Latest / The Start, Scale & Succeed Podcast / Build the Fortress Before You Need It with David Barnett (stage 3) - Ep. 395

Transcript

Build the Fortress Before You Need It with David Barnett (stage 3) - Ep. 395 · The Start, Scale & Succeed Podcast

• 0:00
  Scott Ritzheimer: Hello, hello and welcome. Welcome once again
• 0:02
  to the Start scale and succeed podcast, the only podcast that
• 0:05
  grows with you through all seven stages of your journey. As a
• 0:08
  founder, I'm your host, Scott Ritzheimer, as always. And
• 0:12
  here's a scary truth that not enough people are talking about,
• 0:17
  and that is that as your business gets bigger, so do your
• 0:20
  risks? There's so much more to lose in a successful company
• 0:24
  than in a startup, and because there's so much going on, every
• 0:28
  new level of success actually makes it even harder to spot
• 0:31
  trouble on the horizon before it's too late. And if you're a
• 0:34
  business owner, you have more to lose than anyone because it's
• 0:37
  your signature on every loan, every lease, every guarantee and
• 0:41
  one wrong step, one shock, convey price. Decades of work,
• 0:45
  I've seen it happen. I've done it myself, and you don't have to
• 0:48
  listen to me go on about it, because here to help you secure
• 0:50
  your business and the wealth it creates. Is David C Barnett, who
• 0:55
  is an author, consultant and international speaker. He's
• 0:59
  helped 1000s of entrepreneurs avoid costly mistakes and
• 1:02
  achieve successful business exits, having personally
• 1:05
  started, bought, sold and closed multiple businesses, David
• 1:09
  brings hands on experience rather than theory. He
• 1:12
  specializes in critical areas of buying, selling, financing and
• 1:16
  managing small to mid sized businesses, the key leverage
• 1:20
  points that determine whether an entrepreneur can truly scale and
• 1:23
  succeed. He's also bringing insights to equip entrepreneurs
• 1:28
  to move forward with clarity and confidence, helping them prepare
• 1:31
  for a profitable exit, even years in advance. And that's the
• 1:35
  key, David, welcome to the show. Glad to have you here. Something
• 1:39
  really jumped out at me as I was researching for this episode.
• 1:42
  You spent a lot of time talking about how to grow, protect and
• 1:45
  and successfully exit a business, and instantly that
• 1:49
  that middle one jumped out at me and protecting it. Because it's
• 1:54
  something that if you try and protect everything all of a
• 1:57
  sudden, right out of the gate, you barely ever get off the
• 1:59
  ground. And what that means is a lot of founders who who succeed
• 2:03
  do so sometimes at their own peril, right? They're they're
• 2:07
  okay with risk. They've succeeded in taking risk. And
• 2:11
  there's this tipping point that I've found, and it's different
• 2:14
  for different folks and different risk profiles. But
• 2:17
  there's a point where protecting what you have is not only like a
• 2:20
  good thing to do. It's a necessary, vital thing to do.
• 2:24
  Why is that? When does it happen? And how can it help our
• 2:28
  founders listening today to think differently about
• 2:30
  protecting what they've built.
• 2:32
  David Barnett: Sure. And you know what? This ties right into
• 2:34
  a big question that I hear a lot of people ask, which is, when do
• 2:37
  you start thinking about your exit? And a lot of people out
• 2:41
  there say, think about it from the beginning. I disagree. I
• 2:43
  think that thinking about your exit happens around the same
• 2:46
  time that people should start thinking about protecting the
• 2:48
  business that they built. I classify businesses into
• 2:51
  different buckets. I call them hobbies, jobs, small businesses
• 2:54
  and going concerns. And all of this relates to the cash flow
• 2:57
  that they generate. So if you're a person who should be earning
• 3:01
  $100,000 if you could get that salary somewhere, let's say, and
• 3:04
  you build a business that's paying you 80 then I call that a
• 3:08
  hobby, because you're literally subsidizing that enterprise with
• 3:11
  a part of your time. You're not being paid your fair salary. If
• 3:14
  you grow that cash flow to 100,000 then I say you own a
• 3:17
  job, because you're basically getting the cash flow of your
• 3:20
  business that you would get from an employer out there working
• 3:22
  for somebody else. And once you cross that line, then you get
• 3:26
  into the realm of real small business, because your business
• 3:29
  can pay you what you're worth. And then there's this additional
• 3:31
  cash flow. And this is where you start to see, for the first
• 3:34
  time, a return on the money, time, etc, that you've invested
• 3:39
  in building the business, and you're actually able to pay
• 3:41
  yourself for your time, and then you've got this surplus. This is
• 3:45
  when you have to start asking yourself questions about when
• 3:48
  potentially you might exit someday, or what that plan might
• 3:50
  look like. But it also means that you've now got something
• 3:53
  that is valuable. It's more lucrative than just having a
• 3:57
  career somewhere, because you're actually getting this extra
• 4:00
  money. And that's when you have to start thinking from a
• 4:02
  defensive point of view. And that kind of idea just does not
• 4:06
  jive, necessarily, with a sort of hustle and grind, sort of
• 4:11
  culture that is often promoted on social media, where people
• 4:14
  are always talking about pushing the pedal to the metal and
• 4:17
  growing as fast as you can, and growth and risk are often tied
• 4:22
  together. You know, the faster you grow, it's really easy to
• 4:26
  get kind of beyond the end of your skis, as some people would
• 4:28
  say, and things start to fall apart in how you run your
• 4:32
  business, and you kind of implement or introduce more
• 4:34
  risks into things.
• 4:36
  Scott Ritzheimer: Yeah, there's like, four different ways I want
• 4:38
  to go with that. But when you when you start to work with a
• 4:42
  new founder, a new business owner, and not that they're new,
• 4:45
  but they are. The relationship is new. So they've had some
• 4:48
  success. They've they've met the milestone you talked about.
• 4:50
  They're making more than they would in a regular job. They've
• 4:54
  started to build something what are some of the most common
• 4:57
  mistakes that you see or. Or even better yet, the biggest
• 5:01
  risk areas that are unaddressed for folks like that,
• 5:04
  David Barnett: sure. So the number one thing is that a lot
• 5:07
  of entrepreneurs, when they get going, very few of them are
• 5:11
  accountants, right? And when they do start to learn about
• 5:14
  financial statements or start to look at the results or the
• 5:17
  performance of their business, they tend to be focused entirely
• 5:19
  on the income statement, or the P and L, as it's also called,
• 5:22
  and so they're looking at the sales results. They're looking
• 5:25
  at their costs, their expenses, and how much money that they're
• 5:27
  making. Very few people begin to start examining what the other
• 5:33
  important financial statement is telling us the balance sheet and
• 5:36
  the balance sheet is where every banker, landlord, investor, etc,
• 5:42
  starts their examination of your business. So So one of the
• 5:45
  things that I like to do with with business owners, I like to
• 5:47
  take them to the balance sheet and show them what the balance
• 5:50
  sheet is showing and show how the changes in the balance sheet
• 5:53
  over time are telling a different story about their
• 5:55
  business. So Well, for example, if someone's growing their
• 5:58
  business, and you happen to be in a business that where your
• 6:01
  customers are given 30 or 45 days to pay. For example, the
• 6:04
  faster you grow, the greater the demands on your capital, because
• 6:08
  you are essentially acting like a little bank to your customers.
• 6:10
  You're giving them time with your product after you've
• 6:13
  invested money in it, before they have to pay you. And so I
• 6:17
  start to show them, you know, why do bankers look at the
• 6:21
  balance sheet first? What is it that they're looking for between
• 6:23
  the relationship between these different numbers? How does the
• 6:26
  amount of equity in your business relate to the amount of
• 6:29
  debt, and how does that relate to risk? Because that's how
• 6:31
  bankers look at it.
• 6:33
  Scott Ritzheimer: Yeah. So we've actually never addressed the
• 6:37
  balance sheet on the show, and so it's a great area to walk
• 6:41
  into. Let's, let's just do beginner's guide to what is a
• 6:45
  balance sheet? I only thought there was a P, L, what is this
• 6:48
  other? What is this other document? And and then, if you
• 6:53
  could use that to kind of help us recognize because this trap
• 6:57
  is what so many folks fall into, is the faster you grow, the less
• 6:59
  cash you have. So how does that show up in a balance sheet? And
• 7:04
  what are some things that a business owner could start doing
• 7:07
  today?
• 7:07
  David Barnett: Sure, so the PnL is, I say, think of it like a
• 7:12
  movie, because it tells the story of what happened over the
• 7:14
  period of time. For example, a year. You know how much money
• 7:17
  came in and how we spent it. The balance sheet is a snapshot.
• 7:21
  It's what the business looks like on one single day. And so
• 7:24
  on that day, your business has certain assets that it owns, the
• 7:29
  current assets like inventory, cash, accounts, receivable, etc,
• 7:32
  and then longer term things like delivery trucks or a building or
• 7:35
  something like that. And so all of these assets add up to
• 7:38
  something. If you want to think about it like a homeowner, you
• 7:40
  could say, what's my house worth if I were to put it on the
• 7:42
  market? So that's your assets. And then the next question is,
• 7:46
  how does the business finance the ownership of those assets?
• 7:50
  And we have money coming into our business to finance assets
• 7:53
  in two different varieties. There's liabilities, so money we
• 7:56
  owe to other people, and this has different flavors too. So
• 7:59
  we've got current liabilities, like the fact that you owe the
• 8:03
  phone company money, but the bill isn't due until the end of
• 8:06
  the month, so that would be a current liability, but that's
• 8:08
  still a form of financing coming into your business. And then you
• 8:11
  have the more traditional financing, like a bank loan, for
• 8:14
  example, if you have those delivery trucks and you've got a
• 8:16
  loan against them. So we've got the liabilities, and then we
• 8:19
  have the equity, which is the money we've put in ourselves, or
• 8:23
  it's the earnings from past periods that have accumulated in
• 8:27
  the business. And this is would be our equity. If you want to
• 8:29
  look at the homeowner example, again, we would say, how much of
• 8:34
  how much of a mortgage do we have on this house? And then the
• 8:37
  difference between the assets and the mortgage would be our
• 8:39
  equity in the home. It's the same thing with the business. So
• 8:42
  when you start to line up these balance sheets beside each
• 8:45
  other, say, the beginning of the year and the end of the year,
• 8:48
  you can then see how the business has changed over the
• 8:50
  course of that period of time. And if you are growing, for
• 8:54
  example, on the on the P and L, and you are increasingly
• 8:57
  financing more and more of your customers, what's going to
• 8:59
  happen is one of your assets is going to grow, which is the
• 9:02
  accounts for the accounts receivable. As you're financing
• 9:04
  more of these people, the big question then is, how are you
• 9:07
  getting the money to finance them? Is it because you're very
• 9:11
  profitable and you're leaving money in the business and
• 9:13
  growing the equity to cover that increase in the accounts
• 9:16
  receivable, or are you, in turn, also borrowing? Are you exposing
• 9:21
  yourself to increased debts, and what are the conditions or terms
• 9:25
  of those debts? This is where the risk comes in. So when, when
• 9:29
  people start to grow really quickly, if they start to
• 9:31
  require additional inventory, that's got to be financed
• 9:34
  somehow, they start to grow their receivables that's got to
• 9:36
  be financed somehow, if they don't have a real plan on how to
• 9:41
  execute that growth and where the money is going to come from
• 9:43
  in a reasonable way, then they can get themselves into trouble.
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  Now, all of a sudden, we're still profitable selling our
• 9:50
  goods, but now we've got these huge finance charges, perhaps
• 9:53
  coming out because of the way that we've changed our balance
• 9:56
  sheet, and it's like gobbling up all of the earnings that we've.
• 10:00
  Had because we didn't really have a plan on how we could
• 10:02
  grow. So this is where the balance sheet plays such an
• 10:06
  important role. And when someone like a lender, for example,
• 10:09
  looks at your business, they want to see the relationship
• 10:12
  between the debt and the equity, because that's a quick way for
• 10:16
  them to tell just how risky your business is the more debt that
• 10:20
  you have, sort of the shakier the foundation, I guess, is the
• 10:26
  best way to put it, that your business may be standing on
• 10:29
  Scott Ritzheimer: right now. It's fascinating, and it's so
• 10:32
  true, because when you look at the PnL, that's just revenue.
• 10:35
  That's a win, as we've done it, you know, check the box, we're
• 10:38
  great. And then a cursory look at that balance sheet, and it's
• 10:42
  like, well, our assets are growing. That must be a good
• 10:44
  thing too. But every time that accounts receivable line grows,
• 10:48
  it's coming from somewhere. And has such a great point. I love
• 10:51
  that you brought that up, and it brings me to the main question
• 10:54
  of this episode, which is, what do we do to start protecting
• 10:58
  ourselves in this environment? So how do we go from balance
• 11:00
  sheet to protecting the business that we've built,
• 11:03
  David Barnett: we need to start including some of the elements
• 11:06
  we want to see happen in our balance sheet into our goals of
• 11:09
  how we run the business. So instead of simply chasing
• 11:13
  growth, we say we want to chase growth that is profitable, but
• 11:17
  also under terms that allow us to create a stronger balance
• 11:20
  sheet moving forward. So a great example of this would be someone
• 11:24
  who builds something that is custom for someone you know, and
• 11:27
  in the beginning, maybe they do all the work, and then upon
• 11:30
  completion, the customer pays you, right. But that's a very
• 11:34
  risky kind of way to do business, because you're
• 11:36
  investing time into money and materials labor for employees,
• 11:40
  and then if that person doesn't pay you, or they pay you late,
• 11:42
  you know you you become extended. People can see that
• 11:45
  quite quickly. Well, if you say, I'm going to grow but from now
• 11:49
  on, we're going to charge a deposit upfront to help defray
• 11:52
  some of our costs. What that that deposit is technically a
• 11:56
  liability of your business. It's customers lending you money
• 12:00
  until you've delivered the product that they've contracted
• 12:02
  for. But we don't pay interest on the deposit. You know, we
• 12:06
  don't have to make monthly payments on the deposit. And so
• 12:08
  this would be an example of what I'm saying. We want to plan for
• 12:11
  the growth with the balance sheet in mind, and figure out
• 12:14
  how we're going to grow the balance sheet to make sure that
• 12:17
  we're managing risk while we do so. And so it requires bringing
• 12:21
  another series of goals into how we run the business, and that's
• 12:26
  what the book is about. Basically, is about thinking
• 12:28
  about your business from the point of view of resilience,
• 12:31
  because as you build a stronger and stronger balance sheet, what
• 12:35
  that means is that when something happens that affects
• 12:37
  your P and L. So let's say there's some kind of recession
• 12:40
  or sales drop, or a competitor does something, and suddenly
• 12:43
  your profits aren't flowing the way they used to. You've now got
• 12:46
  time to breathe, because you've got this elasticity built into
• 12:50
  the balance sheet. If you're always pressing the pedal to the
• 12:53
  metal all the time, leveraging every new dollar that comes in
• 12:56
  in some way to try to grow more, grow more, grow more. As soon as
• 12:59
  you hit the first speed bump, then things start to fall apart.
• 13:02
  And it sounds like you've seen this happen before, from from
• 13:06
  some of the comments you've made. Scott,
• 13:07
  Scott Ritzheimer: yeah, absolutely, absolutely, it's,
• 13:10
  it's surprisingly common. You know, in working with a lot of
• 13:13
  founders who are high growth oriented, you know, go get it,
• 13:17
  make it happen. Hustle. You know, without Instagram, they're
• 13:20
  still going to hustle anyway. It's it. There's this
• 13:24
  conversation that has to be had of like, hey, let's talk about
• 13:26
  what that actually costs. And I love this idea, because, again,
• 13:30
  we've had guests on have talked about profitable growth, and not
• 13:34
  just growth, but be you begin with the end in the mind. Begin
• 13:37
  with the end in mind, and being able to measure that objectively
• 13:40
  through the balance sheet, I think is such a simple and
• 13:43
  brilliant way of approaching it.
• 13:45
  David Barnett: Well, here's the big payoff, because this is the
• 13:47
  thing that most people don't like to talk about, is that when
• 13:51
  a small or medium sized business decides, you know, the owner
• 13:54
  decides, I'm going to exit. A lot of the times they want to do
• 13:57
  a sale, they want to sell it to somebody else. The some of the
• 14:00
  best stats we have basically tell us that only one in five
• 14:04
  businesses that goes up for sale is actually ever sold. And so if
• 14:08
  that's the reality, and you could be building something to
• 14:13
  one day be sold, which may never be sold, then you have to start
• 14:16
  thinking about, well, wait a minute, how do I personally
• 14:19
  maximize my own advantage from the ownership of this business,
• 14:23
  right? And that comes from, number one, having a profitable
• 14:25
  business that you can withdraw profits from and start to invest
• 14:28
  in other ways to grow your personal wealth. But number two,
• 14:32
  if you build a strong, resilient balance sheet, whether or not
• 14:36
  you're ever able to find someone to buy the business always means
• 14:39
  that there will be some kind of substantial value in its wind up
• 14:43
  or liquidation, because you've built assets within that
• 14:45
  business, whether it's just, you know, cash balances or real
• 14:48
  estate that you were using that finally got paid off one day,
• 14:51
  like that kind of thing. So that even if nobody wants to buy it
• 14:55
  as a going concern for whatever reason that might exist, there
• 14:59
  is still. Some kind of lucrative outcome waiting for you at the
• 15:02
  end.
• 15:02
  Scott Ritzheimer: Yeah, yeah. It's, it's what one of the
• 15:05
  things that's really fun about the exit conversation is,
• 15:07
  generally, what's good for your business is good for your exit.
• 15:10
  Oftentimes, we feel like there's a tension between the two. I
• 15:13
  have to build it, build it, to get out of it, or I have to. And
• 15:16
  the answer most of the time, you know, some things are different,
• 15:19
  but most of the time, a healthy business is a sellable business.
• 15:22
  And again, I really like this balanced approach to growth and
• 15:28
  security without going overboards. Really, really great
• 15:31
  mental model and practical example, David, I've got a
• 15:35
  question, and then I want to make sure folks know how they
• 15:37
  can get a copy of the book as well to go deeper. But the
• 15:40
  question before we get there is this, what is the biggest secret
• 15:43
  you wish wasn't a secret at all. What's that one thing you wish
• 15:46
  every founder watching or listening today knew?
• 15:48
  David Barnett: I think it's the one that I let slip, is that
• 15:51
  just how few businesses actually are able to successfully change
• 15:55
  hands? You know, building a business is really difficult.
• 15:59
  And what is a business, essentially. It's essentially a
• 16:02
  system. It's where the owner acts as a symphony conductor and
• 16:06
  tries to get the people to interact with the capital
• 16:09
  invested and with the customers and suppliers in such a way that
• 16:12
  creates a positive cash flow. And because it's a system, it's
• 16:16
  extremely fragile. And to if you think about that Symphony
• 16:20
  analogy. It's like a conductor starting a piece of music and
• 16:25
  then somebody else walking on stage and grabbing the baton
• 16:31
  from them and trying to carry on and continue with the music
• 16:33
  being beautiful, right? It is a really hard thing to do, and I
• 16:34
  don't think people appreciate just how difficult it is to find
• 16:38
  the person who's going to buy the business to make sure that
• 16:41
  all of their pro, you know, worries, concerns, etc, and all
• 16:45
  of those of their advisors are satisfied to the point where
• 16:48
  someone is willing to go and take the risk of signing a bank
• 16:50
  note, for example, to get the capital to go and do a deal and
• 16:54
  then have it all come together, you know, at the end where you
• 16:58
  get paid. And it's easy to fool ourselves, because, of course,
• 17:01
  online content is filled with the stories of people who've
• 17:04
  successfully done it, and very few people come on to talk about
• 17:09
  how it didn't work out for them. And so this is the number one
• 17:12
  thing that I wish more people knew, is just how difficult it
• 17:15
  can be to sell a business as a going concern, and how
• 17:18
  troublesome it might be and how it really takes time to prepare
• 17:23
  starting years in advance, not when you feel tired and you
• 17:26
  figure that you want to, you know, exit the next year kind of
• 17:29
  thing.
• 17:30
  Scott Ritzheimer: Yeah, it's, it's really fascinating, because
• 17:33
  I typically am on a similar boat of trying to help folks
• 17:37
  recognize, like, hey, starting a business is really hard, too,
• 17:40
  you know, the Instagrammed business world, and it's the
• 17:43
  same ratio. It's about one in five really succeed, you know,
• 17:46
  depending on the milestones that you set, and what that looks
• 17:48
  like. But if one in five make it, and then one in five of
• 17:50
  those sell, it's, it's, it's a challenge, to say the least. But
• 17:55
  one of the things that I've found is true, is that founders,
• 17:59
  when equipped with the right knowledge, the right advisors,
• 18:02
  are the best suited humans in the world to overcome challenges
• 18:06
  like that. And so coming alongside or having folks like
• 18:10
  you come alongside them, is such an important piece of the
• 18:12
  equation. Which brings me to my last question, that is, how can
• 18:16
  folks learn more about this? How you know, maybe the first time
• 18:20
  they've ever thought about a balance sheet or or they may be
• 18:22
  thinking, Hey, I'd love to get a copy of the book. Where can
• 18:29
  folks connect with you and learn more?
• 18:29
  David Barnett: Yep, so the book is called the Business fortress.
• 18:29
  I wrote it with Mark Willis back in 2025 and it's available on
• 18:32
  Amazon or anywhere else where, where you can find business
• 18:34
  books. And if people are interested just in learning more
• 18:38
  about buying, selling, financing or managing businesses. If you
• 18:40
  just look up David Barnett on YouTube or any podcast player,
• 18:44
  you'll find my show. I've been on the air for 11 years now
• 18:47
  answering people's questions on these topics. So there's just a
• 18:50
  ton of free content available there for you.
• 18:52
  Scott Ritzheimer: Fantastic, fantastic. Well, David, thank
• 18:55
  you so much for coming on today. Really was a privilege and honor
• 18:58
  having you here. I love this conversation, and for those of
• 19:01
  you watching and listening, you know your time and attention
• 19:03
  mean the world to us, I hope you got as much out of this
• 19:06
  conversation as I know I did, and I cannot wait to see you
• 19:09
  next time. Take care.