For many business owners, their business is the culmination of their life’s work and a primary source of wealth. Therefore, you will want to maximize the value through a combination of planning and timing when thinking about how to sell it later on. On today’s show, Domenic Rinaldi is with Michael Zipursky to discuss how to build a solid exit plan and start for a sale before the company wishes to transition out. Domenic, the managing partner of Sun Acquisitions, shares his journey on how he came to enter this business and how, 15 years later, Sun Acquisitions became the largest firm in Chicago. Additionally, he poses important questions business owners should think about. How involved are you in the business? Do you have a self-managing business, or are you so involved in the business that the decisions and processes are reliant on you?
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I’m here with Domenic Rinaldi. Domenic, welcome.
Thank you very much. It’s a pleasure to be here.
You are the Managing Director of Sun Acquisitions. You have a background working as an executive in sales, hospitality and telecom. Let’s start off and have you share with us how you got into the business of advising companies on acquisitions.
Many years ago, I’ve found myself in transition and I was trying to figure out the next step. After having worked for venture capital-backed companies, private equity companies, publicly traded companies, I decided that I wanted to go and own my own thing. This was my opportunity. There is never going to be a better time than now to go out and look at that. I went out in the marketplace and started to search for businesses that might appeal to me, given my background and my skillset. In the process of searching, I was disillusioned. I wasn’t finding what I wanted. I knew I didn’t want to start something from scratch. I didn’t want to take the bet that I’m going to start with no clients, no service, nothing.
I knew I wanted something that was already built where I can see a historical performance. I wasn’t finding what I wanted. In the process of doing that, I had gotten introduced to a couple of people, and the opportunity to potentially buy a mergers and acquisitions firm came up. Long story short, I did about six months of research. It seemed like a great time to enter this business. An opportunity presented itself and I bought an existing firm that was doing small market M&A. It was only a couple of advisors at the time. Here I am, many years later, we’ve got fifteen people. We are the largest firm in Chicago that does what we do. We service clients nationally, but in the Chicago market, we’re the largest company of our size. I was able to build what I was hoping I could.
Before we dive deeper into that, you mentioned that you felt that, when you are going through that transition that at that time, it was most likely the best time for you, like there would never be a better time. Why was that? What were the factors going on that made you feel that that time was the time for you to act?
Let me put a qualifier on that, that time was the best time for the business that I bought. In looking at the macroeconomic trends for this M&A business, there were a couple of things. One, you had Baby Boomers who were about to start reaching retirement age, who was going to start retiring in the US in big numbers. Baby Boomers own 9 million of the 15 million small businesses. They were going to pass those businesses on. I didn’t quite know at the time, but as I came to learn, many of them didn’t have another generation to pass the business onto. A third-party sale was the way for them to monetize that investment. I’m going back to 2004 or 2005, capital markets were wide open. Tons of money, interest rates were relatively low, not as low as they are now, but they were relatively low. Outsourcing was a thing that was picking up steam. All of those things combined got me to the point where I thought making an investment in this type of firm at that time made a lot of sense. The economics and the trends were in my favor.
The less you are involved in the day-to-day operations of the business, the more valuable your business is. Click To TweetYou acquired your first business, which is not common. I’d love for you to take us a little bit deeper into why. Why not start something yourself? Why not create your own child as opposed to “finding one” that’s already out there and has developed to a point? This is a bit of a hypothetical question. I see your point of view, but for those who might be contemplating, or maybe for those who have never even considered the concept of purchasing another business, what attracted you to that?
There were a number of things. I wasn’t looking for a side hustle. I was looking for a real substantial business that had infrastructure and foundation. If I was looking for a side hustle, I might have arrived at a different solution.
Why weren’t you looking for that in terms of you starting off as an advisor in some area? You wanted infrastructure. You wanted a more substantial business that had team, resources and systems. For you, why was that important?
It was important for me because I wanted a platform from which I could grow something substantially, and I wanted to see proof of concept. I wanted to know and be able, in my diligence, to look at the things that we’re working in that business, and why they were working, and how my talents might be able to take that business to the next level, versus working from a blank sheet of paper with pro formas and hoping that maybe I could execute properly and all the stars were going to align. I also had the benefit of having several friends who had tried to start businesses and failed. They had put a lot of money, time and effort, and never got them off the ground. They were able to get some traction, but not to the point where it was a sustainable business.
The other thing was I had worked for a venture capital-backed company that had gotten started from scratch where we raised over $100 million in venture capital money. We got that company to the point where we had filed to go public two weeks before the market crash of April 2000. I had seen all this money invested, all this hard work. It wasn’t profitable back in the days when you didn’t have to be profitable when you were starting an internet company, only to have the markets dictate that we could never get out an IPO in that business while the technology was good. It wound up the technology survived the closing down of that business. There was a lot of money, effort and livelihoods that disappeared almost overnight because we couldn’t get out into the market and raise the money we needed to raise. For me, I wanted to know that there was a platform and a foundation that I could take to the next level. I wanted ongoing cashflows. I have a train to pull. I had a young family at the time. It was important for me to know that my tribe is going to be able to pull that train down the track while I was figuring it out, and that’s still funding my lifestyle every month.
For the consultants and owner who may or may not have the vision to sell their business. What should they be thinking or what are some ways? I know this is a big part of the work that you do with your clients when it comes to increasing the value of a company. For the readers, what are some of the go-to opportunities and areas that you will look at or often recommend to your clients as a way to increase the value of their company and operations?
The first thing I recommend is to understand what the current value of your business is. Whatever it means that you can do that, hire a third-party, go to somebody who knows how to do this, but get a line in the sand. Understand the value of your businesses and what are the key value drivers of your business. What are the things that increase or decrease the value in the business? There are some basic value drivers that cut across all businesses. There might be some specific ones to your business that you’ll need to understand. I can speak to the generic ones.
Give us some examples. That’d be great to make it more tangible for everyone.
The more reliant you are on one vendor or client, the more risk there is in the business. Click To TweetSome examples are one, how involved are you in the business? Do you have a self-managing business, or are you so involved in the business? Are the decisions and processes reliant on you and your involvement? This is a spectrum of value. The less you are involved in the day-to-day operations of the business, the more valuable your business is. The reason for that is when you do decide to go to the market and sell it, if a new buyer comes in, there’s less risk for them when they take over that business. You’re not controlling any day-to-day pieces of that business. They’ve got a tremendous amount of comfort that when they take over, operations are going to continue with or without you. My litmus test on that is you as an owner can go away for 2, 3 or 4 weeks and the business still operates. You have a self-managing business. You’ve increased the value.
Recurring revenues. To the extent that you can build a recurring revenue stream into your business, the value of your business is going to go up dramatically. A lot of people think they can’t do that, that they’re going to have challenges. I would encourage you to pull together some people that you trust, trusted advisors or a consultant like yourself, and brainstorm ways that you can incorporate recurring revenues in your business model. HVAC companies, heating and ventilation companies have been able to do it through service contracts. Who would have ever thought they could build a recurring revenue stream in HVAC business? Lo and behold, they came up with service contracts to repeatable revenue and now you grow it larger every year. Vendor concentrations and client concentrations are another good examples. If you have one client that represents 20% or more of your revenues, there are some significant risks there.
To the extent you do have clients that represent that much of your revenue, you want to work hard to mitigate that and bring that down. The gold standard is no one client represents more than 5% of your revenues. What that means is, if you lose a client, it’s not going to be a house of cards. It’s not going to bring your business down. Working hard to have a lot of clients and no one client representing more than 5% to 10% is a great starting point. Vendor concentrations run across the same thing. The more reliant you are on one vendor, the more risk there is in the business. When it does come time to sell the business, buyers are going to look at all of these things.
What are we talking about in terms of the multiple? Let’s take a simple number, $1 million as top-line revenue for a professional services firm. If that company is quite heavily owner reliant, meaning that the owner is still a key part of sales, marketing, maybe even delivery, and then compare and contrast that to a company that is doing $1 million top-line, just to make it simple, they have recurring revenue in their business.
They have less concentration or more diversified portfolio of clients, not relying too heavily on any given client. The business owner themselves is involved, but not so heavily. They’re able to step out for a couple of weeks at a time. What are the different kinds of multiples that somebody might expect in the world of a consulting business, professional services for those two different situations? I know it’s hard because there are a lot of cases, but just a range so people have an idea.
It’s almost impossible to answer the question because there’s so much more you have to know, but let’s throw something at it. If you’ve got a business where it’s not self-managed, you could get something as low as 1, 2 or 3 multiple, whereas if you have a self-managed business, it’s not reliant on you, and there’s recurring revenue, that multiple could be a 3 to a 5. What is the multiple against? The multiple is against what we call adjusted EBITDA, which is when you add back owner benefits, discretionary expenses, things that the owner is getting that won’t be expenses in the business if they were to sell it. You’re multiplying against that, but that’s a dramatic difference. You’re talking about a 1 to 3 versus a 3 to 5. That could be a meaningful difference on a purchase price in a sale.
What about the consultant or owner that has no desire or plan to sell their business. A lot of the things that you’re talking about here, we’ve seen this in our own business, have an impact and can be quite beneficial even if you don’t plan to sell. What are some of the areas or things that people should be doing regardless of their business that could help them increase the value of the company, whether or not they plan to sell?
No one client should represent more than 5% of your revenues. Click To TweetThe beauty of having your own business is you don’t have to sell it if you don’t want to. You run it any way you want. Increasing value if you’re a solopreneur, maybe you need to access capital from the bank because you have an opportunity, and you need to pull in money to make an investment or do something. Clean financials are critical. Having your profit and loss statements, balance sheet, and tax returns accurately reflect what your business produces is going to increase the value of your business. Why is that? If you ever do need to raise money or get a working capital line, the bank is going to need to see what that business does. Unfortunately, most small businesses run the business for the benefit of the owner, and they don’t keep clean books and records.
They put a lot of things through the business. They use a credit card. It’s hard for banks to understand where the value is in that business. Your ability to tap into capital is limited. In a time like now, where interest rates are low, your ability to tap into capital is key in lots of ways if you want to grow or take advantage of certain things, even if you want to invest in yourself and you want that investment. It is going to come in the way of a working capital line. Keeping clean financials is important.
Is there anything else that you’ve seen in your experience that buyers are looking for or desire, therefore, increases the value of the company that people should be thinking about from a systems, process or brand perspective?
To the extent that you have an operations manual that lays out every step of every process. It’s clear and updated. It’s somewhere where everybody can access it. It’s a living and breathing document, that increases the value of the business dramatically. For the reasons I talked about, a buyer doesn’t have to guess how to do X, Y, Z. It’s all documented. They have to find who to execute whatever the process or system is. Having an operations manual is critical.
I remember early on, I would never think of an operations manual when I was getting started many years ago, because why would I need it? It’s just me. As you start thinking about ways to grow and to have a greater impact, even if you begin by getting a virtual assistant and an assistant, then a part-time person, a contractor, then full-time, whatever it might be, having that documentation and that system makes things significantly more efficient and effective because every time you go to bring someone on, the person leaves and you have to replace them, those situations happen. Being able to refer somebody to, “Check this out. Watch this video,” it saves you as the owner a significant amount of time.
What I always counsel and suggest to clients that we work with our coaching program is if you’re doing something more than once, then you should be building a system or process around it because it’s likely that you’re going to continue doing it over and over again. You might think that you don’t need to document it now because it’s faster for you to do it yourself than it is to train somebody. If you document it once or have somebody who’s working on that document it themselves, which is even better, now you have an asset in your business. That’s what you’re getting to here, Domenic. I want to ask you a question about your team. Since acquiring this company, you’ve built the team. How do you think about your team members in terms of building that team strategically? What do you look for? What hires have you put into place? Any thoughts or experiences that you’ve leveraged or brought into your business, and that you think is important for people to also consider?
I have a couple of things that I’ll mention here. First off, early on, you may take a different approach than when you start to mature. Right or wrong, you don’t have the money to invest early on that you do later. I am incredibly picky about who I will invite to be a part of our team. I value culture. I value how people interact with each other. If I think somebody is not a fit, regardless of what I think they could do for our business top-line, they’re not invited to be part of the team. I’ve had to make some tough decisions in the past about people who were performing but were terrible team members. We had to part ways because at the end of the day, having a cohesive team that wants to work together can elevate everybody’s performance. I’d pay particular attention to culture, harmony, esprit de corps, all those things that I think generate tremendous productivity across the board.
How do you find that? Are you using assessments? What have you found looking back? What are your best practices? When you hire or build or add a new team member, what do you have to go through so you have a better sense to be able to make a better decision that gives you the highest likelihood of seeing success with that person?
The beauty of having your own business is you don't have to sell it if you don't want to. Click To TweetI should use assessments probably, but I am a gut feel manager. I like to take people out, talk to them, see them in a social setting, and I like to get to know somebody. I form an opinion based on my gut. I know whether or not a person is going to fit. Do I get it right all the time? No, I don’t. By and large, I do get it right, but I take my time. I’m not quick to make decisions that could harm the business. If I feel like I haven’t met the right candidate, I’m willing to wait and continue to sourcing. If I have to in this day and age with all of these freelancers, I’ll plug a hole with a freelancer until I can find the right fit.
We did use some assessments for salespeople early on that I found beneficial in some regards. There are some things you can’t catch, and these assessments can be very helpful in that regard. I want to get to know somebody over some period of time to get comfortable. Talking to who they worked for, diving deep, asking, and even getting beyond the references that they gave you and filtering out to a larger network. LinkedIn is tremendous that way with the connections. We’ll reach through LinkedIn and talk to common connections and get some feedback. That’s been helpful for us as well.
When you look to bring someone on, are you setting it as, “Once we reach this financial level,” or whatever that kind of metric is, then you hire? Have you found that you look at, “Here’s where we want to get to and let’s start hiring people now before we even need them?” What’s been your approach? I think a lot of people struggle with that in terms of being a little bit of a chicken and egg situation.
Some of this may be because of my cautious upbringing. I was reared in a Fortune 500 company and we had to prove that we could generate revenue before we get resources. I was trained that way early on. I also happened to work for somebody in my early career who put us to the task. We could have great ideas and he’d say, “Give me proof of concept. If it looks good, we’ll invest.” My approach has always been, “I’ve got to prove that there’s something there for me to go make the investment and it doesn’t have to be much. I’ve got to see the needle move one way or another in order to get comfortable. If I see that there’s a possibility, I’ll make the investment then.
Let’s shift for a moment here. You provide several different services. You help people who are looking to buy a business. You help people who sell a business. You also provide advisory services for clients. You are providing a lot of consulting related work in your day to day at the firm. What are you doing to attract new clients, whether they are the acquirer or the seller? What are you doing as a firm that works best to attract the right kind of clientele?
I’m not certain with the answer to that question. One thing I’m proud of is we will try things. We don’t make big bets, but we’ll try stuff. 2020 has been the best year ever on record. That’s on the heels of 2019 being our best year. We crushed 2020. I’ve had some capital to try a bunch of things and we did with very mixed results.
What did you try and what worked best or what didn’t work at all?
We’re a very high-ticket item. We’re not a $1,000 ticket.
What does that mean? Give us a sense? What’s your average engagement, $25,000, $100,000, less, more?
When we sell a business, we’re six figures or multiple six figures. On the consulting side, it could be far less than that, but on the acquisition side where we’re helping people buy and sell, we’re talking six figures. What I know is that Facebook Ads doesn’t work for that clientele for sure. Google Ads at one point in time was okay but even Google Ads is proving to not be very good. We’re moving away from Google Ads, pay-per-click, we’ll stop doing Facebook completely. We tried YouTube. YouTube is also not a fit for what we do. We’re moving more to LinkedIn. LinkedIn and webinars are the two things that we’re honing in on. My podcast has been a great way to generate firm interest and it solidifies relationships. We’d been having discussions and they can listen to a couple of episodes, and they realize we are subject matter experts.
Is there a typical entry point? Is your team going out to different businesses based on lists that you find in sending emails, making phone calls, and contacting through LinkedIn? Are you guys doing a lot of outbound or is it mainly inbound?
I have a small business development group that supports my advisors, and we’ll do outreach through that business development group, although that’s become difficult in a pandemic environment. Lots of people are not in their offices. Reaching people in their office becomes virtually impossible. Unless you have a cell phone, that’s become hard too. Assuming that that’s going to be the case for some period of time here, we’ve migrated now to LinkedIn as a natural way to try to connect with people.
How important have you found it in terms of your marketing to identify the right type of person? From what I know, LinkedIn doesn’t necessarily show you that somebody is looking to sell or to buy a business. You can identify how many years that person has been in the business. You can identify industry, geography, a whole bunch of other criteria, but give us a sense of what you are doing or how you think about criteria and search filters to hone in on the right type of ideal clients so that your outreach is targeted?
Pay particular attention to culture and harmony because all those things generate tremendous productivity. Click To TweetThis gets to a little bit of strategy and why we built our firm, K2Adviser. The odds are that the number of people that are going to be ready now and at the point where they want to buy and sell is small. It might be 1% or 2% at most. Even then, they might not be ready to sell or buy once we give them all the specifics. The numbers and the percentages are very small. What are we trying to do? We’re trying to get in touch with as many people in advance of those events, and work with them so that they can be prepared. Sun Acquisitions is our M&A arm where if somebody is ready to buy or sell, we can do the transaction.
We built K2Adviser so that if you’re not ready now, that’s fine. We can work with you over some period of time to make sure that you are prepared. Whether the date is 1 or 6 years from now, you know you’ve done all the things that you should do to maximize your returns, minimize your risks, and avoid the pitfalls. We think that that’s a good marriage. We’ll have a much higher percentage of people who will want to spend the time and effort to prepare. We’ll hopefully walk over some of those people to the Sun Acquisitions side when they are ready.
Where is the best place for people to reach out to you and to learn more about the work that you’re doing?
My email is the best way to reach me, [email protected].
Domenic, thanks so much for coming on here.
Michael, thanks for having me. I appreciate it.
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Good discussion.
Glad you enjoyed it Fletcher