Attempt to index field localplayer a nil value?

You are only able to access the LocalPlayer through a LocalScript, otherwise the server script doesn't know what player you are referring to when you use LocalPlayer. If you want to check every player instead with a server script, you can use PlayerAdded:

game.Players.PlayerAdded:Connect(function(Plr)
	local ClassicSword = Plr.Backpack:WaitForChild("ClassicSword",5)
	if ClassicSword then
		print("it works")
	end
end)

If you wanted to print when a classic sword was added to the backpack instead, you could do something like this with ChildAdded:

game.Players.PlayerAdded:Connect(function(Plr)
	Plr.Backpack.ChildAdded:Connect(function(Child)
		if Child.Name == "ClassicSword" then
			print("sword was added")
		end
	end)
end)

The PlayerAdded and ChildAdded events fire every time a player joins/child is added.

Hope this helps!