- February 20, 2012
- Posted by: Paul Foster
- Categories: Create Time Saving Business Systems, Grow a Business, Selling a business
I have always thought of a ‘lifestyle’ business as a good thing to have. When I was researching this topic online, I came across several derogatory comments about lifestyle businesses.
The definition of a lifestyle business
Wikipedia defines a lifestyle business as: “a business that is set up and run by its founders primarily with the aim of sustaining a particular level of income and no more, or to provide a foundation from which to enjoy a particular lifestyle.”
That doesn’t sound too bad to me, especially if it’s a particularly nice lifestyle or comfortable income!
The challenge may come when the founders can no longer run the business due to some unfortunate circumstance.
It’s safe to assume it would be difficult to sell a lifestyle business, pay the income tax and use the proceeds to invest and provide the same level of income to the founders after they sold it. The founders need to plan and fund their retirement from a percentage of the income they earn each year. If they start young and invest wisely they might be able to continue the same lifestyle and income into their retirement. The probability of their lifestyle business continuing after their retirement is fairly low.
Wikipedia doesn’t define ‘scalable business‘ but it does provide a great example of one.
Definition of scalability
Scalability is the ability of a system, network, or process to handle growing amount of work in a capable manner or its ability to be enlarged to accommodate that growth.
The approach necessary to build a scalable business is different than a lifestyle business. The challenge is first to remove the founders time contributions from the business model.
As a simple example, if the founders develop a piece of computer software, it is the first copy that costs all the time and money. To copy and sell the next thousand copies is minimal. The development of some type of protectable intellectual property is key. This is why a scalable business definition includes the requirement that the cost of sales percentage actually goes down as the revenues go up.
Cash flow problems
The other challenge with handling the growth of any business is cash flow. Fast growth can cause real cash flow problems when the large number of new customers take time to pay while the growing business expenses need to be paid right away.
Therefore another attribute of a scalable business is a cash business – the customers pay in full at the time of the sale.
If you can build a scalable business, your lifestyle may be sacrificed while you build it, but the reward comes when you sell it. There is a large pool of cash at venture capital firms looking for scalable businesses with proven profits. However, it is a very small minority of businesses that can build a scalable business and obtain the growth as well.
Maybe there is a hybrid choice. What if you took your lifestyle business and tried to build in some scalability? Shortening the cash flow cycle couldn’t hurt. Developing intellectual property that could be licenced or sold over and over sounds like fun. Working to remove yourself from some of the parts of the business couldn’t be that bad either.
In summary, a business model that considers scalability can provide you a better lifestyle.