Intentional Growth #226: Shift Your Mindset: Quit Solving for Annual Income & Start Growing a More Valuable Business
Many business owners and entrepreneurs want to know how much money they can pull out of the business (and how little they can pay in taxes!) each year. This strategy can make sense... however, what if you’re walking over dollars to pick up pennies? Today’s episode is all about how to shift your mindset away from solving for annual income to focusing on growing the long-term value of a business.
What You Will Learn In Today's Podcast Interview
- The difference between annual income and long-term value creation mindsets.
- How to weigh short-term decisions to pull cash out of the business vs. reinvesting to grow its enterprise value.
- The benefits of regularly tracking normalized EBITDA and how that helps keep your mindset focused on long-term value growth.
- How to use the financials to forecast the value of a business.
- Why higher net income and more revenue aren’t always the top metrics for measuring value creation.
- How your mindset impacts where you spend your time, money and energy.
- What the J-curve is and how to use it like a private equity firm to create a more valuable business.
- How to use your business’s financials to tell the past and future stories of your company.
- What to do with your “extra” money every year.
- Why creating a sustainable, predictable and transferable cash flow gives you the freedom of more choices.
- How your why (ultimate purpose) influences your pain points and drive.
- The importance of crafting a narrative that frames your financials to a buyer.
- How to tap into the financial value of your business without selling out.
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Podcast Summary
"How much can I pull out of the business this year?"
"What are ways to pay as little in taxes as possible?"
Do these questions sound familiar?
There is nothing wrong with maximizing your take-home dollars from your company. However, what if you are stunting the long-term value of your business and, therefore, limiting the number of choices you'll have with it down the road?
Having choices is another way of saying freedom. Choices are a result of having a valuable business with sustainable, predictable and transferable cash flow. Making the right decisions comes from understanding what you ultimately want from the business (and why) and what all your choices are. .
If you’re currently solving for annual income (salary, perks and distributions) rather than focusing on creating a more valuable business, you’re potentially trapped in a mindset that is limiting the future options you have with the business.
In this episode, Pat and I discuss how to compensate yourself properly from your business while also reinvesting in strategies that increase the value of potentially the largest financial asset you own (your business).
It’s crucial to understand the very real tug-of-war between the desire—or need—to take most of the distributions out of the business and the one to reinvest that cash back into the business.
Pat and I break down what creates value and how to measure and forecast that value (and net proceeds) into the future of a business, all without selling.
We believe this clarity can help shift an owner’s mindset away from pulling every dollar out of the company to becoming excited to reinvest into the business. It’s much easier to pass up the next personal desire—the next boat or second house—when you clearly see how reinvesting impacts the value of your company.
Remember: Freedom is the result of growing a more valuable business that creates options to do what you want without sacrificing the things that are important to you.
About the Guest:
Before Pat Hobby became the co-founder of Arkona, LLC, he started with a background in accounting and numbers, as well as being the CFO of quite a few successful companies. Now both Pat and Ryan run ARKONA as well as the ARKONA bootcamp.
We started Arkona with a mission to help entrepreneurs and business owners get clarity and control on how to grow and exit their businesses through educational boot camps and consulting services. We want to help business owners better understand the world of M&A and level the playing field between sellers and buyers (who are almost always more skilled and experienced in M&A) so owners who want to exit can achieve their goals, both financially and personally.
Quotes:
06:00 - “Annual income is-- a lot of business owners are looking and saying, ‘How is my business doing?’ They may just look at their financials and see if they made income. They may just look at their net income and see how much money they have in the bank. I think it stems from not understanding what the options are. They’re just saying, ‘Okay, I’m working really hard and I want to be rewarded for it. And the way they think to be rewarded for it is to take out money this year.” - Pat Hobby
10:15 - “You mention the word return and that gets to figuring out what your investment in your business is.” - Pat Hobby
17:11 - “So you may have pocketed some extra money along the way, but if you haven’t invested in those types of things, when you go to sell your business somebody is going to say, ‘Well, your cash flow is not transferable to me. You’ve got all this risk here.’” - Pat Hobby
29:20 - “I have a friend and she says that denial is the more powerful force in nature and it certainly can be. And the whole purpose of what we do, why we get up every day and go to work, is to help business owners understand.” - Pat Hobby
38:00 - “You buy a company, you want to harvest the value that the previous owner left on the table. That sounds harsh. That doesn’t mean you didn’t pay fair value for the business. But you’re saying, ‘Okay, as it sits today, I’m going to pay you fair value but I think you’ve missed some opportunities to create value in this business.” - Pat Hobby
50:32 - “You can get to the point one day and say, ‘I can make a change in my ownership role without changing my management role or I can make a change in my management role without changing my ownership role.’ So many times people think, ‘I have to do those at the same time.’” - Pat Hobby
Links and Resources:
Mastering Your Cash Flow Digital Course
Reach out to me if you have questions about the boot camp!
You can also reach out to me via email at rtansom@arkona.io, or on my LinkedIn.