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Domenic Rinaldi | The Number One Pitfall in M&A Transactions
POSTED 6.22.21 M&A Masters Podcast

On this week’s episode of the M&A Masters podcast, we sit down with Domenic Rinaldi, President and Managing Partner of Sun Acquisitions. Sun Acquisitions is an M&A advising firm specializing in both buy-side and sell-side advisory services. Domenic also hosts his own podcast, M&A Unplugged, ranked among the top M&A podcasts of 2021. 

From a young age, Domenic had an itch to own his own business. In discussing why he chose the details of Sun Acquisitions, Domenic says, “Quite frankly, I love the lower middle market. They have more sophistication, more infrastructure, but they don’t necessarily have the money for the advisory groups…so they need firms like ours.”

We chat with Domenic about his path to owning Sun Acquisitions, as well as: 

  • The ideal client both on the buy-side and sell-side
  • Encouraging empathy in M&A
  • Experiences with rep and warranty
  • The importance of preparation when it comes to transactions
  • Using podcasts to help spread information
  • And more

Listen now…

MENTIONED IN THIS EPISODE:

TRANSCRIPT:

Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, and that’s a clean exit for owners, founders and their investors. Today I’m joined by Domenic Rinaldi, President and Managing Partner of Sun Acquisitions. Sun Acquisitions is an M&A advisory firm based in Chicago that specializes in both buy side and sell side advisory services. Dom is also the host of the M&A Unplugged podcast, which was recently ranked among the top M&A podcasts for 2021. So we have both M&A, and podcasting in common. Dom, so great to have you. Thanks for joining me.

Domenic Rinaldi: Hey, Patrick, thank you so much for having me such a pleasure.

Patrick: Now, before we get into Sun Acquisitions, and M&A for 2021, let’s give our listeners some context here. Let’s talk about you. How did you get to this point in your career?

Domenic: Yeah, so you remember that commercial a long time ago doesn’t look like you and I needed it. But the men’s hair club, you know, not only am I the owner, but I was a client. Very similar story. I, many years ago, was in transition and was trying to decide what I was going to do next, I launched a business search, I just I had always wanted to own a business from even a very young age, I was always very entrepreneurial, I had my own paper routes, I was, oh, have my own lawn mowing business. I loved to doing my own thing. And I think from a very young age, I really always wanted to own my own business. 

But for many reasons we won’t get into, I launched a corporate career. Next thing, you know, you wake up 30 years later, and you’ve got you know, all this, you know, all these things you’ve done, but you’ve always had this itch to own your own business. And so I decided in my early 40s, that I really wanted to own my own business. And I had done the analysis of should I start something or should I buy something. And for me, the safer route was to buy something because I had what I call a train to pull. Meaning I had young kids, college education ahead of me, a mortgage. 

So I wanted an ongoing concern with you know, ongoing cash flows and clients and, and so I initiated a business search, and I did it on my own. And the long the short story here is in doing all of this, I really got enamored with the M&A business. And lo and behold, as I’m doing my research and opportunity presented itself. It was a small little advisory firm that was for sale, did some diligence actually did a good number of months of diligence, and decided that this really was a path forward for me. And so I bought this business. And here I am, almost 20 years later, we’ve you know, 10, more than 10x, almost 20x the business since then. And it’s been a great ride.

Patrick: You and I are both right around the same age. But we were just coming out of where everybody’s joining big corporations. And the idea of going out and starting your own little firm out there was daunting, because it was still it was there on the periphery. But if you grew up in a city or in a metropolitan area, you just had all the big companies around, so completely understandable. So now we go on to Sun Acquisitions. And let’s talk about that real quick. You bought it as an existing business. So tell me about you know, where the name came from? Why didn’t you name it Rinaldi and and just give us a description of Sun Acquisitions.

Domenic: Yeah, so actually, I wound up rebranding the business, but only slightly. And what I thought was important in in talking to our webmasters, and our and our social media people is that our name should be descriptive, that the more descriptive it was, the better we would show up in search engine rankings and things like that. So really, I did it. We named it Sun Acquisitions, because we wanted acquisitions in the name. We wanted people to know that this is what we did. So when they came to us, there’s no mystery and from a search engine perspective, looking back now, it’s really worked out for us.

Patrick: And then your your focus is more toward the lower middle market as opposed to the larger deals. So give us a context size and why the lower middle market as opposed to other you know, larger size.

Domenic: Yeah, so when I was going back again to when I first bought the business, actually, it was really focused on the small business market, mom and pops and smaller businesses and, and so over the years, we’ve left that market and we’ve gravitated to lower middle market. Quite frankly, I love the lower middle market. It they have a little more sophistication than the small businesses mom and pops, they have more infrastructure. 

And but they they don’t necessarily have the budget for the advisory groups that the big, the big boys do, right. And so they really need firms like ours, at at sort of price points that we’re at, that can help them both get their arms around what the value of their businesses are, if they’re if they’re selling or understand what the market’s like if they’re buying and then go out and help them get those acquisitions or those sales done.

Patrick: Yeah, well, I, what I what I love about the lower middle market is, you know, it’s vast. And it’s established to a point where you know, that these companies, they’re, they’re too big to be small, but they’re too small to the enterprise. And, you know, they’re not aware of all the services that are available to them that are not at that retail higher price. And that’s why I love having having you on here just to spite the spotlight while you’re doing because if if they don’t know about you, and Sun Acquisitions, what happens is a lot of owners and founders that are looking at exit, they default to either a strategic acquire that may not have their best interests at heart. 

Or they may go to some institution that, you know, they’re going to be overcharged and underserved. And really, there’s great value that you’re going to bring because you’re doing not only, you know, sell side advisory you’re doing buy side. So distinguish the two types of services for us, because you can bring, you know, a prospective seller buyers to the table or attract them and, and vice versa. So talk about one side of the table and the other side.

Domenic: Yeah, so the sell side, we are representing owners of privately held companies who want to understand the value and the market timing and whether or not now is the right time. And if they are ready, we’ll represent them and take them out to the market confidentially and represent them throughout the entire process. On the buy side, there are buyers who want professional representation. They want firms like ours that will go out and essentially make a market. And on the buy side, what we’re doing there is bringing discreet proprietary deal flow to our clients. So we’re not bringing them deals that are on the marketplace, which right now, if it’s a decent quality deal is probably getting a lot of action, we’re going into the marketplace. 

And we’re trying to uncover opportunities with owners in businesses that are not on the market for sale, and see if they’d have an appetite to talk to our buyside client who is also paying our fee. And so that’s how we distinguish between the two and right now that the buy side part of our practice is exploding, because there just are so many buyers out there in the marketplace.

Patrick: And I can imagine these are largely strategics or do you have smaller private equity firms that work with you?

Domenic: So largely strategics. But we do have some private equity groups that have retained us to go out and do this work for them as well.

Patrick: Oh, I would think for private equity is an ideal fit to have Sun Acquisitions help them because when you’re you know, looking for proprietary deal flow, that’s a fancy way of saying you’re cold calling. And you’re you’re going out reaching out to owners and founders that may not be in the mindset to take those types of calls yet, and they come around, but at the time, that’s as a real tough slog and have a professional like you that can bring those to them, I think is a great value add that you bring.

Domenic: Well, and the other thing that we hear from owners who have been contacted directly by private equity groups, because for a lot of private equity groups do this work themselves. But the things that we hear time and time, again from owners that have been contacted directly is they didn’t want to go down that path. They felt like they were overmatched. They were in over their heads. And they felt like they needed professional representation. So if a private equity group outsources to us, even though we represent the private equity group, we’re much less intimidating to the owner of that business. When we do that outreach, and we try to make that match.

Patrick: Talk about the ideal profile for Sun Acquisition. Give me a profile of your ideal client both on the buy side and sell side.

Domenic: You know, so I’d say on the sell side, we’re, you know, we’re largely working with companies that are a couple of million dollars of enterprise value up to $40 million. That’s usually our sweet spot. We’re fairly industry agnostic, although I admit we don’t do deals in energy and agriculture. We tend to steer steer away from retail, and restaurants. Those are just not places that we tend to focus on. 

On the buy side. We’ll do transactions from you know, a million dollars up to a couple of 100 million depending on what our client wants, we represent both international and domestic clients. And we’ll do it in any industry they want. And we’ll even do international searches, which we’ve done a couple of for some clients. So the deal sizes there can be can be much different.

Patrick: And geography is not a problem for you.

Domenic: Geography is not a problem, we have our own in house Business Development Group. So we insource, all of that. So we’re not, we’re not outsourcing anybody, we control all of that outbound effort on behalf of our clients. And these are people that are trained on our industry. So when they get an owner on the phone, they understand the sensitivities, they understand what the dialogue should look like. And they’re very professional, and quick about it. So we can really exercise and implement these engagements in a very time efficient manner.

Patrick: Well, I think one of the things is important about what you’ve mentioned a couple times on this, it just shows the empathy that you and Sun Acquisitions has for for target companies, for sellers out there prospective sellers, because, you know, they’re not doing M&A every day. And you know, so they’re inexperienced, or not naive, they’re just inexperienced. And so, there can be a little bit of a intimidation factor there, as they go into this, you know, what I consider, in some cases, a life changing transaction for that. And so, there, there is some fear out there. And, you know, one of the great developments has been out here now, mergers and acquisitions was, has been the development of reps and warranties insurance. 

Where a seller has their representations of their disclosures with their company outline in the purchase and sale agreement. And to a buyer this is standard operating procedures. These reps are there, the buyer performs diligence. But then the buyer says, well, we’ve got this thing called an indemnification clause. So in the event we miss anything in the diligence is with the seller, if we missed anything, this provision allows us to come and claw back money from you for something that you didn’t tell us about may not have known about it, but you know, that’s what it is. And that scenario, particularly for someone who’s inexperienced, and as, as these owners, and founders are, they, you know, have the situation, fall from a collaborative conversation to a confrontational, almost adversarial. Because all of a sudden, you enter a little distrust there. 

Because, you know, on one side, the seller is like, you can’t keep me responsible for something I didn’t know about. And the buyers is saying, well, that’s true. But at the same time, you got to understand, I’m betting 10s of millions of dollars, that your memory is perfect, okay. And so you’ve got that natural tension. The beautiful thing is by ensuring a deal with reps and warranties, that indemnity obligation is transferred away from the seller, to an insurance company, buyer benefits because they got certainty that if there is a breach, and they suffer financially, they can collect from the insurance company without having to, you know, attack the seller. The seller benefits, because the attachment points on these policies is usually lower than most escrows. So less money is held back at the transaction, seller gets more cash at closing. 

Better yet, they have peace of mind knowing that even with that additional money they have, they’re not at risk of any more clawbacks coming back so they can go ahead and exit cleanly. And we’ve just seen this just you cannot understate the tension as released, when when this is brought into the deal. And happily deals now in the lower middle market as low as 10 million to $15 million transactions are eligible for rep and warranty. It wasn’t the case pre COVID. Now it is and so the more we can get that out, the better. But you know, you don’t take my word for it. Dom, what experience have you had good, bad or indifferent with rep and warranty?

Domenic: Yeah, not a lot. Because it like, as you pointed out, it hasn’t really been available down to the, you know, deal sizes that we’re focused on. Right. And so we’ve been learning about it over the last couple of years, we’ve presented it in a couple of situations where we thought we could bridge a gap. But now that it’s coming down market and the price points are, you know, to the point where people can, you know, it really makes a lot of sense for a 10, 15 $20 million deal. We’ll be promoting this a lot more. And I think, especially with post COVID. With all of the new deal structures that we’re starting to see, with all of the uncertainty about is the business recovering. If it’s going to recover, what’s it going to recover to? 

And I know there are some limitations around will it cover earn outs or not and things like that, but there are all sorts of new deal structures because of COVID. And I think if we can fit reps and warranties insurance into that, even in some small way, it will go a long way to bridging bridging gaps between buyers and sellers.

Patrick: Fantastic. Now let’s talk about M&A Unplugged. And just as one podcaster to another I’d love for you to share your story on, okay why did you decide to become a podcaster? And what types of tell us about the content and so forth? How we can find it? I mean, I will comment on one thing for my audience about M&A Unplugged. As of today in post first quarter 2021. There are over 1 million podcast series out there right now. Okay. But the average podcast series is only six episodes doesn’t go more than that. Dom as a you and I talked before you’re approaching episode number 100. So you definitely got some sustainable messaging out there. There’s some great stuff. So tell us about M&A Unplugged.

Domenic: Yeah, you know, I didn’t set out to actually do a podcast, we were trying to figure out how we can help people that do transactions with the number one pitfall that we see, over our 20 years of experience. And over, we’ve got over 400 completed transactions under our belt. And the number one pitfall is people don’t properly prepare. Whether you’re acquiring a business and you don’t put all the pieces together, and you’re not strategic, and you don’t really figure out the finance. Like if you don’t put all those things together ahead of time, you’re bound to hit some speed bumps, and you can lose deals are not met, not meet your returns. 

On the owner side, we see it almost 100% of the time, they haven’t properly prepared, they haven’t put their house their their personal house in order their personal financial situation order, they haven’t put their business in order. And then sometimes they’re not even emotionally ready. And so we wanted a way to help people understand what preparation looked like, whether you’re looking to buy or sell, and what goes into getting a deal done so that when they are ready for their own transaction, at least maybe we’ve played some small role in helping getting you know, helping them to get smart, so that they can maximize their returns and minimize their risks. And when we thought about how can we do this, you know, could we blog? Can we do webinars? 

Podcasting, back we did, we launched in 2019 was already taking off, but not even like it is today. I mean, it’s exploded since I started doing it. And the more I learned about it, the more I thought, wow, this is a great way to create content that’s evergreen people can consume it, they can go back to episode number one or two or whatever, you know, episode topic may fit fit them, and they can consume it. And they can consume it at regular speed, fast speed, like you know, I just me like it was a really flexible way. And and we captured video early on. So we also knew we could put this information up on YouTube. 

And YouTube’s become a tremendous way for people to get content. And so the more I thought about it, and the more My team and I researched it, we arrived at the conclusion that podcasting was the way to go. And our mission has been simple from day one. We just want to help people avoid the number one pitfall of not being prepared. And hopefully we do that hopefully we you know, our episodes and our content deliver on that mission.

Patrick: I can tell yours are nice and tight. And you know, they don’t ramble on very long but very informative. But that’s what you need is you need those kind of bite sized data points and talking points to kind of get you familiar with some of these unfamiliar, which has been a boon. I think also what’s been great is just the, you know, the silver lining COVID was just the evolution of Zoom with being you know, being able to have have these meetings, and so forth, then record them and get them out. So I think that’s just a wave of the future we’re not going to go away from we will do more in person as as as the as COVID wanes. But I’ll tell you, this is a tool that we’re going to leverage quite a bit.

Domenic: I believe that.

Patrick: Yeah. Now as we’re getting into, you know, we’re now a good chunk into 2021. Dom, share with us your perspective, what do you see for the rest of the year? Either be it M&A in general, or Sun Acquisitions in particular or M&A Unplugged?

Domenic: Yeah. You know, so from what we would what we can see in the M&A market at this point in time, there continue to be more buyers than sellers. The buyer market has exploded for a number of reasons. Private Equity pre COVID had raised almost $2 trillion pre COVID. And that money is earmarked for private equity go out and make acquisitions. So you had all that money that was raised pre COVID. You also have all these strategics who are out there trying to grow their businesses. And what we hear time and time, again, is that organic growth has become very hard for people. And acquisitions, if you have a healthy balance sheet has become an easy way, a much easier way than going out and spending money on R&D or starting up a new division. 

Let’s go buy something somebody else somebody else has already built. So you’ve got all these strategics in the marketplace. And then you’ve got this third level of investor groups that have popped up people with a good amount of money, who have decided that they’re done with corporate America. They’ve had two or three people pull, you know, a couple of million dollars together, and they’re out in the marketplace, and they’re looking for acquisitions. And we’ve seen that part of the market explode. So you have all these buyers with lots of money supported by a lending environment with very low interest rates. 

And it’s, you know, it’s a lot of fuel for acquisitions. The piece that continues to be a little bit missing in action are the owners. We have good quality businesses, but not nearly enough to meet the demand of the buyers that are out there, which is why you see multiples being you know, as high as they are in the marketplace right now. So owners who are selling are getting very good multiples for their, for their businesses. And I’m also sort of surprised that the looming tax changes, even though there isn’t a decision on them. But there’s lots of talk about capital gains taxes going up, I’ve been a little surprised that that hasn’t moved more market and more owners into the market to sell their businesses. 

So I’m a little uncertain at this point in time as to where the sellers are going to shake out. I’m still hopeful that before the end of the year, we’re going to see a flood of owners decide that 2021 is the year to get out. They’ve recovered from COVID. And all the buyers are still there to you know, to make those acquisitions. So I think it’s still going to be a very strong year. I think it’s going to be stronger in the second half than it has been in the first half.

Patrick: Yeah, well, I’m stealing from a prior guest. But one of the things that, you know, people overlooked with COVID was, you had all that dry powder. But not only that, you know, time didn’t stop. And so the people that were thinking of an expert that are getting a little bit older, those owners and founders, they’re not getting any younger that time has come on. So I have a feeling that there’s going to be you know, not a surge, but you’re going to see quite a bit more movement. I think as as everybody kind of gets back to work. 

I think there are a lot of owners that, you know, they want to dig out of the whatever lag they have from COVID and get back on their feet, because they don’t want the earnouts they want to go ahead and see if they can build up a bit. Yeah, and you know, more power to them. But I think as as you and I both agree that it probably you know, the in the foreseeable future M&A activities, definitely not going to be going away.

Domenic: Yeah. Yeah. No, I think it’s, I think next couple of years, as long as interest rates stay relatively low and the capital markets remain open. It’s it’s going to be a robust M&A market.

Patrick: I mean, just look at look at a SPACs are out there. And that’s on the high end, and they’re doing 100 million dollar deals. Hundreds of those from out of nowhere. So there’s a very diverse community out there for for everybody. There’s enough for everybody, which is, which is a nice way to view life I guess.

Domenic: Absolutely.

Patrick: Dom this has been fantastic. How can our audience members find you either with M&A Unplugged as well as Sun Acquisitions?

Domenic: Yeah, so M&A Unplugged is on all the major podcast platforms. We also post the episodes on our websites sunacquisitions.com. And you can always reach me directly at my email, which is drinaldi. drinaldi@sunacquisitions.com. And Patrick, thank you so much, and kudos to you too, with your show. You’re also up there in the top shows in 2021 for M&A. So it’s a pleasure to do a show with a fellow M&A compadre.

Patrick: I totally appreciate it. I was thrilled. I didn’t even realize that there was a list out there. And then when I saw it, I was like, you know, I didn’t care if it was a 15 way tie for tenth. I didn’t care. The fact we got on the list. I was thrilled. But it was it was nice, because this is a great way to meet you. And I wish you all the success and let’s keep talking. Okay.

Domenic: All right, Patrick. Thank you.

Patrick: Thank you.