Ep 337: 5+ Mistakes Sellers Make When Exiting Their Business with Domenic Rinaldi

You could be leaving hundreds of thousands of dollars, maybe millions of dollars, on the table if you don't know how to prepare for an exit when selling your business. Hi, I'm Jaryd Krause.

I'm the host of the Buying Online Businesses podcast. And today I'm speaking with a seasoned, eminent advisor, Dominic Rinaldi. He's been through over 500 transactions. He's the owner and managing partner of the firm Sun Acquisitions. And he also founded K2 Advisor to help educate business owners on the requirements for a successful exit and acquisition or the scaling process.

In this pod, Dom and I talk about the current market, where we're at. We talk about tariffs changing things in the dynamic of both the traditional business environment and the online business environment. And we talk about how to understand what the risks are, but also see the advantages in these risks and how to one-up your competitors, whether you're selling or acquiring.

We talk about what you should be looking for during DD to be prepared for tariff changes or environmental changes, and have some contingencies put in place, and what they should be, so you can buy or sell in any market. We also talk about value drivers. Dominic uses these to value businesses.

We talk about what they are. We talk about owner involvement, single source of dependence, and traffic revenue, all those sorts of things. And he's got some examples of where people have been misconstrued or led down the wrong path or have the wrong expectation, and it's been catastrophic for them.

We also talk about how to be ready to sell at any stage and, more importantly, why. Why you should be ready to sell at any stage, and what those things you can put in place to be able to have an exit in case there's the unfortunate event that you need to, not that you necessarily want to.

We also talk about what can go wrong during a deal, and there are so many. Dominic has some examples of what has gone wrong through deals, and that leads us into talking about choosing the right team, who you should have on your team, and who should be the right lawyer and the right people on your advisory team to make sure you have a very successful exit or a very successful acquisition.

Of course, we talk about due diligence in this pod. If you haven't got my DD framework, it's made people millions of dollars, and it saved people millions of dollars in mistakes. It's free. It'll be on buyingonlibusiness.com for just free resources. I'll put a link in the show notes for you guys to get that there.

Let's dive into the pod.

Welcome back to the show.

Hey Jaryd, how are you?

I'm really good. Thank you. How are you doing?

Yeah, it's been a long time. It's been maybe two years, three years. I think that's right.

Yeah. Wow. Mean, everybody listening, Dominic was on the show in episode 87 on why you need season vets on your team when you're buying or selling your business. Talk a lot about due diligence and how to set your business up for an exit.

How have you been? What's been happening the last few years in business for you? Wow. It's been crazy. A couple of years after what I call the pandemic years, which were crazy, meaning M&A activity was at an all-time high, probably starting mid-2022 through, I mean, I'm sorry, mid-2020 through the end of 2022. 23 was a little soft, 24 bounced back.

And 25 got started on a rocket start. And then we've had a few issues, tariffs being introduced, and a little, you know, unsettling in the environment, in the business environment. And so we're not certain where things are going to settle because sellers, owners of businesses, are a little bit in hiding at the moment. However, buyers are out there in full force looking for good opportunities.

Absolutely.

Seems like you've already read my notes for some reason, Dominic, which you haven't because I didn't send you an agenda at all. And I never do for my podcast guests. I was going to get into the current state of the market straight away, and tariffs were one of them.

So let's stick with that. You are seeing, and this is the same as what I see. And I wanted to confirm it is that I've got buyers that are keen, hungry, cashed up, ready to go. But there are sellers just waiting to see what's going to happen with these tariffs before they list, right?

Yeah, there's been a slowdown. People who we thought were going to come to market, businesses that we thought were going to come to market, are sort of hitting a pause button at the moment.

You know, Jaryd, it's very much like what happened during the pandemic. Some businesses are impacted, and there are businesses that are not impacted. And so we're trying to sort through all of that. And so is the buyer community and the banking community, as well as everybody's trying to sort through.

Where's the impact of all of this? And when there's uncertainty, what I've always seen in my 20-plus years of doing this is owners, even though their business might be ready, they hit the pause button because they're not certain what the market is. And even though there's a lot of propaganda out there around how many buyers are in the marketplace, and it's true, they still hit the pause button.

So we're in a wait-and-see mode right now. Transactions are still happening, but not at the same clip that we saw in Q4 and Q4 2024 and Q1 2025. Yeah, absolutely interesting times, especially with tariffs, like you said, through COVID. Other business events, some businesses don't fare very well, and some businesses do fare well.

And it's important when you're doing due diligence to hedge yourself and protect yourself from those risks. I talked about before in another pod, if you're buying a business where its potential for tariffs could change and decrease the profitability of the business slightly or significantly, it's important to understand that everybody in that sector is going to be hurt as well.

And you could see this as a disadvantage, but you could also see this as an opportunity that if you are, whilst you're doing due diligence, you go and find out other suppliers that can do similar or just slightly more expensive, not a massive expense change for production and manufacturing and or 3PL or whatever it is, then you can beat the competition because you're becoming more proactive throughout due diligence. You want quotes and all of that sorted before you winish on a transaction. It's just typical that whenever there's media put out there, it's typically fear-mongering media.

And people get into fear and realize, this is a disadvantage when there's always an advantage if you know how to see it from the right angle. Absolutely. We've always said to people, if you buy a perfect business, there's only one way for that business to go. And it's down when you buy businesses with warts and know, blemishes, you can bring your playbook to that business and potentially grow it or improve it or make it more efficient.

I always tell people you want to find businesses with issues. You just don't want them to be material issues. You want them to be things where your talents and your skillset can improve that business. Yeah, absolutely. Have you helped people exit many FBA businesses or Amazon businesses?

We haven't; that's not a focus of ours online. We're more traditional in the sense that manufacturing, distribution, IT, healthcare, those sorts of businesses. Haven't played much in the online space, although interestingly enough, I come from an online background.

Yeah, it's just good to know that it's not just online businesses that are slowed down in terms of listings and deals coming up for sale, and also tariffs and the economic changes, which affect everything. Absolutely. And you know, it's not just the businesses, Jaryd, that have been impacted by tariffs.

You see some other businesses where consumer sentiment is shifting. And so while the business itself is not impacted directly by the tariffs, consumers are being more cautious, so that business, maybe sales that were going to happen now are being pushed out.

Software might be a good example of that, where, maybe somebody's not going to make that software purchase today, they're pushing it out a quarter because they want to see what happens, even though they're not directly impacted by the tariffs. Yeah, absolutely.

We have talked about before on this pod that inflation has changed how people spend as well, and it always will. And some people, as interest rates were quite high, they're starting to decrease now, a lot of people have not been as thrifty as they were when they had a little bit more spending money.

Yeah. Yeah. Well, you see, consumer debt in the US, at least, is way up. It's at a time of highs in an inflationary market.

Yeahy. Yeah. When somebody's listing or looking to sell a business with you guys, what are some of, or even if they're not, what are some of the mistakes that you see sellers make? I just want people to be listening, be prepared for like how to make making mistakes when listing or selling.

Yeah, I'd say the number one mistake, and it's a broad category, but it encompasses what happens in the exit marketplace. People do not plan for their exit. And what I mean by that is we do these assessments, buyer and seller assessments. It's an easy, it's five-minute assessment, but it gives you back a score as to how prepared you are to either acquire a business or sell a business.

And it looks at the major categories. And interestingly enough, sellers really fail to do some of the basic things. And I'll give you a perfect example. One of the things on the assessment asks people whether or not they know the value of their business. And this is across a broad range of industries and sizes of businesses.

Only 20 % know the value of their business. Well, further on in the assessment, we ask them what their time frame is to sell the business. And 63 % of the respondents are looking to sell in a one to two-year period. Well, I mean, think about that. You don't know, the large majority don't know the value of their business yet.

They're looking to sell in the next one to two years. And I can't tell you how often somebody will come to us and say, you know, we'd like you to value our business. We want to take it to market.

And we go through the exercise, which is a pretty extensive exercise. We not only look at the financials of the business, but we also score it from an operational perspective. We look at their key value drivers and how well they're performing on those key value drivers.

Cause those value drivers really, in many cases, determine whether the multiple is going to be on the high end of the range or the low end of the range or somewhere in the middle. And there's no way that if you don't know the value of your business, you really can be looking to sell in a year or two.

Cause when we give them the report, more often than not, they're shocked that it's nowhere near the number they were hoping for. And so the process of selling your business starts many years before you want to sell. And what I tell people is that the date may come at a time that you didn't choose.

So you always want to be ready to sell because if something happens, you have to have plan A, plan B, plan C. After all, you might have to sell. And so it's smart to pay attention to, you know, what is the value of your business and how does it change from maybe you don't have to do it every year, but you know, every two years.

And then how do you score against the key value drivers, which are what buyers are looking for and why they'll pay a premium for a business? Yeah, absolutely. That's a really good mention. You might not be ready to sell, and you might have to sell. So be prepared and be ready.

There might be a life event, you know, you might be a key person in the business, and you can no longer do the work, or you need money for something yet, or just unforeseeable events. So being prepared for an exit is like being prepared at any time, without even thinking that you want to exit. It's a possibility you might have to do without you wanting to do it, even if you want to hold on to the business forever.

You mentioned key value drivers. Yes, I agree. This is where buyers look at businesses and say, Right, what are the risks, but what are the value drivers that make up a multiple? And it's a blend of risk and value that can be driven from the business. What are some of the value drivers?

Can you list some of these out, for like just standard value drivers? Know, some of the things that we're looking at in a business are how active the owner is in the business. Are they very active? Are they the voice of the business? And the more they can pull away from the business, the more value they're going to create because the business isn't reliant on them.

And so that's a key one that we're looking at. Do they have a management team that is trained, cross-trained, and secured? And what I mean by secured is, do they have proper incentives for a post-transaction? Do they have non-solicits? Are there contracts? If there are contracts, are they up to date? Are they assignable?

Those sorts of things matter. Client concentrations. How many clients represent more than 10 or 20 % of the business? And the more that you have client concentrations, the more risk there is for a potential buyer.

We're in the middle of an IT and information technology transaction, and the three top clients represent 65 % of the business. Now, it's a great business, and those clients have been around for 10 plus years, but in a transition, you don't know what's going to happen, and that's a high concentration.

So there's a lot of risk for a new owner walking into that. It sounds like it's not a value driver, but it is. The tax implications of a sale. Understanding what your net proceeds are going to be and the tax-efficient transaction, because you may have to do things with the structure of your business and change that ahead of time, so that it's very tax-efficient by the time you do a transaction.

And people don't think that that's a core competency, but it's really important because I can't tell you how many times we've had owners get their accountants involved, and they realize how much tax they're going to leave on the table. And now the transaction doesn't make any sense. Can you give us an example of that?

Maybe the business is so profitable, and then they just go away and buy a couple of vehicles or a bunch of things, but they also buy a bunch of things that are personal. And then some things are add-backs, some things aren't add-backs.

Can you give us an example where this tax is key? This is so, so important. Yeah. You hit the nail on the head. Mean, you know, sometimes people are using the business as their piggy bank, and in most cases, a lender is involved, at least in our transactions, and lenders get nervous when they see those sorts of expenses being put through the business.

Know, some are clear cut and you can track them to the general ledger of the business, but some aren't so clear cut. They might be buried in credit card statements or whatever it is. And so it's really hard for third parties to get comfortable with those sorts of things.

Another good tax implication that we come across a lot is that in the United States, we have C-Corps, and a C-Corp is subject to double taxation. And so when the sale proceeds come into the business, they get taxed at the corporate level, and what's left over then flows through to the shareholders, and now they're getting taxed at the individual level.

So you have two taxes that potentially you are paying, and in some of those transactions, the implied tax rate could be over 50%, 50-55%. So now you've given half of the proceeds away to the government. In those scenarios, it's really hard, whereas with LLCs and S-Corps, the proceeds flow through to the shareholders and get taxed once, whether it's at ordinary income or capital gains rates.

And that's probably the biggest example of where you can plan and you can change your corporation from a C Corp to an S Corp or an LLC years ahead of time. And then you won't have any look back from the government on that tax. So I love that. I love that explanation. The big thing with, like you said, when you know, seven to eight-figure deals with finances involved, you've got a lot of in these businesses.

They're making a decent amount of money. They typically going to be making a decent amount of profit and the owners rightly so are going to want to sort of decrease that taxable income by adding in courses on the credit card, just expenses to the business on the credit card, which may be like gifts and apparel, clothes, uniforms, whatever it is, it can be very hidden and that's timely and costly for a lender to go through an audit.

And for a buyer, that's why you need a quality earnings report, a good quality of earnings report, and financial due diligence, a CPA to redo these financials back to front to understand what are real ad backs and what are not real ad backs. Because this is where it can get really interesting and tricky with evaluation.

Absolutely. And even with the quality of earnings, you still run the risk that the lender, if there's a lender involved, may not accept some of those because of how they were expensed.

Yeah. Yeah. And, know, speaking of quality of earnings, I mean, five years ago, we'd have a couple of deals a year that would go through a quality of earnings. And now it's almost every deal. So the timeline on our deals that especially the diligence timeline, has expanded dramatically., We would do diligence in 90 days, and that's including banking, and now we're easily at a hundred and twenty days or more, especially if something comes back on the quality of earnings.

I think they're very important.t In fact, I think they're so important that we advise sellers that they should do their quality of earnings before they ever go to market. Because a sell-side quality of earnings gets you out ahead of a lot of those issues that are going to come up later on that could kill the deal.

And now you've spent time and money and resources and your energy on a deal that couldn't happen because there were all these things that Quality of Earnings Report could have found. So strongly recommend sellers look at doing a quality of earnings.

And you can do that concurrently with a valuation that's being done by an intermediary, so that they match up, and you could be going to market with the quality of earnings and the value all wrapped up into one. Yeah, I love that.

It comes back to what you're saying at the start is like knowing the value of your business at any time, in case you just need to sell. And you could have your accountant, CFO, or a fractional CFO every year for a little bit of money, do your quality of earnings, and sort of help you see, right, this is how much your business could be worth based on the quality of earnings and the risk, the value drivers.

And then that can help you make a decision, all right, like, do I want to sell the business in the next two years? Maybe I'm okay with these personal expenses coming from the card and not being seen as unrealistic ad backs.

Yes. Maybe you do want to sell in a year, and you start making some changes to prepare for that exit. Whereas, like you might remove a car from the expenses or something like that.

Exactly. Exactly. I want to talk about lawyers now on the sales side. So, a lot of your clients are using lawyers and or not using lawyers? What's the, or are they just using you as a sales side advisor? Oh no, a hundred percent of the time our clients are using an attorney.

Yes, I would have thought a hundred percent would be using lawyers. And I wanted to ask what some of the differences in lawyers? What's a good lawyer look like? What's a bad lawyer look like for an &A deal for the sales for the sell side, particularly what should people be looking at?

Because I'm sure you've had lawyers come in and make things complicated or frustrating at times. Yeah. Yeah. Look, the number one thing you want, and I don't know if it's a question of good or bad, but the number one thing you want is you want an attorney who's done a fair amount of M&A transactions and understands the process and the documents and the flow of a transaction.

And if they've done a lot of transactions, they're going to help you get your deal done. They're not looking for ways to kill it. They're going to be creative. They're going to understand where the roadblocks are, and they're going to help you get around them.

Whereas we see some clients and look, I understand from a client's perspective, they might have done business with an attorney for 30 years or 40, and they're friends and they golf together and their families, whatever.

So I understand that there are real connections here and there's value in that. But if that attorney specializes in real estate or they're a litigator and they don't focus on &A, you're doing yourself a disservice by not getting an M&A attorney.

It will save you money because other folks might have to learn on your dime, and they may learn or they may not learn, and it's still all on your dime. And if they don't learn, it might be costly. And I have some examples, unfortunately, of that over the years where people wanted to use an attorney who was their friend, who wasn't an M&A attorney.

And we're not attorneys, but we've done over 500 transactions in our 20-plus years. So we've seen just about every form of an agreement and every provision that's going to get thrown at somebody. So we know what's on the fringe and things that are material and need to change.

And when we're having to educate an attorney in the transaction, that's a bad thing. And we will do our level best to educate people in the transaction that maybe they need to just, even on a consultative basis, bring in an M&A attorney that can work with their attorney to help them through some of those patches, because we can't operate as an intermediary in that capacity.

We can't take on the role of attorney. You need a specialist, just like you need an accountant who understands transactions and an intermediary and an insurance person, and a banker. It's critical to have that team in place and that they've done a lot of transactions and can help you get through the process as smoothly as possible because you and I both know there's no such thing as smooth when it comes to M&A transactions.

Yeah, it's all about the right team. Somebody that can preempt when these things come up and know what strategy to employ to make sure the deal doesn't go sour or south because there's money involved and time involved and it could be six months, could be nine months or longer within a deal and something pops up that wasn't foreseen and it frustrates one side or the other and you need to be able to have the right team in place to be able to say, all right, this is a bit too far on their side, a bit too far on our side.

Let's come back and meet in the middle, and somebody that can preempt that happening, and be it an intermediary that can say, Look, like this is like, can we meet in the middle again? And if we can't then, we can't, not just having, you know, because there are so many things that can change so many things along the way.

And, is it you and I both know from doing transactions, helping set expectations with your clients is so important because you know there are going to be speed bumps almost every step of the way. I know where all the bumps are. I know when they're going to happen.

I can tell people they're going to happen well before they happen. So when they do, they hopefully have confidence that you knew it was going to happen and you've got the strategies to help them through it. Same thing with attorneys. Attorneys should be doing the same thing.

Listen, this is common; they're pushing, they're trying to get as much as they can. Don't get dismayed. We'll figure it out. There are plenty of strategies to help us get to a place that's reasonable for everybody.

Keeping the tenor down, making sure that deal fatigue doesn't set in. And if it is material, then maybe you do have to walk away, but it's very common to have issues. But having the right team in place to help you can get past them is so critical.

Absolutely. Absolutely.

Don, thanks so much for coming on again. Appreciate your time and your experience with that many transactions on your belt and everything you've seen and done. Where can we send? You've got a pod. Can we send people to that, or should we send them straight to the site?

The podcast is on hiatus at the moment. They can go to our YouTube channel and consume some videos. And I'd say one of the best tools we have on our website is the buyer readiness and the seller readiness assessment.

They're five minutes, they're free. It'll send you a report and tell you how ready you are and score it, and, you know, help you understand some of the things that you might need to be planning for if you're going to go down the path. Love that. All right. I'll link to that in the show notes, everybody.

Thank you for listening, and thanks again, Dom, and looking forward to having another one in the future.

Hey, Jaryd, great to see you. Thank you.