Intentional Growth #305: How to View Your Company as a Financial Asset by Clarifying Ownership & Management Roles & Focusing on 3 Financial Targets
EP. #1 [THEME TWO]
Today, we kick off a new theme: are you running a lifestyle business or are you growing a valuable asset?
In this episode, Arkona co-founders Ryan Tansom and Pat Hobby break down what it takes to view your business as a financial asset - regardless of when you want to sell - so you can focus on growing the value of the company. By running your business as a financial asset, you can focus your time, money, and energy on areas that will increase the company’s valuation by creating sustainable, predictable, and transferable cash flow. The more valuable your company is, the more choices you will have down the road and it will allow you to create wealth, enjoy work, and make an impact.
Ryan and Pat dive deep into some key concepts that will help you walk away with a clear understanding of the metrics that you need to focus on - and what they mean - in order to see what your company is worth today and how you can project out the value of the company years into the future. It all starts by clearly understanding the difference between your ownership role versus your management role and three financial targets.
// WATCH THE INTERVIEW ON YOUTUBE: Intentional Growth™ Podcast
What You Will Learn
- The difference between a lifestyle business and long-term value creation.
- The three financial targets that will help you view your business as a financial asset.
- The number one thing holding people back from long-term value creation.
- The difference between ownership and management roles, why they matter, and how it impacts your decision-making.
- How to clearly see the interaction and tradeoffs between funding growth, distribution, and taxes.
- What EBITDA and Normalized EBITDA is, why it matters, and how it is used to value a business.
- How the three financial statements are used to project out the value of a company.
- Why you need to use - and integrate - all three financial statements and why business owners typically don’t.
- How to integrate enterprise value, equity value, and net proceeds into the three financial statements so you can project out the value of your business year into the future.
- The importance of creating a financial “path” to creating long-term value.
// USE YOUR FINANCIALS TO CLARIFY A PATH TOWARDS A MORE VALUABLE BUSINESS: Intentional Growth Financial Assessment
Bio:
Pat started at EY before creating his own outsourced CFO services company. There, he advised over 15 companies. He ended up joining one of those clients as they continued to grow, which led to a working relationship that lasted over 20 years. He then led the sale of the company to a PE firm. Utilizing firsthand experiences and lessons he has learned over the years, Pat helped co-found Arkona to help change how owners grow and exit their businesses.
Interview Quotes:
07:06 - “They’re like, ‘I’ve got a business now!’ But they’ve got that mindset where they’ve never viewed the business as an asset. It’s–in my opinion–the number one thing holding people back, is them viewing their business as a lifestyle business, as a job, as opposed to, probably, their largest asset. They don’t think of it that way, and when they do, they look at it through a completely different lens.” - Pat Hobby
09:00 - “People who start a business and own a business and run it, deserve to be rewarded for their hard work and the risks that they took, and the sleepless nights and worries about making payroll and worries about making rent. So I’m not saying don’t reward yourself. But if you shift your mindset away from, ‘Okay, I have a job and I get paid for doing that job but when I’m an owner, I want to view the business as an asset.” - Pat Hobby
09:33 - “.The goal of owning most assets–not any assets, most assets or, at least, investments–is for them to grow.” - Pat Hobby
13:48 - “Ownership is just owning some stock or LLC interest, in a company.” - Pat Hobby
16:14 - “That’s your job, go do your job. You get paid a paycheck for doing a job. You don’t get a paycheck for being an owner.” - Pat Hobby
33:13 - “Anytime that somebody buys a business, the first reason they’re looking at, in order to buy a business is because of its projected cash flow in the future.” - Pat Hobby
34:21 - “The intrinsic value is the value of the business, based on its cash flow as they exist today, without any other reason that someone would want to own it.” - Pat Hobby
40:32 - “But when you go from enterprise value to equity value, in deals of almost any size, the seller almost always keeps their cash and has to pay off their debt, their funded debt.” - Pat Hobby
48:35 - “When you think about your business as an asset, how much money would you put in your pocket today, if you sold it?” - Pat Hobby
65:25 - “Growth is risky and can be expensive.” - Pat Hobby
70:45 - “The whole point of this is to give yourself choices, understanding of where your situation is, where you’re going, so down the road you’ve got choices.” - Pat Hobby
72:14 - “Employees want to work for companies that are growing in value. They may not articulate it that way, but it’s just more job security, more opportunity, more people to employ.” - Pat Hobby
Links and Resources:
The 5 Intentional Growth™ Principles (5 Videos to Help Clarify Your Vision)
Intentional Growth™ Financial Assessment
You can also reach out to me via email at rtansom@arkona.io, or on my LinkedIn.