Do You Have a Lifestyle Company?
A lifestyle company is a business operated with the purpose of providing a level of income or particular lifestyle for its founder. There is nothing wrong with having a lifestyle company, but the founder/entrepreneur must understand that the “lifestyle company” mentality does not fully align with building enterprise value or creation of a sellable company. Again, there is nothing wrong with either approach, but be sure to understand the pros and cons to make thoughtful choices.
A lifestyle company might be sellable, but below are some “lifestyle company” choices that could negatively impact your ability to sell your company and achieve maximum value:
– Your business would not be sustainable without you. You have not developed a solid team or business processes that would allow the business to move forward without your involvement.
– You have not properly managed your financial accounting. When making financial decisions and preparing annual financials, you are more focused on limiting your annual tax burden than increasing revenue.
– You manage your company year to year with little to no long-term planning. At the end of the year, you are thankful to have made it through another year and do not strategically plan for the next one, five, or ten years.
– You do not invest in the future growth of your business. This indicates you are not seeking to grow your business or not willing to make the investments necessary to do so. You draw and spend all profits and do not reinvest into the business.
– You mix personal and company assets. Examples of this include: your company paying a relative that does not contribute much/any to operations or your company owns a recreational property (beach condo, hunting club, etc.). If you decide to do this, be sure to track these expenses, so they can be added back in the event of a sale.
The way you run your business leads to a certain destination. The destination is not the problem; the problem is arriving at a destination that you didn’t want or didn’t intend. To learn more about what will diminish and more importantly what will create significant enterprise value in your business, contact Investment Grade Advisory.
– Guest Article by Mike McCraw