How do you valuate a small business?
Are you a business owner or entrepreneur looking to build a valuable asset (organization) that can be sold or transferred at the desired valuation? In order to achieve this, you need to focus on creating sustainable, predictable, and transferable cash flow.
Unfortunately, many businesses fail to properly manage their finances, leading to negative equity and liabilities that are not immediately apparent. In this podcast episode, Anthony talks to Ryan Tansen, founder of Arkona LLC, about his experience in turning around his father's struggling business and selling it for eight figures.
Ryan shares the lessons he learned and the mindset shifts he had to make to transform the business into a financial asset. Ryan emphasizes the importance of knowing if what you're doing is worth it and aligning everyone in the organization toward the same goal. He also talks about his current company, Arkona, which provides training and financial services to help business owners grow the value of their businesses.
In this podcast, we discuss the following topics with Ryan:
- How business owners can misunderstand their cash flow
- The importance of professional financial management
- Creating sustainable, predictable, and transferable cash flow
By listening to this podcast, you'll gain actionable insights and a fresh perspective on how to view and run your business like a financial asset.
KEY TAKEAWAYS
As a leader or business owner, have you ever wondered what your ultimate goal should be? Hint: It's not just revenue. In this video, we explore a better way to measure success and achieve your business goals.
Business Valuation 101: How to get the valuation you want for your organization
FULL TRANSCIPT:
Ryan Tansom 00:00
I know finance can be intimidating like when I get up in our workshops, and it's about two thirds through the presentation. And as I kind of land on talking about valuations, I know how this all works. And then I pull up the case study and people obviously like, oh my god, Ryan spreadsheets and numbers come on, man. And I'm like, I was a copier sales rep and I got a deal in accounting. So if I can do this, everybody again.
Anthony Taylor 00:25
Welcome to the strategy and leadership Podcast, the podcast that brings you practical advice, lessons and stories from senior leaders and thought leaders from around the world. This strategy and leadership podcast is brought to you by SME strategy working with organizations around the world to create and implement their strategic plans. To learn more, visit sme strategy.net. And now your host, Anthony Taylor. Hey there, folks, welcome to today's episode of the strategy and leadership Podcast. Today I am joined by Ryan Tansen, who is the founder at Arkona LLC and calling from Where are you calling from today? Ryan?
Ryan Tansom 01:05
Minnesota man.
Anthony Taylor 01:06
Freaking awesome. I love it. What's happening as the day goes on?
Ryan Tansom 01:11
It's above freezing man. So Anthony is melting. And I heard the bird that's March so like, I don't know, life must be good.
Anthony Taylor 01:18
We had snow though snow is finally meant melting where I am in Vancouver, but it dumped for a little while. So yes, it's they say it's spring. But right, Ryan, I'm super excited to chat. Because one of the things we talked about before was, you know, like s SME strategy. We always talk about alignment. And what I thought was really cool about the things that you work on talking to Vistage groups, and what have you is, you know, adding value, making sure everybody on the team has the same perspective and understanding of what the goal is. And that's growing the value of the business and how impactful it can be on an organization's effectiveness. So why don't you tell our listeners a little bit about who you are, and then you know, what keeps you busy, and we'll go from there.
Ryan Tansom 01:58
For sure, Anthony, appreciate it, man. So what my company Arkona we got three revenue sources. We got training and some financial services. But I think that how I got here is probably the more interesting parts is I grew up in a entrepreneur household Anthony and my dad started our business back in the early 90s. Mortgage, our house bought a couple 100 grand worth worth of US Panasonic copiers and never looked back. And so he scaled up, we hit 21 million in revenue. 115 employees worked in our business my whole life. By the time I joined in oh nine in the financial crisis hit AWS, my dad had been distanced from the company, and we lost 940,000 bucks a year. So I spent almost six years turning the business around, we sold a couple of branches for cash turned around, like 60% of the employees build up the managed IT service and the document management, software side rebranded was rockin and rollin, for lack of a better term, having a lot of fun. My dad and I couldn't get alignment, aka that part of this podcast, could you know felt stuck had the groundhog day conversation of what do we do with this thing? Where do we go every other week and couldn't figure that out? So we sold it in 2014. For eight figures paid a lot of taxes and debt had to fire 60 Out of my 90 employees roughly, really, really hard day, dude. And so that was in 2014, July 1. And so since that day, Anthony, I spent every waking moment in my life figuring out what happened and how do I help other people take more control over their outcome, whatever the heck they want. So led to me starting the podcast kind of intellectual sandbox and kind of took what I was learning to go to the, you know, the workshops, I was doing synthesizing it to create our company, man, I just want to help people view and run the company like a financial asset. And I feel blessed that I get to do this every day.
Anthony Taylor 03:39
That's awesome. I love that I love the origin story. And it's just a lot of learnings there. So I mean, as our listeners are, a lot of them are word owners, a lot of boards, a lot of them, you know, entrepreneurs, you know, what are some of those lessons that you've been kind of pining over the past eight years that that you'd like to share with them and you know, whether it's actionable things or a mindset, you know, the floor is yours. What do you want people to know?
Ryan Tansom 04:03
Like you were framed up a couple of different ways of takeaways I say the first couple of big things mainly Anthony were mindset and and it's this whole thing is it's really fascinating to me, Anthony is like because I grew up as a kid and like I was a kid in school. Why? Why why why why why are we got six year old twins man? So like, I'm thinking it in. In I just over the course of most of my life, I realized that like, not a lot of sufficient sufficient answers were given back to me like why are we doing this? So like in business nowadays, I get up in for these workshops, presentations, keynotes, Anthony, Mike. First of all, I got two main questions. Do you know the first one is do you know if what you're doing is worth it? It's different for everybody. So the listeners listen in all the headaches, all the challenges, all the things that come with being a leader and all the responsibility that we have, is it worth it? And that can be different for everybody, I think There's so many people that I come across, and they don't know how to answer that question. So I'm like, do you know if it's worth it? They don't know how to put up their hands? Because they're not sure. So it's either a they haven't thought about it, like, what does that actually mean to me? And be? Maybe it's not, which is a whole nother set of challenges. And then the second question is I'm getting to your point is, then, what's your goal? So for leaders and owners, like what's your goal, and I say, throw your goals, and I usually get like this entity 50 million 100,000,075 to 50, or 75 to 100 million or like, you know, whatever the next milestone is on the revenue side that they usually kind of pegged themselves to, and then I immediately follow up with well, we own that $21 million business that lost nine or $40,000, if we would have sold the bank, or we would, we would have sold the business we are owed the bank money. So I don't really think that's the best ultimate goal. And people kind of just look at me, like confused often. And because it's like, well, what is the goal, then? And hence, the other problem was, where are we? And so I would challenge that, after the last almost 10 years is coming up with a target equity valuation that someone wants at a point in time, regardless of whether they want to sell. But you're then synthesizing and syncing up all of the things you're doing with your time, energy and capital every day, with the decisions that you're deploying time, energy and capital is aligned towards the equity growth. And that then aligns ownership and leadership and then all of the different divisions and people and even someone down to the shop floor or the customer service, that we have to know where we're going. And that's one of our I think, fundamental responsibilities as leaders is that really clarify that outcome? And then put the plan in place and right with you, you and your organization, your practices, then deploy that communication to everybody else through system? Yeah,
Have a strategy session coming up soon? Get in touch with us today to learn more about how our strategic planning facilitation services can assist your team in creating and executing your strategic plan across your entire organization. 
Anthony Taylor 06:51
I find that very interesting. Because so we work with entrepreneurs, we work with nonprofits, we work with private businesses, obviously, I have my own business. And then we work with people that are supported through private equity. And the people that have that most clear answer are the private equity folks, because their goal is to add enterprise value and then sell again, they make their money on the exit for me, I've got my number over here, and I say, Okay, I need recurring revenue to x degree to be able to drive that, and then that's always in the back of my mind. But when it comes to other businesses, the conversation that I find the balance between the owner who looks at the profit and the EBA, and then the business who sometimes only looks at the profit, those are very different approaches, if you go from 20 million to 50% profit and 30 million at 4%. Profit, those are very, very different businesses. And I think understanding the why and to your point, what levers to pull are critical, critical to think about. So
Ryan Tansom 07:51
thoughts on there's well, and there's trade offs, a lot of thoughts on it is, so let's talk about the order because I know with your organization, as I was looking at your pyramid of like, how you come up with the like, the direction of the company and how it all trickles down. And it really starts with the ownership. So first of all, like when I get people, I get people that call me every single week, Anthony, and it's, I want out, and I'm like, I don't know what, your job or your asset, people usually go hmm. So if whether the people that listen in whether you're just a leader, and you don't have any equity, or you have a small percentage, these conversations with the ownership group is so crucial, because here's the here's the here's the issue. And when I was running the business with my dad, he was the one he was the main equity holder, right? And I'm the one running the business. And so if he's sucking all the cash out of the business, but I still have to go from 20 million to 30 million, how the heck am I going to fund that? So if he doesn't know, or he or she, or whoever the ownership group is private equity II sounds nonprofit, sole proprietor or partnership, what is everybody's expectation for distributions and the equity target at a point in time? Because if you don't have that, how much money Anthony do we have this year to spend? I don't know. What's the goal? Well, I don't know. I mean, it just is. So fundamentally, we have to come up with that bullseye. Because then once ownership says, We need this much in cash flow and distribution, and here's our equity goal. We got to pay our taxes. What is the working capital, we need to fund that growth plan? And do we have enough cash? It's just there's just only like so many constraints that are written the Cash Flow Statement underneath the cash flow provided by operating activities. And if it's a zero, we run out of cash in the future, we have to tap our line of credit, come up with a bank loan, or we have to get another investor put more money back in. So if ownership doesn't know what they want, how the heck is leadership supposed to know what they're going to do and how they're going to fund the projects that everybody just made up?
Anthony Taylor 09:47
Yeah, it's interesting, just as you describe that last little piece is the obviously like financial acumen is key and, and not all senior leaders, especially ones who are technically good at their jobs that get promoted, you know, have that whole lipstick understanding and and have you in the groups that you've worked with? Or, you know, in the people that you're educating? You know, have you found that same challenge that there's a need to have financial literacy and financial understanding. But walking into those conversations, people are kind of starting from nothing?
Ryan Tansom 10:20
Just one word answer. Yes, you're right. Give us a give us some follow up on that. Anthony is, is Yeah, it is. And it's, it's so fascinating now to Anthony. It's actually one of my favorite parts of my job. First of all, as for the listeners listening and first of all, double entry accounting was invented in the 1400s. About a mimes didn't invent that. Second is that the spreadsheet that I teach the fun bill, or Bill Gates and Paul Allen either stole it or built, you know, created it back in the 80s. So like, it's all out there, man. Like, none of this stuff is invented. And I know finance can be intimidating, like when I get up in our workshops, and it's about two thirds through the presentation. And as I kind of land on talking about valuation software, how this all works. And then I pull up the case study, and people obviously, like, Oh, my God, Ryan spreadsheets and numbers come on, man. And I'm like, I was a copier sales rep. And I got a D in accounting. So if I can do this, everybody again, I'm not a CPA and a CFA. I'm not any of these other things. Like, yes, I've been at this for a long time. But I think back to my earlier comment about my childhood, like, I always want to know why. Why is everybody fighting? Well, because everybody's bonus is based on net income and not normalized. That's probably why the insult like in that's just an example. That's not all the problems. But my point is, is that when you pull the thread, it always ends up on the financial, here's why most people are having conflict and tension and misaligned. There's the goal and everything that you help people get clear on where we're going. And then you line that up with the financials to say, and we can form the, the plan that Anthony and the team has got is all set out to. So I think it's the the numbers are just so clarifying in the financial literacy. Anthony is the financial illiteracy is crazy. And I was part of it. I was absolutely guilty. And so there's no shame in my comments. For anybody. It's like the unless you were a CPA, which by the way, putting debits and credits and moving numbers into boxes for a tax return is different than managing inventory in October when you're trying to balance payroll inventory taxes and distributions. That's more like a CFO Strategic Finance role than how much do you owe when this is all done? And we looked in the rearview mirror? So I think a lot of entrepreneurs and definitely the leaders that I work with, they know where their conflict and pinch points are. But a lot of people don't know what is that? Why is that a result? Like Where's that coming from? And so we can, I can be happy to to kind of walk through on like net income versus normalized outcome plans can help shake that out. But any thoughts? I mean, I don't know if you see the same thing.
Anthony Taylor 12:59
Hey, Anthony here. One of the things I don't talk too much about on the podcast is what we do at SME strategy. So I wanted to let you know that if you and your team are thinking about getting together this winter, or even in the new year versus strategic planning, that we'd be happy to have a conversation to see how we might be able to help your team walk through the strategic planning process. And make sure that your people your strategy, your culture are on the same page. One of the most exciting parts about the work that we do is being able to lead people through a proven process to help them get to where they want to go. If you're interested about that process, our video about it on YouTube just hit over a million views. So be sure to check that out. Let us know what you think. But most importantly, I want to let you know that if you are looking for somebody to partner with your team, to support everybody and getting aligned, moving forward towards a clear set of goals and objectives, and really making sure that you have the foundations for that next stage of growth, that we can partner with you to do that, whether that's through an off site strategic planning session, or you know, follow up support services to keep you accountable, to help your team grow and develop, or really to lead a full transformation. So if you're interested, check out SME strategy dotnet, you can check out our about page, our services page, they'll tell you more about how we do things, how to be happy to have a conversation with you to see if we're a good fit to help. Thanks so much. I appreciate you listen to the podcast. And now let's get back into the episode. Yeah, no, absolutely. I'd love to hear the difference for our listeners and help for me. But I think one of the things that's just interesting is understanding if we take it to the core, but slightly higher than just the bottom line is understanding like the drivers of the business like the business process, like I was talking to a group the other day in their life for every customer that we brought on, we would lose money. Therefore the like if someone was doing their job and really good at selling, it would be bringing the company faster to decline. And so though,
Ryan Tansom 15:02
let me let me rattle on your rally on that Anthony. So so let's say it wasn't that dire. Let's say someone had a good product or service and their receivables actually, this is a very real example of a client. They sell medical durable medical device equipment, their main, so they have customers, but their revenue comes from insurance companies. Because there's reimbursements. The big insurance companies pay with net 120 days, the faster they sell, the less cash they have, because the receivables are 120 days. Does that simple. You just look and look, my dad and I had the same problem, man, because we buy a million dollars worth of equipment from Canon. Take it in, prep it, sell it, issue appeal, then get the money. I mean, we're 120 days without our cash. Yeah. So the more we sold, the worse it got. Right. So like, if you don't know those numbers, even if you're selling a profitable product or service, that cash conversion cycle is essentially what I'm referring to, is going to blow your business model up if you're not prepared for that. Then it's in there's they're beaten their business models out there anything I've been on a tangent, but people I always like go like, well, how is it possible that you want a $50 million company, and you don't know that stuff? I've now come up with my own thesis. So you could this could be complete BS, but it seems to make sense to me is market demand. So the are the three variables that equal why someone doesn't need to pay attention to the stuff. Market demand is their second plus. So that plus the second variable which is entrepreneurial, and leadership, hustle and grit. So market demand plus hustle and grit. Plus a really good business model where you use other people's money, ecommerce, customer deposits, insurance, you know, assets under management for wealth management firms, whatever it is, whether you're using other people's cash, you don't ever have to look at the cash flow statement, you just look at your income statement. That doesn't matter. So that's how people can get away with not caring about this stuff. But even in that situation, I've taken people on as clients, and they're like, Oh, my God, I got 3 million bucks in the bank account. Well, what do we actually build their numbers in a way that makes sense? So they had negative equity? Because they had been pulling more cash out? And what do you still owe someone goods and services that your cash?
Anthony Taylor 17:19
Wait, how did that how to explain that one to me? How could they have a bunch of cash in the bank? Just I mean,
Ryan Tansom 17:25
so let's say you let's say we're working with an E commerce company that sells sunglasses just making something up, they have an Amazon FBA account or Shopify account, run an ads, click by click by click Buy and they're getting cash every single day. Well, then they get to like, ship it. So use, they're getting cash before they have to deliver the goods and services. Right. Okay. Yeah. So, way, the way that most middle market business owners and privately held businesses that I work with are its fee, they manage their business, like they look at the income statement and build out a forecast once a year. They look at it once a year, maybe do an update once a month. But then what they do is where does it go that the income statement was how do I start that off? So I totally
Anthony Taylor 18:06
like totally cash coming in before the product goes. So so what
Ryan Tansom 18:09
happened was they said they had 3 million bucks in their checking account what most people do, that's where I was going, well, most people do is revenue, gross profit, what's in my bank account. That's how most people manage their business revenue, gross profit, what's in my bank account, I look at my numbers when the month is done probably two months later, but they're not using it for decision making. Anthony. So when you're doing that, you look at your checking account, like damn, 3 million bucks. That's pretty good. Do we take the money out for a bonus for the owners share? Let's take 50 Get out. Well, you keep doing that. And you don't realize why that $3 million is owed for sunglasses, and shipping and all that stuff. It's not your cash, it's actually a liability. And so when people just muddy all that stuff up in their paypal account or their checking account, you can truly have negative equity where you sell the business and you still owe people
Anthony Taylor 18:58
sunglasses, I get it so and somehow zoom auto detected your hand going up, which I think is pretty funny. So basically, they're not doing the financial management far enough down the line. And I think that that's what so I mean, especially entrepreneurs that happened to kind of professionalize their businesses, you might have an accountant, you might have a bookkeeper. But if you don't have somebody with strategic financial acumen, to be able to do those things properly, to at least help you understand none, it's not even a rainy day. It's just the end of the business from like soup to nuts, the end of it. If you're missing that, then you can be building challenges for yourself. So I'd love to switch gears a little bit because we talk about the call it risks downside of lack of financial management. Let's talk about the upside of what teams need to consider what they need to put in place so that they are in fact creating maximum value in their businesses and building more equity as they look to exit or not even so.
Ryan Tansom 20:00
Yeah, just in general, just building an asset. Like if you build a valuable asset, you have choices to sell it whenever you want, however you want at the hopefully the most tax efficient way possible, the most, at the highest probability of getting what you want with the valuation that you want, or the ownership and leadership group is to create sustainable, predictable and transferable cash flow. So if I asked you, Anthony, I want to buy your company, I'd say Alright, tell me where you've been. Show me the normalized, trailing 12 months of EBA. And tell me a story. And then where are you going, and then you would tell your story. And then I'd say get by, it's a great story and really prove it. And your ability to prove your sustainable, predictable, transferable cashflow, using the numbers and using your business as a story board is crucial. Because if I don't believe you, I'm not gonna pay it, right, or I'm gonna de risk it. So like, that's a very easy way of saying like, the lens that every leader should be thinking about, about how to deploy their time, capital and energy is in projects that create more sustainable, predictable and transferable cash flow. I mean, there are definitely strategies and I'm not gonna, I'm not gonna, I'm not gonna dis discredit it, but the, hey, we're gonna raise a bunch of money, burn through cash and hand that bag to someone else that can monetize it. So they can create sustainable, predictable, transferable cash flow. I mean, the last five years, build up a tech companies sell to someone else that can monetize it. That's essentially what the whole VC deal is. Not No, I'm not saying that that's not appropriate. What I'm saying is that that's a part of the marketplace, generally, best and being 500. Should and all the public companies or any privately private equity backed company or ESOP, whoever, whoever should care about cash flow and equity growth. If you want to guarantee the valuation that you want, create the cash flow, sustainable, predictable transfer will make sure that cash flow based on the intrinsic fundamentals of the company.
Anthony Taylor 22:04
Yeah, yes. So novel, right.
Ryan Tansom 22:09
You can tell Amanda, you're on the same page as me like, wait a second peloton that doesn't make bikes anymore might sell their content business, like what do they do? And they burn a billion to a quarter? I don't know, when are we going to get our money back? If we invest in that? Hey, Ty,
Anthony Taylor 22:25
don't worry about it. Right. It's high growth. It's hyper growth. Okay, so I'll take another counterpoint. But saying yes, in certain instances, that's a great model, because you're selling a future dream to somebody that they will then be able to do something strategic. If we look at someone who did somewhat the opposite, but not actually, is Elon Musk, who bought Twitter at $42 billion, and said, Hey, I actually think that I can take the assets that have been built up and monetize this, but within his system, so he wasn't probably taking Twitter for Twitter on its own, but rather what Twitter could develop for, you know, Musk enterprises as a whole. And so that's a very select group of people, and they're playing a different game, then I would argue, most kind of brick and mortar manufacturing service businesses, that if everybody understood the real drivers of what it meant to make money, which most of them do, because they didn't have somebody pumping a couple billion bucks for a wish. You're building sustainable, long term wealth. The challenge that I've seen, especially in the past three years, and maybe in the past couple of months, is that the marketplace has changed. And those AP cycles are getting longer. The AR cycles are getting longer, and it's starting to pinch people. And that's really what happens when you can't sell fast enough or close soon enough or convert fast enough. Have you seen the same thing?
Ryan Tansom 24:03
Yes, I am seeing that. And I would say that the people that have their sh IDs together, like, you can navigate that you've got the tools, like all of our clients, like Dude, you're either using your money or other people's money. You know, I mean, like AR and AP is your money is somewhere else. You know, I mean, like, payables is actually you've got you're using someone else's money, but like, the whole point is, if you focus on that, which is your working capital is the gap to your engine. You can't run out. Yeah, right. Like, and as long as people can see into the future, based on what products and services are trending up, trending down, how you're going to handle that how you're going to adjust. This is why leadership and ownership has to be on the same page because like, what are the expectations for financial distributions for growth, for funding, all of that, and then how does that trickle down? So yeah, it is. It's a great time for good calm buddies, and it's gonna be a really hard time for mediocre companies.
Anthony Taylor 25:04
Yeah, I get that. Okay, so as we finish up, what can accompany that might be mediocre in its financial muscle do to develop their greatness for sustainability. So that's the question. And then tell folks where they can connect with you learn more about you, if they want to learn more about all the stuff that you do,
Ryan Tansom 25:25
I would say that what is in everybody's control that's listening into this, whether you're the finance seat, or whether you're your your partner, or your team member is the finance seat, it is absolutely physically possible to tie your three financial statements together, and tie them to a future normalized EBITA that you want at a point in time, that will give you like, a three dimensional view into the future. And the best way to actually see what that looks like is on our website, arkona.io. We have a bunch of videos Anthony that people can watch for free. And there's a financial checklist down there like hey, it again, I love like I said at the beginning, we didn't invent any of this. So you can literally literally watch those videos and go do it yourself. It's like, trust me, this is how you get the information. So I'd say don't be intimidated with the numbers and find the people that are sitting next to you that are willing to collaborate to learn this stuff without a lot of egos because the output is worth it.
Anthony Taylor 26:20
Like, I love that. Ryan, just thank you so much. I think it's just so cool that even if it is scary and intimidating. It's the stuff that builds that sustainability and the use of sustainability because like you said, you're like, Hey, what should I have done differently is what you inferred in before 2024. And what you're sharing is exactly that stuff. You want to bring longevity, sustainability and greater success to families and individuals so they don't have to hurt. It's putting those things in place. And I just really appreciate you not only sharing it, sharing your story being so transparent about what you've seen, and and doing what you do to help people I think it's pretty freakin awesome. And I appreciate your time today.
Ryan Tansom 27:01
I appreciate it. And I appreciate the compliments.
Anthony Taylor 27:04
Absolutely, folks, my guest today, Ryan Jensen from our Kona check them out. Everybody could do better with their financials. And what we didn't talk too much about is the ability to empower everybody on your team to understand what levers to pull in the right way. But you can't do that if you don't understand it first. So if you're whether you're there or not learn more, empower your people with it, build great businesses make a bunch of money, have a great life. So this has been the perfect. Folks, this has been the strategy and leadership podcast. I hope you enjoyed today's episode with Ryan Subscribe, Like, Share, do all the things to make you a great person. And I'll see you next time. Thanks for listening to today's episode of the strategy and leadership podcast. If you haven't yet, be sure to subscribe so you don't miss a single episode. We post twice a week so you can count on us for your weekly source of content to help you grow and expand as a leader. And if you enjoyed today's episode, please consider giving us a review. We read every single one and it helps us make a better show for you the listener. Also it helps more people find the show, which means we can help as many people as possible. We appreciate you listening and following along and we hope you have a wonderful rest of the day. And as Anthony says until next time.
