Know your number before a buyer names one

Wendy

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, "Oh, I might be able to sell this one day."

Krystyn

There's a number most founders have in their head, the number their business is worth, the number they're planning to retire on, the number that's supposed to fund the next chapter. Wendy Brookhouse 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.

Wendy

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 and but you know what?

Krystyn

This is Worth Owning. And I'm Krystyn Harrison. Let's get into it.

Wendy

Thank you, Krystyn, for having me. I am so excited to talk about this stuff.

Krystyn

Love the energy. Let's just start where um 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. Been on the other side of this. Tell me a little bit more about that experience.

Wendy

Yeah, so it was it was very interesting. We started this company with another adviser who kind of owned the IP and we also had a tech founder, a tech partner as well. So they provided the first build 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 could 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.

Krystyn

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... That's a future story. But today, people build companies. And so, from this perspective, there was a breakdown and then you saw an opportunity to find a path. Um, what was that just in terms of the shape of the company, where it was kind of what that felt like to go from owning it to then being on the other side of transaction? What did that feel like for you, that journey?

Wendy

It felt good from the sense of um hey 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 in a hope and a prayer, right? So you put all your time in, which is your most precious resource at many levels, and you never get compensated for it because you haven't uh figured out what is your endgame or how much do you need for that or anything. So I look at it as hey we learned so much through that venture and we got paid for our time and so I was happy with that.

Krystyn

And this is something that we don't often value and there's things where you could 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 earned 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, you know, I need to be the one to be able to feed my team and therefore I will take the cut.

Wendy

I absolutely it 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? Cuz I think we get into that just going along, we're growing but we're not trying to get anywhere in particular. Um 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 say 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, I'm going for a run. Totally different approach.

Krystyn

Is that how you see a lot of folks operating right now?

Wendy

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 oh 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.

Krystyn

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... Exactly. Begin with the end in mind. 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, and uh and also like what is the enterprise value of this business, which is a complete mindset shift.

Wendy

I'm trying to move them from the end of the jog into a training program, shall we say? Right. 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 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. And then to that end about knowing what it needs to be worth, uh 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 but you know what?

Krystyn

And I'm sure you've seen this. I've seen this firsthand myself where I had a seven-figure LOI for a business. It was the beginning of the dance. You know that it's not done until the bank, right? It's just the beginning.

Wendy

That's the first foray.

Krystyn

First foray, and 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. And 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. Um, and that was because we weren't ready to translate the value of what we did into a value for a buyer.

Wendy

Yeah. I think that we have to a couple of things by doing the education ahead of that time, like taking if that offer is not there now, use that opportunity to educate yourself. Educate yourself on what are they look, what would a potential offer look like or what would they, 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 agreement so that they you they say they're not going to talk about it but now they know the inner workings.

Krystyn

Completely. And that idea of maximizing it, that idea of you know what is that number, what is enough, we 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, maybe 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. Um 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?

Wendy

Yeah. I, well, here's where I'm see, 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 2 years, we 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. Um, and so I think uh that's also part of because they are involved in everything.

Krystyn

Right. This is a really...

Wendy

When someone comes into 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, discount your profit by that amount. So, you're not saving yourself anything in the long run.

Krystyn

This is a really good point. So, there are add-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, um so we talk a lot about positive normalizations where maybe you're paying yourself I don't know um or or sorry, market rate salary. Let's talk about that. Exactly. So if you're underpaying, walk us through what you've seen and what a normalization is in your world.

Wendy

If you're not underpay, if 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 you're paying yourself, 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. So the number they use to multiply by which they're going to give you your value. So you want, you know, 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.

Krystyn

Bang on. And so if you're valued on EBITDA, for example, um 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. Um and then the other piece too, if I mean what are some kind of blind spots or some sort of use 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 is listening you could kind of just give them a check on how sellable the business is?

Wendy

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. For me, 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 of profit, right? And the second level was we were really not interested in buying a job. Right now when we think about most buyers, most buyers they 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.

Krystyn

Absolutely. Well, and it's this idea, can I look at your results and go, oh, I know how you did them. You have playbooks. Do 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. We end up trapping ourselves in business jail.

Wendy

We do.

Krystyn

And so, how do we get out of it? What's the path?

Wendy

Talked a lot about it, but you know, part of it is I think the first step is look at absolutely every activity you're doing. Look at every activity. And when you, if you're first starting this, you can get more strategic about it in the long run, Krystyn, but I think to start off with, just get rid of all the stuff you hate doing. The stuff you put drain on. The stuff you're like, "Oh my god, I got to 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. Um 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, Krystyn, kind of like you.

Krystyn

Yes. Yes. I've lived it.

Wendy

My mistake was, hey, I need someone to do uh 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, Krystyn. We're trying to find a unicorn that does it all versus, "Hey, let's break this down." Cuz guess what? The person who is a good bookkeeper may not be the extrovert you want greeting your guests at the door.

Krystyn

Yes. Yes. Know their strengths. Know what you need. Different profiles, trying to smush them into one.

Wendy

I was guilty of that so bad. Right. In the name of efficiency and you know and it's... Well because it's not a full-time job unless it's all in one job description.

Krystyn

Right. Right. And this is such a, this, 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 oh 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. So walk me through how you think about that one number. What is the question that you're actually trying to answer with a founder?

Wendy

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, Krystyn. 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. 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.

Krystyn

And I like how you're doing that bottom up perspective versus going, "What do you think your business is worth?" And for many, do they have an answer? Because for folks, this is part of why, you know, we engage, right? We help with that answering. That's right. And ultimately, you won't know until you have an LOI, you have a C, 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, okay, where are we starting from? Where do we want to build towards? Um, and so how many founders do you think out there know their number, what their business is?

Wendy

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. So...

Krystyn

Yeah. Yeah. And that's interesting just in terms of the attachment. Tell me about that. What do you see in terms of, is it identity attachment or...

Wendy

Or they're trying...

Krystyn

If they're operating by rules of thumb or they're just like...

Wendy

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.

Krystyn

Right. Right. And that's such a diff, a huge difference. And one of the things we do, and this is where we show up and work with and partner with folks, you know, 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, um 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, um who are building.

Wendy

The pattern, I'll take it even more granular than that, Krystyn, because I'll see it in how female founders price their products, right, of not wanting to seem greedy. And I think it starts at that granular level. And there's some, um, there's some obviously 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 um 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 gumption to say this is my price and then to just be quiet.

Krystyn

Right. And when you see this at the exit side, what do you notice?

Wendy

I think 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, Krystyn, because I think I was lucky enough a couple 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, a 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, what, aggressive or something, and she goes, get out. And then she managed it from there on her own. Her, they, she was being almost socialized by her team to not be assertive and aggressive.

Krystyn

Fascinating. And to doubt herself, which I think as women, I still doubt myself even though my husband and co-founder, I know you're, you work with Kelsey, your husband, "Look at your LinkedIn, Krystyn. Go look at your, look at your, look what you've achieved." And yet I still show up with this sense of I need to have all the buttoned-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 sort of a study that I was reading about how um women associate money with generosity and love, whereas men associate it with autonomy and power.

Wendy

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. We're 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. Um but we still are looking at it and starting to get the confidence that hey, we're making decisions. I think to one person in particular, we mapped out a 10-year plan to exit, but my whole goal as 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.

Krystyn

And this is it. 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 where, 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. And so when... Yeah. Go ahead. Go ahead.

Wendy

I just want to add in a little bit of a commentary there on, this is sophisticated, complex, that I don't think you putting it into ChatGPT 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 and your core will help guide you through those and give you that confidence you might not even have known you were missing, because it just, it slowly compounds over time through constant good decisions.

Krystyn

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 and different. And so I love the work you do. Oh, go ahead. Go ahead.

Wendy

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 in everywhere else in the spectrum of entrepreneurship, we're not thinking like that. We 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.

Krystyn

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?

Wendy

They can check me out on LinkedIn. It's just Wendy Brookhouse on LinkedIn. Um, I have 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 cuz uh, love just getting you to the next level of questions.

Krystyn

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