Management consultancy & finance

Do you prefer a lifestyle business or a growth business?

Entrepreneurship is a mindset that has become a way of life among many people in the recent years. With the current digital revolution, access to information has become easy and many people picture themselves as entrepreneur by starting a business. This also means that anyone can research a business idea they have no experience in, or particular expertise in and find a way to start it and grow it.

However, not all businesses are meant for scale. This would of course depend on the nature and structure of the business, but merely it depends on the entrepreneur. As there are some businesses that are meant to sustain you and give you financial independence that you want in life, others start a business to fill an opportunity or solve a problem. This is the reason why you need to understand “why” you are building a business and what you intend it to be whether growth oriented or just a lifestyle business (to achieve financial independence).

Defining your business’ orientation

Delving deeper into the orientation of your business, let’s begin with describing what a lifestyle business is. A lifestyle business is a business setup 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. Lifestyle businesses typically have a limited scalability and potential for growth because such growth would disturb/disrupt the lifestyle for which the owner set them up. This does not mean that lifestyle businesses can’t be significant. Such companies can easily do millions in terms of revenue or equity. However, as already stated they are self-limiting as they also tend to overwhelmingly focus on one or more key persons, the loss of whom will stop the company in its tracks.

The advantages to starting a lifestyle business include being able to control most aspects of the business, work in an industry that gives you energy, having a positive cash flow from early in the business’ growth, and being able to pursue personal goals with profits from the business. Most advantages revolve around a common theme, freedom:

  • Time and Location: you are free to choose where, when and how long you work
  • Financial: having an income level sufficient enough to support a desired lifestyle. Being able to pick up and go if you want.

The disadvantages of a lifestyle business are the limited funding sources, low chance of equity strong gains and a difficult exit-strategy when you want a retirement or change in work life. Typically, a lifestyle business relies on debt (bank) financing. Because of the way they were structured, they generally are not good candidates for equity investment as the risks are bound to the key persons and upward potential is limited. However, in truly scalable companies focus is on angel or venture financing in order to grow. This is possible because they were fundamentally structured correctly from the outset.

Overall, the difference of a lifestyle business compared to a growth business lies in both the industry and willingness of the entrepreneur. Mainly in the ability of the entrepreneur to transcend themselves for the good of the company (this is what we look for as investors). If you are not able to see the bigger picture and start a company for the sole purpose of enriching yourself (financially and/or emotionally) than you will never have a growth business. If you are able to put the companies needs over your own, and thus be able to share and collaborate then a growth business might work out.

So, it is time to ask yourself, is my business a lifestyle business or a growth business?

Key takeaways

  • There are fundamental differences between lifestyle and growth businesses.
  • The first is about the key persons, their own lifestyle and having a steady income. The latter is about the mission of the company, norms and values and to generate income for its employees.
  • In other words, the difference lies in what prevails: personal interests or company interests.