Mark: Today on Power Tips Unscripted. We talked to Arlin Sorensen, Sherpa of Oak Road Consulting. Understanding how to create value in your business is crucial, especially when it comes to your exit strategy. It’s all about setting clear goals for your personal wealth and translating that into a business value target that can drive your success. Arlin is here to share his insights on how you can develop a strong value creation strategy and align it with your long term financial goals.

Mark: And we’ll hear all about it in just a minute.

Victoria: Hi, I’m Victoria Downing and welcome to Power Tips Unscripted where we talk about tips, tactics and techniques to help you build a strong, profitable remodeling company. And I’m here with my co-host, Mark Harari Idaho. Hey there. This is going to be a great episode. It’s so much on the minds of our roundtable members and all sorts of business owners across the country, right?

Mark: Yeah, absolutely. You got it. You got to think about that future. You can’t decide you’re going to go walk away from it all three months before you do it, or.

Victoria: You can’t be saying like like somebody said to me recently, I want to grow to be 10 million so I can sell this, but they’re only at like 2 million now and three years to do it. yeah. Yeah. you know, so our guest today is somebody I’ve known for quite a few years. And if you are a Roundtable’s member and you participate in our Facebook group, you would have seen that.

Victoria: I’ve posted a number of his blog posts, especially over the last few months, dealing with just this issue.

Mark: That’s awesome.

Victoria: So shall we jump in?

Mark: I can’t wait.

Victoria: Arlin Sorenson is a simple Iowa farm boy that fell in love with technology and has spent the past 40 years plus in the IT industry. His passion is helping business owners and leaders achieve their definitions of success. And I got to know Arlin because he is a member of my peer group or was a member of my peer group, which is a peer group for companies to do peer groups.

Victoria: So welcome to Power Tips Unscripted Arlin.

Arlin: it’s great to be with you and Mark, and I’m looking forward to our conversation.

Victoria: Yeah. You know, you’re going to have to stop back into, visit us at some of these peer group meetings. Again. It’s always fun seeing you and Nancy.

Arlin: Yeah, well, it’s been a big help to us and growing, its connection to Paul, for sure. To learn from everybody else. It’s in the same business.

Victoria: Right? Very cool. So I know you deal with this M&A issue, the creating value a lot. So tell us what is a value creation strategy.

Arlin: Well the reality is that that business owners, really spend most of their time working and not so much time planning and if we’re going to drive value into our businesses, we’ve got to have a plan. And so having a value creation strategy is really all about realizing that that some day, at some point you’re going to exit, okay, everybody exits their business.

Victoria: One way or the other.

Arlin: Into, one way or another, either horizontally or vertically. You’re going to exit, your business. So, you know, if you want to transition that, that outcome into what will sustain your lifestyle, you need a plan. You need to understand what are you trying to get, and then have a strategy for how you’re going to create that volume.

Arlin: And that’s really what we focus a lot on, Paul, is how do you how do you create a value creation strategy, which is really all about knowing what you’re trying to accomplish and how long you have to get there? People forget the timeline thing. They wait way too long to really get after it, and then they come up short.

Victoria: Well, so since you just mentioned that, let me ask how far in advance of a expected exit should a business owner begin planning and begin building this value creation strategy?

Arlin: Well, we we, teach Victoria that it’s part of your legacy planning. And so everybody should begin their legacy planning, you know, as soon as they’re, really out of out of college and in the workforce. and part of that legacy planning, you know, it’s a bunch of legal documents that you should have in place your wills, your trusts, your your, powers of attorney, all that stuff, but part of its financial right.

Arlin: And and beginning to put the put the plan in place for how, how much money do we need to accumulate when we’re done working and getting a paycheck, basically. And, and we call that our personal wealth type.

Victoria: Okay.

Arlin: You know, that that is really the number that should drive the financial side of our business plans going forward. because most business owners are going to extract value from their business that feeds into their personal wealth target. and and so it’s all connected to legacy and financial legacy planning what you want to do. But people wait way too long.

Arlin: There are, there are strategies that take a minimum of five years to put in place just to do a lot of tax savings. So you know, I tell people you got to start at least five years plus to really have full access to the tools that are available. But I, I encourage people to start legacy planning, you know, as soon as they own a business and have a plan for the value they need create to sustain the future.

Victoria: So you talked about having your personal wealth target, and I, I’m always recommending that to our members as well. How can you we tell them you can use your business as a tool, but if you don’t have a goal, how do you know how to use that business? Right. So you have to have that personal wealth target. But how does it relate to the business value target.

Arlin: So so the way we think about it is know when we talk to financial planners, they’re telling us that you need a you need to have a personal wealth target that’s 25 to 40 times whatever your annual spend is to live today. So if you if you’re living on $100,000 a year, today you need at least $2.5 million when you’re done getting, you know, money from your business in the future or getting a paycheck.

Arlin: So, you know, you you set the target, and then and then as an owner of a business, you create the value you need to get to that number. Okay. Now along the journey, you can you can save, which is not the American way, but it’s a good idea. so you can get some of it built up as you’re going through your business.

Arlin: But, you know, the business exit is typically where the majority of that money comes for a business owner because they’re constantly plowing back into their company, you know, their earnings as they go. the thing you gotta remember about that is that Uncle Sam’s going to take his share, right? So that’s part of the issue. You’ve got you’ve got, if you’ve got partners in your business, it goes pretty fast and you start cutting things in half or a third.

Arlin: so you gotta do the math. That’s really what this is about, to me is do the math. Figure out how much you need to have available when you’re done with an income stream, and then figure out the timeline. You’ve got to get there and how you can lay that out in a business plan model to get there over time.

Arlin: And you can’t wait till, you know, a few months or a few years before exit to hope that you can make it happen. You’ve got to have a plan. Much earlier.

Mark: Arlin, you mentioned some of these strategies and tactics take, you know, five plus years to implement in themselves. So could you give some examples. What are some drivers that create value?

Arlin: Well, the main driver without a doubt is is profit or EBITDA right. Yeah. That that’s that’s what allows somebody else to take a business and, and pay for it. So that’s the number one driver. But you know, other things that certainly bring value to the table are, you know, the quality of the customer base that you serve.

Arlin: you know, how how much of that is under, recurring revenue contract, for example? you know, how about your leadership team? How important are you to the go forward ability of the business to survive? And so, you know, of the, you know, and the, seat of ownership, you know, there’s a number of smaller factors, but at the end of the day, it’s all about what’s what’s the bottom line profitability that the company is, is consistently, predictably spinning off.

Arlin: And that’s what gives a buyer confidence that they can pay, you know, a good price for the business and have it come out. Well.

Mark: Yeah. Having one good year isn’t going to set any minds at ease.

Arlin: Most of most people look back at three years and, you know, they’re looking at what was was their growth, right? That’s the that’s the most important part is consistent growth. because they they’re going to need that to be able to pay for this thing going forward. And, you know, organic growth is obviously the better type of growth you can do acquisition growth and and acquire others.

Arlin: But people really like, you know, buyers really like organic growth, where you’ve proven over time you can create a pipeline. You can turn that pipeline into customers, put them on contracts and have that sustain over time.

Victoria: Now, your business as a peer group person who runs peer groups or with an organization that does it and and remodelers advantage, we’re lucky in a sense, because we do have recurring revenue, as do I assume most of your clients. Which are IT companies? Right. Because we have a contract with our IT company every month. We’re chunking away some money to them.

Victoria: But our clients or remodelers don’t typically have that. So and I know that can be a big driver of value. Do you have any suggestions specifically for companies like that?

Arlin: Well, I mean, the concepts are still the same. you know, and it’s the consistent, predictable revenue at a profit level over time and whether it’s recurring contracts or, or, you know, just, consistent work project, loads that, that, that’s still translates into value. And so profit is the bottom line. Actually, you know, if we’re going to boil it down to one thing, profitable, profitable, profitable, consistent businesses, I, you know, but I would encourage your, your members to, to think about how could they create recurring revenue, opportunities potentially with, with the, the, customers they serve because I’m betting there’s ways, you know, it’s we’re seeing that spring up all over

Arlin: the place where my air conditioner now I’m on a monthly contract for them to to take care of my air conditioner and in my Florida place and, you know, 15 bucks a month, and and they come out twice a year and check it out and, you know, so there’s there’s ways in pretty much every industry to come up with ideas to create some kind of recurring revenue stream.

Mark: I think. I think backlogs are probably the closest thing forever. Yeah. You know, because it’s just this future projects that are pending, right. So if they can just keep healthy backlogs, that would be, kind of a good surrogate for right then.

Victoria: And there are concierge services for maintenance for especially like vacationers like you with your Florida place, you know, there’s snowbirds and all that sort of thing, or just regular regular maintenance contracts that we could probably encourage more people to put into place. Now.

Mark: Right. So and so a follow up to what what the drivers create value. What what are things that can derail that value?

Arlin: Well, you don’t want to have a roller coaster PNL right? That’s that’s up and down. people are people want consistency. They want to know what they can depend on. So that that’s certainly an issue. You know, retention is is probably, one of the big drivers in terms of how many, how many repeat opportunities are there. And, you know, in the remodeling business, it’s it’s different per se.

Arlin: But but, you know, people are constantly upgrading their, their homes and those kind of things. And so having a customer base that, you know, you continue to stay in contact with and find opportunities to, to deliver projects too, or.

Mark: Thank you for saying that. I’ve been harping on that for years. Thank you for saying that. I have a list a big list. Yeah, you gotta.

Arlin: Have a list. And man, yeah, stay connected.

Mark: That’s I, I tell our members all the time, imagine if you had, you know, a list of 45,000 people in your service area that are potential clients and you’re in constant contact with, you know, that adds so much value to your business. Just that alone.

Arlin: That alone for sure, you know, and and in, in most businesses and certainly in it, you know, the way you talk to them is, is could potentially be the day they say, hey, man, I’m tired of this. And I need to get this fixed, or I need to get this remodeled and replaced. top of mind is got a big offer, you know, a big value.

Mark: So absolutely. I call it planting and growing your very own customers.

Arlin: Yeah.

Victoria: So I really you talked about retention from a, from a client point of view, but talk a little bit about retention or the building up of ones internal team. How is that affecting or derailing value.

Arlin: Well certainly it certainly it can derail value if you’ve got a constant churn of employees. and, you know, things have changed since the pandemic, in a lot of ways, certainly with employees and the ongoing, you know, expectations around work and all those things. So, you know, if you’ve got a consistent, steady workforce that’s very dependable and you can show over time that, you know, these these folks have been around.

Arlin: They’re skilled. They’ve got they’ve got good customer set, you know, responses. CSat is a big is a big, value driver to when you do work for a customer. Are they happy with what. Yeah.

Victoria:

Arlin: So so that kind of that kind of measurement can be a good value driver as well.

Victoria: So think about a buyer a potential buyer. And they go to look at a company and they find that there has been churn in the team, the company’s employee team. What do they think.

Arlin: Well you know before before the pandemic they thought, you know, must be a bad, bad environment or, you know, too much work or whatever. pandemic has kind of changed that mindset because people people have got a whole different perspective on what work is and means today than they did, years ago. but but they’re going to look under the hood and see, you know, what is the root cause of of what’s going on here with, with employee churn, you know, is it the work environment is, you know, the too much time being spent traveling back and forth to work sites, you know, what are the what are the drivers that are causing people

Arlin: to to or will you know, and certainly I would say there’s some generational differences in what the expectations are today. And so that’s part of what, what buyers are going to try to understand. But, you know, retention is, is a is a certain, definite value driver.

Victoria: And when you’re.

Mark: Oh, go ahead. I’m sorry.

Victoria: When you’re thinking about, the who should be on the team, I’m assuming you’re, we’re talking about the team that helps put together the deal in order to get the right outcome.

Arlin: Well, yeah, you’ve you know, you want to have the right resources on your side. What what a lot of people fail to think about is that when they go to sell their business, it’s probably the biggest sale they’ve ever had in their life. And you need to treat it that way, which means you should get the right, the right people around you.

Arlin: You know, the right attorney, the right CPA, the right tax advisor, because you’re you’re going to be dealing with, you know, significant sum of money and all those all those details matter. It’s easy to get deals done. The devil’s in the detail, right. And how that gets structured and what that impact is in terms of tax liability and other things.

Arlin: And so you want you want to be surrounded by people that can help you get to the outcome and driving toward them. And it’s that’s another one of those things you want to start early with. Mark, to your point, five years working with, you know, not somebody that you’re going to talk to every day or every week, but that you’ve shared your your goals with the day, understand.

Arlin: And and along the way, as opportunities come up, you can reach out and say, how would this be impacted if we made this decision or that decision? Get that input early and create those relationships early so that you’re maximizing the outcome?

Mark: Yeah, that’s great too. You know, it’s funny. There’s a I’m sure there’s a nice healthy handful of our listeners right now that that this isn’t even on their radar. Right. And I know we have quite a few members that are in the process right now of, of a transition to the second generation. Right. And I can’t imagine I don’t want to speak for all of them, but I can’t imagine they’re just starting to move into the company.

Mark: I think the last thing they’re thinking about is leaving it. Right. But this is the time to start thinking of that. Right? And it’s not.

Arlin: It’s not about leaving. It’s about creating value.

Victoria: Right and.

Arlin: Right. What I find, you know, often interesting with family transitions, Mark, is that, you know, parents think it’s a great thing that we transitioning the business to their kids. A lot of times they have actually created enough value in the business to make it all that exciting for this.

Victoria: Very.

Arlin: You know, in some cases, I see kids say thanks, but no thanks. You know, I don’t just want something. I have to get up every day and go to work for. I’m looking for something. I’ll create a future.

Mark: I can buy a sign and put my name on the side of my house. I don’t, that’s it’s got to be more than that.

Victoria: Yeah, yeah. And every every once in a while, you’ll see, family transition like that, where the parents want to continue taking a big chunk of the net to fund their retirement. And that certainly puts an albatross around the the next generation.

Arlin: Absolutely.

Victoria: No Arlin. I know there’s no one universal or two or but for, for, you know, in industries varying the recurring revenue and so on and so forth. But in your industry specifically, and maybe you would reply to us, what about a multiple and a multiple of what that determines some sales prices.

Arlin: Yeah. So multiples are a tricky thing. you know, the, the in the IT space, the multiple really depends on the amount of EBITDA dollars that a business generates. Okay. So that’s one of the key factors. Another key factor is the percentage of EBITDA, that the business is generating from their revenue stream. So it’s they’re $1 million company and they’re generating 20% EBITDA.

Arlin: You know, they’ve got $200,000 of profit coming to the bottom line. That business has more than one that’s a million. That’s $2 billion only generating 10% to the bottom line. So percentage of EBITDA and the dollars of EBITDA are really the two key drivers.

Victoria:

Arlin: And where we see it’s kind of separating in our industry, if you’re sub $500,000 of EBITDA, you might get a multiple of 2 to 4 times that. if you get up to $1 million of EBITDA, then you might be at a 6 to 8 times. Where it really gets interesting when people are up in the 5 million plus dollars in the private equity, it’s really interested you.

Arlin: They they can drive, multiples up into the 12, 16 times. Yeah, sometimes.

Mark: So so what you’re saying is start an IT company.

Arlin: Well. I think companies have got good value for sure. And but surprisingly, you know, people don’t plan and create the right outcomes. And, so they leave a lot of opportunity on the table because they just didn’t have a plan.

Mark: Yep.

Victoria: One more question. Let’s say you’re in a company, you know, that you want to sell or leave, exit the company, let’s say in the next five years and you’ve been making some plans and you’ve been adding, you know, building value, but you’ve got a key person who does not want to buy the business or can’t buy the business.

Victoria: How do you keep that person involved?

Arlin: Well, that’s a really great question and a really important one, because, you know, if the if there is an individual or two that are key to ongoing operations, value is very much tied to their willingness to stay.

Victoria: Right.

Arlin: Post transaction. So, you know, you can you can use tools like open source plan, you know, to to enable them to share in, the growth and success of the business, even though they don’t have official ownership. they have they they get part of that growth value as things happen in that transaction, they, they get rewarded for helping do that.

Arlin: You know, you can do you can do state bonuses. for for people. There’s a lot of tools you can kind of rely on there. But again, that’s not the kind of thing you want to wait until you’re at the negotiation table and the buyer says, hey, anybody that really matters in your company, well, yeah, we got a couple really important people.

Arlin: Well, have you got them under some kind of an agreement where they’re going to stick around, you know, and the answer is not yes, that’s a problem.

Mark: Right.

Victoria: Yeah, absolutely.

Mark: So, Arlan, let’s assume for a second, which I think is a very safe assumption. We have lit some light bulbs over people’s heads, and there are a few listeners right now they’re thinking, I haven’t thought about this, but I need to definitely get this going. What do you want to tell them? What’s their first step?

Arlin: Well, I would start communicating with my family. Right. it’s interesting to see that a lot of times spouses have no idea of what goes on in the business. And, as long as there’s money in the checking account, the assumption is that all is well and our future is secure. you need to have conversations with the people that it’s going to impact and and get on the same page up front.

Arlin: Find your your key resource, which probably in this case would be, you know, a CPA and an attorney and, begin to have some conversations. and learn, learn and understand and where you’re at and, you know, lay out what we’re trying to accomplish and we’ll have a real honest conversation with your CPA. Can we actually get this done?

Arlin: in a lot of cases, they’ve waited too long, and it’s going to be a miracle if they can pull it off unless they do some, you know, really drastic kind of action. So start that conversation early and make it a regular one so that you’ve got a plan that you can follow.

Mark: Okay.

Victoria: Yeah. I’ve got one other question for you too. So let’s say that somebody really wants to sell, really wants to sell, but you know, and their CPA and everybody knows that it’s not going to happen. They just haven’t started far enough in advance. I know the value what yada yada yada. So like in your experience, what percentage of those who want to sell are actually able to move forward and sell?

Arlin: Well, if they really want to sell? I mean, there’s ways to to structure deals so that somebody will probably buy, now the outcome isn’t necessarily going to be that good, but right. Using earn outs, you know, for example, is one way to protect a buyer, because they only pay based on what actually happens in the business.

Arlin: so they’re not buying blue Sky or anything else. They’re buying revenue dollars at a, you know, an operating profit. and they pay a percentage of that to the seller. You’re not going to maximize outcome under that kind of structure. So sure. But it’s certainly better than nothing. so there are tools out there for, for everybody to kind of sell at some level.

Arlin: But I was on a call with, with, a company this week, and all of a sudden he’s got a health issue and, hasn’t started and prepared early enough. And, you know, he’s at a point where he can no longer service his customers and, and called and said, what do I do? And I said, well, we should have started ten years ago figuring out what to do.

Arlin: But, you know, I connect with him with another, individual in his market and said, could you have a conversation? Let’s figure out a way that we can try to help, help this couple get some value out of their customer base, because that’s really all he had to sell. he was a sole proprietor. didn’t have any employees.

Arlin: So, you know, we’re going to work out an earnout kind of relationship where they’ll get they’ll get a piece of the business for the next couple of years. But, you know, certainly not going to sustain their lifestyle by any stretch.

Mark: Yeah. It’s unfortunate. Yeah. Well, on that happy note, how about for move into the the the light lightning round. What do you think.

Arlin: Yeah, I would just say that that stuff happens. The market. Yeah. You know it’s it’s not fun to think about, but it’s important to think about because, you know, some of the most frustrating and sad things that I’ve had to deal with, with, with our peer group members had been situations where somebody passed away unexpectedly or had a serious health concern and they weren’t ready, even to where one point we had we we had a member that passed and, he had been working on his stuff.

Arlin: He was actually laying on his desk at his office, but he hadn’t signed it. And oh, geez, it was a it was a total disaster for his, his wife’s.

Mark: That’s unbelievable.

Arlin: No, it’s not unbelievable. It happens.

Mark: Yeah.

Victoria: So listeners, pay attention. Get started on this now.

Mark: Yes. And and sign the document when you get it. You have. All right. Well let’s let’s hit the lightning round. What do you think?

Arlin: Let’s do it.

Mark: All right, all right. We’re going to do six questions in 60s. Here we go. What’s your favorite business book and why.

Arlin: The go giver. it’s got five principles that work every time.

Mark: If you weren’t the sherpa of Oak Road Consulting, what do you think you’d be doing?

Arlin: I’d probably be farming. I mean, that’s how I started my career doing. And, we live on a farm, and, you know, I still got dirt in my veins. I just don’t do it very well.

Mark: What are you not very good at?

Arlin: Details. I am very bad at details. What’s your starter in a four man?

Mark: What’s your least favorite holiday?

Arlin: Oh, that’s a good one. I don’t know that I have a least favorite holiday. What?

Mark: All right, that’s a good answer. If you had a time machine, would you go forwards or back?

Arlin: I would go forwards. I’d like to know what? What’s coming down.

Mark: Nice toilet paper. Hung over or under?

Arlin: Over. That’s tree over.

Victoria: Arlin. Thank you. This is really good. I think the people are getting a ton out of it. And, you know, so many people are at the stage where they need this information. So good. Good stuff. Thank you for being here. Now, before I let you go, however, I’d like you to share your five words of wisdom with our listening audience and why they resonate with you.

Arlin: Yeah, hard work isn’t business value. Okay. A lot of business owners have the false narrative that if they just get up every day and work hard, it’ll all turn out in the end. And what that is, is a job. Yeah. Gotta get up and work hard with a plan. Well, be sure that you’re using your, you know, your time, talent and treasure on the things that matter and that you can’t.

Arlin: You can’t wait until you’re too close and then hope that it’s all going to work out because it won’t.

Victoria: Right? It’s awesome. With great advice.

Arlin: Plan, plan, plan.

Victoria: I’m behind you there. That’s great. DArline, thank you so much for being here. We are delighted and I hope to have you on again.

Arlin: Well, I’d love to.

Victoria: All right. Thank you.

Arlin: Bye bye.

Victoria: Bye. Well, that was, very interesting. Thought provoking, wasn’t it?

Mark: Yeah, a little scary.

Victoria: A little scary, right?

Mark: Nothing like, a scary story to.

Victoria: Wrap it.

Mark: Up to wrap it up? Yeah. Get those hairs in the back of your neck stand and.

Victoria: Yeah, but, yeah, this is it’s such a prominent issue for so many of our members. And as you can see, for so many of his members, you know, anybody who owns a small business has to be thinking about this, because we’ve certainly seen our share of people who have been able to save nothing, counting on the sale, their business to finance their retirement.

Victoria: And then if it’s not there, right, they’re Sol as they say.

Mark: Yeah. What’s that stand for?

Victoria: We can’t say that on the podcast.

Mark: we can’t okay. I sell it as well. That was fantastic. I hope, you all out there got something good to take out of it. And, get get those balls rolling. If you haven’t started them yet. We want to thank Arline for sharing these insights, and we want to thank you for listening week in and week out.

Mark: I am Mark Harari.

Victoria: And I’m Victoria Downing. See you next time.