Trevor Crow works in the M&A space, specializing in what he calls an “underserved” area: lower middle market companies. He says bigger firms chase bigger deals because of high overheads and other internal costs.
But as a boutique firm, he’s able to work closely with owners and founders of what are often family-owned businesses.
Trevor says Buyers and Sellers at this level are savvy and smart – a pleasure to work with.
He talks about the biggest benefits a small firm like his can offer companies, including quick response times. Tune in to get all the details on that, as well as…
- The last person you should hire to shepherd the sale of your business
- Strategies for balancing risk and the cost of appropriate insurance
- One of the most “dangerous” potential liabilities for companies today
- The biggest obstacle to closing a deal – and how to overcome it
- And more
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here. That’s a clean exit for owners, founders, and their investors.
Today I’m joined by Trevor Crow, founder of Crow Legal, a Denver-based law firm specializing in the purchase and sale of businesses, private securities offerings, tax, and other transactions for the lower middle market. Trevor, welcome to the podcast. Thanks for joining me today.
Trevor Crow: Thanks, Patrick. Looking forward to it.
Patrick: Before we get into your practice, and you’re focused on the lower middle market, let’s get a little context for our audience here. Tell us what got you to this point in your career.
Trevor: Okay, yeah, so I grew up in Denver, for the most part, and bounced around a little bit on the East Coast when I was really young but grew up in Denver and went to the University of Colorado at Boulder for undergrad with a degree in finance. And after that, I worked for three years before going to law school doing several different jobs.
But most notably, I worked at an auditing firm doing the consulting side of an auditing firm. And then I went to the University of Denver law school. Which it was, if those of you who remember 2009, it was not a great year to be graduating law school or really coming out of school anywhere.
It was right at the downturn. And so the firm that I was at, or I had clerked at, at that point, you know, I was doing just transactional work, getting a lot of great experience, but a lot of transactions died in 2009. And so the firm I was supposed to go to kind of said, “Well, you know, we don’t really have transactions going on, but if you want to do litigation, we’ll bring you on.”
And so, you know, my start in my career was actually in litigation, commercial litigation, which was an interesting place to start and, you know, good experience as well, I think, because I was able to see how contracts blow up. And prove with arguments that people can make in court on what a contractual provision says when it seemed clearly written the other way, in my mind, but so that was one experience.
We found out pretty quickly I didn’t want to do litigation and, you know, I kept working towards doing more deal work at the firm I was at. Leaving there, I went to a couple other firms doing just transactional work, M&A work. These were all mid-sized firms in Denver. So most of our deals were lower middle market deals.
And so that’s kind of where I cut my teeth and kind of grew to love that area. I started this firm in February of 2018, after I had made partner at another firm in town, another mid-sized firm. And, you know, I just wanted to strike out on my own and develop more of my corporate practice. The firm that I was at did a lot of real estate work and so I was kind of the corporate guy to the real estate firm.
And it was harder to develop the M&A business. And so I started my firm in 2018. And now we have a couple of attorneys working here as well. And just been kind of doing mid-market M&A deals, lower middle market M&A deals, private securities offerings, and that sort of work. So we’re kind of a boutique transactional firm.
The M&A Mistake the Lower Middle Market Makes
Patrick: Well, tell me why you focused on the lower middle market as opposed to other segments. What is it about the lower middle market you like?
Trevor: The lower middle market is a unique area in my mind because, for one, I think it is underserved. There’s not a lot of… Big shops don’t chase those deals, they’re chasing the bigger deals because they have high overhead and a lot of other things that they need to cover so they want to chase the bigger fees. And so this lower middle market is underserved.
I also like it because you get to deal with sophisticated buyers and sellers. Really smart people who build businesses, a lot of family-owned businesses. So you get to hear, you know, the interesting stories on how they’ve been built up. There’s a lot of smart people that you’re working with, but they’re also the type that are gonna roll up their sleeves and get involved.
It seems like a lot more than these, you know, higher ticket deals. And so I like that. There’s usually less ego and each deal is unique. And so those are sort of the, what’s kind of attracted me to this market.
Patrick: I agree with you that the lower middle market is underserved. I mean, there are thousands and thousands of these companies out there. And because they don’t deal in M&A transactions on a daily basis, they don’t have in-house corporate debt. They’re not used to the services that are available out there.
So what they usually do is they default to going to a brand company or Big Four accounting firm or the major top 10 law firms. Nothing wrong with them. It’s just you’re not going to get the value with those organizations. They may have tons of resources. But those resources are built and designed for major-size deals.
And you know, the lower middle market members, they’re going to get shortchanged. Not only are they going to get less response time and get overlooked, they’re going to pay a premium, and they’re not going to get solutions that are really fit for them.
The larger firms don’t have the bandwidth to have multiple solutions, whether it’s on a quality of earnings, whether it’s on some legal diligence or other services out there. They don’t have a lot of solutions or a wide enough variety of solutions out there. So you end up paying more and getting less.
And I don’t think that’s fair for a lot of these owners and founders who, you know, took it upon themselves to create something where nothing existed and just build tremendous value. It’s just not as large as Walmart. Okay, so that’s where I passionately feel about wanting to serve that community.
Now, Trevor, explain what a boutique firm like yours can do for the lower middle market. What are the types of things that they’re looking for that you deliver that possibly the other larger firms aren’t going to be able to satisfy?
Trevor: Yeah, so I think you kind of hit on a couple of them there with response time. I mean, when you’re a small fish in a big pond at some of these larger service providers, they don’t provide you the time and attention, typically, that you need in an M&A transaction. As anybody who’s involved with M&A knows, time kills deals, and so you want to be efficient, and you need to turn around, be able to turn around, documents from a lawyer side.
That’s what we can do is turn around documents quickly, we answer the phone, you know, so when somebody calls, whoever our client is called, somebody’s going to answer, and we’re going to be able to schedule a time to talk, and we’re going to prioritize, you know, those deals that we have in our shop and that we’re trying to get through.
So I think response time is big. One of the, you know, my pet peeve is seeing people not hire the right team. And that happens, not at any fault of the people that are the buyers or sellers. So a lot of times it’s usually just because they don’t know, and so they either end up hiring people that are not specialists in this area, or they’re going to the big shops and not getting treated well.
And so that’s kind of a pet peeve of mine and I, you know, it just breaks my heart to see when these companies have built a lot of value. You can see deals die because of it, either because it’s a, you know, a family-owned shop or family-owned business that has grown up with an attorney when they were nothing that was kind of a general practitioner, and they helped them with some commercial contracts, maybe some employment issues and that sort of thing.
And then that’s just who they know and so they try to use them for an M&A deal and it can lead to a train wreck, and sometimes it can kill the deal honestly, and I’ve seen deals die because of the counsel, and that’s a problem. You know, you can also hire those big shops and then they can totally over-lawyer, you know, a $5 million deal.
And we’ve dealt with that plenty of times on the sell side representing sellers to, you know, private equity companies and things like that. And so that, I just hate to see that. And so we strive to be, you know, the firm that we come in, we don’t have an ego on the documents, you know, we take a practical approach to it.
These are M&A contracts or an allocation of risk, right? Which you know very well, Patrick, and how that works. And so these, with allocating risks back and forth, you’re not going to get an agreement that takes all your risk away. And so you gotta, at some point, I think a good attorney who’s experienced in this area is going to be able to come to their clients and say, “Hey, here’s where we’re at. Here’s the risk of going this way. Here’s the risk of going that way.”
And there are certain things that I would consider are more legal, but there’s… Ultimately, a lot of it becomes business decisions, and it’s navigating the client through those. “Alright, here’s the risk of this way, here’s the risk of that way. You know, what do you think? How do you feel as far as taking those risks?” And helping them guide to that as well as, you know, telling them what kind of market is out there, what do you see in typical deals.
And I think we’re uniquely positioned to provide that sort of counsel to clients. We have, you know, I’ve worked on at larger firms, I’ve worked on $200 million deals, you know, I’ve been on these larger deals, and it’s, so I have the experience and, you know, the other attorneys here now have developed that experience as well to deal with these M&A transactions. And I think we’ve just kind of been laser-focused on it, which has allowed us to do them efficiently and help deals actually get closed.
Balancing Risk & Cost
Patrick: With what you’re doing there, as you were talking about this, a thought struck me because the parallel I would have is with insurance. When you see startups, startups need insurance, a variety of policies, but the thing is, you can bankrupt a fledgling company by over-insuring them, getting every possible line of coverage out there where you have to go ahead and balance and there’s an exposure here, we’re not going to insure it today, such as Directors and Officers Liability.
Let’s wait until you get funding. Okay, when you get some outside funding, when you get some outside person that’s going to sit on your board, then we will think about a D&O policy, but you’re privately held, let’s get you up and running first, you just, you’re not that big a target, so why lump you up with it?
So I see where you try to find that balance, where you don’t want to under-represent them, but, you know, they’re not going to be taken to the Supreme Court for, you know, a nine-figure, you know, penalty.
Patrick: Yeah. And so–
Trevor: You’re absolutely right. You gotta fit the market and the deal, and again, I think, you know, there’s just not, there’s not a riskless transaction, so at some point, there’s some risks allocated to you in that contract, and you just gotta take it with your eyes wide open. And that’s what our job is, I feel like, is to educate the clients on here’s the risk you’re taking. And if there’s a business risk you’re going to do or that you’re willing to take, then let’s move forward.
Patrick: Yeah, and you’re not going without a net here, there’s going to be some stuff that they’re going to need and just the expert weighing all… prioritizing the exposures out there and then addressing those, I can imagine that you also have a network of other resources. They’re not in-house, but if they need a quality of earnings report, or they need some other diligence documents, you’re not directing them to the Big Four accounting firm, you can find things that make sense.
Trevor: That’s right. Yeah, we have a set of resources, you know, a network of resources that we can direct clients to, whether they need to queue up, you know, they need valuation experts to come in, they need a regulatory expert. You know, we’ve done deals where patent portfolios have been an asset.
And so we’ve had to bring in, we don’t have any patent lawyers in-house, but we know them. We know patent lawyers that can come in and evaluate those patents and whether they have value or if they’re defensible, that sort of thing. Or if there’s other regulatory issues, like, you know, we did a healthcare deal where there were certain Medicaid issues that we needed to have looked into.
And so we brought in another attorney who was a Medicaid expert who could help with transferring those licenses over. And so yeah, we just, you know, part of the problem with M&A is that there’s so many issues that can come up, and so from an attorney’s perspective, you really can’t be…
Your M&A attorney needs to be like a quarterback in some senses from the legal side to say, “We need to talk to this person here. You need to talk to this person there. Or we need to bring in an expert on this piece.” Because there’s just so many things that can come up in a business or in an M&A transaction that may require an expert in another area. And that’s why the, you know, the team is so important, I think, in an M&A deal.
Patrick: Well, let’s provide some context here because we’re talking about lower middle market or almost micro middle market. In terms of transaction value, what’s your range of your typical client?
Trevor: So our typical clients, most of our deals are, you know, in the 3 million to 15 million range, I would say. And so that’s, you know, it depends how you define it, but I thought people would define that as the micro middle market or even just, you know, lower market.
And it’s, you know, it’s not quite mainstream deals, like, you know, selling hair salons and things like that, but we’re, you know, we’re doing businesses that are 3 million and you know, the big shops really don’t want to touch those sometimes. And we get referrals, actually, from larger law firms that say, “Hey, you know, this one, this is probably a good deal for your firm, but we would charge too much on fees to handle this one. So we’ll refer it over to you.”
But yeah, that’s the market. I would say if a $25 million deal or a $30 million deal came in, we would probably take it and be able to handle it very well, depending on, you know, the industry and what other needs that the client may need for that transaction. But I would say the bulk of our deals are in that 3 to 15 million range.
Patrick: Well, now, our focus on the insurance side for M&A is using rep and warranty insurance. And even though rep and warranty insurance eligibility thresholds have come down, so now you can have deals that are as low as $10 million transaction value, where it can be insurable for $2 to $5 million in the full $10 million transaction value when the fundamental reps can be there.
Rep and warranty isn’t always a fit for everybody. There are other things that can be done where, like you said, you can’t cover all the exposures. Well, let’s value which ones are there. So there are rep and warranty light type products out there that are available. What kind of insurance problems do they run into?
Trevor: A lot of them. D&O insurance is a big one, a lot of them just don’t have it. And so we have to talk to them about that and getting D&O insurance because we also do private securities work where we’re helping companies raise money and then, you know, a lot of times that’s when it pops up is, you know, where you got either large angels who want to come in and they want a seat on the board or sometimes VC funds are coming in and they want a seat on the board and they’re gonna require it.
And so, you know, a lot of times we’re talking to clients about the D&O insurance so that’s a big one. Rep and warranty insurance is something that we’ve looked into and, you know, you and I have talked about it a bit.
And so that’s, you know, I’m glad to see that those prices are coming down and can be a fit for some of these transactions that we’re working on now because it’s a huge [inaudible] attorney standpoint in that it makes negotiating the reps and warranties provisions a lot easier and that’s the heart, you know, that’s the biggest negotiated section of a purchase agreement is typically the reps and warranties and indemnification. And so, you know, to the extent we can make that simpler and get us to that closing table quicker, that’s huge.
Patrick: Anything with cyber, is that becoming an issue with what you’re saying?
Trevor: Cyber insurance, you know, we recently had a client asking about cyber insurance, and, you know, we had trouble finding it honestly. And maybe I needed to talk to you about it. But that was about, gosh, a year ago when we were looking into that, and we were having trouble finding it, at least one that fit.
And so, yeah, that’s, I mean, data privacy and protection is becoming a huge issue right now. It’s, you know, all the continuing legal education providers out there are doing events on this, there’s no specialist in this area, because, you know, GDPR, you got California, just, you know, passed new laws on it.
And it’s kind of a, given how the internet works and how it goes, you know, across state lines easily, you kind of got to comply with the most stringent requirements. And so this is becoming a big issue and more and more it’s something that, yeah, more and more clients are asking about. So we’ve run into it. And you know, now I’m glad we have a connection with you that they could talk more about that.
Patrick: Yeah, that’s one of the things with the lower middle market is you’re allocating resources because everybody’s got finite resources. And so you’re not necessarily going to be buying a multitude of insurance policies.
Whenever you start getting and realizing new exposures, it’s usually not until you get to, you know, a transaction, and then all of a sudden, you have to start taking inventory. And so now you’ve got these new developments. And there are a lot of policies out there that suddenly you now need to just check the box.
And you don’t want to spend a ton of money on that. But at the same time, you want something that is viable, that, post-closing, is going to respond to a claim, and you’re not going to get a call in the middle of the night saying, “Yeah, that policy bought for a thousand dollars.” Yeah, that’s not valid for what you have, I mean, you need something that’s gonna be there.
But it’s very important, particularly for the smaller organizations out there where, again, you don’t want to bankrupt them with buying too many policies for every exposure, but then when they need coverage, you’ve got to get itemized specific things.
There are some real laser, finite, purposeful documents and products out there that can provide the coverage and at a good value, I mean, less than what having a policy for ten years would cost. So there are things out there, and it’s important that everybody is aware of that.
Trevor: Let me ask you this, Patrick, if you don’t mind. I don’t mean to turn the tables on you here but they, you know, in any M&A deal nowadays, there’s going to be a rep and warranty about data privacy and that you’ve got laws and, you know, any buyer is going to push for that in there and obviously, you know, from my standpoint, if we’re representing a seller, we’re trying to push back on those and make carve-outs to the extent we need to, but how does that work with say, you know, you have a seller who doesn’t have cyber insurance, they have that rep and warranty in there, but they want to get rep and warranty insurance. Will that cover that or is that carved out?
Patrick: Yeah, a lot of times, the rep and warranty policies are now trying to carve out the cyber, what they will prefer doing is encourage the seller to go purchase a standalone cyber policy, liability policy. Those usually are anywhere from $3500 in premium to $10,000 in premium depending on the size of the company and how your records look.
Okay, that’s purchased. Then what if that is in place and the seller has to have cyber policies and procedures just for protecting data, they have to have, you know, basic firewalls? They have to have policies and procedures among their team, that, you know, that information is weak.
And there’s a protocol so they have to have some things in place similar to employment issues where you’ve got to have an employee handbook if you got fifty employees, okay, you can’t just, “I have an insurance policy, but we have no handbook.” Okay, so you have to have some common-sense policies and procedures in place.
If you do, and you have a cyber policy, a rep and warranty policy will just literally sit on top of that cyber policy. If the rep is breached, and this does happen quite a bit, is post-closing, you don’t know about a breach until months after it happened. And you have no knowledge of it at all until something erupts six to twelve months later, and then you’ve got people coming after you.
Well, if you’ve got a cyber policy in place, they will respond to those claims. The rep warranty policy will then just sit as an excess policy right above it. So those damages usually can be contained within the rep and warranty policy, within the cyber policy primary, and then the rep and warranty.
Keep in mind, rep and warranty insurance policies usually have a deductible that’s 1% to 2% of the transaction value, so you could have a minimum retention of $150,000 on your rep and warranty policy. Cyber policy might only have a $10,000 retention. So you want that early attachment point at that, you know, three to seven thousand dollar premium item, then you’re gonna have the rep and warranty supplement. So that’s how they’re addressing those.
Trevor: Well, that’s good. That’s a good point on the deductible piece, you know, to have that and a good reason to have that cyber policy.
How COVID-19 Will Impact M&A
Patrick: Yeah. Now, as we’re sitting here right now, as we’re recording this, we’re midway through the COVID-19 settle-in-place. At least I hope we’re on the latter half of it now. And I usually ask my guests what they see trend-wise for M&A or their particular specialty.
I’m just curious from your perspective on the lower middle market. Let’s say we get back and up and running, we start opening up in late June, early July. I mean, we’re from California. So we may be shut down until August. But for the rest of the country, probably getting out May into June. What do you see trend-wise for you? How fast or slow? Do you think activity is going to pick up for you on the transaction side?
Trevor: I’m hopeful that things are picked up and going like they were in June. I think that’s hopeful. But I don’t know if that’s going to be the case. And I think, you know, it’s tough to predict now, how it’s going to go, but I know that we had a bunch of deals that were in the process in early March, and those deals have been put on hold.
Actually, one did go through and closed. But the other, you know, four deals are either on hold or they may be dead, I’m not sure. As of now, I think that my hope is that there is a quick recovery. I think it’s gonna affect different industries differently. In other words, there’s a lot of talk about, you know, is this going to be a U recovery, is it going to be a V, is it gonna be a W, you know, a lot of letters thrown out there.
And recently I heard somebody say, maybe it’s gonna be a Y. And I think that’s kind of what I’m thinking it might be, whereas there’s going to be an uptake, I think, hopefully, a quick uptake on certain industries, whereas other industries are probably going to stay down for a while, you know, retail, restaurants, things like that.
I think we’re gonna have a tough time managing this shutdown and coming back, you know, there could be others, but there’s other industries that I think are going to pop back in, you know, start doing deals again.
And so I’m hopeful that that’s how it, you know, at least as part of the economy starts coming back, certain industries come back and deals start going again, I think that, you know, there’s obviously a lot of private equity money out there, and there’s, you know, reports of a ton of private equity money out there ready to buy and so, you know, there could be some, a lot, of shoppers out there looking to get good deals right now, you know, they can push on valuations and hopefully pick up some good deals.
And so that could help get the M&A market back, I think, quicker as well. So, hard to say, hard to have a crystal ball here. But my hope is that by June, certain industries are going again and M&A is picked up.
Patrick: Trevor, how can our audience find you?
Trevor: Find us on our website: crow.legal. Or you can email me directly, it’s just firstname.lastname@example.org and so there’s no “dot com” it’s just a “dot legal.” And you can catch me there or, you know, call me directly (720) 230-7123.
I’m happy to talk to anybody who’s out there in this market–service providers, buyers, sellers, anybody. We love doing deals here, and I think that we provide a lot of value to the lower middle market. So if you need anything from me, please send me an email or give me a call.
Patrick: Fantastic. Trevor, I appreciate it. Great talking today, and we’re going to talk again real soon.
Trevor: Sounds good. Thanks, Patrick.