Are You Running a Lifestyle or Growth Business?

Put another way: Do you have a job that pays well or an asset that produces income for you and grows in value? 

No right or wrong answer, but I assure you that when retirement comes and it is time to sell, the latter has a lot more value than the former. In this article we will discuss the differences between the two, why that matters, and what you can do about it. The point is to be intentional about where you are and where you are going. 

What is a Lifestyle Business?

A lifestyle business means heavy involvement from the owner. The owner is there every day and heavily involved in sales, estimating, operations, and technical support (even in the truck at times making calls). These are usually businesses under $2.5m in revenue and less than 15 employees. The business does not have a general manager and probably no sales team; they may or may not have a lead technician.

Lifestyle business owners are often compensated with a W2 wage, in addition to sharing the company profits. The owner’s attitude often is that as long as customers are happy, employees are happy, and they make enough money, then all is fine.

These owners are not thinking long-term about the ultimate value of the business, their long-term financial plan, or their exit strategy; they are just living day to day, focused on the now. 

Lifestyle Business owners are involved in day-to-day aspects of the business and invest a sizable portion of their time:

• Managing employees
• Communicating with clients
• Conducting marketing campaigns
• Managing the company’s payroll and finances

What is a Growth Business?

A growth business, on the other hand, means limited involvement from the existing owner and the new owner or ownership group. The business is usually over $2.5m in revenue, has management in place, and runs with leadership from the owner (but without his day-to-day owner involvement). There is a general manager, sales team, operations team, and a solid tech team with a seniority structure in place. 

Responsibilities of a Growth Business owner include:

• Profit reinvestments
• Pursuing new customer segments
• Developing growth plans and strategies
• Building a team to execute growth strategies

The owner has a handful of direct reports and has regular leadership meetings where he is updated on the business performance and reviews financials and KPI’s. Most importantly, strategy and growth is discussed. The owner sets strategy and culture that the team executes. 

The owner might draw a W-2 salary, but the vast majority of his compensation is from profit distribution. He has a clear plan for where the business will be in 3-10 years and how this fits into his overall financial plan. He can go away for 30 days, turn off his phone and email, and all is fine when he returns. 

Where It Starts and Where It Goes

Business owners do not start or buy an existing business defining themselves as a lifestyle or growth business owner. They got here by a set of decisions and come into the business with certain goals and objectives as to what they want to do with the business. These could be:

• I just want to do my own thing and make a good living
• I do not want to work for anybody else 
• I want to build something of real value

Regardless of where you start, the business goes through stages based on the size.

Here are 7 levels to think about:

At each level, the number of employees changes, the responsibility of the owner changes, the management structure changes, the infrastructure changes, what the owner thinks about changes, and the stress level changes. The phrase working in the business vs. on the business really comes into play. 

In order to grow you need more customers, more office staff, more field staff, and more support infrastructure. All of those are hard: hard to find, hard to keep and hard to pay for. 

The big jump occurs from level 3 to level 4. That is where the business goes from lifestyle to growth. That is also where the owner’s operational involvement changes significantly. This is hard for many owners because they have to move out of their comfort zone and become strategic growth owners. They have to give up daily operational control. They have to make good hires of senior levels and trust those individuals to do their jobs. There are some big investments that need to be made in people and they have to have faith that this will work out. They have to keep the pedal to the metal and keep growing. Not just growing the top line but watching margins and profitability. 

Why This Matters

When it comes time to sell your business the value of the business matters and finding the right buyer matters. We have discussed each of these in previous articles. 

The value of the business is: Adjusted free cash flow X multiple of that cash flow

There are three groups of buyers:

• Financial Buyers (Private equity-backed consolidators)
• Strategic Buyers (Similar business wanting to grow)
• Owner / Operator Buyers (younger version of you)

Financial Buyers will pay the most, have cash, and can close quickly. They are only interested in growth companies with at least $2.5m of revenue. The larger the company the better. They need meaningful scale and infrastructure in place. We know who these groups are, their buying parameters, and that they can quickly get transactions completed. 

Strategic and Owner / Operator are harder to find, close more slowly, and often have more complexities on the financing side. Many times will need the owner to take a note back to finance a portion of the sale price.