In John Brown’s June 2019 blog , the article discusses the difference between Lifestyle and Enterprise Business, he discusses that fact that many businesses are formed to accommodate the lifestyle of the owners without giving too much thought as to the long-term effect of the business value when it is sold.
While the business is up and running, it is doing exactly what the owner wants it to do, and that is to provide a steady and profitable income to carry the lifestyle of the owner and their family. Again, this is great for the business owner, their families and businesses in general. However, the article discusses the problem when the owners are forced to sell, or just want to sell and exit the business.
Business owners may think they can run their businesses as a lifestyle business and still plan for an exit of their business for the highest potential value. This is a myth, since the strategy of exit planning involves different philosophies and strategies used to grow the business best potential value.
Most business owners don’t really know what their businesses are worth. Because of this, they never understand why they don’t receive the perceived value upon post exit. Also, many business owners take for granted, the perks from the business as normal and ordinary. These perks evaporate once they exit. A double hit to the owner of a lifestyle business model.
The article emphasizes the fact that you can’t have it both ways if you wish to exit your company at the best possible price. Business owners who are running a lifestyle business, must turn that business into a business enterprise if they expect to exit their business at the highest possible price.
A business enterprise has transferable value. It needs to be worth something to the purchaser, for example an equity group, as lifestyle value means nothing to a private equity group compared to the business owner of a lifestyle business as they both have different philosophies of business purpose.
Turning a business into a business enterprise is basically creating a business that is worth something to people or entities beyond the owner. Brown suggests the transforming of a lifestyle business to an enterprise business is a challenge mostly because of the owner’s emotional attachment to the business, and limited owner resources.
It has given him and his family a nice lifestyle, freedom and pride. “Why should he change anything?” The owner created this baby, loved it, invested in it and build it. Consequently, it is not only a physical transition but a psychological transition.
When you look through the eyes of an outside investor, they are looking for other aspects about the business, mostly flaws of the business, inefficient areas of the business, management, potential return on investment, cash flow, potential growth and a host of elements needed to make a future profit from the purchase and sales of the business, not lifestyle to the owner.
Lifestyle Owners Sensitivity
Owners may become sensitive to having an outsider put the business under the micro
scope and question past decisions and procedures which the owner has implemented, but don’t line up for the future purchaser, who is more interested in turning the business into profit.
Another transition that may be hard for the owner to make is to create an insider key person or group. This may be hard for the owner to implement since they have been the decision maker and go to person since the beginning of the company. In order to sell the business to the insider group, they need to be trained and start thinking like owners. One key aspect of developing a key group is delegating tasks which the owner transfers to the key group or person. This allows the key group to grow with more experience and start taking the role of an “employer”.[i]
The owner needs to give up some control of the business to help grow the key group, which creates a stronger business value for the future. This may be one of the most important elements to an outside purchaser.
Over the years, I ran across this type of business owner, never realizing the distinction between and lifestyle owner and an enterprise owner.
Recognizing the difference of the two business models, will help the advisor advise the business owner. It also, formulates key questions which will help the owner define more precisely what the owner wants from the business in the future.
John Brown’s article is important to professionals as it makes you think of the level of discussion you will have with this type of business owner knowing that his reasons for not planning for future growth has more to do with what he expects out of his company today, and not tomorrow.
[i] Some data suggests that 66% of the sales of small companies comes from sales within.