Buying And Selling Businesses Without Making Big Mistakes with Domenic Rinaldi

How do you make business problems disappear? Wrap them in bacon for business owners, marketing execs, and anyone trying to grow your business, pump your profits and make more while doing less. Welcome to Bacon Wrapped Business with Brad Costanzo. Sizzling hot business advice guaranteed to make you fat profits. Every week, our chefs will serve you proven recipes for ramping up your revenue. Now here's your host, Brad Costanzo. Welcome back to Bacon Wrap Business. This is Brad Costanzo. And today I have got a topic and a guest that you've probably heard me talk about before because it is one of my favorite topics, which is acquisition, deal making, creative financing, and just really stepping above the business and understanding how you can either buy a business, sell a business, or do a deal that makes a massive impact upon your life. I know that in the past decade and a half that I've been what I would consider an entrepreneur. Although I've been entrepreneurial for a lot longer, I have grown businesses, bought, sold a little bit of everything in between. And one of the things that I realized early on is that I'm not operating a business and starting it up is not actually, I take that back. Starting it up is fun, but starting up, operating, et cetera, there's so much more involved. And oftentimes the real wealth is either created when you sell something that has really good enterprise value or you buy something and take a shortcut to getting into momentum and to getting in to where you can, whether it's fix it up or accentuate it and then run it for cash flow and a lifestyle that you want or sell it later down the road. So it's one of my favorite topics. I believe it's one of those things that takes you above the operational details. And today I brought on an expert in this subject of buying and selling businesses, Dominic Rinaldi, and he's up in Chicago. He's the owner and manager of Sun Acquisitions, and he helps his clients both buy and sell businesses across a variety of industries. And since 2005, he's been personally involved in over 300, maybe more by this time, transactions for businesses with enterprise values of 2 to $50 million. And he's joining us here today so we can learn a little bit more about the mergers acquisitions market and what it means for stock, small and big business owners everywhere. Dominic, welcome to Bacon Wrap.

Hey, Brad, pleasure to be here. Thanks for having me.

Absolutely. No, this is one of my favorite topics to discuss. It's one of the areas of business that I actually know the least amount about only because of, you know, Compared to like running and marketing and sales and operations, et cetera. But it's one of those areas that I'm constantly trying to honor. Honed my skills on having bought and sold smaller businesses in the past and seeing the opportunities there, but also the intricacies and the headaches and the potential frustrations involved if you don't do it right. Because it's one of those things that you can lose a lot of money if you get this wrong. Tell me a little bit about your history in this business. I know offline you said that you've been doing this for quite a while, but back us up a little bit to how you got started in acquisitions and mergers.

Yeah, so I go back to 2004, and after a long career in corporate America and in venture capital backed firms and private equity backed firms, I was in transition and I decided that I wanted to really create personal and financial freedom for myself. And I thought that owning a business was really my path to doing that. And so I went out into the marketplace and started to look for businesses to acquire. And in the process of doing that, I was working with a bunch of folks like myself now who represent sellers in the marketplace. And I really wasn't finding what I was looking for. And I just found that there was a real void in the marketplace for folks that were representing sellers. And I started to do my homework. And the more I did my homework, the more I realized that I thought MA advisory and business brokerage was a tremendous opportunity. And so luckily I had met somebody who was in the industry who had been doing it for a while. There was an opportunity in Chicago, and after about six months of research and really diving in, I bought this firm. And it was small when I bought it. There were only a couple advisors that had been around for about five years. They had done transactions, but they weren't lightening up. And I thought I could take it to the next level. And here I am 15 years later. And I think we're the largest. I don't think we are the largest small business MA brokerage firm in Chicago. We do deals all over the country. We even have international clients. But in the city of Chicago, we are the largest small business brokerage firm.

Nice. So was your personal first acquisition, Sun Acquisitions?

It wasn't when I had worked for some venture capital firms, we had done some acquisitions as a means to grow. And so I had been involved in acquisitions before, but not on the level obviously that I'm involved now. So I had a taste of it. But honestly, I had to Adapt that knowledge and really start to drink out of a fire hose and get up to speed. And luckily, I had bought into a firm that had some processes and procedures and the foundation, and then I could leverage my talents against that foundation and grow. Worked out. It hasn't been easy. As you know, small business ownership is not easy. Right. I mean, I'm now lived through one major recession, one pandemic, but interestingly enough, this will be our best year ever on record, in spite of the pandemic.

Nice. And then you also mentioned that you've got another company called K2 Advisors.

Right.

So Sun Acquisitions. Is it fair to call that more of a brokerage?

It is.

And then. So tell me what K2 acquisitions does.

Yeah. So the K2 advisor, K2 advisor is all about helping people prepare for either an acquisition or a sale. And the reason we started it and we launched it in January is after 15 years of doing transactions, the major pitfall that I see is that people don't properly prepare. And even when they think they've prepared, we meet with them, we go through what they've done, and invariably they've missed some critical steps. And, you know, Brad, as you know, because you've bought and sold, you miss a couple of things, and it could really cost you a lot of money. And I'm not just talking about a purchase price, what you sell it for, what you buy it for. It's all those terms and conditions, the tax liabilities, the clawbacks, the indemnifications, you know, all of that stuff that either makes for a good transaction or a really bad one. And so my mission now, really, I think, for the rest of my career will really be helping people be prepared for that acquisition or that sale. I love helping people get ready for that transaction.

What do you think is the more complicated side of it? Okay, so when you're. I mean, obviously when you're selling, the big loss there. And let me back up. When I say, what's the more complicated side? That's way too ambiguous of an answer. But when we're talking about being prepared, I know that if I'm selling a business, if I'm not fully prepared, the, you know, one of the loss could be, you know, a multiple or several multiples. Like it's opportunity loss. Like, okay, I could have sold my business for 5 million, but I only sold it for 3. Right. Because I didn't do these. On the flip side, as a buyer, depending on how you're doing this, it feels to me like it's a riskier Thing because you could go in and buy something, but you miss one or two really critical things that could wreck your entire investment. And you know, if you buy something for $5 million, for instance, chances are you probably put in some debt and cash, et cetera. That can really wreck you. If things go south there. Where do you feel, which side do you feel as though the risk is higher and the preparation more necessary if it's just an A versus seller versus Buyer?

Yeah, you know, I think there are really significant risks on both sides of the equation. There really are. Because when you look at the seller side, it goes way beyond missing a multiple. Did you do all the things to put yourself in a tax advantaged situation? So let's say you sell your business for $2 million. How much of that $2 million you keep in your pocket after the sale really matters. And if you haven't done all of the tax prep ahead of time, you might have a really hefty tax bill versus if you did it, you're going to keep more of that 2 million. So it's not always just about the multiple. And then there are probably seven, eight other items that could really impact or the value or create risk for you post transaction. On the buyer side, you know, the risks are many. You know, you didn't, you weren't strategic. It starts with, are you being strategic in what you're searching for? You know, oftentimes I'll see people who blindly go out and start to look for things based on a cash flow or an industry and they haven't really taken a step back and done an inventory of what it is they're trying to achieve at the end of the day what their goals are. And so they get into something and realize, oh my God, I'm way in over my head. And now it's a race to figure out can they get up that learning curve before something bad happens. And the obvious one is diligence. Right. Did you really understand how to do diligence and all the components that go into it? And oh, by the way, in this Covid environment, diligence has taken on a whole new risk level. Right. There's so many more things that the banks are looking for and you as a buyer should be looking for. So I think that there are significant risks on both sides. They're just in different places.

You know, you bring something up, I'm just, just take this down a rabbit trail.

Yeah.

If you're, especially now in this Covid environment, like if I'm going to buy a business, right. Now, there's a whole lot of things like, did the company take PPP money? What is the ramifications of that? From what I've talked to some clients, there's still a little bit of gray area of is this forgivable, is it taxable, is this, that or the other? And they're still kind of confused and waiting for guidance from the government and the irs. I mean, it's safe to say you could probably buy something that, that if they took certain forms of stimulus or disaster, money that could come back to bite you if you don't really understand the ramifications of what they did during.

Yeah, well, the banks have put some governors around that. And so in order for a business to transfer, if the business has taken PPP money, they have to get a waiver if forgiveness hasn't been given. And so typically what's happening now is, is if forgiveness has not been granted, there's actually an escrow amount that's being set aside for the full amount of the ppp. So think about that. If you're selling a business and you've taken out a half a million dollar PPP loan, that half a million dollars is going to sit somewhere until forgiveness has been granted. As a buyer, you're taking comfort in that, but there's all sorts of other risks that go with that. You know, buying a business that's been that impacted by Covid.

Right. Now, granted, I mean, I guess it would be a little bit different if you're just doing an asset sale versus you're buying the entire entity. But I mean, now we're getting, you know, kind of down into the weeds.

You're right. Yeah, yeah, there are some. Yeah, you can start to peel the onion back and it can get way more complicated. But.

But yeah, and the point is, don't go into it blindly. Like this is one of those things where one. One facet of a deal can have ripple effects throughout the entire thing and it can either make or break the deal. Right.

So, yeah, look, and Brad, I'm sure you've covered this a million times. I covered a million times on my podcast. Surround yourself with experts. Yeah. You know, don't get an attorney who does estates. Get an attorney who does M and A transactions. They live and breathe it. Get an attorney. I mean, an accountant who, you know, does M and A transactions and understands all the permutations of tax laws and states and trusts. You know, you just need experts.

You know, speaking of that. So I know in some of the deals that I've done, they have not required. They've required due diligence but because they've been sub million. Well, actually one of them was about a. I was buying it for. What was I buying it for? I think it was like a million and a half. This is the one that fell through at the very end. And I was able to keep due diligence costs reasonable. But it, you know, it was still thousands of dollars for my benefit. My listeners, like on the buy side, let's say it's an average acquisition cost of let's say a 1 to 5 million dollar business that you're buying. What is the average cost, and I mean range of a due diligence that somebody can be prepared for. Because and I know it depends on the type of business and the industry and all of the other things. There's a lot of it depends. But some people who are in the market for a new business, I want to go buy this business, et cetera. And then they get shocked even if they find one going man, this might cost $50,000 or a lot more in due diligence. So what can you, what can you tell myself, my listeners, to realistically prepare for costs of. When you do find something?

It's sort of an impossible question to answer.

Yeah, I know it is.

You hit the nail on the head, right? It depends on the industry. I mean you might be buying a chemical or pharmaceutical business, you know, where you know you're, you're going to have to do deep dives, right? Or a medical practice where you're going to have to look in all the HIPAA like unbelievable range. But here's my advice. My advice to diligence is be practical about it. I always like to see that my clients, when we represent them on the buy side, do an initial cut of diligence on their own. Like don't bring in the pros until you've vetted out some really important things yourself. Like and there's some basic things that you should be able to do if you're going to own a business like foot the general ledger to the P and ls, right? Like make sure that those all tie. Look at the bank statements, make sure the bank statements foot to the P and L. Like if you see major gaps in cash that's hit the bank versus cash that's on the P and L, you gotta stop the train and you gotta start asking some questions right now. You also have in there, is this an accrual based business? Is it a cash based business? So you might have to figure out some of those nuances, but do high level diligence yourself on all of the major stress points in the deal and make sure they pass your sniff test. So now you're not spending a lot of money, right. You've done it on your dimension and it's your sweat equity into the deal. And if everything passes that test now go bring in the pros to do the forensic sort of diligence that's required depending on the deal. And I think that's really a great way to make sure that you're not getting deep into diligence on a deal that's got a material issue. Right.

That's actually what I did on that deal is I did a lot. I've got enough financial background and understanding to be dangerous. But so I was able to get it past my first sniff filters going okay, this looks good. And then I brought in a couple of other experts and they were the ones who actually said, well, based on the way you're structuring this deal, etcetera, these numbers aren't actually going to pan out the way you think, et cetera. So that's one of the reasons I walked away at the last minute is just they weren't willing to renegotiate the terms back to something that would pencil out. And luckily, if I wasn't working with a good, you know, CPA and attorney on that, I probably would have made a mistake that I would have regretted, but.

So you paid a couple of thousand dollars, which look, you know, a couple.

Thousand dollars, it's probably like five, five or six. Five or six at the end of the day.

I mean, it's a lot of money to some people. Right, but compared to what it might have cost you on the other side, it's probably a pittance, right?

Yeah, exactly. You know, and luckily, you know, my CPA even said if you, if you come across any other deals like this, if she, you know, we were talking about this and she was saying that she'd be willing to do it, you know, almost like cutting her in like a performance fee. Not performance fee, but it's like, look, come across another one of these, maybe I'll defer the fee for a, like a, give me a, give me a slice of the pie.

Okay, that's creative. That's a creative way to do diligence.

Yeah, exactly.

Perfectly acceptable. Yeah.

So we'll see. Do you typically personally work more with representing buyers or sellers? Because when I've come across is that most of the brokers that I either know or have talked to et Cetera seem to represent sellers more often than buyers. Is that kind of the norm in the industry?

I'd say predominantly we do more sell side than buy side, but we have a really robust buy side practice. We probably right now have a dozen or more buy side engagements we represent. I have a gentleman on my team who is the head of our buy side services. He was formerly with GE in their corporate development group. So he's done billions of dollars of acquisitions and divestitures and he heads that up. And we even have international and national clients there. So we're probably more robust than most in that area.

Nice.

So then right now it's incredible how many buyers are in the market. Enormous number of buyers.

Well, let's talk about that. So do you think there's a particular catalyst for that? Like why right now it's such a seller's market?

Yeah. So it was really this way pre pandemic and now it's just sort of gone on steroids. And I can describe why, but let me talk about the pre Covid environment. So first off, you had private equity groups who pre Covid had raised about $1.5 billion to go out and make investments. Enormous amount of money. And they were actively pursuing both platforms and working with their platform companies to do add ons. So that slowed down a bit during COVID They were trying to figure out how much money they might have to put into their existing platform companies to stabilize them. But it seems like now that settled out and they're back to looking at acquisitions to add on to their platform plays. The other thing that we had was strategics who were companies who had really healthy balance sheets. Over the last five, six years, companies have collected a lot of money on their balance sheets. And I don't know about you, but growing organically has become harder and harder for a lot of people.

Oh yeah.

So acquisitions have been a great way for companies to grow, whether it's acquiring competitors or diversifying. So we've seen a lot of activity out of the strategic marketplace. The thing that's really added fuel to the fire right now though is all of the high net worth individuals that have either been laid off, furloughed, have had their job descriptions changed, they've taken on a ton more responsibility for the same compensation. We've seen a lot of those people now flooding into the market to try to buy businesses as a way to get off of that corporate habit trail and all of that. Underlying all of that are the capital markets which have remained wide open. Banks are absolutely lending for Acquisitions and interest rates obviously historically low. So when you have this kind of interest rate environment and banks and lenders being wide open, you've got a recipe for pretty frothy M and A environment. And that's exactly what's happened.

Yeah, yeah, that makes a lot of sense. And I've seen more and more, some of the high net worth individuals I know starting to look for acquisitions, et cetera, do you typically find. So those are like, you know, they're reinventing themselves. Right. Okay, well, I'm not going to go just try to get a job somewhere. I'm going to go buy a business. Have you found that those types of people are trying to buy a business, typically in a, in a related field to their existing career, or that they're like, nah, I just want to run a business sometimes totally different than my level of experience. Like I'm going to buy a car wash or I'm going to buy this, that or the other. Like, I'm just kind of curious of what the tendency for those kind of buyers has been.

Yeah. So I'm going to take that question from a couple of angles.

Cool.

First off, you know, I'm going to separate side hustles from substantial businesses. You know, lots of people starting side hustles. And I think you can, you know, with a little money, you can do whatever you want. Right. But if you're looking to buy a substantial business that's got moving parts where you're going to make a real investment in it, my firm advice is you should look for things where you can transfer your experience into that business and move the needle in a positive way. And the governor on that is going to be banks. If you try to leave your field completely, if you've spent your life in retail and now all of a sudden you want to go into manufacturing, you're probably not going to get a loan from a bank. They're not going to be willing to take that risk. So if the bank's not willing to take the risk, you shouldn't take the risk. So you have to really think about where could you apply your skills, your experiences into an industry where you can really take it to the next level?

Yeah, that makes perfect sense. That's always one of the things I'm looking to do. Although I'm not if I come across a business that I can buy, I'm looking for one that can utilize my skill sets as a, like, as a consultant and, and as a business owner myself. I'm always focused on growth. I bring other people in for the tedious operations. But I always look for something that even if it's not in my industry, doesn't have those characteristics where my strategies of growing a business would apply here. So that I can know that like even if I buy this, I'm not just buying this and going man, I don't know what to do with any of this. Is there some kind of a synergistic effect it'll have with my, with my skill set when it comes to, when it comes to like for instance, you're representing a seller. You know, buyers come in with a wide range of ability to buy a company. Some of them are, you know, like PE companies and they've got a war chest full of cash. Other of them are going to need to arrange, you know, loans and debt financing, sometimes creative financing and owner carrybacks, et cetera. As a broker, from a broker's point of view, when you're representing the seller, I would think it makes the most sense for you to personally want the all cash. Like the all cash buyers. Those are going to be the simplest transactions, no contingencies, et cetera. If they like it, they're going to buy it. And if they buy it for all cash, et cetera, you're going to get your fee. The seller gets his piece and moves on. I've got a multi part question here. I think one of them is how often for the cash buyers so somebody comes, I've got a lot of cash, I could take it all down. How often do you see them actually buying the entire thing all cash versus doing a partially cash transaction and either a partial earn out or a seller financing? Because I would think that the more sophisticated and able they are, they're still going to want to dangle a carrot for that owner so that they don't just give the cash and the guy moves on. So I'm just kind of curious of what you see as an industry professional.

Yeah, so first off, I rarely if ever see an all cash offer. You know, maybe and we don't do these deals but you know, if you're talking a couple of hundred thousand dollars, you might see an all cash deal. But when you're in the millions, you really never see an all cash deal. The typical transaction is the buyer comes in with a pretty substantial down payment and then goes leverages a bank loan for the balance and the seller will walk away at the closing table with 80 to 90% of the purchase price and the balance. That 10 to 20% could be some combination of seller note and earn out some Other mechanism could even be a rollover of equity. The previous owner might keep 10 or 20% of the entity on a go forward basis. So you could see lots of different things. But I never see somebody come stroke a check and cash a seller out. That just doesn't happen.

It's actually one of the ways that when I was structuring that, that deal that I said it fell through as a, you know, about a million and a half I think was the, this has been like three years now. But I was buying 80% of the business because the goal I saw tremendous ability to do value add. And I just asked him, I got a, you know, I got a better price in terms, I actually got better terms on the deal because I said, well, if you keep 20%, you'll get to participate twice. So that was the way that I had structured it.

But yeah, yeah, yeah. And depending on, you know, what that owner, their age and what they're looking to do, you know, that that's a, that could be a great outcome. They could get two bites at the apple there. You know, the other thing I was going to add here is in this Covid environment, you are going to see more earnouts in deal structures. It's almost impossible to get away from that. If you've had a business that has been negatively impacted as a result of COVID and is on its way back, but it hasn't recovered and you want to sell now, it's going to be hard to sell that without some form of earnout. Conversely, if you've had a business that has done really well and we've seen a lot of this where there are businesses that are doing incredibly well during this environment. So they're at new watermarks on a revenue and cash flow basis. That may not be the new normal yet they want to get value for that new watermark. Well, that may also require an earn out so that if that is the new steady state, great, they get paid. But if not, it ratchets back to really what the normal value of that business would be.

Yeah, that makes perfect sense when it comes to some of the more sophisticated institutional buyers. And these can be anywhere from like from a PE firm to maybe it's a bigger strategic buyer or something of that nature. And as I said that, I just kind of lost the second part of that question. But I was, I think, let me look through my notes over here. What I was going to say sorry to all my listeners. I am human too. So I know in the past, typically like PE buyers and whatnot, they tend to look for slightly bigger deals, 10 million and up, et cetera. Because they really, if they're trying to place a billion dollars or something, they need something that's going to move the needle. Some of my colleagues and industry people I've seen have said recently we've seen some of the PE firms, et cetera, dip down a lot lower than 10 million and 5 million, sometimes even sub that, probably not too much. But are you kind of seeing that as well that some of the bigger buyers are starting to dip down into the lower range of the market as well?

Or big time really. And two things that keep in mind here, one is 84%, 83%, 84% of all businesses in the United States are sub 2 million in annual revenues. So as you go up market and look for larger deals, they're hard to come by. They're few and far between. Right. I mean the majority of businesses in the United States are small businesses. So you know, and there's a lot of people chasing those 50, 70, $500 million deals.

Hyper sophisticated too. It was funny. Just on that note, I saw a few months ago, I saw a statistic at how many businesses are actually like $10 million in revenue plus and it's surprisingly small. It is infinitesimally small. I was like, I'll be damned. Like, I don't know. Sometimes I think 10 million plus. You think there's tons of them out there. There's really not.

That's a think about all the investment banks that are chasing all those large deals, all the private equity groups that are changing. I mean it's just so when you've got all this money going back to private equity has a billion and a half dollars, you have all this money and you have to put it to work or you have to return it. What are you going to do? Which leads to the second part of the answer which is they have come way down market to the point where we've got private equity involved in transactions that are half a million dollars to a million dollars. Well, why is that? Well, they're not buying platform companies that are half a million to a million dollars. But what they are doing is helping their platform companies acquire add on businesses as a means to grow. So they've got their large 7500, 200 $500 million asset and now the goal is how do we grow that asset and acquisition is a great way. So they'll naturally come down market as a way to grow that business. Right.

Which I guess that is good for the seller Typically, because, I mean, I guess there's two sides of that story. If I'm selling to a sophisticated PE firm, I'm going to probably get. They know all the tricks. Granted, that's also one of the value propositions you bring to the table in representing a seller is you know the tricks too. So if you are selling your business and selling to somebody sophisticated, you know, you better have somebody sophisticated on your side. On the flip side, I guess as a buyer that can probably be fairly intimidating because you're an individual who wants to go buy a business and maybe you want to buy a million dollar business and you could be competing against people who can really woo the seller more than you could. But I'm kind of curious at your experience in working with sellers, the way they view sophisticated investors versus more individual investors. I mean, I would think one of them would be more intimidating. One might be more like, oh, I've got an actual relationship and rapport with this guy. Like, let's say I wanted to go buy a business. I'm just Brad Costanzo and I don't represent this huge PE firm. I'm kind of curious that, you know, do buyers look at, you know, do they, have you seen them give one preference for one way or the other? Is it. There's a long, super long winded way of asking like, does the smaller buyer have much of a chance still competing against some of these more sophisticated players?

Very hard. Yeah, very hard. If you're an individual buyer in the marketplace, you got your work cut out for you right now. You have a ton of competition. Ton of competition. And by the way, I want to qualify that answer with assuming you're looking for a substantial business. Right. If you're looking for a small business, you probably don't have a ton of competition, but a larger business, something that's got EBITDA, adjusted EBITDA north of 3, 4, $500,000, something that's going to pay you a real salary and service the debt on the loan you're going to take out. You probably need something that's got a couple hundred those types of businesses and above. You have a ton of competition for those. And the problem with the competition is they probably can remove some expense out of that business that as an individual buyer you can't. What do I mean by that? They can merge it into an existing operation. They have corporate teams of accountants and attorneys and they can absorb those resources and you and that business can get rid of those resources, which makes the business immediately more profitable to them. Thus they could pay more for the business. And when they can pay more for the business, you as an individual buyer have a hard time competing against that. So either you have to overpay, which I'll tell you is don't do it, don't overpay. Because now you're setting yourself up for a real problem. Any blip in the market and you might go sideways on your loans or working capital could be a real issue. So you have to be very creative as an individual buyer right now on how to source deals.

Yeah, that was actually one of the.

Things that on K2 Advisor, we help people figure out. We give them the secret sauce on how to go do that.

Beautiful. I'm just making a note of that for the show. Notes here. What are some of the industries, I don't know, three to five industries that you've seen in some of the hottest demand for, you know, if you're a seller, hey, you're in a good spot because people want this. And if you're a buyer, there's a lot of competition.

Yeah, yeah. It is very hot. It is very. We just sold. In the last 45 days, I think we've closed on three IT businesses. I mean, it is very hot. Healthcare, healthcare, distribution, healthcare, manufacturing, very hot. Staffing had been doing well and staffing in certain categories is continuing to do well. Like medical staffing right now is really hot. Some other staffing is not doing as well. I predict manufacturing is going to have a resurgence with what's happened with the supply chain breakdown with COVID you're going to see US Companies demand that their suppliers have supply here in the US because nobody wants to hold a ton of inventory on the shelves. Right. So I think you're going to see some of that manufacturing come back in certain sectors to the U.S. well, especially.

Granted, if Trump would have been reelected and the continuing trade wars with China, it'll be interesting to see if Biden flips it back over to just business as usual. But I think between that, the trade wars and then how we all really realized, oh, crap, we are so dependent upon these global supply chains that, you know, we are screwed if and when that stuff shuts down. So, yeah, I agree with you. I think manufacturing, I don't think it'll come roaring back like it was. No, but definitely, especially some, what do you call them, essential industries.

Without a doubt. We're going to see, we're going to see in certain industries a resurgence from, from that perspective.

Yeah. It's funny, one of my, one of my colleagues in the in the PE space and M and A space, he was, he actually echoed, with the exception of the manufacturing and staffing. But he was like, yeah, the three hottest deal areas that he's seen as IT and then the two in health he mentioned were like dentist offices, specifically even for roll up strategies. Dentist offices and independent veterinarians.

Yeah. And that's been going on for years by the way. There are some private equity groups that do nothing but roll up that industry. So that, that has actually been an ongoing, it's been an ongoing trend for sure.

Nice. You know, let's dovetail selfishly into one of these areas, the IT space. I'd love some of your insights on this. Right. So I have got a business partner of mine that I do, he has an IT service, MSP business, small but extremely profitable, et cetera. And I not I'm partners in his business, et cetera and growing it, and there's a handful of other things. And we've actually been talking about the opportunity to say he's got his operations down absolutely phenomenally well and it's high profit margins, really well run, very virtualized, very systematic, et cetera. And I was really impressed with what he was being able to do with that. And we've been discussing potential opportunities to say, well, there's probably some other smaller businesses that an acquisition might make sense because if you already know how to, you know, the operational efficiency, et cetera, this could be an opportunity. At the same time, I'm aware that that is probably one of the hottest areas for sophisticated acquirers to come in. So we've been tossing this idea around, a little intimidated going, do we want to get into this business and search for some IT businesses? But being as that is something that we are fleshing out at the moment, what other insights can you give me that from both the here's why you might want to do it, here's why you might not. Besides the sophisticated competition.

I can't think of a reason why you wouldn't want to do it unless you don't have the ability to integrate the business into your existing operations. And what do I mean by that? I mean things like you have the resources where it's not going to impact your existing business. You have resources that can spend time worrying about integration, but assuming you have bandwidth and resources and you're not taking somebody that's got a full time job and asking them to also do integration. Culture, if he's got a great culture, you don't want to mess with a great culture. You'd have to be really careful about the target company that you're trying to integrate in and make sure that that current owner has sort of the same mind frame and has built the business the same way that you're running yours. There's good synergies or cross selling opportunities between the clients. If that doesn't exist then you got to wonder, you're just doing a geographic land grab and is that as exciting as if you could buy something where there's cross selling opportunities? And now one and one is in two, one and one is four or five, Right? Yeah.

That's one of the things I actually really like about that IT business is that it is an essential. It's a pretty essential service. It's not going anywhere tomorrow. And the cross sell, you get a lot of degree of trust with your clients and the ability to cross sell. Like maybe one company offers just like IT security and monitoring and you find another one that offers telephony.

VoIP, VoIP, without a doubt, et cetera.

And then what? That's one of the other things we were looking at is do we look in other cities? For instance, his is based in Reno, do we look at Vegas, do we look at other places around the country? And you mentioned both systems and culture integration. That's one of the things that we were thinking about is do we actually try to integrate them or do we try to operate them separately and just treat it almost as well. We'll use the best SOPs and marketing practices to get that running, but it'll maintain a completely, wholly different company.

Yeah. And that's specifically. That's a perfectly acceptable way to grow through acquisition. What's going to be key if it's in a different city is that you're really comfortable with the management team that they can run independently. They do run independently today. They don't need a lot of supervision. They're crystal clear on the goals and objectives. Culturally there still has to be somewhat of a fit. Yeah. But not the same way as though you were going to integrate it. Right. But that's perfectly acceptable way to grow through acquisition. I think the other thing to be looking at too is cyber security.

Yeah, that's big.

I think that if you're looking at an MSP going much deeper in cyber is going to be critical because I think there's probably, probably a date on the calendar for a lot of MSPs. With the proliferation of cloud based systems where that in office networking infrastructure is going to move all into the cloud. Right. And third parties are now going to be responsible for it. But who's keeping the third parties in check? Who's making sure that your assets, if they sit out in a cloud somewhere, really are protected and meet the string, you know, the stringent sort of requirements that are appropriate for the type of business that you're operating. So I think there's a whole opportunity there.

Nice. Yeah, that's definitely something that we have been actively trying to flesh out and say, okay, do we want to help? Do we want to move forward with this and to what degree? Yes, because are we going to be competing against people who have tens of millions of dollars, are ready to go hyper sophisticated and ability to pay a higher multiple? Because as you mentioned, it may be a part of a bigger platform and they may have a lot more operational efficiency that they can just roll in and go, oh, we can pay eight times for this. Because as well, and you're familiar with this, my listeners might not be, but they might buy something for let's say six times multiple. But if they're a bigger company with an already established valuation, that acquisition at 6 times multiple may add another 10x multiple or whatever to the value of their company. So they can overpay it because they know that they're getting it in the valuation arbitrage. Basically we wouldn't have that.

Yeah, yeah. Which may point to then buying and targeting smaller businesses that you can merge in is maybe the better way to do it because if they're micro businesses might be easier way to integrate into your existing business if you can pick up a diversification skill set. When you do that now, you might have the platform to get grown bigger. Right, right.

I'd love your opinion on this. So I read an article a few years ago about this strategy and he was particularly talking about, he was using IT service as an example, although he could have used any company. And on the surface level I was like, oh, that's brilliant. The execution of this though makes me think that this would be very difficult to pull off and that it sounds, it's like, you know, it sounds better in theory than in actual practice. So what he was, it was a, it was a version of a roll up, but instead of, instead of actually like, let's say you find five IT companies, right. And each one of them is doing, I'm just going to say 2 million top line, it's all together, you got 10 million. So the traditional roll up strategy would be I'm going to buy all five of them and then roll those up and then sell the entity to a bigger so what he was saying is he goes using a combination of, in essence, like an option to say, listen, Dominic, I'm going to give you. So let's just say on the open market right now, I'm just using basic numbers. The most you could get would be a 3x EBITDA multiple. Like, that's pretty much top end. Would you be willing to sell for 4x? If I'm able to get it. If they say yes. Okay, cool. So he signs a purchase and sale agreement, consolidates the financials with all of these companies, but he doesn't actually close on any of them. His special purpose vehicle just has a right to close on all of them. And his SPV gets a percentage. I'm sorry, if you. He gets a percentage, let's say 10% or 20% of the total. Now he was saying, shop this to the bigger buyers and say, basically, I have the access to a $10 million enterprise. But where this started to make, which I like, because it's like you don't actually have to close on this. You just consolidate financials. It sounds good in theory, but when it comes time to actually sell that package together, you actually don't own them. You just have the rights to buy them. Felt like that might fall apart with the buyer that you find. Maybe it doesn't, but I don't know how does. Have you ever heard of a strategy like that? Does it immediately sound like, I don't know. What's your opinion?

Actually, I know people who've done it. Really, it's a viable strategy. The distaste in just your mannerisms a little bit is. I think you're thinking through all of the challenges that go with that. Right. So you don't have one seller, you have five sellers in that scenario. So now you're herding cats. Right. So your upfront agreements have to be really rock solid where if you bring them a number, you want them to be on board. Because the last thing you want to do is spend all that time and effort marketing this opportunity only to have one or two of them when you get there and you do get the multiple that everybody was hoping for. Say, you know, we're not really interested. We sounded right, but now we don't want to do it now. Months of effort and all of the upfront work that went into consolidating financials and building the market, now it's all out the window. Right.

That would be my biggest worry, is that the buyer would be like, yeah, that's great, but I still have to go through full blown due diligence on all five of these companies. What if one of them, like, yeah, four of them look great, but one of them is that. You missed this, this and this. And this is a piece of crap. We don't want it. Then does that affect the valuation of everything else? So I started to just think through like beyond the lipstick. Is this a pig with lipstick?

No, no, no, not necessarily. Not at all. And like I said, I know people who have done it and have had very successful transactions doing it. So it's a viable way to go to market. There's lots of challenges with it. You probably need to do a couple of things to make sure you really have buy in from all of the sellers. One quick example of that is you could make everybody pay for their piece of preparing the financial package.

They got skin in the game, then.

Put together an audited package. So the buyer has a lot of comfort that everybody's paid for an audit or at least a review of all the financials and make all of the owners pay for that. And so you've got some buy in from everybody, but still doesn't mean that, you know, you're going to get to the table and somebody changes their mind.

Right.

Happen. Whether it's five sellers or one seller, by the way. So, yeah.

Well. And would they actually be. I don't know if there's a legal question or not, but if I've got a purchase and sale agreement with you to buy your company, right. And we're going to go through this whole thing, are you actually legally obligated to sell? Because I would think that at the time that this person, like, if everything went super smooth and let's say it's a PE firm and they're, yeah, we'll give you $10 million for this and it's smooth. And can one of them legally say, no, I decided I don't want to. I want to sell for. I want, I want a higher amount. I mean, I guess they, they could do that, but. And then you get into all this legal jeopardy. But it's not like, I don't know.

If this is probably the easiest thing if you got into a battle, a legal battle, which would probably be worth anybody's time and effort to get into a legal battle. Purchase price is probably the easiest thing to go point at and say, hey, you're in breach. But keep in mind there's all the terms and conditions that have to be negotiated. So even though you might say, here's the multiple and if I bring you this multiple, will you sell? And everybody says yes, that's great. But you still have all these terms and conditions and somebody might find a particular term onerous and they don't want to sell under that term. Well, now, are they really obligated just because you brought them the multiple? If there's a term that's onerous, so it goes way deeper. There's layers to this.

That's what I thought.

In your scenario, you really need five people that are motivated. But isn't that always the million dollar question? You always need a seller that's truly motivated.

I don't want to buy from a seller who isn't motivated because I'm not going to get a good deal. I mean, in most cases. But that's interesting because I know that I was enticed by at least the upfront relative simplicity of if you can find these people, you make them a deal to say, look, if I can get you a better deal than you could get on your own, would you be willing to do this? It's when you come to that end agreement, I could see that, that being. But I, I get all excited about super creative ways to kind of fast track a deal like that.

But certainly viable, Brad. I mean, I like the fact that I know it's happened. I have friends who've done it, so.

Oh no, that'd be, that'd be interesting. I'd love to flesh that out some more. So right now are, you know, for my listeners who've got either businesses that they might be considering selling or potentially looking to acquire both strategically for their own company opportunistically to just get into something else. Is there a particular criteria of kind of client that you're looking for versus not like. So, for instance, if somebody wants to come sell their business for $100,000, I'm guessing that's probably a little smaller than you guys work with. But is there a. How should somebody know if they should get in contact with you?

Usually we're looking at businesses that have enterprise values of 2 million or plus. You know, if it's. There are strategic reasons, we'll dip below that. So for example, we just represented a client. The enterprise value on that deal was million floor. But it was very strategic. We had a good number of buyers. We know that we'd pick up that asset and sure enough, we got the transaction done in under six months. But generally speaking, enterprise value is 2 million and above.

Okay, perfect. And then if somebody's looking to purchase, is there a particular type of buyer that you Same.

Same threshold.

Somebody looking to buy something. Approximately 2 million.

Yeah, yeah. And again, we'll dip below that. If it's strategic. We know we've got sellers on the other side that would meet the. Would meet the bogey. You know, we'll be opportunistic there to help somebody.

Okay, and is that applicable across both businesses? Sun acquisitions and K2.

Well, so K2, when you think of K2, it's more of a coaching platform and consulting platforms. So we're not doing transactions. So on that side, actually, I work with buyers. For example, we do a boot camp. So over the course of six weeks, we bring buyers through a boot camp on how to buy a business. You know, those might be buyers that are looking for fairly small businesses. Gotcha. But it's done in a group coaching setting. So it's, you know, we don't. We don't really discern for that that way.

And that's a good way. Yeah. To really understand all the nuances of. Because there's. There's a lot of things that, if you've never been through this before, it's a whole different ballgame of terminology and strategies. And just I remember when I started to, you know, go through. I've done a lot. I've done boot camps, I've done training, I've worked with mentors. And it's like, wow, okay. Never would have in a million years guessed you could do that or that you need to do that.

It's so funny. You're so right. I mean, the number of times that I see light bulbs go off and people say just that, oh, my God, you can do that. I never even thought of that. Like, and. And it might be something pretty important. So.

Yeah, absolutely. Well, this has been really enlightening, Dominique. Where do. What's the best way for people to find out more and kind of go down. I mentioned rabbit trails. Go down your rabbit trail and just see if this is something that, you.

Know, email is the easiest way to reach me. I'll give you my K2. 1. It's just Dominic D O M E N I c@k2advisor.com and it's k the number two a d v I s e r.com advisor with an e. With an E, Yep. Perfect.

Well, now, are there any particular nuts you're trying to crack right now in your business besides just finding, you know, more deals and clients and that, you know, when I say, is there a nut you're trying to crack that could be particular challenge you're trying to overcome A person you're trying to, you know, to meet. Maybe it's a marketing or biz dev strategy you're, you're trying to crack. This is just where myself or one of my listeners could think like, oh man, maybe I've got an idea for you.

Look, we're always, we're always on the hunt for new and better ways to market in this brave new world of social media marketing. And we're always on the hunt for new and better ways. And I think one thing I'm really proud of, we're always willing to try something that makes sense. We'll give it a shot. And so we're willing to test and try new things.

Beautiful. Well, I will definitely think if there's anything that comes to mind that I may be able to, you know, pass your way as far as any ideas and if any of my listeners have any advice for Dom on that, please do not hesitate to send him an email. It'll be in the show. Notes and available. Dominic, I really appreciate your time on the episode today. Sorry, here at Bacon Wrap Business we don't have episodes, we have epicizzles because they are so hot. I am corny as hell and I like it. But no, this has been really good and I love hearing, I think you can tell I have an authentic interest in this topic.

Absolutely.

And I love hearing different perspectives. I've had people who buy businesses, I've had brokers, I've had other people. But this has been a really great, well rounded conversation. You've given me a lot of good insights into what to expect and been very real. Right. You'll say when it's challenging and when it's not and the things you need to look out for. But I think that both buyers and sellers are lucky to have a company like yourself out there who can help guide them through a very sophisticated and complex, complex transaction. At the same time, from the sell side, it's one of the ways that real wealth is built. It's on that exit event and in fact, just an addendum on there, I remember years ago where I had a little epiphany change. Have you ever read the book Millionaire Fast Lane by MJ DeMarco?

No.

Really good book. And so in it he talks about like a fast lane to wealth. He goes, first of all, they almost all revolve around an event like an exit and typically an exit event. Most people don't get super wealthy by just gradually having a business that pays them well, et cetera. It's like they build it, they sell it for multiple. They kind of do it again, et cetera. He's like, so watch for those events that can, you know, can give you that access. But one of the other things he said was a lot of people think that get rich quick doesn't exist. He goes, they're confusing it with its evil cousin, get rich Easy. But he goes, you have to redefine what quick means. Like, if you buy a business or start a business and you work 12 hours, 18 hours a day at it, you bust your butt for, I don't know, five years and then you sell that for, I don't know, what's a good number? $5 million in cash, $10 million. He goes, did you get rich quick? Because it wasn't overnight, but if you compare that to working 40 hours a week. I'm sorry, 40 years. 40 hours a week. 40 years for some company and saving and slaving. He goes, you got rich really quick. But that really only happens if you understand how to have an asset that you built or bought and then sell it. And I think that was. I remember thinking, huh, Never thought about it in those terms before, but I liked it.

So, yeah, I think that makes, I think that makes perfect sense. You know, when you look at private equity groups, these are the most sophisticated buyer group out there, right? Their typical hold times for a business are five to seven years. They buy something and it's flipped within five to seven years. So you know that isn't by chance, right?

Exactly. Exactly, folks. Cool. Well, Dominic, thank you again and for everybody listening, if you enjoy the words that are coming out of my mouth and that of my guests, smash the subscribe button. Shoot me an email if you have any questions, comments, concerns, guest recommendations to ask bradakenraftbusiness.com and as always, if you are stuck on a. On a business problem, maybe you've plateaued and your business is no longer growing or you're trying to reinvent something because it's no longer working anymore. Feel free to use that same email. Ask bradbaconratbusiness.com I'll see if there is something we might be able to do together. Worst case scenario, I'll give you a free second opinion and we will pick back up on this podcast next week. The next guest. So make sure you're subscribed so you don't miss out.