In this eye-opening episode, David Barnett, Owner of www.DavidCBarnett.com, shares how to protect and strengthen your business as you grow in stage 3. If you’re growing fast but feel exposed to hidden risks, or worry that one mistake could wipe out years of work, you won’t want to miss it.

You will discover:

- Why focusing only on revenue and profit leaves your business dangerously vulnerable.

- How to use your balance sheet to spot and manage risk before it becomes a crisis.

- What changes to make now so you can grow profitably while protecting what you’ve built.

This episode is ideal for for Founders, Owners, and CEOs in stage 3 of The Founder's Evolution. Not sure which stage you're in? Find out for free in less than 10 minutes at https://www.scalearchitects.com/founders/quiz

David C. Barnett is an author, consultant, and international speaker who has helped thousands of entrepreneurs avoid costly mistakes and achieve successful business exits. Having personally started, bought, sold, and closed multiple businesses, David brings hands-on experience rather than theory. He specializes in the critical areas of buying, selling, financing, and managing small- to mid-sized businesses—the key leverage points that determine whether an entrepreneur can truly scale and succeed. His insights equip entrepreneurs to move forward with clarity and confidence, helping them prepare for a profitable exit even years in advance.

Want to learn more about David Barnett's work at www.DavidCBarnett.com? Check out his website at https://www.investlocalbook.com/

Connect with David through his LinkedIn at https://www.linkedin.com/in/davidbarnettmoncton/

Check out David's YouTube channel at https://www.youtube.com/@DavidCBarnett

Get a copy of his book The Business Fortress: How to Grow, Protect, and Exit Your Business with Confidence at https://www.amazon.com/Business-Fortress-Grow-Protect-Confidence/dp/B0F99NVR38

Mentioned in this episode:

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If you’re a Founder, business owner, or CEO who feels overworked by the business you lead and underwhelmed by the results, you’re doing it wrong. Succeeding as a founder all comes down to doing the right one or two things right now. Take the quiz today at foundersquiz.com, and in just ten questions, you can figure out what stage you are in, so you can focus on what is going to work and say goodbye to everything else.

Founder's Quiz

Hello, hello and welcome. Welcome once again

to the Start scale and succeed podcast, the only podcast that

grows with you through all seven stages of your journey. As a

founder, I'm your host, Scott Ritzheimer, as always. And

here's a scary truth that not enough people are talking about,

and that is that as your business gets bigger, so do your

risks? There's so much more to lose in a successful company

than in a startup, and because there's so much going on, every

new level of success actually makes it even harder to spot

trouble on the horizon before it's too late. And if you're a

business owner, you have more to lose than anyone because it's

your signature on every loan, every lease, every guarantee and

one wrong step, one shock, convey price. Decades of work,

I've seen it happen. I've done it myself, and you don't have to

listen to me go on about it, because here to help you secure

your business and the wealth it creates. Is David C Barnett, who

is an author, consultant and international speaker. He's

helped 1000s of entrepreneurs avoid costly mistakes and

achieve successful business exits, having personally

started, bought, sold and closed multiple businesses, David

brings hands on experience rather than theory. He

specializes in critical areas of buying, selling, financing and

managing small to mid sized businesses, the key leverage

points that determine whether an entrepreneur can truly scale and

succeed. He's also bringing insights to equip entrepreneurs

to move forward with clarity and confidence, helping them prepare

for a profitable exit, even years in advance. And that's the

key, David, welcome to the show. Glad to have you here. Something

really jumped out at me as I was researching for this episode.

You spent a lot of time talking about how to grow, protect and

and successfully exit a business, and instantly that

that middle one jumped out at me and protecting it. Because it's

something that if you try and protect everything all of a

sudden, right out of the gate, you barely ever get off the

ground. And what that means is a lot of founders who who succeed

do so sometimes at their own peril, right? They're they're

okay with risk. They've succeeded in taking risk. And

there's this tipping point that I've found, and it's different

for different folks and different risk profiles. But

there's a point where protecting what you have is not only like a

good thing to do. It's a necessary, vital thing to do.

Why is that? When does it happen? And how can it help our

founders listening today to think differently about

protecting what they've built.

Sure. And you know what? This ties right into

a big question that I hear a lot of people ask, which is, when do

you start thinking about your exit? And a lot of people out

there say, think about it from the beginning. I disagree. I

think that thinking about your exit happens around the same

time that people should start thinking about protecting the

business that they built. I classify businesses into

different buckets. I call them hobbies, jobs, small businesses

and going concerns. And all of this relates to the cash flow

that they generate. So if you're a person who should be earning

$100,000 if you could get that salary somewhere, let's say, and

you build a business that's paying you 80 then I call that a

hobby, because you're literally subsidizing that enterprise with

a part of your time. You're not being paid your fair salary. If

you grow that cash flow to 100,000 then I say you own a

job, because you're basically getting the cash flow of your

business that you would get from an employer out there working

for somebody else. And once you cross that line, then you get

into the realm of real small business, because your business

can pay you what you're worth. And then there's this additional

cash flow. And this is where you start to see, for the first

time, a return on the money, time, etc, that you've invested

in building the business, and you're actually able to pay

yourself for your time, and then you've got this surplus. This is

when you have to start asking yourself questions about when

potentially you might exit someday, or what that plan might

look like. But it also means that you've now got something

that is valuable. It's more lucrative than just having a

career somewhere, because you're actually getting this extra

money. And that's when you have to start thinking from a

defensive point of view. And that kind of idea just does not

jive, necessarily, with a sort of hustle and grind, sort of

culture that is often promoted on social media, where people

are always talking about pushing the pedal to the metal and

growing as fast as you can, and growth and risk are often tied

together. You know, the faster you grow, it's really easy to

get kind of beyond the end of your skis, as some people would

say, and things start to fall apart in how you run your

business, and you kind of implement or introduce more

risks into things.

Yeah, there's like, four different ways I want

to go with that. But when you when you start to work with a

new founder, a new business owner, and not that they're new,

but they are. The relationship is new. So they've had some

success. They've they've met the milestone you talked about.

They're making more than they would in a regular job. They've

started to build something what are some of the most common

mistakes that you see or. Or even better yet, the biggest

risk areas that are unaddressed for folks like that,

sure. So the number one thing is that a lot

of entrepreneurs, when they get going, very few of them are

accountants, right? And when they do start to learn about

financial statements or start to look at the results or the

performance of their business, they tend to be focused entirely

on the income statement, or the P and L, as it's also called,

and so they're looking at the sales results. They're looking

at their costs, their expenses, and how much money that they're

making. Very few people begin to start examining what the other

important financial statement is telling us the balance sheet and

the balance sheet is where every banker, landlord, investor, etc,

starts their examination of your business. So So one of the

things that I like to do with with business owners, I like to

take them to the balance sheet and show them what the balance

sheet is showing and show how the changes in the balance sheet

over time are telling a different story about their

business. So Well, for example, if someone's growing their

business, and you happen to be in a business that where your

customers are given 30 or 45 days to pay. For example, the

faster you grow, the greater the demands on your capital, because

you are essentially acting like a little bank to your customers.

You're giving them time with your product after you've

invested money in it, before they have to pay you. And so I

start to show them, you know, why do bankers look at the

balance sheet first? What is it that they're looking for between

the relationship between these different numbers? How does the

amount of equity in your business relate to the amount of

debt, and how does that relate to risk? Because that's how

bankers look at it.

Yeah. So we've actually never addressed the

balance sheet on the show, and so it's a great area to walk

into. Let's, let's just do beginner's guide to what is a

balance sheet? I only thought there was a P, L, what is this

other? What is this other document? And and then, if you

could use that to kind of help us recognize because this trap

is what so many folks fall into, is the faster you grow, the less

cash you have. So how does that show up in a balance sheet? And

what are some things that a business owner could start doing

today?

Sure, so the PnL is, I say, think of it like a

movie, because it tells the story of what happened over the

period of time. For example, a year. You know how much money

came in and how we spent it. The balance sheet is a snapshot.

It's what the business looks like on one single day. And so

on that day, your business has certain assets that it owns, the

current assets like inventory, cash, accounts, receivable, etc,

and then longer term things like delivery trucks or a building or

something like that. And so all of these assets add up to

something. If you want to think about it like a homeowner, you

could say, what's my house worth if I were to put it on the

market? So that's your assets. And then the next question is,

how does the business finance the ownership of those assets?

And we have money coming into our business to finance assets

in two different varieties. There's liabilities, so money we

owe to other people, and this has different flavors too. So

we've got current liabilities, like the fact that you owe the

phone company money, but the bill isn't due until the end of

the month, so that would be a current liability, but that's

still a form of financing coming into your business. And then you

have the more traditional financing, like a bank loan, for

example, if you have those delivery trucks and you've got a

loan against them. So we've got the liabilities, and then we

have the equity, which is the money we've put in ourselves, or

it's the earnings from past periods that have accumulated in

the business. And this is would be our equity. If you want to

look at the homeowner example, again, we would say, how much of

how much of a mortgage do we have on this house? And then the

difference between the assets and the mortgage would be our

equity in the home. It's the same thing with the business. So

when you start to line up these balance sheets beside each

other, say, the beginning of the year and the end of the year,

you can then see how the business has changed over the

course of that period of time. And if you are growing, for

example, on the on the P and L, and you are increasingly

financing more and more of your customers, what's going to

happen is one of your assets is going to grow, which is the

accounts for the accounts receivable. As you're financing

more of these people, the big question then is, how are you

getting the money to finance them? Is it because you're very

profitable and you're leaving money in the business and

growing the equity to cover that increase in the accounts

receivable, or are you, in turn, also borrowing? Are you exposing

yourself to increased debts, and what are the conditions or terms

of those debts? This is where the risk comes in. So when, when

people start to grow really quickly, if they start to

require additional inventory, that's got to be financed

somehow, they start to grow their receivables that's got to

be financed somehow, if they don't have a real plan on how to

execute that growth and where the money is going to come from

in a reasonable way, then they can get themselves into trouble.

Now, all of a sudden, we're still profitable selling our

goods, but now we've got these huge finance charges, perhaps

coming out because of the way that we've changed our balance

sheet, and it's like gobbling up all of the earnings that we've.

Had because we didn't really have a plan on how we could

grow. So this is where the balance sheet plays such an

important role. And when someone like a lender, for example,

looks at your business, they want to see the relationship

between the debt and the equity, because that's a quick way for

them to tell just how risky your business is the more debt that

you have, sort of the shakier the foundation, I guess, is the

best way to put it, that your business may be standing on

right now. It's fascinating, and it's so

true, because when you look at the PnL, that's just revenue.

That's a win, as we've done it, you know, check the box, we're

great. And then a cursory look at that balance sheet, and it's

like, well, our assets are growing. That must be a good

thing too. But every time that accounts receivable line grows,

it's coming from somewhere. And has such a great point. I love

that you brought that up, and it brings me to the main question

of this episode, which is, what do we do to start protecting

ourselves in this environment? So how do we go from balance

sheet to protecting the business that we've built,

we need to start including some of the elements

we want to see happen in our balance sheet into our goals of

how we run the business. So instead of simply chasing

growth, we say we want to chase growth that is profitable, but

also under terms that allow us to create a stronger balance

sheet moving forward. So a great example of this would be someone

who builds something that is custom for someone you know, and

in the beginning, maybe they do all the work, and then upon

completion, the customer pays you, right. But that's a very

risky kind of way to do business, because you're

investing time into money and materials labor for employees,

and then if that person doesn't pay you, or they pay you late,

you know you you become extended. People can see that

quite quickly. Well, if you say, I'm going to grow but from now

on, we're going to charge a deposit upfront to help defray

some of our costs. What that that deposit is technically a

liability of your business. It's customers lending you money

until you've delivered the product that they've contracted

for. But we don't pay interest on the deposit. You know, we

don't have to make monthly payments on the deposit. And so

this would be an example of what I'm saying. We want to plan for

the growth with the balance sheet in mind, and figure out

how we're going to grow the balance sheet to make sure that

we're managing risk while we do so. And so it requires bringing

another series of goals into how we run the business, and that's

what the book is about. Basically, is about thinking

about your business from the point of view of resilience,

because as you build a stronger and stronger balance sheet, what

that means is that when something happens that affects

your P and L. So let's say there's some kind of recession

or sales drop, or a competitor does something, and suddenly

your profits aren't flowing the way they used to. You've now got

time to breathe, because you've got this elasticity built into

the balance sheet. If you're always pressing the pedal to the

metal all the time, leveraging every new dollar that comes in

in some way to try to grow more, grow more, grow more. As soon as

you hit the first speed bump, then things start to fall apart.

And it sounds like you've seen this happen before, from from

some of the comments you've made. Scott,

yeah, absolutely, absolutely, it's,

it's surprisingly common. You know, in working with a lot of

founders who are high growth oriented, you know, go get it,

make it happen. Hustle. You know, without Instagram, they're

still going to hustle anyway. It's it. There's this

conversation that has to be had of like, hey, let's talk about

what that actually costs. And I love this idea, because, again,

we've had guests on have talked about profitable growth, and not

just growth, but be you begin with the end in the mind. Begin

with the end in mind, and being able to measure that objectively

through the balance sheet, I think is such a simple and

brilliant way of approaching it.

Well, here's the big payoff, because this is the

thing that most people don't like to talk about, is that when

a small or medium sized business decides, you know, the owner

decides, I'm going to exit. A lot of the times they want to do

a sale, they want to sell it to somebody else. The some of the

best stats we have basically tell us that only one in five

businesses that goes up for sale is actually ever sold. And so if

that's the reality, and you could be building something to

one day be sold, which may never be sold, then you have to start

thinking about, well, wait a minute, how do I personally

maximize my own advantage from the ownership of this business,

right? And that comes from, number one, having a profitable

business that you can withdraw profits from and start to invest

in other ways to grow your personal wealth. But number two,

if you build a strong, resilient balance sheet, whether or not

you're ever able to find someone to buy the business always means

that there will be some kind of substantial value in its wind up

or liquidation, because you've built assets within that

business, whether it's just, you know, cash balances or real

estate that you were using that finally got paid off one day,

like that kind of thing. So that even if nobody wants to buy it

as a going concern for whatever reason that might exist, there

is still. Some kind of lucrative outcome waiting for you at the

end.

Yeah, yeah. It's, it's what one of the

things that's really fun about the exit conversation is,

generally, what's good for your business is good for your exit.

Oftentimes, we feel like there's a tension between the two. I

have to build it, build it, to get out of it, or I have to. And

the answer most of the time, you know, some things are different,

but most of the time, a healthy business is a sellable business.

And again, I really like this balanced approach to growth and

security without going overboards. Really, really great

mental model and practical example, David, I've got a

question, and then I want to make sure folks know how they

can get a copy of the book as well to go deeper. But the

question before we get there is this, what is the biggest secret

you wish wasn't a secret at all. What's that one thing you wish

every founder watching or listening today knew?

I think it's the one that I let slip, is that

just how few businesses actually are able to successfully change

hands? You know, building a business is really difficult.

And what is a business, essentially. It's essentially a

system. It's where the owner acts as a symphony conductor and

tries to get the people to interact with the capital

invested and with the customers and suppliers in such a way that

creates a positive cash flow. And because it's a system, it's

extremely fragile. And to if you think about that Symphony

analogy. It's like a conductor starting a piece of music and

then somebody else walking on stage and grabbing the baton

from them and trying to carry on and continue with the music

being beautiful, right? It is a really hard thing to do, and I

don't think people appreciate just how difficult it is to find

the person who's going to buy the business to make sure that

all of their pro, you know, worries, concerns, etc, and all

of those of their advisors are satisfied to the point where

someone is willing to go and take the risk of signing a bank

note, for example, to get the capital to go and do a deal and

then have it all come together, you know, at the end where you

get paid. And it's easy to fool ourselves, because, of course,

online content is filled with the stories of people who've

successfully done it, and very few people come on to talk about

how it didn't work out for them. And so this is the number one

thing that I wish more people knew, is just how difficult it

can be to sell a business as a going concern, and how

troublesome it might be and how it really takes time to prepare

starting years in advance, not when you feel tired and you

figure that you want to, you know, exit the next year kind of

thing.

Yeah, it's, it's really fascinating, because

I typically am on a similar boat of trying to help folks

recognize, like, hey, starting a business is really hard, too,

you know, the Instagrammed business world, and it's the

same ratio. It's about one in five really succeed, you know,

depending on the milestones that you set, and what that looks

like. But if one in five make it, and then one in five of

those sell, it's, it's, it's a challenge, to say the least. But

one of the things that I've found is true, is that founders,

when equipped with the right knowledge, the right advisors,

are the best suited humans in the world to overcome challenges

like that. And so coming alongside or having folks like

you come alongside them, is such an important piece of the

equation. Which brings me to my last question, that is, how can

folks learn more about this? How you know, maybe the first time

they've ever thought about a balance sheet or or they may be

thinking, Hey, I'd love to get a copy of the book. Where can

folks connect with you and learn more?

Yep, so the book is called the Business fortress.

I wrote it with Mark Willis back in 2025 and it's available on

Amazon or anywhere else where, where you can find business

books. And if people are interested just in learning more

about buying, selling, financing or managing businesses. If you

just look up David Barnett on YouTube or any podcast player,

you'll find my show. I've been on the air for 11 years now

answering people's questions on these topics. So there's just a

ton of free content available there for you.

Fantastic, fantastic. Well, David, thank

you so much for coming on today. Really was a privilege and honor

having you here. I love this conversation, and for those of

you watching and listening, you know your time and attention

mean the world to us, I hope you got as much out of this

conversation as I know I did, and I cannot wait to see you

next time. Take care.