258 - 350 Deals Taught Him the 3 Deal Killers; Now He's Buying One with Kevin Henderson

0:00I see constantly folks buying the numbers, like former Carlisle Wharton MBA that's like buying the plumbing company. Are you like four and a half years from now, like when shit's hitting the fan and like something's going on in your family and your dad's on hospice care, like it's going to the plumbing. That was really, really important to us. That is Kevin Henderson. He is the number one SMB lawyer in Texas. He's overseen over$2 billion in transaction volume, and he's closed over 350 deals for other people. But for years, he refused to buy one for himself. That was until today. I wanted to know, what did he see in those 350 deals that made him cautious?

0:37And what specific red flags finally convinced him it was safe to pull the trigger? We're going to cover the exact deal he avoids, the SBA loophole he invented to help other buyers with no cash, and the checklist he uses to buy his first business. Let's get into it.

0:54i didn't realize how much of an entrepreneur i was because my legal background made me so risk averse but like i am not intended to be a senior director of something in a 14 000 employee corporation you know across the world and i just was not for me i hated it every minute of it so it was really an attempt to get back yeah you're more of a like sitting in the front row of a leonard skinner concert with a tuxedo shirt on you've seen that picture yeah i have it's amazing it's a great picture but corporate law the one you were doing those mna like those mna deals are not what eta is eta is typically i'm just gonna say five million dollars or less i know that there's deals that are above that and but five million dollars and less these are small transactions that's right you were working on mergers and acquisitions with a publicly traded company and obviously securities compliance that doesn't really translate to the eta space i mean some of those things do, I'm sure.

1:49But how did you wrap your, like, why that leap? Why were you like, yep, I'm quitting the oil and gas industry. I'm going to go help ETAers buy businesses. Yeah, it was really the opportunity, Nick. My partner, Eric, I've known, we've been friends for years, almost a decade now. We practiced together at big law firm, you know, previously. So we had known each other for a long time. And he's the one that kind of stumbled across at the time, SMB Twitter, now SMBX, and had started to participate in that conversation. it really grew out of this idea that there weren't a lot of sophisticated transactional lawyers supporting the space.

2:26And what he learned immediately, I mean, he jumped on Twitter with an anonymous account in like September of 20. This would have been September of 21. And by like December, we were on the phone discussing what would this be like to start a firm because it was that quickly that his DMS were blowing up with guys that were like, Hey, I signed an LOI three weeks ago. I've called four lawyers and I can't get anyone to return my phone call. Right. Or the only guy that returned my phone call says he's an MNA lawyer. But I went and looked at his website and it says that he does, you know, divorce and family law.

3:02Right. So he was referring this out. Even people he was referring it to like, oh, that's too small. Like we don't really do$3 million deals. And these were guys that were like, I literally have a deal. I'm ready to wire money. Will someone please represent me? So we started, he had sent me a couple of deals knowing I did some side work. And I was like, yeah, but I got a day job. I can do like one or two at a time. So we started talking like, you know, it really feels like there is this void of, it was really either highly inexperienced lawyers, lawyers that were not actually M &A lawyers. They're kind of learning on the internet to do a deal.

3:39or the guys that were experienced were like regional firms that were still 800, a thousand dollars an hour and didn't really want to do the$3 million deal. So we just started putting our heads together. Like what would it look like to take our expertise doing multi-billion dollar deals for a decade for like the world's largest companies and bring that down to Main Street and, you know, be able to do transactions quickly, efficiently with kind of the, the mindset of a big M &A lawyer of like, how can we really protect our clients and not get them stabbed in the back? I've bought a couple of businesses.

4:16The problem is that sub$5 million, they're going through the SBA because they don't have a lot of money anyways. That's right. To close the deal. So instead of putting 20 % down, they want to put 10 % down. And in some instances, maybe they get 5%. But because of that, they're relying on the bank to do a lot of things like underwriting, even though they shouldn't. They probably aren't doing a quality of earnings, although they should be doing a quality of earnings. And so as a result, they also just have less money to spend on legal fees, even though they should be worrying about the legal side of things.

4:43They just have less money to spend on the legal side of things. So for me, I'd be looking at it and saying like, yeah, I just don't know if the juice is worth the squeeze. How did you guys come to a place where you're like, okay, yes, they can, we can charge less. They have less money, but if we do it like this, we can be profitable. Like, like what was the thought process there? It was a long evolution and we arrived at something we thought was really unique, honestly. A, it's worked because our firm has grown and is very successful. And B, there are a lot of other players in the space now doing virtually the same thing, right?

5:20Not to say that we're geniuses, but we feel like we kind of pioneered our structure to solve a lot of those issues. It's common in the private equity world, which is my former background at big firms, where they will roll fees for busted deals, right? You accrue half a million dollar in legal and the deal dies, no problem. When the next deal comes around, we'll bill that deal and then roll the half a million dollars of accrued fees into that closing fee and you'll pay us$1.3 million or whatever. So you're not cash out of pocket. We really struggled because like, obviously that's ideal for the client, but A, we're a small bootstrap law firm.

5:56We just can't afford to do that. And B, that only works with really entrenched, longstanding relationships with big private equity funds. We couldn't take the risk, right? If you hire me and accrue$20 ,000 of legal that I say, hey, sorry, your deal busted. Just pay me on the next one. What are you going to do? You're just never going to bring me your next deal, right? You're going to go to some other lawyer. There might not even be a next deal, right? Or there might not even be a next deal, right? So we had to figure out a way to bridge that. And one of the things that we did that was a little bit unique, I think, in retrospect, is we went to Twitter and just started asking people.

6:33Eric ran a number of polls. So this is not made up. We kind of had the ETA community tell us what they wanted. And we tried to accommodate it because, of course, they're all like, we don't want to pay anything until closing. Okay, we can't do that. So what can we do? And what we backed into is a progress payment method, but heavily back-weighted to closing. So we felt like we were comfortable, especially if we worked the timing of when we get engaged with our clients, we felt comfortable that we could minimize as much as possible the risk of busted deals. And to the extent that a deal does fall apart, we developed a model that at least lets us collect enough to where we can cover our overhead and things like that.

7:13We aren't losing on the deal. we just lose our margin, right? We really make our margin when a deal closes. And that was a risk we were comfortable taking for a number of reasons. One, we thought it was a good business sense and would sell well. And number two, we just, we love the ETA community. And as investors and business owners ourselves, you know, being able to support when a deal bust like that was important to us. What percentage of your deals would you say are SBA? Right now, probably about 75 to 80%. Okay. And back then, was it closer to 100 or was it less? Oh, yeah. Back then it was like 95 plus.

7:50Yeah. Does the SBA allow you to roll legal fees? I don't know that I remember. It does. It does. It does. Okay. So that's one of the interesting benefits. So effectively what we do, because we're not hiding anything at this point, but effectively what we do is when we do a fixed fee, that was one of the other things that we did a little bit differently. Transactional lawyers are terrified of fixed fees because they're afraid of getting screwed. Yeah. And again, with low overhead, our opinion was if we get screwed, that means our effective hourly rate goes from$400 to$200. That's still$200 in it, right?

8:26It's still good money, right? So we were very comfortable with the idea of fixed fees. Plus, we're highly experienced M &A lawyers. We felt like we could predict better than most how much time a deal would take. So we set a fixed fee. And then what we do is we take a small monthly progress payment each month through the course of the transaction. And then when the transaction closes, we settle the balance of the bill, which is oftentimes more than half. So there's a heavy, heavy component of the fee that is effectively contingent. on closing. All that said, if you incur transaction expenses throughout the transaction leading up to closing, you can count those transaction expenses against your equity injection for SBA purposes.

9:10So really simple math. Assume you are doing a$2 million deal and have to bring$200 ,000 to the table. 10 % is the norm for an SBA loan. That means that if you've paid me$10 ,000 out of pocket and you paid quality of earnings,$15 ,000 out of pocket. When you show up at closing, you only need to show up with 175 ,000 because they're going to credit the 25 ,000 you've already paid, which means it's effectively financed right back into your acquisition. Well, that brings me to, here we are, three, four years. How many years in are we? Three and a half. Okay. So fourth year of SMB Law Group. And that brings us to who the hell is Kevin Henderson?

9:49a few years ago, the Texas, I don't remember who it was. Is it Texas Law Review, Texas Law Journal? Texas Law Book. Yeah. So they rank every single year the top firms based on deal volume, not necessarily dollar size, but the number of deals that have been transacted. They do both. I know they do both. Just our ranking based on dollar value, as you could imagine, is quite low. So we don't cite that one as much. And so, you know, the volume-based deal ranking came out and Kevin Henderson was, were you number one or were you? I was, yeah. Yeah. Kevin Henderson's number one and he's like ranking against all these other staples of the industry.

10:29And they're like, who the freak is Kevin Henderson? Because no one had ever heard of the guy. And here you are in the middle of Texas, Capel, Coppel, however we say it. And you're blowing these large firms out of the water. did you know that article was coming out or was it was it like a surprise that i knew that the actual article because they they contacted me to to interview for the article so i actually got the backstory on on the headline just a couple of things to note there only because it's even crazier that award or ranking was for 2023 which was the calendar year i mean we launched in may yeah so that was the first full calendar year we were number one by deal count and in the same which is mind-blowing.

11:13The background of the story, of course, in the legal world, league tables are very common with the big firms, right? And again, that was one of our secret weapons because we're former big law lawyers. We know about these league tables. There are a lot of other smaller firms that do M &A that just have no idea this is a thing or exists or matters. We just, we happen to know. So league tables? It's called a league table. It's very, very common in the investment banking world. And several decades ago, they started also then ranking the law firms as well. But the league tables were always investment banking tables.

11:48It was, you know, who who does the most rankings? Yeah. Who does the most banking deals and volume and stuff like that? And then, of course. Hey, I don't know if you remember this, but when we started this podcast, we entered into a social contract. I would spend time, energy, and money producing this podcast, interviewing these individuals and giving you insights into how to build, buy, start, grow your business. And you would like, subscribe, and leave me five-star review. Now, out of that, we both get to talk to really cool people and hear really cool insights. We both get a ton of value. But I just want to help you keep your word.

12:22So would you do me a favor? Will you go leave a five-star review for me on Apple or Spotify? It would really help. And if you want, even share this with a friend. Law firms are always hand-in-hand with the investment bank doing these deals. So they started doing law firms. So that's what these are. They're called league tables. We discovered that Texas Law Book is unique in that they do not just deal volume and dollar numbers. They do it in count. And we knew, I mean, we're small business focused. We're never We're going to compete with the big law firms and, and, you know, dollars and cents, but in deal count, absolutely.

12:55Yeah. So we, we started submitting like the other big law firms do. And the way that these journals work is they, I mean, all the reporters know all of the key players because they, they report on them. They, they, you know, their PR teams reach out when big deals happen to get write-ups and whatever. And so the, the story there is that when the guys that, that run the corporate league tables for the Texas law book had submitted their info and the rankings. And, you know, it's named partner from Gibson Dunn that everyone in Texas knows, named partner from Sidley Austin that every lawyer in Texas knows.

13:33While I'm sitting there at the top, apparently the editor-in-chief came into the meeting to sit down where they were going to talk about this. And literally, he sat down and the first thing he said was, who the hell is Kevin Henderson? and the reporter that covers it who i'd spoken with several times i'd contributed to some other articles just started laughing and he's like will you please he's like i'm going to do a write-up on him will you please let that be the headline and the guy was like yeah knock yourself out so yeah he ended up making that that headline and there's this like pencil drawing thing of my face that the that that reporter's son actually that was like 14 years old he like that's amazing sure it's like a really really cool little story but yeah that was that was the background there on who the hell is Kevin Henderson.

14:15They obviously know every lawyer in these tables and we were just a newcomer from a small firm. They were like, what in the world? Who are these guys? That's pretty cool. Your first calendar year. It was wild. It was really wild. Here's my last question. When you were looking at this business, you've got hundreds of deals, lots of experience. What was the number one thing where you're like, honey, we got to make sure this happens? Was it like we do the Q of E? Was it, hey, we got to make sure we have a relationship with the seller. We got to make sure I don't even know what it would be. But is there anything that's like top of mind of I made sure this one thing was something that we kept as the top priority?

14:50I've done a ton of deals. I still paid for quality of earnings. One of the benefits of doing so many deals is I know my limitations and I am not a finance guru. I will say to toot my own horn, quality of earnings came in with it with less than$5 ,000 Delta for my own modeling calculation. So I actually did a pretty good job in retrospect, but, but they did, I mean, they did infinitely more than I would have done or ever thought to do were a huge help on the due diligence that that was just a non-negotiable to me with how many deals I see that we were not ever going to do. And I never will do a deal without paying for quality of earnings.

15:27So that was a big one. The deal, again, not to say too much, but the deal involves a franchise and, you know, I've gotten to know the franchise space pretty well. And I think got a pretty good deal. That was a big area of focus of, you know, level of support, what the terms are and things like that. So that was that was really high. And then third, really from my perspective, because I see constantly folks buying the numbers and I understand from a financial perspective and a business perspective wanting to do that where all other considerations are secondary. It's all about the financial model.

16:08It was really, really important to me to go into this with a long-term commitment mentality that it had to be a business we would actually love to own and operate. And I recognize that there's some privilege in me saying that because I also run a law firm and make great money. So I'm not using this necessarily to support my family. And that gives us the opportunity to pass by a lot of things. Maybe not everyone has that luxury. but that was really, really important to us is that if, if we were going to buy something, we wanted to buy something that we knew we would actually love, you know, selling the product.

16:43Right. And, and being a part of, and, and I, you know, I think that's what we found, but that was, that was really important to me. And I think some people discount that when they're like, you know, a former Carlisle Wharton MBA, that's like buying the plumbing company. That's like, are you like four and a half years from now, like when shit's hitting the fan and like something's going on in your family and your dad's on hospice care, like is going to the plumbing, that's no knock against plumbing companies. And for a lot of people, the answer will be yes. And that's fantastic. My only point is be thoughtful about that.

17:16And that was really, really important to us to make sure. Yeah. Two of those three are my, are in my top three. Number one is you have to be passionate about the business, not necessarily the, whatever is being carried out, but like something within the business has to be more than just I'm going to make money off of it because otherwise you're going to get it out. Like there has to be something. That's always number one. The Q of E is always a non-negotiable. I've just seen so many. And then for me, the third one is actually in SMB deals. I'm not talking about upmarket, but SMB deals, you have to have a relationship with the seller.

17:48Like you have to get clarity on like, why are they selling? Or even a relationship close, close. Like those are, for me, those are the kind of the three things. So it makes me feel good that someone is knowledgeable as you. And if I had gone to a fourth, it would have been that one. Also really important. We've added the seller here quite extensively, probably more than most people do. You did say it basically. You said it was a franchise. So it's like if you become a franchisee, the seller is the franchise or anyways. Yeah. Dude, this was amazing. SM Bash. I want people to go check out SM Bash.

18:19It's an opportunity for people to gather once a year and discuss all things SMB deals, the search, running. Obviously, a big focus is on search. But where is that going to be this year? We've actually stopped moving it. So we moved to Dallas last year. It was such a raging success. Fantastic venue. It's easy to travel to in the middle of the country. So we're rinse and repeat. Same venue in Dallas, the end of April, April 22nd to 24th. It's a fantastic conference. Okay. So here's my last set of questions. I have to know, had you bought a business before you started this S &P Log Group? You're outing us, Nick.

18:58It's not lost on us that we are a startup law firm in a space of acquisition entrepreneurs. But no, I personally had never bought a business. Had it ever even entered your mind? Had you ever been like, I'm going to buy a business someday? Me? No. My partner, Eric, yes. Actually, when he got involved on Twitter, it was because he was thinking he was going to leave the law to buy a business. And then this kind of blew up and the opportunity was too big to ignore. How many businesses have you purchased since you started this company? Like personally, because you said you're buying a business right now, right?

19:31Is this your first one? Just that one will be the first like that we actually like own and operate. My wife will be the primary operator. Obviously, I have a day job. Don't worry. Was that you pushing that or was your wife like, I think I could do whatever business that you guys are getting into? Was it something that you'd both been looking at? It was my idea. I mean, I've always wanted to. We're not in this space just because it's a big cash grab. We're in this space because we love it and it's turned out to be profitable for us. So it's not just lip service. So the more I've gotten to know and the more I firmly believe that one of the most attainable paths to wealth in America right now is an SBA finance business acquisition.

20:08I do actually believe that. No, it really grew out of trying to figure out the next step for my wife. Our youngest just started high school this fall. So we're kind of on that, that downward clock here. And, you know, at this point, three and a half years, we'll be empty nesters, you know, and, and they're fairly self-sufficient at this point too. So she was, you know, talking over the summer, you know, cleaning up her resume, trying to think like, where do I want to go? What do I want to look at? It's time to start thinking of like what my next phase is so that I don't get caught in three years wondering what I'm doing with my life.

20:44And so it was me that kind of suggested like, Like, hey, we have a lot of flexibility in our life. Rather than giving that up for a nine to five, like we could just buy a business. And she took right to it. And ironically, three days later, through a connection, this opportunity fell into our lap. And so we kind of jumped at it. All right, hopefully you liked that episode. And if you've made it this far, you're either really committed or you're stuck doing yard work and you can't actually skip on your phone. So while I have you, the show is growing, but I have a favor to ask of you. Will you please help me grow the show?

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