Why most 7-8 figure businesses are not sellable - with Wendy Brookhouse

Krystyn Harrison: When I do workshops to just say, let's think about this, let's start being intentional and deliberate, 90 % of the room has never contemplated, ⁓ I might be able to sell this one day. There's a number of most founders have in their head. The number of their business is worth, the number they're planning to retire on, the number that's supposed to fund the next chapter. Wendy Brickhouse has spent 20 years watching founders discover that that number may not be real. She's the founder and chief strategist at Black Star Wealth. She's a CFP, a financial planner who also co-owned a software company and sold it. She built a practice specifically around the moment between building and exiting. And you're actually doing all the social media, you're doing all the HR, all that stuff, and they realize they're going to have to hire three people. They're going to discount your profit by that amount. So you're not saving yourself anything in the long run. Revenue and profit drilled into our heads, right? Let's add the third leg to that stool, which is the value of your business. as the third leg that you should be measuring and tracking. I have a story about a client of mine who used to come in and he'd go, yeah, I have an offer for my company. But you know what, if I work another year or two, I know I can increase that by like 100, 200,000. And I was asking him one day, I'm like, well, how much do you need? He didn't know the answer to that question. He wasn't willing to go down the hole to figure it out. And so as a result, I think he kept pushing off because as we know, a ready willing buyer. is a beautiful thing. And when they come, they need to be treated properly. This is Worth Owning, and I'm Kristin Harrison. Let's get into it. Thank you, Kristin, for having me. I am so excited to talk about this stuff. Love the energy. Let's just start where a lot of folks kind of skip when they introduce you, because I think it's really important for us to understand before we get into the advice and the wealth side of this, you co-owned a software company. So you weren't just advising someone through an exit. You've been on the other side of this. Tell me a little bit more about that experience. Yeah, so it was very interesting. We started this company with another advisor who kind of owned the IP, and we also had a tech founder, our tech partner as well. So they provided the first bill as part of their buy-in, so to speak. And we kind of managed the company. And then along the way, what happened was we just really lost faith in one of the partners. And we're like, you know what? It's time to go. We can't be building something that we can't, we don't have faith in. And so what happened was we then tried to trigger our shareholders agreement clauses around the sale. And it actually brought up a whole bunch of stuff. And it was a fascinating point in time. And that's why I also say I have had been in businesses without the shareholders agreement. And I've been in businesses with the shareholders agreement and that shareholders agreement saved us. It saved us because it had the blueprint for how you're going to value the company. Here's how the sale will be handled. Because they tried to go all around all of that. And we were able to go, well, actually, according to clause nine, subsection three, this is what it is. so it was kind of fascinating to be able to do that and not be bullied, right? And this is such a, this is a common thing for exits that we don't often hear about in terms of there's a disagreement with a partner and this people build companies at the end of the day, maybe AI will build companies on their own. That's a future story, but today people build companies. so from this perspective, there was a breakdown and, and then you saw an opportunity to, to find a path. ⁓ What was that just in terms of the shape of the company, where it was, kind what that felt like to go from owning it to then being on the other side of the transaction? What did that feel like for you, that journey? It felt good from the sense of, we had built something, put in blood, sweat, and tears, honestly, and then we actually received a dollar value for that, right? Because a lot of times, we go into these ventures and it's all on a hope and a prayer. right? So you put all your time in, which is your most precious resource at many levels, but you never get compensated for it because you haven't figured out what is your end game or how much do you need for that or anything. So I look at it as, we learned so much through that venture and we got paid for our time. And so I was happy with that. And this is something that we don't often value and there's things where you can start to kind of create a shareholder loan for yourself. And we will get into kind of the details of this, but at the end of the day, you know, I've had a business that completely failed and I earn nothing from it, but the opportunity cost to me in my head, the way I rationalize it is the learning that I parlayed into the next thing and that's part of the ride. But a lot of times founders, for example, are not paying themselves a market rate salary because we have this sense of... heroics around, know, I need to be the one to be able to feed my team and therefore I will take the cut. But the question really is, are you building a business that has the potential to be scalable? How long are you going to take that on? And I love that you were able to actually get through to the other side and the auto folks unfortunately are not able to get to that point. So I guess what does that teach you now that you're on the other side? You're an advisor, you're a certified financial planner, you're in the wealth space, you're seeing a lot. of different patterns. I imagine it's changed the way that you show up ⁓ for founders having lived it yourself. Absolutely. does have that lived experience is very, very helpful from that perspective because that was a share sale. We've also done asset sales. We've seen good, bad and ugly on both sides. So it really does affect us. And what we have been trying to do and I think it happened when I hit a certain age and I started realizing man, you need to start being more intentional and deliberate about this, right? Because I think we get into that just going along, we're growing, but we're not trying to get anywhere in particular. And some of the things, it's like we're going out for a jog, but we're not training for anything, right? Because when we're training for, a marathon, we're very deliberate about how long the run is, how many runs we're doing, all those things versus, hey, it's nice that I'm going for a run. Totally different approach. Is that how you see a lot of folks operating? Right now? Yeah. Because they've never been introduced to this concept, right? So when I do kind of workshops to just say, let's think about this, let's start being intentional and deliberate, like 90 % of the room has never contemplated, ⁓ I might be able to sell this one day. It's very interesting. The startup culture in Canada is huge. The get out culture isn't as big. The get out culture. It's so interesting too. And there's a principle from I believe it's the highly, you know, the habits. What is it? The seven habits, right? Of highly effective people. end with mine. Exactly. Begin with the end in mine. And we are so strategic or we think we're being strategic and thoughtful and we're thinking about ramping and growing revenue of the business. That's the North Star versus to your point, thinking about what is the exit path? What am I building? What is this worth? Is that going to help fund? the next chapter, whether that's retirement or another build or what have you. also like what is the enterprise value of this business, which is a complete mindset shift. And so we meet people along the journey. I'm curious where you see people fall in this. know, there's sort of the, you know, folks who are thinking intentionally about this and those who are jogging just kind of day to day in the business. Where do you meet people? What sort of... How do they see their business? I'm trying to move them from the end of the jog into a training program, shall we say? Right. Yes. I think what we're trying to do is change the lens, right? So I love your point about revenue as the North Star, because I think there's revenue and profit drilled into our heads, right? Let's the third leg to that stool, which is the value of your business as the third leg that you should be measuring and tracking. And then to that end about knowing what it needs to be worth. I have a story about a client of mine who used to come in and he'd go, yeah, I have an offer for my company. And, you know what, if I work another year or two, I know I can increase that by like a hundred, 200,000. And when, and I was asking him one day, I'm like, well, how much do you need? Yeah. How much is didn't know the answer to that question. He wasn't willing to go down the hole to figure it out. And so as a result, I think he kept pushing off because as we know, a ready willing buyer is a beautiful thing. And when they come, they need to be treated properly. And if you know what your floor is, you're going into your negotiations at a whole different level. Cause if they're offering above it, you're like, yup, let's do it. And I'm sure you've seen this. I've seen this firsthand myself where I had a seven figure LOI for a business. was the beginning of the dance. You know that it's not done until cash is in the bank, right? It's just the beginning. That's the first foray. First foray. the behavior and the way, you know, folks around the table changed when money was put in front. There's this very interesting psychology that we all have with money. And what I observed is just sort of it does change behavior. so conversations with partners, with investors, with board become very, very fine pointed on how everyone is showing up emotionally around. money as well. And so for me, I mean, my story there was it was a seven figure deal opportunity, but it completely fell apart. And that was because we weren't ready to translate the value of what we did into a value for a buyer. And I couldn't run a process myself. was not a competitive bid. So learned a tremendous amount about what not to do. But a lot of folks we speak to get inbound interest all the time. And it can feel very flattering. So ⁓ What are some blind spots that you've seen about moments like that where an inbound buyer is coming in and a founder starts to go, ⁓ this could be my path out? Yeah. I think that we have to do a couple of things. By doing the education ahead of that time, taking, if that offer's not there now, use that opportunity to educate yourself. Educate yourself on what would a potential offer look like or what would be their motivation. Because what we don't want to have happen is they're just doing it to see what you're up to. And they might sign off on an NDA and non-disclosure agreements so that they say they're not going to talk about it, but now they know the inner workings. And so that can change the approach as well. So making sure that they're coming in with the right intentions and with the right piece and not going into exclusivity until you're sure that, hey, because one person is interested, maybe we should go get others. And I feel like sometimes when we get that unsolicited offer or whatever, we were like, oh, well, they want it. So I guess I shouldn't go do other things. Like you feel this invisible obligation because they brought the idea to you versus, okay, how do I maximize this? Completely. And that idea of maximizing it, that idea of, you know, what is that number? What is enough? We'll get into more of that in a moment, just kind of on what wealth. looks like and the emotions around money. But I'm curious, some of the stuff we've talked about and you've talked about on your podcast, it may be a little uncomfortable as a point of view for founders to hear about the state that most businesses are in. And that is around how sellable is my business? And this is a question we hear all the time, because until you start thinking about it, and for many people, you're thinking about it, maybe when you're not at your strongest, right? Maybe you're feeling extremely burnt out, right? And there's three kind of buckets that we see. There's like, you know, the founder who's like, I have a job. I am in every aspect of my business. you know, we'll get into sort of the TLDR on that, very difficult to sell a business that entirely relies on you. The second is I've already got an asset. Do I want to keep scaling it or do I want to step back or exit? And then the third is I am ready to go. And there's sort of folks across that spectrum. Is that kind of similar to what you've seen in terms of the way you look at it? Yeah. Well, here's where I'm seeing a little bit of that, but I'm also seeing of uncertainty of where they are. I want to get them before they're tired. I want to get them because, you know, during the pandemic, we were talking to a partner, an accounting firm about this whole concept of buying and selling. He goes, the number of business owners that are coming in and they're like, I want to sell. And they're like, well, if you wait two years, could get you, we could fix this. So you have pay less tax and do all this stuff. And they're like, yeah, no, I'd rather pay the tax right now. That's how tired they are. And so I think, that's also part of because they are involved in everything. So some of the work that, you know, can be done to make your business more sellable is actually going to make you enjoy your business more. This is it. This is the end of it, right? And so I think there's this ⁓ perception and depending on the size of the business, I sometimes see people, well, I can just do that myself, right? Yeah. And so I think what happens is, is when we start going in and we start looking at value and everything else. We realize that you're doing all the stuff because you wanted more profit, because you're actually doing jobs that other people could do and get paid for. So you've actually artificially inflated your profit. Right? This is a really someone comes in and looks at your business and you're actually doing all the social media, you're doing all the HR, all that stuff, and they realize they're going to have to hire three people, they're going to discount your profit by that amount. So you're not saving yourself anything in the long run. This is a really good point. So there are ad backs or adjusted EBITDA normalizations where a buyer is going to go in. And a lot of founders, Wendy, I've met don't actually know this. And why would they, frankly, you don't go to school for this. And there's so much education about how to start and scale, but exiting. And this is where I think we're both super aligned as partners on this. Like, you know, ⁓ so we talk a lot about positive normalizations where maybe you're paying yourself, I don't know, or. That's right. rate salary. Let's talk about that. if you're underpaying, walk us through what you've seen and what a normalization is in your world. you're underpaying yourself, they're immediately going to add back in what is the cost, the true cost of the role you've assumed, right? And if you have three different roles you're doing, they're adding them all back in. So that means you're paying yourself 100, it really should have been 150 plus we should have been paying 60,000 to another person to do this. they're just going to take all that extra money right off the profit or the EBITDA, the number they use to multiply by which they're going to give you your value. you want to have your multiple high and you want to have that profit as pure as possible and as high as possible as well. Bang on. And so if you're valued on EBITDA, for example, this could be where you're going to see a discount because they're going to have to add all of those people to do that job. ⁓ and, and then the other piece too, if, mean, what are some kind of blind spots or some sort of cases that you've seen where a founder is involved? For example, they're the number one salesperson in the company. What are some other sort of checks that if a founder's listening, you could kind of just give them a check on how sellable the business is. Well, I'll give you an exact example. So my husband and I were approached to buy a business. It had a nice healthy profit of 500,000 a year. mean, woo, that's awesome. Lots of coin. And then we started digging in and we realized that the two kind of founders in the company were working 12 to 14 hour days. So the one of them was doing all the quoting because she didn't trust anyone else to do the quoting on the jobs. So there was that piece all added in. And so then we looked at, well, if we're going to hire someone to do all the quoting, there goes, that's not $500,000 to profit. Right? And the second level was we were really not interested in buying a job. Right? When we think about most buyers, most buyers, want to buy a cash producing machine and they want confidence and predictability in how much that machine is going to push out cash wise every year. Absolutely. Well, and it's this idea, can I look at your results and go, ⁓ I know how you did them. You have playbooks, you have SOPs, you have people who are following them. And I can see that in your results and your weekly scoreboard, the system that you've built, the asset that you've built versus the job that you have. And I think it's really interesting when you think about technology and how it's supposed to make us more productive and you think about why we all start a business, we want time freedom at the end of the day and somewhere. up trapping ourselves in business jail. We do. And so how do we get out of it? What's the path that you see? talked a lot about it, you know, part of it is, I think the first step is look at absolutely every activity you're doing. Yes. Look at every activity. And when you, if you're first starting this, you can get more strategic about it in the long run, Kristin, but I think to start off with just get rid of all the stuff you hate doing. Exactly. The stuff you put the crossword on. The stuff you're like, ⁓ my God, I gotta do that. And then you let it pile up to the point where it becomes this massive project that you are like, can't stand doing. And you're like, then you take three days to do it instead of five minutes a day. Those are some good indicators. ⁓ My caution there is, and I have been victim of this, I'm in the school of if I made this mistake and I can keep one person from making that mistake, it was okay, Kristen, kind of like you. So my mistake was, hey, I need someone to do my books, we'll bring them back in-house, we'll do that. I need a receptionist and I need someone who can book appointments or what have you, right? So I hire one person to do all of that. Because what we're trying to do is find a unicorn, Kristen. We're trying to find a unicorn that does it all versus, let's break this down. Because guess what? The person who is a good bookkeeper may not be the extrovert you want greeting your guests at the door. Yes. Yes, know their strengths, know what you need. profiles trying to smush them into one. I was guilty of that so bad. In the name of efficiency. Well, because it's not a full-time job unless it's all in one job description. Right. And this is such a, the design that goes into scaling a business, the thoughtfulness. And I think so many of us get so heads down in the build. that we're scaling so fast, the wheels are coming off, or at least it feels like it. And then all of a sudden we're going, ⁓ we need to look inwards and optimize this engine that we've built and fix it. And that's okay. That's okay. But I think what happens along the way is we start to really not enjoy the house we've built, which is what you talked about, right? And kind of how do we get out of that? So walk me through, let's talk about, you know, numbers, which I know you're all about, but also the heart behind the numbers. Walk me through how you think about that one number. What is the question that you're actually trying to answer with a founder? What I'm trying to answer for that question is what does the end result of your sale have to be to your point to fund either retirement, next phase, whatever you want to do. And then let's work our way back. But I start at the very, very beginning, Christine, because I don't know how far away that is. I don't know when that might happen. But what we can control is today. So what we can do is look at what does your today cost? And let's figure out how much you need from your business to fund that. Okay? Yes. Then we can add in, oh, in your ideal life post-work, I call it life after work sometimes, because the word retirement doesn't seem to resonate all that well with business owners. We also talk about work option. Work optional is kind of the goal for a lot of people we work with. I'm with you. What's that going to cost on an after-tax basis? Because I'm not interested in knowing what it costs pre-tax, because that's where the strategy I can apply is, but that's where I want to do. Now here's a key thing for business owners is like, we've almost got to normalize your retirement income or your life after work income. You're running a lot of your life through your business. If your business is no longer there, you must now assume those costs personally. We need to add them back in. We're going to be skewing our final numbers. But that gives us kind of like, okay, if we want this much income, we can now figure out along the road, how much you would need to do. So if I have all these other assets, okay, that means the business would probably need to net out this. And we have to look at it from, hey, you're gonna have to pay, you're gonna probably want some consultants along the way to help you build the value. You're probably gonna want a really good accountant and a really good lawyer on your team, which are specialists in ⁓ &A and don't do real estate on the side. So you're gonna want that specialist, so you wanna price that in. Then we're going to have to go, hey, how are you structured? Do we need to add in a holding company, a family trust? How are we maximizing all these pieces and letting them grow? These are some actual costs that we're going to have to deduct from the gross to come up with what your net is. And that's the net we're working with, but we will reverse engineer back to say, hey, based on all these assumptions, this is what the value needs to be. And you're here. Now let's go. And I like how you're doing that bottom up perspective versus going, what do you think your business is worth? for many, do they have an answer? this is part of why we engage, right? We help with that answering. And ultimately, you won't know until you have an LOI, you have cash in the bank. You actually will not know what it's worth. But you can get an appraisal, a bit of a sense, a framework to go, OK, where are we starting from? Where do want to build towards? Exactly. And so how many? What founders do you think out there know their number, what their business is very, very few. The few that do, somehow it magically ties into what your capital gains exemption is or the amount of debt you personally have. Something along those lines, like there's something driving the number that is external to the actual value and you attach, and I see a lot of business owners attach themselves to that, right? Yeah, and that's interesting just in terms of the attachment. Tell me about that. What do you see in terms of that identity attachment? or they're trying, if they're operating by rules of thumb or they're just like, they're feeling the work that they've put in. So they're trying to say, what is that worth? Right? So they're evaluating the value of their effort versus the actual asset, whether they've built an asset or not that someone else might want to own. I think. Right. Right? Right. Yeah. Right. And that's such a huge difference. And one of the things we do, and this is where we show up and work with and partner with folks like you and not like you, because from the perspective of you have built, you have sold, you have done the thing, we are very similar. We're very aligned. And that's important to us because you have empathy for what it feels like to actually feed families, right, through your business. This is not something to take lightly. And so part of the question I have for you when it comes to the psychology of money, the emotions of money, ⁓ I wanted to just share something that I've noticed in myself, and I'm curious if this is a pattern you see, particularly with female founders, ⁓ who are building. so for me, you you've, you've built value in a company, you've scaled it, you get to a point where like, you know, I know this intellectually that this is worth something, but then, you know, like when someone sort of, when, someone asks you like, what do you, what do you want? Like, what, what are you building? What's the wealth that you're looking towards? Like, when you talk about wealth. there is this sense of kind of holding that back. You kind of flinch a little bit and go like, can I say that out loud? And I was speaking to a founder the other day who was saying, I feel like as women, don't feel like we can be unapologetic about wanting to build wealth. And there's this stigma around wealth related to, ⁓ you know, ⁓ viewing it as I don't want to be greedy. When the shift for me has been kind of going, no, wealth could be a tool. And I can align that with my values and I can align it to how I want to live my life and what I want to build outside of a business, outside of the walls, who I am as a person. But there's a lot of unwinding with that. So I'm kind of curious, what do you see on the emotional side, whether it's female or not? Is this a pattern that you've seen? The pattern, I'll take it even more granular than that, Kristin, because I'll see it in how female founders price their products. of not wanting to seem greedy. And I think it starts at that granular level. there's ⁓ some, it's intrinsic in them. There's a couple of things there. I can't be greedy to your point, but also who am I to charge that much? Who am I? And ⁓ what if someone says no, when you are assertive at that level, right? So I think that... It takes all the gumption you have to price appropriately and it takes all the gumptions to say this is my price and then just be quiet. And when you see this at the exit side, what do you notice? I it's going to be the exit side as well, right? When you look at the female founders. I have a great story though about the opposite side of things because I think it's systemic at some level, Christian, because I think I was lucky enough a couple of years ago to be at a dinner table of someone who had done a very successful exit. And she was telling the story of how she's in the negotiations and her lawyer is in there with her, guy, and she's going, no, this is how it's going to be blah, blah, blah. And he's going, I think you're being a bit harsh or a bit aggressive or something. she goes, get out. And then she managed it from there on her own. she was being almost socialized by her team to not be assertive and aggressive, which I found fascinating. And to doubt herself. which I think as women, I still doubt myself, even though my husband and co-founder, I know you work with Kelsey, your husband, look at your LinkedIn, Kristin, go look at your Red, look at you've achieved. And yet I still show up with the sense of I need to have all the button down answers. I need to be the one who knows the, and there's this sort of level of trust. And so this shows up in exits. There was a study that I was reading around how women associate money with generosity and love, whereas men associate it with autonomy and power. Neither is wrong. when you're thinking about negotiating and looking to maximize value, and I've seen this with clients, I've worked with female founders who value to them isn't about a dollar number. It is about the impact to their team, the way that the culture is gonna be maintained. It is about what it does for their family. And there's this very interesting difference. I would say some men that I've worked with as well. It's not about I don't think it's exclusive to your gender, but I think predominantly you could say. So I'm curious, you see this sort of psychology with money and wealth in women and in female founders? I do. I find what it's interesting too is that when I work with a female founder over a period of time, part of our process is we actually measure kind of what's the value of your assets and we do it every quarter. So we're looking at the market assets. looking at not necessarily we've done their business valuation. So we have it, but we only do it once a year type of thing. ⁓ but we still are looking at it and starting to get the confidence that, we're making decisions. I think to one person in particular, we mapped out a 10 year plan to exit. But my whole goal is her financial planner is, Hey, I'm just going to be here to root you on, but I'm also, my goal is to build so many options for you. How can I make all the options available so that if you decide to stay on as chairman of the board, woohoo, you're supported. You decide to sell to your employees, you're supported. You survive to totally just sell to a third party. We've got all the vehicles built to do that. Like every kind of option, if we can max it out because ⁓ even things I think about sometimes, which I don't hear a lot of other advisors talking about is on the sale, you've used up all your capital gains exemption. You sold the company for 1.25, boom, no tax, wrong. There's gonna be this thing called the alternative minimum tax that the government's gonna say, really like some tax today. So what we have to do as advisors is go, we know that there's a potential to happening. Let's make sure you have enough revenue producing assets that will offset that tax over the next four or five years. So thinking about it from that strategic point of view so that we are ready for anything. And this is an optionality is a word that we both love. Know your number, both personally and in the business, understand your options and start building with the end in mind. Think about what you want out of your business, what you want out of your asset and don't be afraid to seek help and do the work. Do the work because the work matters in the end, right? Measure twice, cut once. so Wendy, yeah, go ahead. I just going to add in a little bit of a commentary there on this is sophisticated complex that I don't think you putting it into chat GPT is going to give you the right answers at this point. Plus, I think there's that whole point we've been bringing up about mindset around money and how that a good planner and advisor in your court will help guide you through those and give you that confidence you may not even have known you were missing because it just. It slowly compounds over time through constant good decisions. Completely. And once you can mirror ⁓ and look at aligning your values, the direction of your life, where you want to go with your life and know that number and then work backwards to what the business could be worth today and see kind of if there is a gap. A client of ours recently started a sale because they felt ready. They saw the number and it gave them the frame to go, this is the time. This is what I want to pursue. So knowing that helps inform your decision set about where you want to go. And every single case is so deeply personal. different. And different. And so I love the work you do. ⁓ go ahead. Go ahead. I was going to add another mindset piece. I think that in the media or just in the whole entrepreneurial sphere, I think that sometimes, I think in the tech startup, it's different. You're almost groomed from day one for an exit. Whereas I think everywhere else in the spectrum of entrepreneurship, we're not. So I thinking like that, talked about that, but then we attach this obligation to not sell versus preparing for a sale. And when we get into this world of there's so many neurodivergent entrepreneurs with ADHD and things like that, and a lot of them, they really like starting things up, getting it going, and then they want to move on. So let's do that. Let's not think that a bad thing. Let's make sure you're going to get paid every time. That is beautiful. And that has also been my, I don't know where I am, but ultimately I am the starter person. I am the zero to one. I thrive in change. And so just knowing who you are and it's okay to give yourself permission to design a path out. That is okay. And that is beautiful and that is celebrated. And if you want to stay and build something generational, that's also beautiful. And that's why it is deeply personal. Wendy, thank you so much for joining me on the show. How can people find you? What's the best place for them to get in touch? They can check me out on LinkedIn. It's just Wendy Brookhouse on LinkedIn. My podcasts get posted there. My newsletters get posted there. And of course, my website is blackstarwealth.com. And I love to chat with anyone about anything because ⁓ love at... just getting you to the next level of questions. Thanks for listening to Worth Owning. If you found value in this conversation, share it with another founder who needs to hear this. Subscribe to Worth Owning for more unfiltered conversations about building enterprise value and designing the life you actually want to live. New episodes every other Wednesday.