Doug Wendt is a co-founder and senior partner with Wendt Partners.
One of the most important factors essential to an effective business strategy is understanding and planning around the owner's personal objectives. Sometimes, the owner is motivated by a desire to create new products or innovations. Other times, it's about creating a legacy that can be left to future generations, or building the business into an asset that can command a high valuation at exit. Sometimes the owner has no clear idea of what their personal objectives are. And sometimes, the owner expresses the desire to position the company as a lifestyle business.
The reality is that there are no lifestyle businesses. There are certainly some businesses which seem to more easily contribute to the owner's personal life – providing physical mobility, time freedom and the opportunity to do many things – but this concept has become so widely discussed that a surprising number of business owners have begun thinking that if only they could do X or Y with their company, it could become a perfect lifestyle business.
Here are seven reasons why your company will never be a lifestyle business, and what you should do instead to achieve your goals:
1. Expectations for Supporting Your Intended Lifestyle Are Off
Ask any financial planner or wealth manager how often she or he comes across a CEO who is properly positioned to achieve retirement, maintain an attractive personal lifestyle, travel and enjoy their future years…while also saving for healthcare, unforeseen events, personal emergencies and family needs? The answer generally hovers close to zero. Business owners are notorious over-spenders. The average small business CPA will tell you that the number one problem they see with privately held companies is the owner's tendency to fund his or her personal lifestyle with too many distributions, company-covered costs and other decisions that subordinate the company's needs to the owner's wants. And today, as people's life expectancies continue to rise and the cost of late-in-life care escalates, you need much more, not any less. In short, you can't build a lifestyle business tomorrow, first and foremost, because you're already funding your lifestyle today on the back of that business.
2. Recurring Revenue is Usually a Financial Fantasy
In the world of the web and cloud computing, more and more companies are purchasing and selling products and services on a subscription model. Assets that a company used to buy one time are now being managed as an ongoing monthly fee…forever. Certainly, that has created new business opportunities that enrich many entrepreneurs. But when the average CEO thinks about the wonderful life that recurring revenue can provide for them, they forget that there are two sides to the equation – gain and loss. Recurring revenue models can give you a customer for life…and they can also mean that you never get big infusions of cash (that $20,000 one-time purchase now becomes a low monthly payment that you're financing in the early stages), and as customers become accustomed to subscription-based business solutions, they also become more and more comfortable switching vendors.
3. That 'Guaranteed' Contract is Not a Safe Bet
Okay, so you're inking a new contract that gives you a high-yield five year project with reliable revenue coming in every month. Time to enjoy that lifestyle! Not so fast. First off, keeping the contract means making sure every employee of your company is doing their part to work closely with the client team, and remind them regularly of the value of your business as their strategic partner. And contracts do change… a lot. Construction contracts get cancelled when financing falls through. Government contracts get reconfigured to respond to new budgets or changing mandates. The prime contractor whose coattails you're riding might royally mess up project management and when the customer sends them packing, you'll be going with them. In short, no matter how much you want to take a step back, you need to press forward -- or to quote Sheryl Sandberg, it's time to "Lean In", not out.
4. Your Desire for the Lifestyle Business is a Clear Sign You're Not Ready
Ask yourself why you want a lifestyle business at this point in your life. Perhaps you've run your company for ten or twenty years, and you're just plain exhausted. Maybe you have a young family now and you want to spend more time with your children. Perhaps after a major personal crisis (divorce, serious illness, accident, etc.) you're more than ready for a change. And maybe, just maybe, you're tired of every employee in the company coming to you for advice, counsel, decisions and direction. In fact, chances are that last one resonates with you regardless of whether the others do. And this is precisely why you're not ready to have what you so clearly want at this point. The reason everyone comes to you and you're carrying so many burdens is because…? Perhaps it's because you don't delegate. Maybe you keep the financials so close to the vest that even your operations manager or accounting director doesn't see them fully. You sign the paychecks because every employee is your personal hire. Pricing is set by you because you arrange different discounts for each channel partner…all decided on the basis of personal relationships you have with each one. Do you see a pattern here? In short, the company relies on you because you're not ready to delegate, systematize, process manage, document and empower the company to operate any other way.
5. Your People Are Nowhere Near Ready to Replace You
And speaking of delegation skills, chances are you also dramatically overestimate your employees' overall readiness to take over. Not that they're disinterested or incapable, but you're talking about a radical change – the removal of yourself from day-to-day leadership, presumably – and that means that your staff needs to be able to actually manage, and lead, that company without you. So how much have you invested over the last three to five years in executive coaching for your top staff? How many business processes and procedures are fully and clearly documented? How ready is the company to handle a major leadership transition? Chances are, not much.
6. You Can't Have What You Don't Plan For
Along those lines, you have to recognize that making your company able to operate without your day-to-day involvement (which is most owners' definition of a so-called 'lifestyle business') means planning and executing a multi-year strategy to get there. It's no different than preparing for an exit – except that you won't be selling just yet. If you haven't planned, invested and progressed along a clear path toward this goal of making your company a lifestyle business, then it isn't a goal – it's a fantasy. Put your money where your mouth is and be willing to sacrifice some of those distribution checks now, so you can invest in the company's ability to transition tomorrow.
7. It May Be Time to Exit Stage Right
At the end of the day, there is one reliable way to achieve a lifestyle business – and that is to sell the business and use the proceeds to fund your lifestyle. Many CEOs fall back on the idea of turning their company into a 'lifestyle business' when they wake up one day and discover that the company is worth far less than they thought (or hoped). Just because you own a company does not mean that you are building an asset. Building the business as an asset whose value grows over time – that takes real planning and serious execution over time. And if you stay in charge of your company after you've mentally exited anyway, you're going to suffocate the company and kill the goose that lays your golden eggs. You cannot underestimate how small changes in your leadership or involvement can lead to major crises tomorrow. If you really can't stand the thought of running your business any longer, then sell it to someone who wants to grow it to the next level and move on.
Just to be clear, there are ways to reduce your stress, frustration, and exhaustion as a business owner. These include changing your business model, strengthening your leadership team, bringing in a qualified consultant to guide you through difficult decisions, and investing in your people so they can take the company forward with confidence. But first, you need to set the lifestyle business fantasy aside and get back to the task at hand – taking a long-deserved break, then coming back to your company with strategic clarity and a refreshed (and realistic) vision for the future.
Image Credit: Flickr @ Creative Commons)