Many business owners start their companies as lifestyle businesses. This means that they start the business to support a certain kind of lifestyle that they want. Maybe they founded the business because making money building their own thing is fulfilling. Perhaps they got tired of having someone else tell them what to do and decided to become their own boss. Whatever the reason, many businesses start as and evolve into lifestyle businesses. This is great for business owners, their families, and their businesses in general, but it can be a disaster when owners decide (or are forced) to exit the business.
Lifestyle Businesses vs. Business Enterprises
When business owners start thinking about their business exits, they sometimes assume that they can plan for their exits while continuing to do business as usual. With the right help, the planning process can proceed smoothly, but rarely does Exit Planning mean business as usual.
We’ve harped on the idea that most business owners don’t know what their businesses are truly worth, which is a common reason why some business owners don’t get the money and post-exit fulfillment they expected from selling or transferring their ownership. More specifically, owners sometimes take things about their businesses for granted. Things like perks, bonuses, and even personal clout factor into the kind of lifestyle that owners expect for themselves and their families. Once they leave the business, those things typically disappear, which affects their lifestyle.
To exit on their terms, business owners must turn their lifestyle business into a business enterprise.
When we use the term “business enterprise,” we mean that the business must have transferable value. The business must be worth something to someone else. It cannot simply act as a means to support the owner’s lifestyle, because it’s likely that the things that support the owner’s lifestyle have less value to, say, a private equity group. Additionally, running a lifestyle business typically requires the owner’s constant presence to assure that the business actually does support their lifestyle.
Lifestyle businesses support the owner right now. Business enterprises support the owner, the owner’s family, and often the business itself both now and in the future. Every buyer wants an owner’s business to be a business enterprise. How can business owners and advisors transform a lifestyle business into an enterprise?
Turning a Lifestyle Business Into an Enterprise
Conceptually, turning a lifestyle business into a business enterprise is easy: just make the business worth something to people beyond the owner. The difficulty in turning a lifestyle business into a business enterprise typically comes from three places: the owner’s emotional attachment to the business, the owner’s pride, and the owner’s resources. Today, we’ll look at the emotional attachment aspect and how advisors can address it.
An Owner’s Emotional Attachment to the Business
It’s not something that most owners and advisors are comfortable talking about, but an emotional attachment is one of the primary causes of resistance in Exit Planning. For many lifestyle business owners, the very idea of changing a business that brought them the wealth, success, and fulfillment they’re used to can be jarring. “This business has done great things for me, my family, and my community. Why should I want to change that?”
The answer is simple and a bit brutish: Third party buyers typically don’t care about the owner’s lifestyle.
The things that owners consider “good” aspects of a business—supporting themselves and their families, perhaps maintaining a culture—often don’t matter when an outside buyer does their due diligence. They’re looking for flaws in the business where the owner may see strength. They’ll question practices that fail to maximize profits and cash flow, even if those practices line up with the owner’s values. These facts can cause owners to resist transforming their lifestyle businesses into business enterprises.
One method that advisors can propose to smoothen the transition from lifestyle business to business enterprise is transferring the business to an insider, such as a key employee, co-owner, or family member. In fact, transferring the business to an insider is the most popular Exit Path for owners: About two-thirds of Exit Plans created by BEI licensed members are insider transfers. But when owners choose this Exit Path, they must not forget the importance of transforming the business so that it can continue without them.
Transferring to insiders doesn’t remove the need for owners to assure they’ll be financially independent once they leave. The good news is that achieving financial independence and maintaining personal values doesn’t have to be an either/or proposition. Owners can have it all, but it can require years of proper planning, because no matter what, owners must turn the lifestyle business into an enterprise. When presented with this reality, some owners might still resist the idea of changing their businesses to create a better future.
To overcome owner resistance, advisors must be vigilant in framing the conversation properly. Encouraging owners to talk about their goals and determine the objective value of their businesses is the first step in turning resistance into acceptance. Squaring away how the owner feels about the business and their post-exit lives with the actions they must take to eventually exit it on their terms is key to turning a lifestyle business into a business enterprise.
Next week, we’ll dive into the other two factors that prevent owners from transforming their lifestyle businesses into business enterprises: pride and resources.
- Every kind of buyer—from third parties to insiders—wants to buy a business enterprise, not a lifestyle business.
- Transforming a lifestyle business into a business enterprise can require years of technical planning.
- The technical planning required cannot truly begin until advisors guide owners through their emotional attachments to their businesses and establish what’s important to them.