What is a lifestyle business?
Passion, control, flexibility, or pure necessity… all reasons entrepreneurs decide to pick up and start a company. Building the business was synonymous with having the lifestyle you wanted to live. Having the freedom to be your own boss and work on your own schedule is a luxury that so many of us dream about.
I was recently asked what is a lifestyle business, and how does that compare to the other types of businesses out there. So here it goes…
Lifestyle business defined:
A lifestyle business is one where the company and its cash flow can provide the owner the type of lifestyle they desire. Most of the time it cannot be sold for much more than 1 times earnings because the owner IS the business and the potential buyer is buying a “job”.
Running a lifestyle business or value-based business is neither a good nor a bad thing. It comes down to the intentions the owner has for their business, their life, and the employees that they have taken responsibility for.
It is common for a business to morph from a growing business filled with passion and energy into a mere vehicle that can provide a lifestyle for the owner, causing business to plateau. The entrepreneur that was once there willing to risk it all and work through all hours of the night has slowly faded away.
The transformation: growth to lifestyle business
The transformation begins around the time when the cash flow of the business provides a level of lifestyle that satisfies the business owner. This could have come from prior notions of what equaled “success” or if there was a set salary amount that meant they “made it” and they could provide for their family in all the ways they desire and do all the things that make them happy. Either way it has an affect on the level of risk or “stomach” for future growth and change.
If you have all the things you want, the door opens for the feeling of contentment and it creeps into the mindset of a once tenacious and determined entrepreneur without much warning. This is a dangerous spot to be in because being COMFORTABLE is the enemy of growth, innovation and hard work.
The danger of comfort… can you relate?
Why would you go in and fire your GM if you don’t have to? The check cleared, nothing is burning to the ground, and the rest of the employees seem pretty happy. If you fire that person then you will have to take over the responsibilities and dive into the day-to-day, which by the way you don’t know much about any more and you don’t want everyone to know how absent you have been. SO let’s take the GM out to breakfast and have the tenth conversation about the things that need to change.
Your industry is changing and the competitors are picking up more products and services and you would need to invest more capital into the company if you wanted to compete on their level. You haven’t lost many customers and you have very loyal clients so would it be worth the risk? Why dump another 500k into the company if you don’t know you will get it back? You really wanted that cabin up north and this will affect that timeline. You already showed your kids and wife and that conversation will be a tough one. It would be easier to just tell your executive team that you want to wait to see how it shakes out with the local players before you make a move.
The company did pretty well this year and you will be able to give yourself a bonus this year because of the excess cash. This will pay for the cabin and your daughter’s tuition for the year.
Caught in a trap
Sound familiar? You’re not alone. This is the reason you started the business isn’t it? Freedom, tax write-offs and a good lifestyle, all while doing what you love. How can you complain?
This is not the issue. The problem lies in the trap that you have created for yourself. How do you get out when you finally want to? Do you have any idea how much the company is worth and who would be the potential buyer?
Check out The Value Advantage and the steps it takes:
You hear that two of your buddies in the industry you know, from a national peer group, sold their companies this past year. They are completely free and are moving on to something new. Of course no one is supposed to talk about numbers but the rumor mill is going and you hear a few figures that really get you thinking. Was that number based on a multiple of EBITDA? “No way” you think to yourself, “not a chance I could even get close to that”.
Now what?
Little did you know that while you were buying your cabin and trying to keep the status quo at the office, your friend spent the last three years tightening up his operations, people, and processes with a laser-tight focus on his EBITDA, with every intention of selling.
A wave of anxiety flooded over you. It was like you were trapped in this fantasyland where the cash flow from you businesses would always be there to support your lifestyle. Just like if someone wiped the mud from your windshield, you could see your situation plain as day… shrinking margins, high competition, product diversification, under-skilled employees, and no leader to make the changes.
It would take twice as long to do what your friend did in your office. Who would even be the potential buyers? Could you personally afford to make the changes that are necessary? If you can’t, will you even be able to retire? What would you do if you did sell?
A lifestyle business can give you exactly that: a lifestyle; but what happens to your lifestyle without the business? If you don’t take steps to answer this question then your lifestyle business will eventually become your own trap.