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:
– What changes to make now so you can grow profitably while protecting what you’ve built.
– 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.
Episode Transcript
Scott Ritzheimer
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.
David Barnett
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.
Scott Ritzheimer
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,
David Barnett
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.
Scott Ritzheimer
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?
David Barnett
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
Scott Ritzheimer
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,
David Barnett
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,
Scott Ritzheimer
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.
David Barnett
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.
Scott Ritzheimer
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?
David Barnett
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.
Scott Ritzheimer
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?
David Barnett
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.
Scott Ritzheimer
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.
Contact David C. Barnett
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