Harvard Professors Break Down a $6M Legal Consulting Deal
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- You know, a little bit about this business from a different angle, more of a doer than an investor. - I think at a price it would be okay. So it's not something I'd run away from, but for the reasons you said, I don't love it. - Attorneys typically like to make, you know, several hundred thousand dollars even coming out of law school.

So I don't think that this is a very credential heavy organization. This could be a pretty active, ongoing sales pipeline type process because you don't have its project work and maybe not even that many repeat customers, which makes you think of it a little bit differently. It's more of a sales job in the legal profession. Hello, another episode of Acquisition Anonymous. We don't have 100% beard anymore. And thumbs down on just the plus inventory alone.

Welcome to another edition of Acquisitions Anonymous. Today, Mills and I got visited by two very great guests, Rick and Royce from HBS, from Harvard Business School, the guys that wrote the book. And they have a podcast now that you guys should all check out as well called Think Big, Buy Small. I've been on it once. So they joined us today while we looked at

a really interesting firm in the legal profession. And it is, we couldn't quite figure out exactly what it does, but it has to do with expert witnesses and trial preparation around expert witnesses. So it was a very interesting discussion. We learned a lot from Rick and Royce, and I hope you'll enjoy the episode.

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All right, everybody, welcome back to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-hosts. Me and Heather are here with some special guests today, Rick and Royce. I will let you guys, most of our audience, I think, knows you and knows your background and knows what you do on a day-to-day basis. But I'll let you give kind of a brief intro for folks who aren't familiar with you and help jog their memory. Well, I'm Royce and my partner Rick is here with me. We're so pleased to be on your podcast. I'm

Our day job is we're professors at the Harvard Business School. We teach entrepreneurship through acquisition. We publish books on it and...

In the last couple of years, we've started our own podcast produced by HBS called Think Big, Buy Small. So we're just delighted to be on your podcast. Yeah, thank you for having us. So guys, the format is we're going to live vet a deal together. I'm going to pull it up on the screen. I'm going to read it. And then we talk about what we like and don't like. Sometimes

People accuse us of being Debbie Downers or being a little bit mean, but you look at 100 deals and you might like one. And so we found that that ratio is somewhat true for the things that we look at. Okay, so I'm pulling this up and I'm sharing the screen. Can you guys see my screen there? Yep. Okay, so this business, it's listed by a company called The Firm. Okay.

advisors, and this is an expert witness prep and placement for law firms. It's a legal consultation firm for corporate litigation owner, not a lawyer exclamation point. They've made that very clear business. They're saying does 1.3 million in cashflow. They are asking $6,150,000. The business does revenue of 4,114,000.

They're asking essentially a 4.7 times multiple. Business has 44% profit margins and they say down payment of 15%.

So the brief description here says this opportunity is a litigation consulting and expert witness firm that provides business analysis and expert witness reports and testimony. They assist law firms and government agency clients. The focus is on identifying and retaining qualified experts. They're engaged throughout the duration of the case to support those experts. The firm also has special expertise in using social media analysis to develop litigation ready evidence.

Their client base is top recognizable corporations, news channels, Department of Justice that need assistance with finding expert witnesses, case analysis, witness reports, trial strategy and preparation. They say they have a team, a stable team of 12 people made up of mostly attorneys, law professors, MBAs and accountants. But the buyer does not need to be an attorney as the current owner is not. So I think they would say we're very clearly not giving legal advice to

is the distinction there. The owner has some roles in the business development and staff oversight, though he has recently been offloading more of his client facing roles in order to prepare for a smooth transition. Seller has offered a transition period ranging from one to two years. He's willing to do seller financing or role equity of 25% as a sign of good faith. All personnel work remotely, which drives their 44% profit margin and allows them to take on clients across the U S and Canada.

It says priced at six million one hundred and fifty thousand. The business offers a strategic buyer the opportunity to expand their practice or allows it for an individual with legal experience looking to start their own practice. I think most of this is kind of is repeated after that. There's also an attachment which I have not signed an NDA or anything like that. So I'm going to pull up this other screen and you'll see the kind of one page teaser there.

All right, so here's the kind of one-page teaser. I'm not going to zoom out because I think it'll be hard to see, but it basically repeats some of those things. It gives us a little bit more about historical financials. So

The revenue or gross sales in 2020 was three million. Then in 2021, they went to four point seven million top line. And then in 2022, four point one million. So this is a little bit dated. We don't have twenty three sales data. We don't have twenty four sales data.

which we may be able to read into a little bit. And then they give cash flow, which fluctuates between $980,000 up to $1.7 million. I'm throwing a lot at you guys, but what do you think? Do you like this deal? Do you not like it? Well, first of all, let me say that I'm not familiar with this firm, but for years I've had a long-term consulting relationship with a firm called Charles River Associates.

firm that provides economic testimony in exactly these kinds of situations. It's a much bigger firm. It's a publicly held firm. But I just wanted to acknowledge that I do have a prior relationship. And so I know a little bit about this business from a different angle, more of a doer than an investor. And that's probably going to color my thoughts. But I just wanted to acknowledge that up front.

So, Rick, when you're doing that, are they paying you a flat fee as a doer or is it is it an hourly rate? And, you know, are you getting on the stand in some cases or is it? Yeah, I would. I do get on the stand in some cases. I haven't done very much of it the last couple of years. But, yeah, I would get on the stand and I do get paid based on effort. Yeah. Yeah. Interesting.

So I can give you some impressions about the business. Should I start? Yes, please, Rick. Well, the number one concern about this business is that it is a project business, at least the ones I'm aware of.

An attorney will find – an attorney is retained for a matter. They progress with the legal matter as long as they can without hiring expert witnesses. They'd rather have their own associates do as much of the background work as they can. Makes sense. Both because they control it. They know what it is and they control the people. And they've picked the people so lots of – and they get the billing. So lots of reasons there.

And then at some point when it either gets messy, more complex, whatever, or they anticipate needing expert testimony, they will reach out to an outside consulting firm and say,

Typically, depends on the size of the matter, but it's not unusual for lawyers to look at several outside consulting firms. It's a rare, of course, you know, opportunity.

In the case of CRA, they of course have all the best experts, but other people believe that they have competing experts as well. I'm not sure why they get these delusions, but as a result, it's a competitive project business. So it's like being a contractor. It's also highly uncertain that in the sense that you can –

get retained on a big project and invest a lot of time and effort in building your team and turning down, in fact, turning down other work because you only have a certain amount of capacity and then the case can simply settle and disappear. And that capacity is then lost.

you know, has to be redeployed. And it goes the other way too, in the sense that projects get bigger than you anticipate and you've got to find a way of finding additional resources. So it's a tough business to manage and it's a project business. I don't, for all the reasons Rick said, I don't love this business. I mean, I think at a price it would be okay. So it's not something I'd run away from, but for the reasons he said, I don't love it. I think anyone who's looking at this business is,

The first thing to do is dive into revenue and find out, first of all, how diverse is my customer base? Is there any concentration? And second, when I look at the, say, law firms, are they typically buying projects from me year after year after year? The problem is exactly what Rick said. Underneath those law firms, they're

They're independent projects that come to a stop. And there are probably various lawyers in that firm, some of whom choose you, some of whom choose your competitors, some of whom bounce back and forth. So it's not really that you have customers in the traditional sense of they're buying from you all the time. So the quality of that revenue is not great because it's a project and it's really hard to get your –

arms around just how formidable a position do you have with these customers. So I'm not loving the business, but at a low enough multiple, I could get interested. Yeah, but it gets worse than even that, Royce. I'm going to lower that multiple then, but go ahead. Is that while you don't have – you might not have customer concentration in the sense that you don't have a law firm that's dominant –

I think it said they had 12 employees. Is that about right? Yeah. So if you think about a normal pyramid, that means they probably have two experts. And it goes out of its way to say that the owner isn't a lawyer. It doesn't say that the owner is not an expert. So maybe the owner is one of the two experts. Maybe it's not.

But either way, you have one or two or three experts that you're selling repeatedly. And it's a little bit like having a great three-point shot, right? You can get money out of the business by saying, you know, I would really like a bigger share of my profits this year and –

You own the business and you say, no, I'd rather give you a smaller share. Why don't we just agree on a smaller share for next year? And they say, well, okay, we'll just go play for a different team. And so you're on this knife edge with your employees where they have to say, with the experts particularly, where you have to be able to convince the experts that working for this firm is in fact a great professional opportunity.

opportunity better than it would be for working for somebody else. And this firm is quite small as these firms go. You know, one of the things I think CRA has that I've learned from CRA is that as you get bigger and it's a publicly traded firm, as you get bigger, you

A lot of these risks disappear because you can institutionalize them. But this isn't – this is like a two-expert firm is my guess or a one-expert firm. So this is a baseball team with one pitcher and that's great if you only have to play one game. But sadly, there's 162 of them.

The way I thought about this to start was that they were kind of like more of a matchmaker and sat as an intermediary between providers and purchasers of services. I have a friend who owns a court reporting firm, and he has a relationship with every law firm in town. And then he has a relationship with maybe a third to half of the court reporters who are all independent contractors.

And he knows the preferences of the attorneys and which court reporters they like and their availability and all those things. But it's a very repeatable, it's a very kind of compliance-driven thing. In this, I thought that this business was a little bit more like a kind of matchmaker. Or like a broker, like a broker of experts. That's the way I thought of it too. Oh, that's interesting because that's not the way the first page read. The second page here that you have up says –

says that the customers need assistance finding expert witnesses.

That's even worse. I think you're right though, Rick, because if you look at 12 employees on this level of revenue, the revenue per employee is only like $350,000. And attorneys typically like to make several hundred thousand dollars even coming out of law school. So I don't think that this is a very credential heavy organization. Right.

If, for example, their niche was health care, you know, and they were doing expert witness for maybe medical malpractice or something like that.

then you would not have the world's best expert witness ophthalmologist on staff. You would go find that person and say, hey, we need 20 hours a week for the next couple of months and you're kind of semi-retired. Could we pay you enough money to do that? And you would kind of solicit and procure their services that way. I think you're right, though. I think that this is kind of generic.

in the advice that they're giving. It's kind of tax, business, and maybe a little bit of kind of legal implications from expert witnesses, but not anything really in depth. I mean, it says provides, we're getting Talmudic here, you know, what does it really say? But it provides litigation, consulting, and expert witness advice

that provides business analysis and expert witness reports and testimony. So it may be that they outsource the reports and testimony, but normally the way these firms make money is by the leverage that the witness provides, right? That there's a leverage, you know, for every hour the witness is working, right?

The research firm is working substantially more hours. It obviously depends on the matter and how much leverage there is and the professional status of the workers, of the research help. But I can't – this is a small firm. By the way, it's also overpriced. My understanding is these firms tend to suffer one-time revenue at most. So it's subscale, overpriced, and –

episodic project revenue other than that. You love it. Oh, oh, oh, oh. And we don't know how. And it's a fully remote business, which means that your workers can walk without having to move. That's a terrible thing. Heather, is this business even able to, you know, the one thing about this particular advisor and broker that I don't like, but I understand why they do it, is they kind of do the math for you.

All the time and show you, hey, look, we'll put the deal together almost. We'll sketch a deal for you. They even have like a cash flow analysis Excel spreadsheet in the you don't have to sign the NDA to get this. So, Heather, is are you able to borrow money to buy a business like this when it comes to the SBA?

you could it's not probably at this price or if you were going to pay this price you would be putting in a lot more equity than your typical sba deal to bring the leverage down but i can see someone the right buyer being able to get a loan they probably would be an attorney or they are at least an expert in this area somehow i think a lender would absolutely require that for a deal like this

And I am still curious from a lender's perspective, is this more like a staffing company that also offers litigation prep? Like, you know, they go out and they find the expert and they have sort of a network of experts for different things. And they're like a staffing company where they bring in the right experts. That's something that banks, SBA banks at least, are used to seeing in other industries. And that may be something they could wrap their head around here if that's the way that it worked. But yeah.

It seems like it's a little bit of both to me. I think it's a little bit of like a staffing for the expert witness and some services that help with the litigation prep around those witnesses. That's because otherwise I can't understand why they'd have 12 people. It seems like it's pretty heavy on people.

The margins are pretty okay for something of this size, and they have made money consistently. So if a buyer could understand what the sales process and the sales channel really look like and kind of it didn't have those really big concentrations anywhere, yeah, there's a level of leverage that an SBA lender would probably put on something like this. 75%?

Not at this, not of this price, you know, so I would, I think of it more in how many turns of adjusted EBITDA. And usually I'd say about three to three and a half.

And with the project work, I go more towards three, you know, lower leverage because you have projects and you have other risks. So at three times adjusted EBITDA, it's got really good DSCR. And if you could vet out some of these other risks and have a really good solid buyer. Yeah, I think so. Have you guys seen professional service businesses like this that have a little bit more risk

kind of customer durability, whether it's through, you know, a proprietary process through technology, through regulation or compliance, because there are plenty of businesses out there like this that are not in manufacturing. They're not in distribution. They're not in, you know, trade the trades and they, you know,

They, I think, hit a ceiling a lot of times in this size range. Have you seen professional services that have some durability around customers and around services provided that allow them to scale? Well, certainly accounting firms, right?

Yeah, Mills, I would say Rick and I see a lot of these because we tend to focus on B2B service businesses. And we actually like this size range because the pricing is normally attractive, more attractive than the asking price here.

I think the difference is in revenue quality. The businesses that we spend time with have real recurring revenue and usually the customers are sticky because they're switching costs.

And as we've discussed, this is not that. So I think you're getting an immediate reaction from us because kind of the size is very familiar. And you're right. Often these businesses sort of reach a point where they're finding it hard to grow because it requires a different set of managerial skills and maybe a little bit more capital to, say, field a sales force position.

They're a little unclear as to how much of that they have here. But the revenue quality is – and some of Rick's comments, other comments are quite troubling here.

Again, I think at a price, this could start to get interesting. A $1.2 million B2B service business, I think of having a natural home around 4X. To me, I think the poor revenue quality would make me think 2.5 to 3X. I don't think the seller is likely, given their aspirations, to –

take a bid like that, but that's sort of what I think. Or this has a natural home inside of some strategic, like a larger company in this business wanting to buy the book of business. But there is no book of business. Well, there's a set of customers who come back to you

There's that. Yes, potentially with some regularity. I mean, contrast this to an accounting firm where – It's not that. It's not that. Where an accounting firm, there is a switching cost, right? You don't switch your accounting firm, your tax accounting firm lightly. And also it's not a project business because there's a recurring project every April 15th. Darn. Darn. Why did you say that?

The bull case, though, for this to me is that it is asset light. And if you had some edge, if you had been, you know, if you'd been in the legal world and you understood and you had a Rolodex of legal firms and this business doesn't seem geographically constrained, it's not like a fencing company that says we're only going to install fences within a two hour radius of our headquarters. Right.

They're not geographically constrained. They're asset light. I think that the staffing side of this business, even if it is all in-house, it could scale to, Rick, like what you're more familiar with, where it is more of kind of a distributed hire an expert. But you would have to have some kind of foot in the door where you would feel comfortable about hiring.

scaling this business. To me, that's the only bull case for it and not at this price. I totally agree. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the

specific loan structure that you need, or a little of all of those things. That's why my company, Viso Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at visocap.net, then click Zoom Sign Up in the top right corner. That's visocap.net and click Zoom Sign Up.

Yeah, I'm curious what the sales process looks like and how they get the customers, how regular these customers are, these law firms that bring them in. I kind of think it's got a niche of some particular type of testimony and some particular type of cases where, oh, we've got the right people for those type of cases, and then they've got to scan the...

you know, the world of lawsuits and find who's, who's got something like that and then go pitch that. That's what I'm imagining the sales process look like, looks like. And that's maybe why they have 12 people, because this could be a pretty active ongoing sales pipeline type process because you don't have it's project work and maybe not even that many repeat customers, which makes you think of it a little bit differently as more, it's more of a sales job.

One of the things we talk about on the podcast a lot is buyer business fit. You know, this business, I think, requires somebody who understands the corporate world and the corporate B2B service sales process. And I think that's a big part of it.

If you haven't been in that world, if you haven't worked in big law or in corporate America, I think that this would be – if you've been the chief legal officer for a Fortune 1000 company or something, I think you would know this world really well. Yeah, I think that's right, Mills, and I think that if you also owned businesses that abutted it.

If you owned a expert network business or if you owned an executive recruiter for lawyers, those are the kind of businesses where you might feel this is a product line extension. I'm troubled by the fact that we coincidentally have on this podcast someone who knows the business really well and he ain't biting. Yeah.

Yeah. That's a sign. That's a sign. I feel like most businesses jade you like that, though. Yeah. I own a roofing business. Because you're familiar with all the problems of that business. I own a roofing business. I'm not that way at all. I'm not that way at all. I'm normally, you know, I'm usually the one who sees all the joy in a business because I'm fascinated by businesses. Part of this is that this teaser is pretty confusing and not really complete enough.

I mean teasers are never complete, but we're not really sure what they do. Heather thinks the 12 people sell. I think the 12 people are back office people who are doing –

research and some expert work witness work you know sometimes they use in-house experts more profitably than they use outside experts so but I the fact that nobody really knows what this company does even though we've all read this paragraph a few times and

Brings me back to the Talmudic description, right? Because that's the case there as well. But I wonder, I think if you could flip around and say, what would have to be true to buy the business, to be excited about buying the business? And for me, what would have to be true would maybe have to be a niche business. So they do a particular kind of expert work. You know, they do expert work.

related to some subcategory. It's special. The litigation is frequent but manageable in size. Maybe each bite is $75,000. Each project is $75,000 and is a routine that the expert goes through and maybe the experts aren't coming from

you know, the most competitive universities, maybe the experts are coming from, you know, a broader set of people. Maybe there's some retired business executives that are the experts, who knows? But you need to be able to find something where you can be pretty confident that you don't have concentration on the supply side, that it's

It's not a business that requires 80 or 90% utilization of your 12 people to make a lot of money. And I think all those are possible. I think all that's possible, but it's really hard to tell from this teaser because it is at best a teaser. And, you know, we're just seeing the shadow of the person who's the tease, right? We're not, we're not really seeing that.

We're not really seeing their face here. So I guess another way of asking Royce's question, and I'll just ask it to Royce. Royce, what would you pay for this business? I'd pay like two and a half times for this business. I realize we might not get it. So $3 million. Yeah. Yeah, I think at that price, you're pretty – there's a business here. It's just –

Volatile is how I look at it, and I'm not sure what the midpoint of it is. Yeah, I agree. I agree. We usually wrap up the episodes by saying thumbs up, thumbs down, and it's not thumbs up, thumbs down. Would I take this business all the way to the finish line and close? No.

but you know, do I like it enough to find out more? And I think to both of your points, you know, I try to be optimistic and I love your question, Rick, of what would have to be true for me to like it. And I,

I'm always curious and it doesn't, you know, the opportunity cost of signing an NDA on something like this is fairly low. You could sign the NDA and find that they have an amazing niche and they're really, really good at one thing. And they get almost all the phone calls for that one thing. And it may be a very small niche.

total addressable market, but they get the majority of it or they get enough of it to, you know, to, to be sustainable. Yeah. I guess the question is, is you don't want to get teasers. You don't want to get Sims on every business because you just don't have enough time to process them. So,

So, I mean, look, so many people who are searching don't want to live in a particular, don't want to be tied to a particular geography or want to live in a particular geography and looking for a business. So a remote business like this would work really well for them. This is an open door. Some people want to buy a business exactly in this size range, the one to one and a half million dollars of cashflow. So that's, that's a win right there. It,

It doesn't seem like it's a blue-collar workforce, so you're dealing most likely with pretty well-educated people who are, you know, some people think are easy to manage. Don't ask the dean of the Hobbit Business School that question, but other people might think that it's easier to manage white-collar workers than blue-collar workers. So it has certain advantages that are really cool and would work out really well,

so would I sign the NDA for this? If I was searching, the reason I would sign the NDA, this is, I think the remote nature would fit very nicely with lifestyle. And so, um,

I'll probably sign the NDA just to see if there's a way. The danger of this, of course, is that you'll project the characteristics that you'd like into the business, whether they're there or not. And Heather will lend us the money. So we're going to go ahead and buy this business. It's a real danger. Yeah, it's a real danger. Yeah.

That's a great point, Rick. And I'm putting you down for a thumbs up just so you know. And here you go. But I think – I mean that's the trouble with looking at anything is our nature is to project what we want onto the canvas of that business and go, well, it's maybe not as bad as it could be or maybe it's a little bit better than I hope it will be.

Heather, what about you? Thumbs up, thumbs down? I would sign the NDA and get the SIM. There's a lot of questions I'd want to have answered. It's intriguing enough to want to get that. Yeah. Royce? For me, to be intellectually honest, I would do a thumbs down. I know I just said I'd take it at two and a half times, but that's really saying no with a number. I don't think the seller is going to part with it at that price.

I just think it is possible there might be a gem in here that's unexpressed in the teaser and that, as you know, Mills, which is why you said it, that happens. But I think the odds that I would get there on this are just low. And if I'm riffling through 100 teasers a month, I just – I don't think I'd look further on this. But how about if you were geographically constrained and – Yeah, and desperate. Yes. Yeah.

There it is. Desperate works so well. It does. That's a really great point. Guys, I've loved having you all join us and you've brought great commentary. It's interesting to me. I'm mindful of the fact that you guys are

from where you sit, you coach a lot of people and you're advising a lot of people who, you know, they have a defined runway. They have probably some immutable parameters like I need to be close to family or I need something that taps into my recent experience. And it's cool how that that's the majority of our audience in a lot of ways. But but it's cool how that perspective from your lived experience comes into this particular deal and these characteristics.

Thank you so much for having us. It's been a real pleasure. It's been fun. I could buy this business. Maybe I could buy it for two times, Royce. Sell it to me for two and a half times. Two and a half times. Launch a whole new career. Yeah, or hold old career. Hold old career.

Are we now off tape? No, not yet. Not yet. I was going to give you a chance to plug here. Plug y'all's podcast and how can people find you? I know there's a handful of ways people can find you, but give us the best ways for people to follow what you're doing. If you want to listen to Think Big, Buy Small with Rick and Royce produced by Harvard Business School, you can get it anywhere where you get your podcasts, Apple, Spotify, iTunes.

Harvard Business School podcasting. And each episode, we bring a guest on who's pursued a journey in search. We listen to their story and Rick and I kind of treat it like a HBS case, which means we try and comment on what are the important lessons about searching that you can take away from this person. So Rick, would you add anything to that? No, it was perfect.

Are they all cases where somebody has bought a business or are there cases where they've searched and haven't closed on a business? Most of our cases are what Rick and I call journey cases. There's someone who's made a journey and bought a business. Some work out well, some work out less well. And then occasionally we bring in.

Experts like Heather. Experts like Heather who's been on our podcast and talked about SBA borrowing and lending. But yes, we're trying to show people examples of how people make this journey and what you can learn in that by way of preparation. Well, you guys have been great. We'd love to have you back on another time. I'll try and do better. I'll try and bring a deal that Rick actually likes and that Roy should give a thumbs up. You did great.