Meet Erik Owen

Erik brings over 30 years of diverse business experience across manufacturing, distribution, services, and banking. He spent 20 years in corporate America, including roles at Fortune 500 companies, focusing on finance, operations, and executive management, with expertise in IT, strategic sourcing, logistics, and Lean/Six Sigma. In 2009, Erik founded Oak Hill Business Partners, a boutique consulting firm in Brookfield, Wis., dedicated to growing the intrinsic value of lower-middle market companies through excellence in finance, sales, marketing, and operations. Oak Hill has been recognized multiple times by the Milwaukee Business Journal and has successfully guided companies through growth, M&A transactions, and exit planning. Erik holds CPA and CEPA designations and is actively involved in the Exit Planning Institute and the University of Wisconsin-Milwaukee.

Highlights

00:00 Welcome to the Social Capital Podcast

01:09 Introducing Today's Guest: Erik Owen

01:41 Top Problems Businesses Face

05:18 Valuation of a Business

10:55 Alternative Exit Strategies

18:40 Preparing for an Exit Plan

24:23 Fun and Reflective Questions

31:48 Final Words and Contact Information

Connect with Erik

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Social Capital Podcast is sponsored by Keystone Click, a strategic digital marketing agency that believes in order to successfully market to your ideal customer, you have to first understand your customer. Learn more at KeystoneClick. com.

Today's guest is Erik Owen. Erik spent 20 years in corporate AmErika for Fortune 500 companies. For the last 15 years, he has been helping middle market companies grow their value and business owners prepare for and exit their companies through his firm, Oak Hill Business Partners. Erik, welcome to the show.

[00:01:28] Lori Highby: Excited to have you here. Great conversation. I know you and I have actually chatted about this a little bit, and that's why I've decided to bring you on the show so that our listeners can hear all about Exit planning.

But first and foremost, what are the top problems that you see when businesses approach you?

And so that, that alignment problem, whether it's not the strategy hasn't come down correctly into each of the areas, whether they don't understand the strategy, whether the strategy is being doled out piece by piece to them and they don't have any idea. All of those reasons cause what we call alignment problems. And those alignment problems mean that we don't get the kind of productivity, the kind of performance out of the business that we're looking for.

[00:02:57] Erik Owen: And the second one really is often there are mechanical problems and those can be things like our sales team isn't working or we don't have a good marketing plan or execution in the finance area. Around finance, it might be we have a cash flow problem and those mechanical problems they can tell us the symptoms of those problems. They can't often articulate what the actual problem is. So we have to go really root out what that problem is and then help them with that problem and figure out cashflow problems, for instance, aren't caused by finance. Cashflow problems happen because of sales and operations. Yeah. So we got to go fix the actual real problem and plug the holes in the bucket. Yeah. Not just put a superficial, tape and bailing wire over it kind of solution.

[00:03:54] Erik Owen: Yeah. And I think it's one of the things that differentiates in the marketplace. Lots of people carry around their duct tape and their bailing wire to put a quick, cheap, inexpensive fix on things.

And we take a different approach. We think it's going to cost a lot more if you have to fix that problem three or four or five times. We'd much rather meet with the business owner and say, look, we've identified these three problems.

We think this one is the highest priority because it's costing you the most money or it's holding you back from your growth or, you're trying to do this marketing campaign and you won't be able to be successful at it if you don't fix this problem. Let's go fix the real problem and put it to bed and never have to talk about it again.

[00:05:00] Erik Owen: Correct, and that's where you have to educate the client a little bit and just show them why you're 20 percent or 30 percent more expensive seemingly in the short run, but in the long run you're actually probably more efficient than, yeah.

[00:05:18] Erik Owen: Yeah.

[00:05:25] Erik Owen: Yeah it's a great question and a great point.

And there's really two pieces to it. One of the things that we use that we think is a great way from the business owner standpoint to measure success is we measure ourselves by increase in valuation in the business. So we often start with an initial valuation of the business, and then we measure ourselves regularly, maybe once a year, whatever time frame, whatever cadence we agree with the client on.

But we measure ourselves by that increase in valuation. And so it comes down to the second and even more obvious question, how do you value a business, right? There's a number of answers to that question, but the most basic way to think about it is that evaluation is boiling down the earnings of the business times the appropriate multiple for that business in their industry and their performance. So what does that all mean? Let's unpack that just for a second.

[00:06:31] Erik Owen: So earnings is a, most people understand there's two primary financial statements, right? A balance sheet and an income statement and earnings is that income statement, that P and L profit and loss statement, right?

But it's not just the number at the bottom of that profit and loss statement. we talk about earnings as EBITDA or earnings before interest taxes and depreciation technically and amortization, we back those out so that we can normalize the business. And get closer to what would equate to cashflow.

And secondly, we make adjustments to that EBITDA for things like underpaying or overpaying the owner, if they're taking a larger than normal salary, then we'd have to add that back and we'd have a higher EBITDA if they're putting a lot of personal expenses through there, if there are other one time expenses, a little thing we all noticed a couple of years ago called COVID. And we had PPP money that came through and that created income. Well, that wasn't normalized income. So we have to normalize for some of those abnormal kinds of things that happen in a business.

And I'm cruising along at 30, 000 feet here. There's a lot of little subtleties in there, but you get the idea that we're taking the earnings and getting back to a normalization. The other thing is the one year earnings. And so we are looking at earnings over the next year or two, three, four or five years, a good amount of time so that we can look at the trend in earnings and look at either a weighted average or, a simple average or, and is that going up or down? All those things play into it, right? Then the second component is the Is this multiple component? What does that look like? And that, the multiple is the harder one often for people to understand. First of all, it's industry driven. Each industry has its own multiple. Some multiples are off of sales. That's why when Facebook and some of these I. T. companies aren't making any money, they can still be worth billions or trillions of dollars because they're multiplying off of off ofthe revenue number, not off of the earning number. So you can multiply off a lot of things. Typically it's a multiple off of earnings.

And that multiple off of earnings again is driven by the a range in that industry, and then you determine where you are in the range by your performance of your company and by some other measures. If you as an owner are highly dependent in the business, you're going to be lower in that range, because it's hard, it's harder to sell the business without you. If you don't have documented procedures, you're going to be lower in that range because it's harder to sell for a buyer to buy your business.

All those kinds of intangibles. What we always say is all the things that are on your financial statements, your balance sheet, or P& L are included in the earnings. All the things that aren't are included in the multiple. Think about intellectual property. Yeah. Sure. If you have a great brand or if you have, some great patents, you might have capitalized some money on the balance sheet, but the true worth of those things, Kentucky Fried Chicken's worth of their recipe is not on their balance sheet adequately, but it is in the multiple.

The earnings times that multiple gets you to what the value of that business is.

[00:09:58] Erik Owen: Correct. And that's where there's a lot of art or judgment in coming up with what the approximate value of a company is.

And then there's always an argument in the sense of a discussion, and sometimes a true argument on what the value is between a buyer and a seller, right? The true value of a company has nothing to do with earnings and a multiple. It has to do with what a, a fair market value or third party buyer is going to pay, right?

What are, I can say my house is worth a million dollars, but if I can't get a buyer to pay me any more than 800, 000, that's what it's worth, right? So we can appraise it all day. That's what a valuation is. It's like an appraisal on your house. In the end, what determines the real value is what a buyer is willing to pay.

One is, just shut the door and say, game over. I'm done. And the other is find a third party buyers. We were just talking about. But sounds like there's a lot of alternative exit strategies out there. Can you talk about that?

It's, there's more to it than just swinging the club and being able to putt the ball, right? There, there's some strategy to it. There's some gamesmanship to it. There's some mental toughness to it, right? It's the same in this. You're right. The two obvious ones that people know are I'll just shut the doors and maybe liquidate the assets, right? I'll sell the desks and the computers and all the stuff for whatever it is. And the other one they know is, oh, I'll sell it to somebody else. I'll sell it to a third party, so to speak. We categorize the two groups of four alternatives into Internal and external. Internal transactions look like a sale to a family member, which should be much different than selling to somebody I don't know, or a competitor, or somebody just out in the market who wants to buy.

So internal are all known buyers, a family member, a partner, or a management team. And then the fourth option there is ESOP. So ESOP is a, actually it's actually a retirement plan program where the, where you would own stock of the company within a retirement plan. Mm-Hmm. But you can use that structure to to buy the company.

The ESOP can actually purchase all the stock for the company, some or all the stock for the company and actually own it. And then the employees, Employee Stock Ownership Plan, the employees are actually the owners of the company and it's a great way to control the process, reward your employees because they end up getting ownership of the company and still be able to monetize the company out. There's a structure to it, but it's highly regulated because it's a, it's an ERISA regulated process. Because it's like your 401k, it has to be controlled and everything has to be reasonable.

Valuations come into an ESOP has to have an annual valuation to show what the value of each of those stocks are so that if they're going to do any stock transactions and so the employees know exactly what they're, what, what's happening. So more like dealing in the public company arena, right, in terms of the structure, in the fact that there's a lot of regulation. On the external side, there's, of course, the third party sale, and there's liquidation that we just mentioned. But there's also other things, something we call it a recap or recapitalization.

Think about having somebody come in with some money and restructuring the equity part of your business, you own your business a hundred percent, you want to grow and you need capital. What if you sold 30 percent to somebody and you sold that for 3 million, that would make your company worth 10 million, right? If they're willing to pay that. And then, and then you, and then now you have capital 3 million to go invest in your business. You own less of it, but your company might be able to grow and you're going to own 70 percent of a bigger pie rather than 100 percent of a smaller pie, right? That's recapitalization.

That often happens with a PE firm or some other structure and a private investor, right? And then the last one is an IPO. You could do an Initial Public Offering. You could take a company public and there are, variations on that. There's something called SPAC, where you you buy a special purpose acquisition company, you buy a company that's already publicly traded, but as a shell of a company, there's nothing in it.

And then you have that, do a reverse merger and merge your company into that. And now you went, you just went public, your company becomes publicly traded. There's all kinds of variations. My point isn't to get into every little thing, but there's all kinds of variations in each one of these.

Now, what's really interesting is I just listed off four internal and four external. There's one more that we don't, that nobody ever talks about. And that is, don't sell your company, retain ownership in your company, hire somebody to run it for you, and continue to maintain that cash flow generator that you have. Now you have to pay somebody 200, 300, 000, whatever it is, whatever that is reasonable for that, but there's cashflow beyond that.

And you grow the company and now you get to continue to participate in the company, but you don't have to be the one running it. And then the last thing we talk about, and this is where things get really interesting is you don't have to do any one of those. You could do a combination of them. What if I did a 50 percent ESOP and I sold the other 50 percent to my management team? Or what if I did what if I sold part of it to a family member or a partner, and I sold the rest to a PE firm? And that'd be a third party sale and an internal sale, right? So you can start combining. There's no rule that says you got to do any one of these. You can combine these different things into into some really interesting, and that's where it gets, that's where it gets fun, right? Now you start solving the real problem, right? I don't want pie or ice cream, I'd like both, right? And so now you get both.

I never even thought of variety. I just thought of you just pick a path and pursue it. So wow.

Sometimes we can't do some of them because you're not set up correctly for it. To do an ESOP, you have to have a continuity of cashflow to pay the loan on the ESOP over time. And so if you're not in that, if you haven't positioned yourself well, or you're not in the right kind of industries, it just isn't possible.

So some of those get taken off the list because you haven't prepared properly in a way that would allow those to be possible. Sure. Just like, you know, look, I graduate with C from high school, I'm not going to Harvard. That's just off the list.

[00:18:50] Erik Owen: Yeah, this is again, one of those really interesting questions that can only be answered with an it depends. Again, a little bit like if I looked at you and said, How long does it take to have a really effective marketing campaign?

It depends on what you're trying to do and how you've structured it, right? If you're already at or near the value, back to our valuations discussion that you want to obtain, you've already got the number you want, it doesn't take very long to get ready. If your house is well maintained and you've done everything, it's got a fresh coat of paint and, it looks nice, it doesn't take long to put it on the market and sell it. If you haven't been doing the maintenance on it for 20 years, it's going to take us a while to fix it up into a condition that we're going to be able to put it on the market and get you the full half a million dollars that you want out of it.

We might not only just fix up the delayed maintenance, we may actually have to go do actual improvements on the house, add a fourth bedroom, fix up the bathroom, do some things that bring it up to date. And so the, That's the challenge is where are you in that process? Show me a company and where it's at. And we can answer that question much more directly.

But in general, we spend three to five years on average with a with a client because generally speaking they're 20 to 30, maybe even 40 percent low to their numbers, right? And they've got some things that they want to accomplish in their business before they want to put it on the market, just like most homeowners, right?

[00:20:35] Erik Owen: Yeah. It really works because we all understand that if we've kept something up, if it's always prepared and ready to, in ready to sell condition, it's so much easier to do it and the value of it is intrinsically higher. Yep, absolutely. If we haven't maintained something, a car, a house, or whatever, its value has declined simply by the fact of us not maintaining and keeping it in current up to date condition.

[00:21:26] Erik Owen: Yeah. And depending on how big the things are, we've got some tools in our toolbox that take a while to change and I'll just give you one or two examples. You come to me and you say, Erik, I've got a concentration in my customer base. Three of my customers make up 50, 60 percent of my sales.

As you can imagine, a seller looking at that, that can be risky. Again, there's a lot of if those are contractually obligated and other things that can take some of the risk out of it. But still a customer concentration, generally speaking, is looked upon unfavorably, right? And so if we want to fix a customer concentration, the only way, generally speaking to fix that in a really short time is acquire another company and add that company's base.

So maybe I double the size of the company and my 60 percent goes to 30%, right? And I just took a lot of that out, right? Acquisition of a company doesn't generally happen in a couple of months, right? Let's say it takes us 12 to 18 months just to find the company we want to acquire. Then we got to negotiate with them, go through due diligence.

It might take us another year to get that transit, six to 12 months to get that transaction done. So we might be two to three years out just to get an acquisition done. And that's the short way to do it. Think about organically trying to eliminate that 60 percent. Now we got to go sell to everybody else and not grow those customers, right?

And how long does that take to do? Another great one is you want to sell your building and your business and you want to maximize the value on both. And if the buyer doesn't want the building, they'll give you a bundled price. Solution for that might be, one solution, sale and lease back. Sell the building to somebody else and lease it back.

But the buyer doesn't want a 10 year lease when they buy your business. They want a 2 or 3 year lease so they have flexibility to go where they want. So I might need to do a sale and lease back and have enough time to work that lease down to a reasonable amount that I can then sell the business and still maximize that asset without the lease, that long lease pulling the value down. Those are two examples of things that tape just take time.

[00:24:01] Erik Owen: Yeah. Just like marketing, there are a lot of tools in the toolbox. And so it's just, it's interesting to throw a couple of them out and just talk about them and think about them. And I find it really helps when people start hearing that way. Oh, I never thought about something that might take more time. Why can't you get it done in 18 months? Because what you asked me to do isn't possible in 18 months.

Yeah. Not that this isn't fun. It's fascinating, but...

[00:24:31] Lori Highby: Erik, if you go back to your 20 year old self, what would you tell yourself to do more of, less of, or differently with regards to your professional career?

In whatever way that is. Whether it's your family, investment in that, and we all know how that can often pay off. But long term relationships with people. I have a guy in the Milwaukee area that he and I have known each other since preschool, right? He can finish my sentences for me, and I can finish his, right?

And so when we talk, when he and I talk. We can talk at a much, much deeper level and can help each other so much more quickly than somebody I just met because we, he knows me and he knows who I am and so when I bring up a point, he already knows where I'm going with it rather than me have to tell the two hour story of why I'm trying to go there, right? Yeah. And so those relationships pay off in any number of ways, right? And so,. Yeah.

[00:26:05] Erik Owen: Yeah. What, you ended up starting your own business. What made you decide between being an entrepreneur and being an employee for somebody else?

So I decided to go out on my own and do it the way I want to do it. And it's not perfect. I know that I've learned a lot of things, by doing things the wrong way, but I learned from them. So that's important to me. But I, I'm always fascinated with how can I be more efficient? How can I do it better? How can I be smarter? How can I give to others in a better way as well.

[00:27:42] Lori Highby: I think, and I have been asked similar questions, but the biggest thing when I did get started was I felt that I could do it on my own. And I realized over time, and it's no different than how we position what we do, but I didn't go to school for finance or bookkeeping or accounting, yet I was doing all that on my own. So then I'm doing, running the business Monday through Friday and then Saturday and Sunday trying to figure out what QuickBooks is and how to use it and how to balance things. And I'm like, why am I doing this?

But it took me a good year to realize, Oh, there's people out there that do this for a living. Why am I not hiring them for their expertise when I'm expecting people to hire me for my expertise? So it took me a little while to have that light bulb moment of I don't have to do everything myself. I don't need to know all the answers. I just need to know the right people that have the right answers or are willing to educate me on how to make an intelligent business decision.

I think the one thing I would add back to the comment I've been thinking about your question. I love the relationship part, but I think, I think the one thing in my, that I've used more than anything that's made that actually it's two, two things that made me more successful than I realized that don't get a lot of credit, persistence and curiosity.

Just being able as entrepreneurs, being able to just put your head down and keep going when other people quit is a huge skill. Lots of people give up and if you're disciplined or in my case, stubborn enough that you just don't give up, you get through things and you get to the other side and not a lot of people come with you because they just they've given up earlier.

Sure. And that curiosity part, I think helps. I see it in you too, Lori. You want to understand and you want to talk to people and that curiosity helps you to peel the onion a little bit and get a little deeper than most people will go because you really want to understand. You're not doing just that knee jerk reaction to things. You're actually spending the time to understand what's there and you want to know it. And by wanting to know it you come up with a better solution, or you service the you serve the customer better because you understand their business better. You're not just asking the road questions.

[00:31:04] Erik Owen: We all need those checklists that we go down to make sure we haven't missed anything. Yeah, right?

[00:31:11] Erik Owen: Like the basic stuff but also the things that get make sure you're comprehensive in your, that you don't spend all your time over on the left side and you never get over to the right side of the business and ask them this stuff over here, right?

But I think we get too caught up in the checklist as the tool and the real tool is curiosity. Correct. Let's ask enough questions till we understand it. And then let's make sure we truly understand it. Yeah. And then when we've gotten to that point, now we can really solve the problem.

That applies to both of our businesses.

[00:31:48] Lori Highby: All right. My last question, any final words or advice you'd like to offer our listeners with regards to business or relationships? And we covered both.

You said it before really well as entrepreneurs, we think it's our job to do everything. It's really our job to do the things we do really well and then find creative ways to have other people do the things that can help us be better in the areas where we don't do things well. And that's hard for all of us.

[00:33:00] Erik Owen: It's hard to give up the control.

[00:33:06] Erik Owen: It's hard to give up the control. It's also hard, especially as a new entrepreneur to give up money for something that you perceive as not high value. But having done this for a while, is the financial stuff high value?

[00:33:27] Erik Owen: Yeah. You got to be able to file your taxes ultimately and give financial statements to the bank and you got to have them right. So, you know, whether if for no other reason, you want to measure your business and know whether you're doing them right. That's, and that's just finance.

Is marketing important? Should I pay somebody for marketing? I think I should because if I'm not doing it well, I'm probably missing out on leads that I should be getting. Right? Yep. Each one of those functional areas, we could go down and say, you should be able to give it up to somebody who can do it better.

Hire people who are smarter than yourself in your business, and then when you need to sub things out to other people that they're better at than you are. And that'll allow you to do what you're really good at and excel.

[00:34:16] Erik Owen: Our website is out there, Oak Hill, B as in business, P as in partner.com, Oak Hill, bp.com. All our contact information is out there. I'm on LinkedIn also. ERIK. O. W. E. N on LinkedIn. And you'll find Oak Hill business partners on my LinkedIn profile as well.

We will include all that information in our show notes. Thank you so much for taking the time to be on the show today, Erik.

[00:34:45] Lori Highby: Absolutely. We could obviously talk for hours and hours. All right, this wraps up our episode of Social Capital. A huge thank you to Erik for taking the time to connect with us.

If you have a burning marketing or relationship or business question, just reach out. I'd love to answer it on the show. And as mentioned before, let's connect on LinkedIn. Connect with me, connect with Erik. We're both looking forward to hearing from you. I hope you enjoyed today's show. I want you to go out there and get noticed.