Ep. 226 — Pat Hobby: The Mindset That's Quietly Capping the Value of Your Business

5 min read

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Episode Summary

It’s December. You did a million in EBITDA. After taxes and the distributions you’ve already taken to fund lifestyle, there’s roughly half a million sitting there with no home yet. Take it out, buy the cabin, fund the boat. Or put it back into the GM hire, the ERP system, the second salesperson. Most owners default to taking the cash because nobody ever showed them the math on the other side. Pat Hobby and I sat down the day after Thanksgiving for the version of this conversation we usually have at a bar. We got into why annual income is the default mindset, what it’s actually costing you, and why the gap between a 3x multiple and a 6x multiple on the same million in EBITDA dwarfs every distribution you’ll ever pull. We dug into the J-curve (the deliberate dip in EBITDA that PE firms use to position a company for a steeper growth path), why Normalized EBITDA matters, and the part most owners have never heard: ownership and management are two separate decisions. You can monetize the asset and keep running the company. Jack Stack did it in the 80s and is still the CEO 35 years later.

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## Top 10 Takeaways
  1. If you can’t track the value of your business in real time, every reinvest-or-distribute decision gets made in a vacuum.
  2. Annual income asks what’s in the bank in December. Long-term value asks what asset you’re building over a decade.
  3. Lifestyle creep into distributions means you can never stop working. The day you do, the cash flow disappears.
  4. Predictable, sustainable, and transferable cash flow is what actually moves your multiple, not net income.
  5. Normalized EBITDA is how you reinvest aggressively without making the business look like it got worse.
  6. The J-curve isn’t a private equity trick. It’s a deliberate dip in cash flow to fund a steeper growth path.
  7. Burnout usually isn’t the business. It’s the seat. You held on to too much and never invested in the team to replace you.
  8. Your ownership role and your management role are two different decisions. You can change one without touching the other.
  9. You can ring the cash register without selling out. ESOPs, recaps, and refinancings let you harvest value and keep leading.
  10. The reward for 20 years of hard work isn’t this year’s distribution. It’s the asset you can harvest on your terms.

Sound Bites

“Annual income is, a lot of business owners are looking and saying, ‘How is my business doing?’ They may just look at their financials and see if they made income. They may just look at their net income and see how much money they have in the bank. I think it stems from not understanding what the options are.” (@00:06:00) — Pat Hobby

“The goal to create a more valuable business comes from having more predictable, sustainable, and transferable cash flow. That is what’s going to increase the value of your business.” (@00:12:14) — Pat Hobby

“You buy a company, you want to harvest the value that the previous owner left on the table. That sounds harsh. That doesn’t mean you didn’t pay fair value for the business. But you’re saying, as it sits today, I’m going to pay you fair value but I think you’ve missed some opportunities to create value in this business.” (@00:38:00) — Pat Hobby

“You can get to the point one day and say, ‘I can make a change in my ownership role without changing my management role, or I can make a change in my management role without changing my ownership role.’ So many times people think they have to do those at the same time.” (@00:50:32) — Pat Hobby

About This Episode

Pat Hobby is Ryan’s co-founder at Arkona. He started his career as an auditor at EY, held a series of finance roles, and launched his own outsourced CFO services firm. One of his clients grew into a full-time role that lasted over 20 years, where he helped lead acquisitions, an ESOP sale, and ultimately a transaction to a private equity firm that delivered a significant outcome for the employees. He brings the rare combination of operator, CFO, and PE-side perspective, which is exactly what’s needed to argue the annual-income-vs-long-term-value frame with credibility. This episode is the unscripted version of the conversation Ryan and Pat usually have at a bar.

Resources Mentioned

  • Arkona — Ryan and Pat’s firm at the time, and the home of the boot camp and digital course referenced throughout. — arkona.io
  • Profit First by Mike Michalowicz — Referenced as an example of bank-balance accounting mindset.
  • Bob Moesta — Jobs to Be Done — Referenced for the “struggling moment” framing.
  • Bo Burlingham — Referenced for the study finding that 75% of owners are unhappy after they sell.
  • Jack Stack / SRC Holdings — Referenced as the example of selling to an ESOP and continuing to run the company for decades.

Connections

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Concepts referenced:

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