Speaking
to a group of business owners 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 the founder's 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. 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 and your business?
Next Issue: The
Attributes of the Lifestyle business vs. the Equity Value business.
What
are your thoughts? Share your reactions.
