Which Do You Have – a Lifestyle Business or an Equity Value Business?

Which Do You Have – a Lifestyle Business or an Equity Value Business?

It’s Important to Know the Difference

In speaking to a group of business owners recently about defining their business vision, I suggested that they be clear about whether they want an "equity value business" or a "lifestyle business", because the way they approach building a business must be very different depending on how they will define success. 

The Lifestyle Business. The term “lifestyle entrepreneur” was coined in 1987 by William Wetzel, a director emeritus of the Center for Venture Research at the University of New Hampshire. Mr. Wetzel was using it then to describe ventures unlikely to generate economic returns robust enough to interest outside investors. In financial jargon, “there's no upside potential for creating wealth," he explains.

 "Lifestyle ventures are usually ventures that are run by people who like being their own bosses," Wetzel says. "But they're in it for the income as well. Indeed, lifestyle entrepreneurs offer a different...view of success than those who are mainly focused on longer-term wealth accumulation.

Lifestyle businesses are businesses that are set up and run by their founders primarily with the aim of sustaining a particular level of income and little more; or to provide a foundation from which to enjoy a particular lifestyle. Some types of enterprises are more accessible than others to the would-be lifestyle business person. Those requiring extensive capital are difficult to launch and sustain on a lifestyle basis; others such as small “creative” businesses are more practical for sole practitioners or small groups such as husband-and-wife teams.

Lifestyle businesses typically have limited scalability and potential for growth. In conventional business terms, lifestyle businesses typically have limited scalability and potential for growth because such growth would impair the lifestyle for which their owner-managers set them up. However, a lifestyle business can and do win awards and provide satisfaction to its owners and customers. These are firms that depend heavily on founder skills, personality, energy, and contacts. Often their founders create them to exercise personal talent or skills, achieve a flexible schedule, work with other family members, remain in a desired geographic area, or simply to express themselves. But without the founder’s deep personal involvement, such businesses are likely to, well, founder. Professional investors therefore rarely get involved with lifestyle businesses. A lifestyle business is also one that can allow the owner to call his/her own shots and to move at his/her own pace. It’s a business that fits his/her current way of living rather than dictating how things ought to be done. For millions of people, these sorts of small ventures are an excellent way to “do what you love.”

The Equity or Value Business. Equity can be defined as: A company's assets, less its liabilities, which are the property of the owner or shareholders.  Popularly, equities are stocks and shares which do not pay interest at fixed rates but pay dividends based on the company's performance. The value of equities tends to rise over the long term, but in the short term they are a risk investment because prices can fall as well as rise.

An equity or value business is one where the owner intends to build real assets with a grow-able, tangible value that can be bought and sold - either as shares or the entire business. Success would be defined as the increase in value of the business over time. These businesses by definition will be built to succeed without the presence of the owner(s). In many cases, current lifestyle of the founder/owner is sacrificed in order to build significant long term value. In equity value businesses, owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, strong management team that can operate and grow the business without the owner’s constant involvement,

By contrast, a lifestyle business is one where the entrepreneur seeks to generate an "adequate" income while living where s/he wants, doing what s/he loves, or having the flexibility to be around when the kids or grandkids come home from school or take long weekends in the winter to go skiing. Success would be defined as an increase in satisfaction with one's life over time.

It’s imperative to decide which one you are. These are very different scenarios. "Equity value or lifestyle" is one of those fundamental decisions you should make early in your company’s history. If you're contemplating going into business with a partner, determine if you both would answer the same way. So why is it important to decide? Businesses that do not have a clear understanding of the type of business they want – and are prepared to be suffer inferior returns. Going down a path that straddles both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value). Consider one company with an innovative product in the education products space. The founder had a stated goal of building a value business. However, actions demonstrated to key employees and managers that the true motives of the founder were to facilitate lifestyle. A confused culture prevailed. Top employees and managers interested in growth left the company, leaving a cadre of lower performers, interested in maintaining the status quo. The company growth and profitability lagged and the company ceded its leadership position to more aggressive competitors. In the end this company accomplished neither growth in value nor an exceptional lifestyle for the owners.

Be honest with yourself about your appetite for risk, your need for autonomy, your desire for current compensation. In the end, neither is good or bad. It's just, which one is for you?