrivate. It doesn't get quite that far, but it's basically the same type of database that private investigators use. And so we do do checks through public records on owners and the executives, and you're exactly right there. I want my clients to know if they're buying a business from someone who's had serious financial issues, criminal history.

JON STODDARD (31:01.203)
Yeah.

Eric Hsu (31:17.578)
They've had investigations by state agencies. And it reflects not only on the business, because I think it gives them the ability to look at the business with the proper lens going, okay, now that I know that this is who's been running the business, do I still wanna buy it? And then on top of that, with almost every acquisition, they're going to be working with this person for the next three, four, five, sometimes up to 12 months.

And SBA caps it at 12 months. So that's the extent of this. If it's an SBA funded deal, that's the extent of the transition involvement. But they'll be working hand in hand with this person for the next 12 months on their business. And they'll be often identified with this person even after this person's left. So we need to make sure they're comfortable with it.

JON STODDARD (32:06.79)
Yeah. Let me ask you about this. Like we talked about some red flags that you're uncovering when you go into due diligence, but what about somebody that brings you a deal and say, Hey, Eric, I need you to start working on this. And you just say, no, don't go for the deal. And here's why. And you give them like three reasons. What, what, what are you, what are you regularly seeing?

Eric Hsu (32:20.514)
Okay.

Eric Hsu (32:28.152)
In terms of reasons not to go after a deal.

JON STODDARD (32:29.586)
Like say, hey, your client asked you to look at the deal and said, I wouldn't buy this deal. And here's why. Here's the top three reasons I see.

Eric Hsu (32:41.622)
Boy, I don't see too many deals that are untouchable. I've seen deals that, for example, have huge tax liens. Stay away from that. Sometimes I'm like, what if I could get really cheap? Like, no, don't do it. Or I think another one is, and this is the big one, where the owner will say kind of on the sly, hey, I know my income doesn't look really high as filed with the IRS, but I don't put everything in there. Can I show you my real books and sell it to you based on that?

I've had that come up a number of times with clients and I'm just like, no, this is no good way to buy that business. And then sometimes people are like, I don't care, I just want to show you the inflated real earnings, I'll sell it to you for anything you want. And I was like, if this person is willing to fudge the books with the feds, don't touch it.

JON STODDARD (33:33.414)
Yeah. Yeah. And you just, is that a cash business could be like a restaurant business? Kind of businesses. Are you seeing those? Yeah.

Eric Hsu (33:40.175)
Yeah, that or yeah, I've seen that or sometimes it's like laundromats or I can't remember the last one I had where what it was but it was it was one of those.

JON STODDARD (33:48.986)
Are laundromats a big, I know it's all quarters, right? So a laundromats are a big, and I'll tell you this, I know some people that promote laundromats can make money, but how do you know what the real books are? If everybody's putting quarters in and you can just say, oh, we did 50 loads today and we got these quarters, but I'm gonna take 25% of this and just put it in on my bed over here in my closet.

Eric Hsu (34:03.732)
Well, I. Right. It's funny you should ask because as a full time RVer I travel full time right now in an RV with my family. We see laundromats everywhere we go and.

Actually, I'd say 75%. I am a laundromat aficionado. Almost not a joke.

JON STODDARD (34:28.059)
You're a laundromat, Viggo.

JON STODDARD (34:35.902)
Do you go, do you go, hey man, if you ever want to sell, let me know, like leave a card for the launderman. Go, yeah.

Eric Hsu (34:42.27)
Well, no, they're not a part of the RV resort. But I was gonna say, I'd say like a good 60 to 70% of them are going to credit card swipes. So to answer your question, I think a lot of them are modernizing. It's just, I don't think owners like carrying giant bags at quarters to the bank. And then I think there's like a quarter shortage from COVID. And it's just so much easier. You can be an absentee owner.

JON STODDARD (34:44.584)
Yeah.

JON STODDARD (34:51.888)
Oh, interesting. Yeah.

Eric Hsu (35:09.91)
Not ever have to worry about the guy, you know, who collects your quarters skimming off the top. Right. So I see that quite often now.

JON STODDARD (35:15.246)
Yeah, curious. I guess I'm pretty naive or ignorant about that. They're going to credit card swipes. So if somebody brought you a deal and you've got a due diligence, it goes, hey, make sure it's 80% credit card swipe or something. Do you make that recommendation?

Eric Hsu (35:33.922)
I actually haven't seen a laundromat deal or anything similar. I think those are pretty, not very big, but I would recommend that, and this is probably something that they'd have more of a conversation with their financial due diligence person on, but yeah, I would recommend that it's verifiable and they do a quality of earnings. And I think, I imagine with a quality of earnings, they'd have a hard time doing it if most of it was in cash.

JON STODDARD (35:58.226)
Yeah, there's no way. Yeah. Man, he pays his daughter's ballet shoe bills with quarters. Ha ha ha ha.

Interesting. Yeah. So how, how do you work? I mean, do you charge by hour? This is the vein of like talking to your attorney. Make sure you have your questions ready to go. And then there's no, you know, messing around with, Hey, how are your kids? Because when he picks up the other phone, you're on the clock.

Eric Hsu (36:30.209)
I'm sorry.

I absolutely despise hourly billing of any sort. I've used attorneys before that are hourly. I can't stand that. And I know how much my clients hate that too. So from the very, very beginning, when I started my practice in 2011, I never charged. Like there's a few things I've had to charge hourly. When someone says, hey, can you research this thing for me? I'm like, well, I don't know, sure. I'll charge hourly. But other than open-ended things that are like oddball, that I don't take anymore when I do any day deals, everything is flat fee.

JON STODDARD (36:35.304)
Yeah.

Eric Hsu (37:01.23)
And so exactly that. I don't ever want a client thinking, I need to ask Eric his question, but I need to like condense it. I'm going to chat GPT and ask it instead, you know, for free.

JON STODDARD (37:08.458)
I'm afraid to ask it because it's going to charge me $300. Yeah.

JON STODDARD (37:16.19)
Hey, I'm glad you brought that up. Tell me about what chat GPT is doing to your industry. I mean, I can't, I've already asked you to write an asset purchase agreement and it gives me an example. It doesn't cover all the specific points. What's it doing for you?

Eric Hsu (37:30.141)
Mm-hmm. Mm-hmm. Sure, it's doing a few things for me and I think it's doing things for my clients. Starting with for me, it makes my job a lot easier. Sometimes when I need to do research on an arcane thing, it gives me a good head start. And then I can double check it because it usually gives pretty good references.

So it helps me with my content writing. I do quite a bit of content on Twitter, LinkedIn, and then with my newsletter. It helps me a lot with the legal research, or not sorry, the legal research, but the stats research. So for example, if I wanna know what percentage of businesses are owned by baby boomers, I'll ask it, and it'll give me a good citation too. Or if I say how many baby boomers are retiring every day, what are the...

JON STODDARD (37:59.654)
You do, I see it, SMB Twitter, yeah.

Eric Hsu (38:21.194)
what's the default rate for SBA loans because people say, oh, that's super risky, you know, well, let's see what the default rate is. It'll tell me it is very low. Right, exactly. So it does those things for me at all. Great minds, great minds. But I also use it for day-to-day things.

JON STODDARD (38:26.83)
It is not, it's less than 4%. Yeah. Yeah.

JON STODDARD (38:33.11)
I asked that same question to GPT, yeah.

JON STODDARD (38:40.004)
Yeah, yeah. Actually, hey, I would not, well, I would not want to loan with 11% now, but double digits, but yeah.

Eric Hsu (38:46.15)
Oh man. Well, it still works with the right structure. Um, but yeah, chat GCPT helps me on a daily basis. I use it for, you know, um, drafting and routine things. If I need to write a resolution, I'll just, you know, for, for LLC resolution, I'll just give it the specs and it'll write it. And it's pretty good. And it's about 95% of the way there. Um, I just need to tweak a couple of things and it's done. So I love it.

JON STODDARD (39:11.21)
Can it do deeper research? Like you talked about that UCC codes or somebody's criminal record. It has to have access to the database to give you that information, right? And if it doesn't, you're just doing public domain information.

Eric Hsu (39:16.302)
Mm-hmm. Correct. So I don't think you can.

Eric Hsu (39:26.898)
Right, I think it could tell you though if you said hey, I want to do a UCC search in this state What website should I go to it'll tell you oh you see see code or you know this this entity maintains it? And here's how to get to their website and do a search. It'll tell you that but it won't do the search for you

JON STODDARD (39:42.222)
Yeah. Yeah. What about records, individual records? So here's like, hey, you know, did IRS documents, you can't really get access to IRS, but can it tell something about like the, what the guy filed and if he filed and did he restate his, you know, filings, etc.

Eric Hsu (40:03.758)
I don't think so. I think that's behind the locked door there, so to speak. Well, I turned down anything that's gonna overload me, which is kinda common right now with how busy the industry is. And then I also turned down opportunities that are too specialized and too niche. And so for example, I've had...

JON STODDARD (40:08.254)
That's behind a locked door, yeah. So what opportunities do you turn down?

Eric Hsu (40:30.722)
deals come along better in very, very regulated industries, some that are like double regulated. I'll give you an example. One was in the medical billing collections. And I'm like, well, I have to learn too much about too arcane of a subject times two in order to properly diligence and advise you on this. I suggest you find an expert. Or, you know, these days I might take something like that and just let them know, I'm going to have to find two experts to help. Are you okay with that? And I'll be the expert on the M&A piece.

And they might very well be okay with that because the chances of them finding an expert in M&A transactions in the medical field with collections on top of that and not finding you know Like some attorney and a big law firm that's gonna charge them $100,000 are probably low so I Might take it and do that

JON STODDARD (41:17.767)
Yeah, yeah, yeah.

When you say overload you, did you, you made a conscious decision going, hey, I'm not working over 30 hours a week or 40 hours a week because I want quality time with my family and kids. What was that decision?

Eric Hsu (41:33.486)
Mm hmm. Well, at this point, you know, I kind of have a daily schedule that I try to keep by and, you know, certain things that are blocked out for family time. And I'm still trying to juggle it to see what my exact capacity is. Because that, for example, I just brought on an assistant. I got busy enough. I brought on a full time assistant started this week.

and I'm trying to offload a lot of non-legal things to her. And I think that'll free me up to really focus on only the legal aspects of deals that I'm working on. And that might open up my capacity some. So I'm trying to jockey it around and make sure that I'm being realistic. But I also wanna make sure that I properly serve my clients. And that's so far been good and I've been able to do that. And so I don't know what my capacity exactly is, but I.

trying to get a feel for it. And it was, I'm only one person, I'm a solo practitioner as you mentioned.

JON STODDARD (42:24.838)
Yeah. Yeah. Yeah. So what is the goal of being the RV? Where do you like checking out America and seeing every like the funniest things in each state? What's the goal? Or is there no goal and you're just going? Yeah.

Eric Hsu (42:37.911)
Well, it's adventure. There's no grill. You know, we're probably winding down soon, heading to the north wet to kind of find more of a landing spot. It's actually been a little tough recently with my three year old who is like three years old going on six. And she's always asking, hey, you know, where are my friends at? These friends I met, where do they go?

Where's my grandma? Where does she live? Why are we so far away? Why can't we see her anymore? So we're starting to wind down the travels and settle into somewhere in the Northwest. But it's been just for adventure. My wife and I love that. We talked about it the very first weekend we met. Boy, it's been eight years now. And we talked about always wanting to do this. And so it was one of those things that we planned on for eight.

Boy, no more like six years, pull the trigger and did and we're glad we did it.

JON STODDARD (43:33.074)
Let me ask you about your marketing. How do you market a law firm, a solo entrepreneur attorney at law, SMB M&A lawyer? I know you do a lot of work on Twitter. Is it daily stuff? Twice a day, you're writing good stuff? I mean, you write great content. I love your stuff. Yeah.

Eric Hsu (43:39.694)
Mm-hmm. Mm-hmm. Well, thank you. Thank you. I believe in kind of an idea of sharing knowledge and demonstrating my abilities to help people on deals by sharing knowledge. And so if all has been...

I think some people call it content marketing. And that's probably been my style the whole way through my entire career as a business lawyer. So I used to publish a lot on my own blog. I don't do that as much because I think blogs are a little bit, people still read them, but a little bit outdated. Yep, yep, yep, yep, exactly. But back when it was popular, I had a blog. I wrote quite a bit of content there. And I do...

JON STODDARD (44:25.374)
seem to be a little bit outdated, aren't they? Like, I got a blog, yeah, yeah, yeah.

Eric Hsu (44:36.47)
I was more regionally focused back then, like locally focused. Um, and I do guess speaking appearances and things like that. They kind of, my, my goal is always been to educate. So, uh, that's all I do on my content is I just want to educate people. If people want to contact me and work together, uh, as a side effect, great. But the purpose of it is not to market for services. It's to educate. Um, and then, uh, everything kind of.

JON STODDARD (45:03.266)
Yeah. Yeah. Myron Golden that, uh, you know who Myron Golden is? He calls that community services, the education part.

Eric Hsu (45:11.13)
Oh, okay. I like that. I like that. It's enjoyable.

JON STODDARD (45:12.882)
Yeah. Yeah. So what's a, yeah. What's a, what's a win for you? I mean, do you want to like, Hey, I've got to see if I say it, I was going to be a coach for helping people buy a business. The win for me is like, they bought the business, right. Is that what's a win for you?

Eric Hsu (45:28.714)
Mm-hmm. Mm-hmm. Sure. Boy, a win for me is a couple. I mean, on deals that I work, a win is getting them successfully across the finish line, seeing them successfully on to their journey as new owner of the business. That's a celebration every time. But at the same time, with a lot of the social content that I do and the newsletter, as I mentioned to you, that I'm launching in a week, the win really is to help people.

understand that buying a business is very viable for many, many people. I think a lot of people discount that as an opportunity for them, especially people that are stuck in a nine to five and they wish they were doing something different. They're entrepreneurs at heart. I know there's so many people out there like that. I know because I was one and I took a different route. I grew a side hustle, but I think probably the easiest way for so many of those people is to buy a business. And so if I can help.

those people, I can help educate, empower, and encourage those people. That's a huge win. I get people who message me all the time say, I love your content. I'm a nine to five-er. I want to buy a business. I see now that it's a great way out of the rat race and I want to be out. And you've encouraged me to do it. That gets me going all day long. I love encouraging people to take that leap, to believe in themselves.

JON STODDARD (46:53.658)
Yeah. One last question. Where are you starting a newsletter? Is it Substack or some other, your own newsletter on a website?

Eric Hsu (47:01.471)
It's my newsletter through ConvertKit. So it's freedomthroughacquisition.com is the name of the newsletter. So I kind of took a little bit of a twist on the entrepreneurship through acquisition. It's freedom through acquisition.

JON STODDARD (47:15.978)
Beautiful. Eric, Shu, thanks so much for being on Top M&A Entrepreneurs today.

Eric Hsu (47:21.954)
Thanks, John. Really appreciate having me. Have a great day.