My friend Eric* has a problem that many business owners face. He has been running his small business profitably for over five years. He hasn’t achieved much growth on an annualized basis but the company generates sufficient cash flow to give him a comfortable standard of living, keep his eight employees happy and fulfill his customers’ requests. He has what is commonly known as a “lifestyle business.” But Eric has suddenly been presented with an opportunity that would more than triple the size of his company (on a revenue basis) if he accepts the project.
Many business owners—especially in this economy—dream of having problems like this. But for Eric, he isn’t convinced that he should accept the project. He’s asking himself if he should scale his business.
Have you asked yourself this question?
When we talk about “scaling a business” we are talking about increasing revenues by several orders of magnitude. Businesses that go through this process of rapid expansion are known as “growth companies” and typically are considered the rock stars of the entrepreneurial world. Why would the owner of a successful lifestyle business consider transitioning into a high growth business?
The reasons include:
It’s easy to maintain a lifestyle business if your industry is composed of similar companies. But as soon as a growth company enters your market, it’s time to adapt. Otherwise the new competitor will aggressively capture market share. This will allow for economies of scale that could underprice you. It may also create doubt among your existing customers. They may start to think that perhaps there is something wrong with your company that doesn’t allow you to grow. It could lead to the forced sale or closure of your business.
Many lifestyle business owners grow tired of the monotony of operating a business that doesn’t grow. The lack of new challenges and opportunities could lead to sloppy execution as focusing on the day to day tasks becomes more difficult.
While lifestyle businesses can generate steady cash flow that provides for a comfortable living, they won’t make the owner a fortune. Whether it’s through acquisition or a public offering, exit strategies that create tens of millions or hundreds of millions of dollars for owners are growth companies. I can’t envision a corner deli selling for $80 million.
If you are considering changing from a lifestyle business to a growth business, keep in mind three recommendations:
1. Scale everything
Many businesses make the mistake of scaling their sales without scaling their operations and financing to proportion. Bombarding your existing employees and equipment with a barrage of new orders isn’t scaling— it’s a recipe for disaster. You have to invest in your business so that it is prepared to handle the rigors of scaling. In order to scale you will need large amounts of capital. Make sure that you have this secured before you start the process.
2. Assess your expertise
The skills required to operate a lifestyle business are very different from those required to manage a successful growth company. Do you need a partner? Do you need a new management team that is experienced in operating larger businesses? It’s true that some entrepreneurs run their companies from seed to exit. But those are the minority. Most have to cede day to day control to someone else because they simple aren’t able to manage at a larger scale.
3. Prepare your family
Most lifestyle business owners enjoy a large amount of quality time with their families. That freedom and flexibility are the reasons why they went into business for themselves. Are you prepared to say goodbye to this freedom (for a time at least)?
Let your spouse and children participate in the decision-making process. Be prepared for many long nights, much stress and continuous uncertainty. While the financial rewards could be life-changing, you need to make sure that you have support from your loved ones. It’s just too difficult to do this without that.
*name has been changed at his request