Ep. 425 — Ken Sanginario & John Lawlor: The Cash Flow Gap Hiding Inside Your EBITDA

6 min read

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Episode Summary

Your CPA hands you a number called EBITDA and your bank account hands you a different number, and nobody is sitting at the chart with you explaining why. I had Ken Sanginario and John Lawlor back to dig into the gap that’s eating most owner-operators alive: the difference between normalized EBITDA, free cash flow, and the actual return your equity is generating against your weighted average cost of capital. Ken walks through a real client at $100M revenue throwing off $60M EBITDA and only $12M of free cash flow. John brings the diagnostic layer, the eight functional areas behind their Value Opportunity Profile, and we got into why most owner-operators pick their EOS rocks based on what their leadership team enjoys instead of where the actual constraints live. The sell-versus-hire-a-CEO decision tree, why your hurdle rate is still your hurdle rate even when 100% of the equity is sweat equity, and the order of operations: ownership goals, then current state, then the strategic plan that closes the gap.

Top 10 Takeaways

  1. Hand the same fact pattern to ten CFOs and you’ll get ten different normalized EBITDAs. EBITDA is not cash.
  2. Your $1M EBITDA is not $1M of free cash flow. Working capital, taxes, and CapEx sit in between.
  3. Your weighted average cost of capital is your hurdle rate, even if 100% of your equity is sweat equity.
  4. If the company can’t beat your hurdle rate, the right move is to take the capital somewhere else.
  5. IRR is the discount rate at which net present value equals zero. Anything above it is excess return.
  6. Selling for $3.5M and reinvesting elsewhere may produce less cash than keeping the company throwing off distributions.
  7. Recapitalizing the business lets you pull a big distribution and stay diversified instead of selling outright.
  8. Hiring a $250K CEO eats $20K a month of cash before you’ve replaced the salary you weren’t paying yourself.
  9. Your EOS rocks are probably your leadership team’s passions, not your company’s actual constraints.
  10. Milestone 13 — Strategic Plan is your future state. The diagnostic is your current state. Don’t confuse the two.

Sound Bites

“If you gave the exact same fact pattern to 10 CFOs and said, tell me what the normalized EBITDA is here, you’re going to get 10 different answers.” (@TBD) — Ken Sanginario

“$100 million revenue, 60 million EBITDA, year in year out, 60 million EBITDA. But I went through the free cashflow calculations, his free cashflow was like 12 million.” (@TBD) — Ken Sanginario

“The weighted average cost of capital is still their hurdle rate because that’s risk adjusted for their business. If they can’t get a risk adjusted return higher than their risk adjusted hurdle rate, then they should be taking that capital and investing it somewhere else.” (@TBD) — Ken Sanginario

“Do you guys really think that you’re developing your rocks with an objective understanding of where the weaknesses and constraints are in your company? Or are you developing your rocks based on your passions?” (@TBD) — Ken Sanginario

“The dysfunction of any company is a direct reflection of its leadership team.” (@TBD) — John Lawlor

About This Episode

Ken Sanginario is the founder of Corporate Value Metrics and the creator of the Value Opportunity Profile (VOP), a diagnostic that scores companies across eight functional areas tied to value creation. John Lawlor co-leads the CVGA certification program with Ken and brings the leadership, culture, and strategic planning expertise to the methodology. Both have been frequent guests on the show. This is one of the in-the-weeds conversations where I dug into the financial mechanics behind their work, how free cash flow and IRR actually connect to the eight functional areas, and the order-of-operations problem most owner-operators face when picking what to work on.

Resources Mentioned

  • Corporate Value Metrics & the CVGA program — Ken’s firm and the certification program he and John co-lead.
  • Value Opportunity Profile (VOP) — The eight-functional-area diagnostic referenced throughout.
  • The Last Link — Book John pulled off the shelf on the disconnect between strategic planning and front-line execution.
  • DiSC behavior profile — Referenced as the behavioral framework underlying how the eight functional areas are organized (D drives planning/leadership, I drives sales/marketing, S drives people/operations, C drives finance/legal).
  • EOS / Traction — Referenced as the operating system that works well at execution but needs better inputs at the rock-selection stage.
  • Conscious Capitalism — Referenced for the mission-driven capitalism conversation.
  • Bill Mills’ leadership process — Referenced for the engineering-style approach to communication friction inside teams.

Connections

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Milestones:

Concepts referenced:

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