A Lifestyle or a Growth Business? The Pros and Cons of Both

When it comes to establishing or selling a business, asking yourself what type of business you want to build is one of the most important questions to ask.

Businesses that are geared to supporting the owner’s lifestyle sell for much less—if at all—than those that build value over time before an eventual sale.

Here’s what you should know about both.

The Pros and Cons of a Lifestyle Business

The primary goal for lifestyle business owners is to provide income and cash flow so they can enjoy a desired lifestyle without sacrificing a work/life balance. These businesses generally aren’t sustainable or scalable without the owner, which makes selling them a significant challenge.

In addition, funding for these businesses comes from the owner and not outside investors. As a result, capital-intensive businesses—such as manufacturing—are difficult to launch and sustain on a lifestyle basis. Personal service or creative businesses are more practical for sole practitioners or small groups and would be considered lifestyle businesses.

These firms depend heavily on the owner’s skills, personality, energy, and contacts. Often their founders create them to exercise personal talent, achieve a flexible schedule, work with other family members, remain in a desired geographic area, or simply to express themselves. Without the founder’s deep personal involvement, these businesses are likely to flounder. That’s why professional investors are rarely involved with them.

Lifestyle businesses can become growth businesses and be valued and sold apart from their founder/owner. However, this is a difficult process because it requires some significant changes. The business’s key value drivers must be examined to determine how to enhance its value and make it sellable. This will alter the company’s dynamics—and the reasons the owner started it.

The Pros and Cons of a Growth Business

These operations exist to create value, which provides a reasonable income for the owners and other stakeholders. They may have professional management and often are wholly or partially owned by investors, families, or one or more individuals. While profits are important, increasing the growth and value of these businesses is the primary goal. This means cash and profits remain in the company to support its expansion, which reduces the money available to fund the owner/managers’ lifestyle. While these people still maintain a good quality of life, that’s not the focus of the business.

Their goal of creating value typically makes growth companies much more attractive to investors than lifestyle businesses. Outside investors include angel, seed and venture capital, private equity, companies wishing to make mergers or acquisitions, and shareholders who participate in an initial public offering of common stock, if appropriate.

When the owners of a growth business contemplate a transition or sale, many potential options are open to them. To maximize these, the business should:

1. Have a well-diversified customer and vendor base; 
2. Be able to run without the owner; 
3. Have well-documented financial results; and
4. Legal documents in good order (among many other things).

Know Who You Are and What You Want

When it comes to establishing and running a business, it’s important to know what you expect from it. If you want the operation to fund the way of life you envision, then the lifestyle business is a better fit. If you wish to create a company that will support yourself and others, and ultimately continue without you—while giving you some recompense for your contributions—then a growth business is your goal.

Make a conscious choice, because there are long-term implications.

This article first appeared on Birkdale Transition Partners. Reprinted with permission.