NOW Is The Best Time To Buy Or Sell Your Business With Domenic Rinaldi
Are you considering selling your business within the next three years? In this episode, Domenic Rinaldi, a managing partner of Sun Acquisitions, explains why you should sell your business NOW. Why? Because banks and lenders are willing to lend you money for acquisitions and interest rates are at historical lows due to the pandemic. The same is true if you want to buy a business! Join in the conversation as Domenic shares valuable insights on how you should prepare yourself when buying or selling a business.
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NOW Is The Best Time To Buy Or Sell Your Business With Domenic Rinaldi
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Now on to our guest and his incredible story. Starting out in life, we all look for jobs and he found one in Corporate America. In 2004, a transition happened and he struggled with what to do next. In that next year, he figured out that he wanted to own his own business. Just as he reached that conclusion, opportunity struck and he located the perfect mix of risks and took a bet on himself. He bought into the business. After years of optimization, his first company became a self-managed business. Now he can help others achieve what he had done and he’s not looked back since. Welcome, Domenic Rinaldi, to the show.The biggest mistake people make is they launch into trying to buy a business without having their complete plan pulled together. Click To Tweet
Mitch, thanks so much for having me.
It’s my pleasure, Domenic. You surely have an interesting story. There are a lot of people who strive to have an optimized business that runs without them. Apparently, you achieved it, but then you chose to do something more. Before we get into what you chose to do, tell us more about the history. Go back to the day that you left Corporate America. What happened in your life? What motivated you to do that? Where you’re fired? Did you quit? Tell us the story.
I was in a situation that was not a healthy situation. We mutually agreed that the time had come and I needed to exit. It’s an interesting day because in the back of my head for many years, I had been thinking, “I needed to do my own thing.” It was in my heart probably from when I was a young kid. The challenge was I didn’t know exactly what that was. What did that look like? I took the opportunity to start to research what it is I would do next. I didn’t even bother looking for another career opportunity. I knew that I wanted to own my own business.
I put my heart and soul into figuring out what it was that I could do. Where could I take all my experiences, my knowledge and apply it into a business that I could take a hold of and then grow to the next level? That took a while. It wasn’t obvious and it wasn’t easy. I started to peel back the onion and do research. I looked at a lot of businesses. Interestingly enough, I found an industry that I fell in love with, which was helping other people buy and sell businesses. Now here I am. I’ve been doing this since 2005.
When you decided to go into that business when you were certainly younger and inexperienced, what did you go through? Did you ever regret it at any point or did it become a rocket ship straight up as soon as you bought in?
No. It’s interesting because I had young kids at the time. I had a train to pull. I had college in front of me. I had a mortgage. I had a lot of obligations. I was taking a big risk. I felt placing the bet on myself was in my best interests long-term. At first, I got my arms around the business. I was able to stabilize it and get it moving in the right direction. I had lots of ups and downs early on. Most business owners can do this. You look in the mirror and you’re like, “What can they throw at me next? How am I going to deal with this?” If your heart and soul are into it, and if you’re open-minded, and you don’t get into these dogmas type of thinking, you’ll stay open-minded, creative and you ask questions and you realize you don’t have all the answers, you hopefully break through the other side. For me, that was the case, but there were many days, especially during the 2008 recession in my industry that tested me to the core.
I don’t know about you, but I would say there were times in my business when I had this thought, “If I had known it was going to be this hard, I never would have done it.” I would have gone to a dental school or something. As you said, “What will they throw at me next?” I’m sure anyone who’s in business for ten or more years has had about everything thrown at them. What would you say was the most challenging situation that you had to deal with as a new business owner?Swiftly matters right now because, believe it or not, the marketplace is incredibly active. Click To Tweet
I certainly point to the recession of 2008, which hit us in 2009. I had an operation at that time with 24 people. We had come off of our best year at that point since I had owned it. In 2008, we had a great year. 2008 was good for us, but then in early 2009, as the financial crisis had first hit the residential market and residential banking, it then later hit business banking and business deals. We didn’t get hit at the same time that the residential market got hit. A couple of significant changes happened for us with lenders.
Lenders essentially shut down for about six months. When you lose your access to capital, deal flow completely dries up. You cannot get deals done because people don’t stroke checks for the entire purchase price of a business. Everybody wants to apply leverage. I’d say those first six, seven months of 2009 challenged us in ways that I had never imagined I could get challenged. Luckily though, coming off of a great year and something that I had learned from somebody I worked for a number of years ago, I had left a fair amount of dry powder cash in the business.
I was able to withstand that downturn while most of my competitors in the marketplace went under. They couldn’t withstand the turmoil that our industry was in. In the second half of 2009, we got a few deals done, but we limped along and it wasn’t until probably mid-2010 to 2011 that we started to come out of a horrible funk. There were moments where it was incredibly challenging and for my people too. It wasn’t me in the business. It was for my people. It was tough to rally the troops and stay positive while you couldn’t see any signs of positivity around you at that moment.
I’ll convey a story that I remember very vividly. It was a point in the company. We’re probably 3 or 4 old. We had been established in our marketplace. We at that time had 50, 60 people. We had this huge order for distribution, but we were not going to release the order until the software had been fully tested. We’ve been through that before and we know what it’s like releasing buggy software. We’re holding the order and holding it and all of a sudden now, we’re out of cash.
I take a look and speak to my CFO. He said, “Mitch, we’re at the limit on the credit line.” I asked my development manager, I said, “When do you think this will be ready?” He said, “We don’t know. It’s software. We keep testing it and we keep finding bugs. There’s nothing we could do. It’s just not ready.” I said, “Do you think it will be ready in the next 30 days?” He said, “I do. Thirty days should not be a problem.” I went to my partner and I said, “Neil, we need to fund payroll. We missed this payroll, we lose our people. We have a short-term hump to overcome.” Without hesitation, he opened his wallet and he put all his credit cards on the desk. I did the same and we did transfers from all those cards. We made payroll.
One week later, we released that order. The money was wired to us another ten days later after the merchandise had arrived. That was the arrangement we had. A rare arrangement where a distributor pays on shipment. We got that money. We cleaned up the credit cards. We didn’t even pay too much interest, but that was a tight rope, scary story. Whether you’ve been through exactly that sort of thing, I’m sure you’ve had many of those in your business as well.
That’s a hell of a story. You’ve got to have a lot of belief in yourself, your business and your people to take out those credit cards and do what you did. Taking on debt should not be something you do lightly. Kudos to you for believing and pulling through.
We were in a “burn the boat” situation. We had arrived on the island and burned the boat. We were stuck on the island, that’s it. If the business failed, I would have gone bankrupt anyway. Why not go bankrupt with more debt? Our thinking was that way. To tell you how ridiculously optimistic we were, that wasn’t even a consideration. We weren’t even scared. We knew we had to somehow get past that middle stage between when the credit card bill was due and when the order came in. Whatever we had to do, we would have done it. The bottom line is I know what it takes. I know what you’ve been through because I’ve been there too. Let’s turn this conversation now into a masterclass because Domenic, you’re a smart guy. You’ve helped a lot of people. We have readers who would love the idea of acquiring a business, maybe have been researching it. Not yet sure when to pull the trigger or will there be a recession? Will interest rates shoot up after inflation starts? Who knows? What do you think? What should entrepreneurs do right now?
We have this assessment on our site where buyers can come in and under ten minutes get an immediate score on how prepared they are to buy a business. We’ve been collecting hundreds of these in 2020. It was no surprise to me what I’m going to tell you right now. I knew it intuitively because I’ve been helping people buy and sell businesses for several years now, but people don’t properly prepare. That’s exactly what the assessments are showing us time and time again. People aren’t fully prepared, yet they launch into trying to buy a business without having their complete plan pulled together. For a lot of people, if this is your first time, you don’t even know what that means. You don’t have a concept of what are all the pieces you should pull together.
My number one piece of advice is to get in touch with an advisor. Somebody who understands what it takes to acquire businesses and put together a comprehensive plan so that before you launch your search, you have all the pieces of the puzzle pulled together. When you do get into the market, you can act swiftly and with confidence. Swiftly matters right now because believe it or not, the marketplace is incredibly active. There are so many buyers. There’s so much money. Interest rates are so low. There’s a lot of activity. You can easily get beat out on deals if you’re not prepared to take action when you see the right one.
There’s urgency right now. What do you think is driving that urgency?
There are a couple of things. When you look at the types of buyers, I put buyers into four different categories. One there’s high net worth individuals and investor groups. The second category is companies, competitors that want to buy other competitors. The third category is companies looking to diversify, and then the last category is private equity groups, smart and financially-oriented buyers. Starting with private equity groups, pre-pandemic, private equity as an asset class raised over $1.5 trillion. The number is close to almost $2 trillion that they’ve raised to go out and acquire businesses. Those are numbers that we’ve never seen before. You’ve got all that money and private equity, if they don’t put the money to work have to return it to the investors. There’s no private equity group that wants to return the money. You’ve got $2 trillion almost sitting on the sidelines in private equity.
You look at the next two companies that are looking to do diversification plays or companies that are looking to buy competitors. Many companies pre-pandemic had built up a war chest of money on their balance sheets. As I hear time and time again from company owners, it’s become incredibly hard to grow organically. Organic growth has become very hard. One of the best and maybe easiest and cheapest ways I would contend to grow is to go acquire businesses. You don’t have to acquire the whole business. You can acquire assets. You acquire certain things, but go out and make acquisitions. You could even be acquiring to get people or clients or technology. There are lots of different reasons, but these companies had a lot of money on their balance sheets and that’s the easiest thing to do with that money.You've got to have a lot of belief in yourself. Click To Tweet
You’ve got that last group that I referenced, which is high net worth individuals and investor groups. What’s flooded into those groups are all of these middle to senior-level managers who were furloughed during the COVID pandemic or have been reassigned or had their jobs changed, their compensation changed and they’re thinking, “There’s got to be a better way. Maybe I should take the war chest that I’ve assembled and go out and buy a business,” just like I referenced earlier in my own situation.
You have all four of these groups coming together in enormous numbers fueled by and what’s underlying all of this is a capital market environment that is wide open. Banks and lenders are ready to lend you money for acquisitions and interest rates at are historical lows. That’s the fuel and the foundation to allow all of these buyer groups to come into the market and make acquisitions. It’s been an incredible storm. We’re ending our best year ever in 2020 by a long shot. We crushed any of our previous years if that’s any indication of how active the market is.
You said that the interest rates are near zero. The other thing is that I believe there’s an urgency right now to convert US dollars to appreciating assets because the US dollar is a depreciating asset. Certainly businesses, properties, these are all targets right now. That’s why where I live here in South Florida, the properties in 2020 or 2019 might have been in a certain range of now 40% more, not 20% and people are getting it. Why? In fact, there are people buying properties here on a Zoom call, basically a walkthrough with a cell phone because they don’t want to even go into the property to see it.
There is this sense of urgency. Now, we would be having this conversation. You could have the same conversation about cryptocurrencies and Bitcoin. It’s surging because the asset that it’s purchasing is a depreciating asset. What about the young person who has been dreaming of creating this new thing or starting this new service? There is a case to be made that would say, “Don’t do it. It’s riskier to start your own business than it is to buy an existing operating entity.” Would you agree or disagree with something like that?
I firmly believe that. When you look at the statistics that over 50% of all businesses fail inside of five years, and then you get out beyond that 7 to 10 years, the statistics go up to over 75%. The failure rate is incredibly high for startups unless you’re looking to have a side hustle or maybe you make a few shekels on the side. If you want to own a substantial business that’s going to provide you with personal and financial freedom, I believe the best way to do this is to buy an existing business that has a track record, trained employees, existing clients and all of the things that go with an ongoing operation.
Another aspect of this is talent. If I wanted to start a business, I have a great idea and I don’t have a product development person or I don’t have a sales team. There’s another very compelling reason to buy that business, grow it for 1 or 2 years and then use those assets to branch out and do something a little bit different maybe, but having the asset itself backing you up as you move forward. Let’s shift gears a little bit because we have people here who would like to either start or buy a business. Is there a directory or a place that people can go to find businesses that would like to sell?
There are lots of business for sale websites. We even put some of our listings out on those sites. Not all of them. We don’t put everything out there, but you can go to places like BusinessesForSale.com, BizBuySell, BizQuest, Merger Network or places like that, where you can see businesses that are being offered in the marketplace. Usually, you can see what the revenues and the cashflows or adjusted EBITDA are, the asking price, a short description of the business, maybe how many employees they have. You can get some high-level information.
The challenge right now with those directories is the market is so frothy that unless you act quickly, you could find yourself in a bidding war just like what’s happening in the residential market that you described. You could easily be in a situation where you’re up against 5, 6, 7 offers. I’ll give you a perfect example. In our merger and acquisition business, we represent a heating and ventilation business, an HVAC business. We got our sixth offer on that business. It’s only been in the market for a few weeks. It’s an indication of what is happening in the marketplace and how crazy it is. Our owners are going to get a good multiple at price on that business and get a pretty nice walkaway. A couple of years ago, it wouldn’t have been anywhere near this price.
The value of money has gone lower so the value of real assets has gone higher. I want to share with you an idea that I have used myself in the past. I’m sure you teach this and I’m sure you’ve used it yourself as well. You spot a business, you like the business, and you find out that it’s for sale so you approach the owner and say, “Let’s pick a number.” You’re asking $1 million for the business. “How about I buy the business for $1.5 million? Are you okay with that Mr. Owner?” The guy will say, “Yeah, sure.” You say, “I’m not going to pay you upfront. I’m going to pay you out of the proceeds from the company.” You’d call that a leveraged buyout. Do you see that going on much these days?
I don’t. Only because it’s become so much of a seller’s market. The only times that you’re seeing things like that are when the business is in distress and the owner doesn’t have a lot of options. Those opportunities exist. They’re harder to come by but if it’s a healthy business that can be easily financed, you don’t see that very often right now.
That’s good to know. If you could look into your crystal ball and tell us a little bit about what your thoughts are. I’m going to give you a scenario. I’m not saying this will happen. I have my own crystal ball, but it seems like things are headed in this direction, Domenic. The thought I had is we’re being flooded now with cheap money, the national debt is through the roof, but sooner or later, we’re going to have to implement some form of control. That control will mean inflation and higher interest rates. What happens several months from now when the market has slid a little bit or a lot, when interest rates have increased maybe a few ticks or a little more, and when things have gotten out of hand when it comes to pricing? Where do you see us as business owners going in that environment?
If we’re looking to sell our businesses just to be clear, supply and demand and so what will happen naturally is the cost of money goes up. You’ll have fewer buyers in the marketplace because the capital is going to be harder to get. Valuations are going to come down. I’ve seen this time and time again. While evaluations are soaring, they’re going to get knocked back as the other side of the equation takes a hit at higher interest rates. Capital is harder to come by. There will be a leveling off of valuations. How quickly that happens? I don’t know. You have this other issue sitting out there, which is our tax environment. There are proposals that capital gains could go from 20% to 39.6%. Let’s take a business that’s in the business services sector, not a lot of equipment, not a lot of fixed assets. The majority of that business is goodwill. Meaning the majority of the tax those owners are going to pay is capital gains. Now on a $1 million sale and these numbers are not completely accurate because there are some deductions you take before you pay taxes, but let’s keep it simple. At 20%, $200,000 is going to pay your tax bill. That same scenario of these tax changes go into effect, you’re now paying almost $400,000 on that same $1 million.
That’s got to affect the value of the business as well. If those tax changes happen, it’s like 1031 exchanges in real estate. If that goes away, it’s going to affect the value of reseller property. All of that makes sense. Your crystal ball says that valuations will drop, money might get a little harder to get at higher valuations and taxes might go up. I’m interpreting what you’re saying is now’s the time to act. Would you say?
We’re telling every owner that we speak to that thinks that their exit window is in the next three years, they should seriously consider pulling the trigger now because I’ve not seen a better time in my several years of doing this for owners to do that. It could have taken another 1 or 2 years for these crystal ball changes to come into effect, sure. We know what we know now. If your window is in the next three years, you seriously need to consider doing it now.
Domenic, we’ve reached the time in our interview where we get to transition just as you did many years ago to a new part of our conversation. This now is more about you. The way we do this is we ask you a couple of questions that I’ve asked now over 250 times. I will tell you this, I never get the same answer, which is incredible. That’s what I love about doing this. Here’s the first question, who in all of space and time would you like to have one hour to enjoy a walk in the park, a quick lunch or an intense conversation with?
Mitch, I knew this question was coming and I gave it a fair amount of thought. It’s a tough question because there are so many figures like Winston Churchill or Frank Sinatra. There are many people that I’d love to have a conversation with. At the end of the day, I would covet having a conversation with my grandfathers. I never got to meet either of my grandfathers. One died well before I was born. The other died when I was only one year old. I would love to have an hour with my grandfathers.
It’s sad that someone you love passed, but you could almost predict what that conversation would be like. It would be filled with wisdom. It would be this moment with the two of you where you could show your grandfathers what you’ve become and your beautiful family. That’s a great choice. I’ve heard people say things like that, but never quite that way. Thank you for sharing that. Here’s the second question and this one’s a little harder. It’s called the change the world question. What is it that you are doing or would like to do that truly has the potential to literally change the world?
Change the world is such a big thing. In my little corner of the world, I think of changing the world, one contact, one engagement at a time. I have to say while what I do is very finance-heavy and very negotiation-heavy, there is an element to working with an owner of a business or helping somebody buy a business that has this amazing effect on everybody involved. I’ll tell you, it never gets old. Quite simply when you can work with an owner of a business that has run that business for years, maybe decades, they built it or took it over from their father or someone else in their family. Now you help them sell that business and realize a return and go on to the next chapter of their life. The gratification in helping them maximize the value of their business and go and experience the next chapter never gets old. It’s the same thing when we help people buy businesses. I can think of some examples where we helped executives buy their first businesses and they talked to us about how it was always their dream. To be a part of somebody’s dream and watch that happen never gets old. Are we changing the world? No, but we’re changing people in our small little universe here having some positive impact.
Domenic Rinaldi, you are changing the world one person at a time in the best way to do it. Readers, I had mentioned to you earlier that we have a great giveaway that Domenic has set up for you so that you could do some evaluation of your own as to when the timing might be right to either buy or sell. Domenic, do you want to tell us a little bit about what you’re offering to our readers?Act swiftly and with confidence. Click To Tweet
As we referenced earlier, after personally being involved in over 300 M&A transactions, the one thing that I kept seeing is that whether you were looking to sell a business or buy one, people weren’t properly prepared. We built the short, impactful assessments and the brevity of them should not take away from what we can glean from the answers and the report that they’ll get. If you’re someone contemplating buying a business, you can go to our website, K2Adviser.com and take the buyer assessment. In less than ten minutes, we’ll give you a score between 0 and 100. We’ll email you the questions and the answers so you can see where you scored on each of the questions and it’ll be obvious where your gaps exist. These are the big things that people should be covering before they ever launch a search.
On the flip side, if you’re an owner of a business, whether you want to sell now, 5 or 20 years from now, if you take this assessment, it will show you where the gaps exist that are keeping you from maximizing the value of your business. Our contention is whether you want to sell now or twenty years from now, you should always run it at maximum value. The reason is life happens, stuff happens, and you may be forced to have to sell your business at a moment’s notice for reasons you could have never dreamed of, and why not have that business always at a maximum value so that if that does happen, you can quickly turn on a dime and get the business sold. These are free assessments. You can take them. It gives you some tremendous feedback.
Domenic, thank you so much for being a guest. Thank you for sharing your wisdom with our audience. We look forward to chatting with you again soon.
Mitch, thanks so much for having me on. Keep up the great work. I enjoyed the show.
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