Podcast: The Four Best Pieces of Advice for Entrepreneurs, an Interview with Arlin Sorensen
After doing 10 mergers and acquisitions, Arlin Sorensen has these words of wisdom to share with any business owner who wants a successful exit.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Arlin Sorensen serves as the CEO and Founder of the Heartland Companies which includes HTG Peer Groups. When he is not traveling to speak and consult, Arlin is home on his farm in Iowa with his wife Nancy. He is a proud “Pop” to four precocious grandchildren who serve as daily reminders of why he is intentionally living to leave a strong legacy of faith and integrity. He loves making a difference in the lives and companies of small to mid-market business owners.
If you listen, you will learn:
- Arlin’s background in farming and IT management.
- How Y2K changed Arlin’s business.
- The mindset change that caused Arlin to try M&A.
- The first company acquisition and the awesome team that developed after it.
- The second company acquisition and the shift into peer group consulting.
- How the new team helped get Arlin and his business become more financially disciplined.
- What is a platform and how to use it effectively?
- The factors Arlin and his team consider during an acquisition.
- The changes Arlin made to the company with every acquisition.
- Why HTS was sold.
- Arlin’s non-negotiable conditions to a sale and why they were important.
- Arlin’s advice to the listeners.
- Planning is key.
Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Hey there and welcome back to the Life After Business podcast. This is episode 98. If you got an out-of-the-blue offer today, would you have any kind of context of whether you would accept it or not? Do you know how much you need? Do you know what you want, what kind of legacy you want to live, how that would impact your life now and in the future? Well, that's why I'm excited to have Arlin Sorensen on the podcast today. He is a legacy for my old industry, the managed IT services and his wisdom throughout the podcast is amazing. He starts off by explaining to us how he went from farming into it services, grew it up to about $4 million dollars, and was flat, went through some y2k problems and then ended up merging with another company, filling in a lot of gaps in building a platform that allowed him to do up to 10 acquisitions before you eventually ended up selling the company.
Ryan Tansom: And Arlin also has a company that he just sold called HTG, which is peer groups for managed it providers and regardless of the industry that you're in, Arlin and his sheer exposure to his experience and all the companies that he's worked with has developed a philosophy that is about planning and the four things that you need to know as a business owner to run your company like you're about to sell it tomorrow and you've got your non-negotiables and you've gotten a written legacy plan about the financial numbers and what you want from your business. What is your life plan? What are you going to be doing after you sell - life after business? What is your leadership plan? How are you going to continue to develop yourself and other leaders and then what is your business plan and how does that accomplish all the different things that you're trying to accomplish for your other plans?
Ryan Tansom: What I really liked about that is his core philosophies and core values really align with GEXP Collaborative and what we're doing, and it's just really fun to hear that the problems that they're dealing with are the problems that a lot of entrepreneurs have, so to really look at your company like it's a sellable asset and if you're getting knocks on the door from buyers, brokers or investment bankers, whoever it might be, you have an idea of what's important to you so you can say yes or no immediately and then continue on your life to try and march towards the goals of what you have. I really hope you enjoy this interview with Arlin. Towards the end of the interview, he really gets going with all the different insights and the different things that owners have to be doing in order to be ready. So without further ado, here's my interview with Arlin.
Announcer: This episode of Life After Business is brought to you by Solidity Financial's growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your time frame to the right buyer at the price you want.
Ryan Tansom: Morning, Arlin, how you doing?
Arlin Sorensen: Hey, I'm doing really well, Ryan, great to be with you.
Ryan Tansom: I'm looking forward to having you on the show. You are kind of a legend in the it space with all the different, uh, people that you bring together with the HTG peer groups that you've had and then also the background in a lot of the different experiences that you've had over the decades of being in managed IT and technology world. So for the listeners that might not be too familiar with your background, can you go back to how you went from a farmer into technology? Because I think, you know, there's got to be a bridge there somewhere.
Arlin Sorensen: Yeah, well it, it certainly wasn't a planned bridge, but there definitely is a bridge. Uh, I came back to the farm in 1977 with the full intent of spending the rest of my life, uh, running the family farm operation with my brother and uh, in '82, I bought my first, uh, first computer, an Apple2+ — a 16 k dual floppy drive machine and a, a piece of farm accounting software. Uh, I had, I had seen, uh, seen some computers at some different industry, AG industry events and decided that, you know, I, I needed a machine to keep my accounting current with. So I spent $4,000 actually to buy that powerhouse. And uh, but I, it got me, got me hooked on computers and uh, over the course of the next few years I started to help other farmers go to Omaha. And, and, uh, that was the closest place we could get them, get a computer, and I'd help him pick one out, bring it back, help set it up and teach them how to use the accounting system.
Arlin Sorensen: And, uh, after a couple of years of that, it became obvious to me that either I had to stop doing that or I had to charge something for my time because I, I instantly became the, the tech support guy, too. And uh, they were calling me all the time to help them. And, and uh, as, as that grew, I had to create a little sideline business to, uh, to get into the industry. And so in '85, that's, that's really when I set up official shop and started to sell farm accounting packages and over the course of the next five years moved into the business world. And uh, from there we started the company that really focused on using technology to drive business outcomes for folks.
Ryan Tansom: So you've had quite a couple of different milestones and steps throughout your, your, your journey as an entrepreneur. So what's that business that you had started and then you had grown... What- can you kind of give us a little bit of the backdrop of it, know, how did you guys go and what were some of the growth? Because there was a couple other times in there that you ended up merging before you ended up eventually selling it, correct?
Arlin Sorensen: Correct. Uh, yeah, from '85 really through 2002, uh, it was, it was a business we ran here actually from the farm. So over the course of that time, I added on the end of my house five different times and we've got 12,500 square feet of office space attached to my house out here in the middle of a cornfield. But, you know, we got to y2k and uh, we were doing pretty well. We staffed up because of the pending opportunity that was supposed to change the world. And, and, uh, we had grown to 36 folks by that time and y2k came and no business came with it and all of a sudden we were faced with having about 10 people more than we had work for. And uh, that, that was, that was a really challenging period of time. Uh, we had had pretty decent growth up until then, but we kinda got stuck right right there.
Arlin Sorensen: And, um, we ended up having to let some folks go and, and, uh, the business really kind of plateaued. We were doing about 4 million in revenue at that time and uh, in 2002 after we'd had four consecutive years of really flat performance, uh, we decided to take a different approach and, and, uh, went down the M&A trail and over the next 10 years we, uh, we did 10 different merger or acquisitions across the Midwest. So when we actually sold the company at the end of 2012, we had seven offices across five states and a hundred little over 100 folks in the organization. So, you know, we, we, we did the organic approach for the, for the first 20 years or so. And then, then we took the M&A approach for the last 10 and that was a very learning experience to say the least. But uh, definitely as I grow companies M&A is something that I think has certainly got a place if you want to really take your company to another level.
Ryan Tansom: Well, and there's so much I want to unpack there because I think, you know, 10- doing 10 acquisitions over 10 years, you're learning a lot so we know and M&A as a growth strategy I think is also a very interesting topic and I want to unfold as well. But maybe Arlin, can you explain how did you, how did you shift your mindset in that challenging time where you were flat? So it because I think right before the call you and I were talking about the difference between a lifestyle business and then creating enterprise value. Did you have a shift in like, hey, you know, here's what's the ultimate goal and how am I going to get there? And then how did you land on M&A being part of the growth strategy?
Arlin Sorensen: Well, uh, I wish I could say I had a grand plan for, uh, for why we took that strategy. To be honest, it was driven mostly by my frustration in being able to continue to grow the company from where we were. You know, we're, we're out here in the, in the middle of rural Iowa. And our trade area at the time was, was basically a couple hour radius from, from Harlan and, and, uh, most of the communities we serve were, you know, 3,000 to 7,500 people. So we had penetrated pretty deeply and you know, I just came to the realization that if we really wanted to grow any further, we were going to have to have a bigger geography and we had tried doing some remote offices and in smaller communities around the region and it was just tough to, to go in there and, and start from scratch and build something. So I knew people in the industry through some of the different community events and industry events that I went to and got to talking to them and, and there were some that were looking for an exit strategy and I certainly had no idea what I was really doing when we started down the path. But, uh, we dove in headfirst and did a couple acquisitions the first year and, um, you know, mark...
Ryan Tansom: How did that look? As in... did you just like chat with someone at a trade show because I think that happens a lot. I mean, was there certain synergies that you're looking for? But what sparked it with the first, the first acquisition?
Arlin Sorensen: The first one was, was actually a merger where, uh, my, my strength was really around technical things and, and, um, you know, some of the, some of the operational stuff. Uh, I, I was, I was dangerous, uh, as far as financials and some of the back office things. And um, I really was not very good at sales. And so, uh, when we came together with Connecting Point in Joplin, uh, the big driver was that a two partners that came out of that, were a finance CFO and, uh, a vice president of sales. And so it filled the two biggest weaknesses that we had in the company. And that was a very important piece of us being able to scale. From there, we finally put together a team that, that wasn't just technically focused and able to fix most any problem, but we actually could run the company profitably and had some controls.
Arlin Sorensen: And, and then we had a sales engine for the first time that, that really had some focus. And, and, uh, we began to build, you know, the sales engine to, uh, to allow us to continue to grow as we added in companies. Most, most IT companies are not very strong on the sales side. And, uh, that was certainly our case. So that first one was all about bringing together a team of people that we could build on and create a platform from. And then the second one that year was a, was a individual that was looking to get out of industry, had some health problems and, and, uh, so it was a perfect way to test our platform and we had plenty of bumps in the road, uh, but it really went pretty smoothly. And we found that we could layer in a company and, and uh, you know, in fairly short order bring them online and leverage our back office systems and, and move us forward. So that was, that was really the start of using a platform to go to the next level.
Ryan Tansom: So, which I think is extremely um a huge point because whether it's a platform to do your own M&A or to give to someone else, there's going to be a huge amount of value that's created there. And before we, before we dive into that, how, you know, when you, when you had these different individuals and you did that merger... Arlin, how did you guys like determine what is the operating agreement? Who has what shares, I mean, how did you guys divide up and value both those companies? And then the, how did you like in the, in your platform from the tech side, did you have anything on the finance side to figure out how this is how we're going to do it?
Arlin Sorensen: Well um yeah, from a, from a valuation perspective, um, we, we just agreed to use the same formula on both companies and, and there wasn't a lot of really deep scientific things we put in place. We kept it simple. We, we looked at the balance sheets of both, both had fairly good balance sheets and, and, uh, we put a formula in place to kind of value the company. And then we did a, we created a new, a new corporation and rolled both of them in, at the, the, uh, percentages that, that the valuations indicated. So, uh, we made that pretty simple, um, you know, and, and what happened as we came together was that Jane, who's, who's the financial genius, uh, she came in and, and we had known each other probably for three or four years ahead of this, off and on. So she had some idea of kind of the, let's say, the creative ways that I would, would manage finances and uh, you know, she pretty much came in and, and put a Kibosh to things and got us, got us running the business the way it needed to be run.
Arlin Sorensen: So we, we immediately moved over to, to their platform in terms of financials, uh, used in the Great Plains accounting system and put in her controls and discipline. And, and that was, that was huge. Uh, we brought to the table, the, the technical side and, and ConnectWise and the way that we were operating the service delivery side of the business and implemented that. So it was, it was a pretty immediate... We got holes in lots of different ways. We picked the best of breed solutions from the two companies and implemented them immediately and, and, uh, that became our platform going forward.
Ryan Tansom: Which, which is awesome. And a couple questions on the financials and was some of the things that you called it creative. So what are some of the things that she did on the financials to, to put it in some controls, was there a certain standards that she had then layered on top of yours or what was some of the things that you guys did to make sure that you all have the same?
Arlin Sorensen: Yeah, I mean from a, from a standards perspective, we didn't really have any. Uh, so she brought, she brought a lot of discipline, you know, the bill reviews and things. Uh, you know, paying bills for me was like, you know, Saturday night when I was, had to get them out because they were due on Monday kind of thing. And I, I, I, I didn't review them carefully. I didn't have any kind of plan around doing that and a lot of times invoicing would pile up and not get out because it just wasn't high on my priority list. And so we got into a, you know, a very disciplined financial approach of we had two people signing checks. So we had control over that. We had invoicing that went out, you know, every week. And it was very structured. And, and done the right way, um, and so that, that really served us well as we grew in scale, the, we, we implemented the majority of, of the processes and procedures that, that she had built in her own company and, and laid those across to what we were doing.
Arlin Sorensen: And Great Plains brought a lot of discipline that, that the early versions of Quickbooks didn't really have from a financial perspective. So, um, so it was just a, it was the right thing at the right time to help us really build a solid financial footing. And then, you know, when we had our, our weekly meetings, we actually looked at numbers. We had a budget. I mean, there were, there were things that, uh, I had just kinda is there if there was money in the account we were doing okay kind of thing. And that all that all changed too, you know, what are we trying to accomplish? What's our balance sheet look like? Uh, you know, what's cash flow projections look like? What's the pipeline look like? All, all things that were pretty foreign to me at the time. I was running it by the seat of my pants and just making it happen. And, and so that's where we're, that's when, uh, we got a little more mature.
Ryan Tansom: Well, and I think, you know, there's a lot of people that do that and you know, filling the talent gaps is a, is a really big challenge and so it's being able to get the talent together and then actually build this platform. So in your mind and what's your definition of a platform and then how did you guys use that and change your strategy going forward?
Arlin Sorensen: Well, a platform to me is really the assembly of best of breed products and tools that are configured with a team of people around those things that can execute them consistently with discipline over time, and then a, you know, a team of leaders that, that can guide the strategy and execution of that platform to scale a business. Um, and so, you know, we, we brought together those things and we built that and, and it, it became really are our way of, of building value in the company because we use the platform then to do acquisitions and we did one other merger along the journey where we brought in a COO because that was kind of a weak spot. We discovered over time that we just didn't have enough leadership in terms of managing operations. And so, uh, we brought, brought one more key leader into the mix through an acquisition. But, um, most of what most of what we did was buying companies that had established customer bases and plugged those into our back office and our platform of delivery and uh, and then migrated them quickly to that platform so that we could leverage the cost savings and efficiencies by having everybody on the same thing.
Ryan Tansom: So what were some of the KPIs, because you mentioned that creating and growing company value, which I want to, you know, really dive into what were the KPIs and that you were, that you were measuring to make sure that you were judging on how well you were doing. Was it a valuation formula and then there's layers of KPIs from customers to profitability to what were some of the things that you were measuring and then how did you use that to then roll in these other, um, other companies?
Arlin Sorensen: So we, we, we measured a lot of things. Um, the, the, one of the beauties of, of having a financial genius like we did was that she was able to create a dashboard for us pulling data from, from the accounting system, from Connectwise, from, uh, some of the other tools we had in place and, and provide us real-time, daily information almost going on in the operation. And, and that, that became a huge, uh, an important piece for me trying to run the company. Uh, I, I knew what was going on for the first time in my career, actually. A lot of times in the past it was, you know, gut feel because I didn't have data, but uh Jane brought it all together into a dashboard that, that was in my inbox every morning. And it told us, you know, my, my number one concern was cash flow.
Arlin Sorensen: We were rapidly growing, we're hiring people, we were doing all kinds of stuff. And, and cash is cash is king and it causes a lot of companies to have real challenges. So, uh, that was, that was the number one thing I watched a everyday, you know, valuation. There's all kinds of formulas, there's all kinds of ideas of what companies are worth. At the end of the day, people buy companies that have got consistent profit. And so, um, we monitored carefully EBITDA (earnings before interest, taxes, depreciation, amortization), because that's really what most companies in in this industry or are bought off of. And so we wanted to watch that and make sure that we were consistently driving or profit to do that. Of course we gotta we gotta watch our service delivery efficiency, so we, we, we monitored a KPI called the W2 multiple that is uh, something that service leadership taught us, which is about basically how many dollars of service revenue are being generated per dollar of W2 expense.
Arlin Sorensen: And so you want to have a number that's around three times. So if you're, if you're paying a, a service delivery engineer, let's say $50,000, you need them to be generating $150,000 in service revenue to really be able to cover costs, cover benefits and have some money left at the end of the day. And so we monitor that very carefully and we set our comp prep program up to align to that. And we, we comped engineers more if they, if they drove higher a W2 multiples, but that, that was a key part. We had 30, 36 engineers on the road at our peak. And, and uh, so they were a huge part of, of our ability to, uh, to drive profitability. Gross margin was another one. We were a large product reseller, so we monitored gross margin carefully to make sure that, you know, we weren't selling product too cheaply and, and uh, that kind of stuff. So, uh, you know, there was a number of things on the dashboard, but those were some of the key ones that I paid really close attention to.
Ryan Tansom: Well, and I think you hit on a lot of good things in it. I think what's really interesting is when you have high-level numbers that you're watching, there's a lot of decisions that layer in and make it easier to develop things around there. Where you know if you've got EBITDA that you're always looking at and you're trying to drive it - because you know, you've mentioned consistent profitability and that's easier to transfer the profit to any additional future buyer, whether it's internal, external, all that stuff. And then if you have the W2 ratio models, you're going to be driving efficiencies. So, you know, I, I think, you know, what's really interesting about the managed IT services industry that a lot of different industries also struggle with you is you're going from trading dollars for hours to having a machine and a system. Did you guys start out at break-fix and then merge into the managed IT and scripting and all these other things and, or, or did you start there? And I think how did you know a certain service delivery things that you were doing, you know, were there ideas that you had came up with and how you looked at that stuff because of those ratios you were looking at?
Arlin Sorensen: Yeah, for sure. We, uh, you know, we, we started back in the eighties, so we definitely didn't start with managed services. We were a break-fix shop that went through the different transitions to, uh, you know, doing some proactive services where we would actually try to call customers and go out and proactively look at their stuff and deal with that to then selling block time to people where they could prepay for a block of hours and get a discount to, you know, to the point where we finally began to, uh, to do some managed IT services where, where it was all about, you know, a fee for an exchange for keeping an environment functional and uh, you know, that, that happened over a number of years. But it's a model that allows you to scale. And uh, it's, it's difficult to, uh, to manage that, uh, especially getting it started. But once you get it in place and you have the right systems on the back end and you can automate a lot of things, uh, that's when you're able to actually kind of take advantage of the platform and use it to drive revenue and profitability.
Ryan Tansom: So what were some of the things that, you know, what was difficult about some of those, you said it's difficult to manage. What's difficult to manage about it?
Arlin Sorensen: Well, one of the first challenges is that we had spent decades teaching our customers that, that they only needed to pay money if there was a big problem and uh, you know, with, with managed IT, the, the idea is it's somewhat like insurance. You pay, you pay no matter what's going on and you're paying for the reality that your systems are just going to work and so we had to kind of un-train all of our clients and teach them a new way of thinking where it was not the pay-as-you-go kind of thing, but you pay monthly and, and uh, you know, it's better for you that way. That was a tough transition. But you know, the other thing that, that is really difficult in the transition is for years we had been, we had been rewarding engineers for hours worked and billed. And when you go into a managed IT environment, you win when you're not putting hours on the customer account, basically, because you've done a good job and are using automation and tools to help keep the systems running. So the reward engineers for not working on on machines because they've done a great job of keeping them healthy and, and uh, working along the way. And so it's a complete mind shift. I had to redo our, our entire comp plan and model and um, you know, anytime there's a change like that, it's difficult to educate and, and get everybody on board.
Ryan Tansom: Well, and were those KPIs that you were mentioning, those were helping you determine that it was worth the effort, right?
Arlin Sorensen: Absolutely. Yeah. And uh, you know, there, there's no question that as you go through these different gyrations in any industry as it matures, is that the profitability, you know, starts strong and then it starts to wane and fall off and you've got to jump curves and, and go to another, another business model. So, so we've been through a, you know, a handful of those to say the least. And each time that you watched your profitability fall off before you jumped to the, to the next thing, and then had to build up, you know, the operational efficiencies and back end to make those things profitable again.
Ryan Tansom: So I think that's a lot of industries and a lot of companies have to go through those gyrations like you mentioned, but did you guys have a foot because of the m and a that you were doing, you were starting this immune, you had very real life experience of how things were valued because you're the buyer, right? I mean you're, you're managing risk and then looking at your way of how the bigger enterprise works, you know, when you have those gyrations in the profitability, knowing that you have the foresight on enterprise value, how did you see these, these things that you were implementing change the overall efficiencies of your company, but also the valuation of the business? Because I, you know, I think the, it's like a foot in this year's cash flow, but then also a foot in the enterprise value. It's a constant balance.
Arlin Sorensen: Yeah, it's definitely a balancing act. And, and obviously cash flow is a, is a big driver and how much of that you can do, you know, what we, what we saw over time was that, that we were able to, we got better at basically acquiring employees and customers from an organization and, and plugging those into our system. So, you know, in the early days we didn't really know what we were doing around employee onboarding, employee training and all the things that we needed to bring the people that we acquired up to speed quickly so they could contribute and uh, didn't feel lost for the first six months that they worked for us because we, we weren't doing a very good job of bringing them on board. We had the same, same issue with customers. Um, you know, we often, we're transitioning, uh, their, their world from what they were accustomed to, to, to our platform and, and service delivery model.
Arlin Sorensen: And, and, uh, in a lot of cases that was coming, coming off a block time or a break-fix kind of relationship into a monthly recurring model. And, and it took a lot of education, a lot of sales calls and things like that to educate and bring them up to speed so they could plug into the system. We, we struggled far more retaining employees when we did acquisitions than we did customers. Customers were pretty willing to stick and ride through the changes. Uh, employees were, were a, a much more of a challenge for us because we were shifting mindset and what they were accustomed to doing. We were giving them a whole new set of tools to work with, you know, and for the first time in a lot of cases they, they were smaller companies so they were getting reviews and things they weren't accustomed to. And, and we're measuring them, you know, uh, in ways that they weren't used to. And, and so, uh, you know, we lost, we lost some folks as we did acquisitions just due to the changes that were part of what was gonna happen.
Ryan Tansom: So, you know, I think you, you've... when you're looking at these companies in the 10 acquisitions that you did, and then we can kind of migrate into the overall things that you're seeing in the marketplace. But like, how did you, what were some of the things that you were seeing them, you know, because you've built this platform which has all the things to do right. And then you would look at these people have all the things that they're not doing right. So you know, if you take, you know, I don't know if you've got maybe some hypothetical numbers of, okay, if you take a $2,000,000 company with, you know, 400 grand, you've done, you know, how did you value that? And then when you brought that profit stream into your machine, did the value change because you're almost getting into a direct return on your investment as you're plugging it in. I mean it, right? I mean is that kind of the whole approach that you guys are rolling?
Arlin Sorensen: Uh, yeah, but it's, it's not, it's not immediate. And that's probably the biggest thing that people get wrong in my opinion about M&A. There's a lot of folks that think one plus one is going to equal three. And my experience is that the first year, one plus one is more like 1.6-1.8. It's not even two. You take a dip before you're able to make the changes that are necessary to then begin to capitalize on what your, your acquisition is. So, um, that's a, that's a fallacy that I see a whole lot of people walk into, especially on their first M&A, and they think that they've just struck gold and they find out that the money's flowing the wrong way and that's just part of what happens in an acquisition situation. But, you know, valuation is based on a whole lot of factors and, uh, a lot of times it depends on the situation that the ownership is in and what they're trying to accomplish and how they want to get paid. And, you know, my perspective is the number is not nearly as important as the structure of the deal. Um, a I see some high, high dollar offers out there that have got a terms that are not very favorable for the seller. And over time, they often end up with less money than a much lower offer they could have gotten for cash up front. So, uh, we tried to focus on kind of the structure of the deal with, with those that we acquired to help the owner achieve what they were, what they wanted to accomplish. In some cases they had debt they needed to get rid of, you know, in other cases they were looking for more long-term employment.
Arlin Sorensen: And so their employment agreement was, was a driver in some cases, um, you know, they were looking for income that was, was stretched out over time that help them manage some of the tax implications of a sale. So we focused a lot on structure of the deal and uh, tried to make that a part of the attractiveness to the seller. And that allowed us then to figure out how to really maximize the business value creation on our side and, uh, and then drive efficiencies into the, the customers that we acquired and turn them into profit as soon as we could.
Ryan Tansom: Well, I think you hit on a huge thing. I mean, the deal structure is the thing that I think a lot of entrepreneurs see this "Oh, gotcha" after the fact, right? It's like, "Hey, I'll pay, I can pay you $20,000,000 for your company, but it's going to take me 25 years." And so you know, and there's going to be all these drivers that essentially you've got a glorified sales person running your company, you know, because of maybe we can kind of shift into the HTG as you guys, you know, maybe what did you, how did you guys, what was the final decision that you had to eventually sell the business? And then what were some of the things that you learned throughout that and why did you end up, you know, migrating over to HTG?
Arlin Sorensen: Well, um, you know, HTG started in 2000. It grew out of the struggles we were having a as a company, uh, with y2k and one of my employees actually said, "you know, we ought to call some other Iowa companies and just see if they're having the same problem with y2k as we are, or if we're just too stupid to see where the opportunities are." And so that's what we did a in April of 2000. We called three other Iowa, uh, companies and, and asked if they'd meet us in Des Moines for half a day to share notes on what was going on with y2k. and they all showed up and they actually spent the whole day together because we got, we got so much value out of just talking to each other about business. And uh, so that grew over time.
Arlin Sorensen: Um, you know, and, and when I finally decided to exit HTS at the end of 2012, which was the IT company, um, I had really lost my passion for the business, quite honestly, and was having a lot more fun working with HTG, which had grown significantly. Um, and the other thing was that the cloud, the cloud transition was, was right there and I really wasn't looking, looking to do another major business modification and shift. Um, so we, uh, we hadn't really had a plan to sell the company. I got a call out of the blue and followed up with the broker and it appeared to be real. Uh, one of the best things that I've used in, in selling the two companies I have is I had a predetermined list of things that were non-negotiable. Um, if I was, if I was going to sell the company, I have a list of things that had to be true.
Arlin Sorensen: Um, and in the case of HTS, you know, some of them were, you couldn't go in and close down the rural locations that we were serving because our, our model was, we were, we were serving smaller locations around a larger metro areas, but we wanted to take care of, of the smaller, the smaller businesses. Um, and so that was something they had to, they had to take care of our employees. Um, we weren't gonna allow somebody to come in by the customer list and fire our team. Um, so, so we had, we had this list of things that were, were a requirement and a, in order for us to really even have a conversation. And of course, you know, as most business owners we get, we got lots of phone calls from people that wanted to buy our business, or thought they did. And my immediate response was, hey, I'll send you our list of non-negotiables and if, if you're good with it, give me a call. Uh, you know, I never had any callbacks until October of 2012. And um, a company said okay, you know, what, we'll, we'll do this. We're, we're from a small rural area ourselves and uh, you know, in three months we sold the company and, and uh, moved on.
Ryan Tansom: So there's a couple of things that you mentioned. So you said that you didn't really have any plan to selling, but yet you had these predetermined. So was there... over the course of these 10 acquisitions, I mean, did that help you formulate those non-negotiables because you watched the situations, so even though you weren't ready, per say ,you had, you had something in, in a, in an idea and a plan for what should you be ready?
Arlin Sorensen: Absolutely. I mean, that was one of the things that Jane, our CFO was, was really stuck on is we had to run the business every day like we were going to sell it. And um, so, you know, we, we talked about what would cause us to sell on a regular basis and we ran the business financially. Um, you know, not, not messing around with the numbers and trying to make them look any which way or other it was. The numbers need to be the way the numbers are and we need to run it likely would sell it tomorrow. And that served us really, really well kept discipline in what we were doing. And, and, uh, you know, I, as I consult with, with a lot of companies, a lot of lot of things get, get messed around with financially where were owners will take money for this, that, or the other thing. And, and, uh, you know, that's, that's, that's a privilege and a right of, of owning and running a business. But, uh, when, when you get to the point of sale, um, we didn't really have any add-backs or deducts from our, from our numbers because we ran it clean and uh, so, you know, it made a transaction go pretty smoothly.
Ryan Tansom: Well, you ran it cleaning, I'm assuming because you've done it 10 times by that point and you've also been in the ACG, talking to other business owners you had probably, whether it was written down or not, did you have, you know, the answers to the questions that you knew were going to come?
Arlin Sorensen: Sure, sure. We had done a lot of due diligence and we knew we knew what the due diligence process would look like. And, and, uh, you know, the, the company that purchased us, they brought six folks into my office for a week and set up, and, uh, you know, they looked at, they looked at everything very carefully, but they, they found everything because, uh, because we had run the company in a way that kept it ready for that kind of inspection. And so clean these things up and we've got to shred this stuff and we got to hide this and whatever it was. Sure. Here's the files, you know, go to it. And uh, and so there's a lot that can be done just by running a business in a disciplined way so that you're prepared whenever that time comes.
Ryan Tansom: So I know you guys do a lot of, uh, education and preaching of that in HTG. So, you know, when we, when we kind of shift the conversation, I'm curious because of the sheer exposure that you have to managed IT services industry and there's a, like you're never saying before we got on the air, is that it's an epidemic all across lot of different industries. You know, what are the things that you're seeing that people aren't doing consistently that they should be in order to kind of have their eyes wide open?
Arlin Sorensen: Well, Ryan, I think the biggest, the biggest thing that we see that people are not doing is number one to, to have a plan for what they want to accomplish financially. That starts with what they need personally to have available when they're going to quit getting a paycheck and they need to live on whatever they've accumulated. So we call that a personal wealth target. People need to know how much money they need to accumulate so they can live the rest of their life. And you know, uh, the best advice we've been able to find from financial planners that we've talked to is that a, you need to. You need to know how you're going to come up with basically 25 to 40 times whatever you live on today. So if you spend a $100,000 a year to live today, you need to have two and a half million dollars of assets that you know you can leverage to live out your, your time after you quit getting a paycheck.
Arlin Sorensen: Most people have no concept of how much it costs to live and have no plan for how they're going to accumulate that beyond social security, if there is any, and maybe a little bit of retirement funds. But when you look at the data for the United States, something over 55 percent of people can't handle a $5,000 unexpected bill and those folks are all going to retire someday. And uh, so that's the first thing we see is what's the personal need you have? And then as a business owner, that has to tie into how much business value do you need to create to make sure that you fund that personal a gap because that's what most business owners think is gonna happen. They're going to sell their company, they're going to have all the money they need from selling the company to take care of their personal needs. And I can tell you from watching dozens and dozens of sales over the last few years that that often does not happen. People try to equate hard work as value. And I can tell you, buyers don't buy hard work. They don't care if you worked 80 hours a week for 25 years in your company, they're going to buy it based on what that company is able to generate into the future. And it's not hard work. So...
Ryan Tansom: It's interesting, I think like, you know, going back to the work smarter not harder right now in those numbers, you know, if I had a dollar for every time I saw someone's face kind of look weird when you say, okay, so your company is $5,000,000 in revenue, maybe a million or so in EBITDA, and even then maybe it's worth five times, so you got $5,000,000 and by the way you pay 45 percent in taxes and then the rest is going to come over time and then you're not going to have a company credit card to run through your trips and your cars... and the next thing you know, you've got like, Holy Shit, what do I have left?
Arlin Sorensen: Exactly. That's exactly true. And, and uh, you know, so people have got to, they've got to do the math right? And, and that's, that's probably the biggest mistake I see that happens out there is that they're are uninformed about the reality of the numbers. And, uh, we're spending a lot of time with owners just doing simple spreadsheets where we ask a few questions and plug in the numbers and we watch their faces just like you said, and their jaws drop wide open. And uh, you know, when, when you, when you look at companies that are marginally profitable and they need to generate significant amount of, of EBITDA to be able to sell the company to meet a target. And, you know, I've seen numbers where, you know, companies that are doing $3,000,000 in revenues today at very low, very low profitability, but they want to, they want to end up with a business that's going to give them $10,000,000, let's say. They've got to grow from 3 million to like 50 million [Ryan interjects: They need 3 million in EBITDA] to get to the EBITDA number that they need to get to the profit number or to the sale number. And, and it's just like, it's not computed. They're not connected in their mind that, that this stuff all really, really matters. And, uh, everybody thinks that, well, you know, we can fix it tomorrow. And I can tell you that it takes, it's not a tomorrow fix, it takes years to fix things and get them to a place where it's going to achieve what the end game is. So people have got to get their numbers figured it out.
Ryan Tansom: Well it's interesting, too, and I think, you know, I think you guys are doing justice to it because if you think about you're coming from the managed IT services space and all of a sudden you know, you gamify being a tech in the service delivery. You know, you got to ConnectWise, you get the dashboards and ratios. And if you think about this in my perspective of going through it too, is you got being an entrepreneur, you can gamify. Okay, if you want $5, million net, how much do you need to grow the value of the company too? And then all of those KPIs that you had mentioned should tie to the enterprise value and your net proceeds that you have various specific things that you're marching towards all day long because you've got a reason to do it. Instead of just saying, Hey, I'm going go buy a new boat or cabin.
Arlin Sorensen: Yup, absolutely. It's all tied together. And, and uh, the, the big challenge that we see is that people are not thinking like business owners in this particular area. And, and they got, they got to make a shift. They gotta invest the time to learn their own financials and learn how the market really works so that they can not get to a place. And one of the saddest conversations I've had in the recent years has been with a guy in South Carolina that called me and said, I'm selling my business. I've had four different offers. They're taken advantage of me. Can you look at my numbers and tell me what's fair? And uh, I looked at his numbers and I said, you know what, these offers are not out of line. Uh, they're, they're paying you what this company is really worth. And he said, "you don't, I have missed every basketball game, every anniversary, every birthday. I traded my life for this company for 27 years. I can't sell it for this. My wife will kill me." I said, "man, I don't know what to tell you other than you should have worried about this a long time ago," and he ended up selling his company for about 10 percent of what he had promised his wife he was going to get for it and had to go get a job. He couldn't afford to retire. And, and so, uh, that, you know, those kind of stories that are all too happening all too often.
Ryan Tansom: Well, and I've seen it myself and with the people that I've talked to or our clients or the interviews and what I have... I'm curious on your, what you've seen is once someone has that experienced the eyeopening, okay, I've got a target I gotta hit. How have you seen their, their strategy and their focus shift because they've got a specific thing that they're trying to do. So going back to, you know, kind of the context of my question is, you know, the hard things that you have to do from changing business models or replacing the people that aren't working out, have you seen it where people make those determinations faster, quicker or easier because they've got a reason to do it or what's the correlation there?
Arlin Sorensen: Yeah, absolutely. Um, you know, we, we, uh, we press our, our members to write a plan, number one, so they've got to put it on paper, which is, is a big part of the process. If you write it down, that will help and then you've got to look at the different levers you have available to pull to really help you accomplish that plan. So, you know, a lot of, a lot of it is looking at key metrics and understanding which ones will move the needle the quickest to help you get to where you want to go and what, what do you need to do to make that happen? Uh, in a lot of cases it's just drive up the way they run their company. And, and, uh, you know, if, if you're running a company that's running at at five percent profitability and you needed to get it to 10 percent, you know, the first discipline you have to have is every time you make a decision, you've got to ask yourself, is this a 10 percent decision?
Arlin Sorensen: And you have to realize that if it's not, then you better have another one that's a 15 percent decision that's going to offset the one you just made for five percent. And we have to just train our minds to think profit first. So many small business owners feel guilty making a profit and they don't recognize that it's their future, that they're, they're gambling away when they choose to do, to make poor decisions on profitability. So it starts with writing a plan, putting it on paper, you know, sharing it with people around you that can help hold you accountable and can help ask that question. That's one of the values of a peer group is when, when we know that you're trying accomplish x, we can ask you why you made a decision that didn't move you toward that. And uh, all of us need that kind of accountability to keep us on track.
Ryan Tansom: So I think peer groups, no matter what industry or wherever you go, you have to add, especially as an entrepreneur owning a company because you can't, you got to have someone that's going to actually hit you between the eyes and not someone that's going to say yes because you pay their paycheck. But I'm curious around, you know, when you say... how do you guys or how have you seen it, the, the balance between, you know you said looking at profit and I think there's these decisions, that's why I kinda went back from the foot in the annual cash flow bucket versus the foot in the enterprise. So if you have to invest... So, you know, I've seen a lot of people cheat on investing of like, you know, the new CFO, I'm going to hire the $80,000 person instead of $120,000 person, you know, because it's going to affect profitability or my lifestyle. How do you guys, or how have you seen people balanced that in a way that's actually effective for certain cases?
Arlin Sorensen: Well, uh, you know, there's no question that, that lifestyle drives a lot of the decisions. Um, but the, the, to me, the key is planning, right? And, and you know, we drive, we drive people to have four plans that they need to have written down and updated every year and shared with their peer groups. They got to have a legacy plan which tells us what's the end game they're trying to accomplish. And a big part of that is the financial goals that, that you need to have set stone so you know what you're tracing. They got to have a life plan. How are they going to live the hours that are not in the workplace and make it meaningful. They got to have a leadership plan, which is how am I going to invest in myself as a leader? How am I going to invest in the key people around me that I need to help me succeed and achieve what I want for my legacy?
Arlin Sorensen: And then they are business plan which drives how they're going to operate and run their business to drive toward the legacy they want to have. And if you get into the discipline of building those kinds of plans and really, you know, writing them down and having specifics, you know, having a budget that means something that you manage against it quickly becomes obvious when you've got shortfalls in, in talent or other things around you that you need to have to achieve those goals and you can make better decisions. And, and so I'm a big believer that the main value of planning is it gives you a reason to say no to things. Entrepreneurs seldom say no to anything if it looks interesting and, uh, often they need to say no to most things. So, um, if you have a, a disciplined planning process, it gives, you know, the guidelines basically to say no. If it's not in the plan, the answer's got to be no, not right now. If it's really important, then you have to adjust the plan and put it in there. But, um, most people don't, don't follow that mindset. And, and thus they'll make poor choices in how they spend the money they have and to come up short in key areas.
Ryan Tansom: I mean, I couldn't echo what you just said any better. I mean, it's the... there's an analogy I give a speech that I do or you know, if you think about Google maps is one of the most powerful tools on the planet. And if you don't plug in your point B, what happens? Nothing. No. Like, let's go to a quick trip across the country. Well, you know, that wasn't on my way. Yeah, I mean it's, yeah, it's super simple, but I think it hits home, you know, I, you've got a ton of a gold nuggets that you've given us, you know, if there was one thing that you would like to highlight, um, over the things that we've talked about or one thing that you want to leave our listeners with, what would it be?
Arlin Sorensen: Uh, you know, a lot of people sometimes feel like they, they can't, they can't do it. Uh, it's, it's an impossible goal. And, and I would tell you from watching lots and lots of people, planning will get you where you want to go. If you plan your work and you work your plan, your plan will work. You got to make sure there's enough time in that, in that equation. But planning is the key to not just making a, you know, the amount of money you need to personally succeed or driving the enterprise value of your, your business planning is how you succeed in life as well. And it's the willingness to be disciplined, to stop and think about what it is you really want to accomplish. It all is built on that legacy plan and where you're trying to end up. But you can work backwards and figure out what needs to happen this year to move me there. And if you take that time and you are willing to really let planning work for you, you can accomplish whatever you want to achieve.
Ryan Tansom: I mean, wow. Well said. And I, you know, I think with a plan you, that your ability to say no to. And I, I just, I was just thinking as you were saying that too, and how, you know, these people are getting random offers and they don't know whether they should say no to that or not because they don't know what kind of context to put it in.
Arlin Sorensen: Exactly. And that's, that's where the non-negotiable thing was, is so important. You know, if you've got a number that you're looking for, if you've got the kinda the contract requirements that you're looking for, if you know what it is you want, saying no is pretty easy.
Ryan Tansom: Uh, what's the, what's the best way to get in touch with you for listeners if they want to know more?
Arlin Sorensen: Um, they can connect with me by email. Uh, it's, it's a Sorensen, a s o r e n s e [email protected] or I'm on linkedin. They can connect with me there or on twitter.
Ryan Tansom: Thank you so much for coming on the show. I had a blast.
Arlin Sorensen: Me too! appreciate the time, Ryan.
Ryan Tansom: Thanks for listening. I really hope you enjoyed that interview with Arlin. I can't tell you how much I think that what he was saying towards the end needs to hit home. You need to soak it in because planning is hard work, but then executing a plan is even 10 times more difficult and I think we as entrepreneurs, we're very driven based on things that we want to accomplish, so we have to spend the time to crystallize what we want. So whether it's the four things that Arlin mentioned or if you go onto the GEXP website, there's the five different things that you need to be marching towards, you have to understand why you're making the decisions because it's hard work to create value in a business.
It's hard work to build a machine that kicks out cash and if you know why you're doing that, to accomplish your legacy, to accomplish the profitability, to accomplish the ability to transfer that company to someone at some point, you're putting yourself back into control and back into the driver's seat, which is where you want to be as an owner. Because if you're not doing that, you're just at the complete mercy of the industry, of things that happen, because you don't know what your non-negotiables are because you don't have a plan and you can't put it into context, so if there's anything that you took away from this interview is sit down and just think about it. Think about what's important to you. Is it cash flow, is it legacy, is it employees, is it a freedom and time? Whatever it is, start writing those down and then start saying no to everything else because you have to march towards that and it's not going to just happen by accident because it's intentional work to do all this stuff.
I hope you enjoyed the interview with Arlin. If there's anything that you need, there's GEXP's website, gexpcollaborative.com has tons of podcasts, white papers, surveys all about these topics and we're going to continue launching more ultimate guides that have extremely detailed media information of valuations, targets, value driving, exit options and how to hire a team so they're going to be slowly coming out. We're working really hard on it, so if there's anything else, go into iTunes. Give us a rating, share this podcast with anybody else that you know that needs it and I will see next week.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.