by Paul Donnelly
Are you creating a lifestyle or a value creation business? These are two different types of businesses an entrepreneur or owner operator (my preferred term) might operate. Your approach to wealth creation should fit your business model, its goals, and the way your business defines success.
Lifestyle Business
The term lifestyle entrepreneur, coined by Bill Wetzel, describes a business founder whose venture probably won't create financial returns at the level that attracts outside investors or potentially buyers. However, lifestyle businesses, which are often viewed as “mom and pop” shops can also include larger businesses that generate strong cash flow. Statistically speaking, most businesses are lifestyle businesses — with more owner operators entering the arena every day.
The term "lifestyle" signifies that the business income works for the location and mission chosen by the owner operator. It can also mean a measure of flexibility, to mesh income-generating and household-related obligations and goals.
For the lifestyle owner operator, the business is not an end in itself, but a means to a sustainable livelihood. Yet some business owners would take the term "lifestyle" to task for emitting a casual tone that downplays their diligence and financial commitment.
The lifestyle business has a profit mission, but it might have nothing to do with rapid expansion or appealing to buyers down the road.
Many of today's lifestyle owner operators understand that wealth creation is generated by using the cash flow generated by the business and investing it in other investment assets that can produce both investment diversification and future capital gains.
When the lifestyle business requires additional capital, investment by the owner or debt financing are the usual methods. Because outside investors are often looking for capital gains and future liquidity generated by a corporate sale, equity investments or an exchange of equity in lifestyle businesses are often limited to succession planning and the transfer ownership to either family members or employees.
Value Creation Business
The founders of a value creation business define success in terms of wealth accumulation resulting in capital gains. Here, the owner seeks to create a business that can be sold — generating liquidity or cash, or a path to liquidity in the form of seller notes, equity shares and/or performance based cash earn outs. Success means increasing market value and enterprise value over time. Thus:
The business focuses on a space with potential for high growth and a defendable market position.
The business model delivers sustainable leverage, which may be the result of a proprietary technology, competitive cost advantage, brand leadership, recurring revenues and/or customer stickiness or retention.
Properly executed, this dynamic generates strong profit margins, financial metrics and overall growth within the company, all of which position the company for an exit or liquidity event that delivers an increase in ownership value.
Value creation businesses are often attractive to angel/seed, venture capital, and private equity investors. Their milestones, which includes an exit event, are often achieved through an M&A transaction, private equity recapitalization or buyout, or an initial public offering.
Most such businesses, without overpromising, position themselves in markets conducive to delivering earnings before interest, taxes, depreciation and amortization (EBITDA) that can scale to $5+ million and beyond.
About Optivest Investment Banking
Paul Donnelly is Senior Managing Director of Coil Partners. Coil Partners provides corporate finance advisory and transaction based investment banking services for emerging growth and middle-market companies. The Coil Partners team has completed over 90 client engagements representing $3.75 billion in transaction value. Visit optivestib.com to learn more.