Transforming Your Lifestyle Business into a Company
A business can take many different shapes and forms. Lifestyle businesses – in their most basic definition – allow their owners to maintain a certain lifestyle, either by being better compensated, enjoy more flexibility or use skills they would otherwise not while being employed. They are started and grown to a certain size after which the owners can take their foot off the gas.
My thesis is that lifestyle businesses are seldom started to fulfill an entrepreneurial desire first. For this reason they are run differently than businesses that are started based on other motives. If you set out to create a 100 million revenue company you will go about things differently compared to when you just want to put food on the table.
Once you’ve established a lifestyle business it is not unusual to start experiencing a nagging feeling. Your business is doing fine, but you’ve hit a rut. You want to keep growing your business, yet you find yourself in an organization that was intended to scale past this stage. What factors make it so hard to make this transition?
Team – Both your leadership and employees might lack capabilities to support further growth of the business. You can hire yourself out of this to a certain extent, but this puts additional strain on the business. Especially when you need to hire for roles which would typically fall to the owners of the business.
Business model – While a lot of business models allow scaling up, your revenue model and cost structure will probably require a rethink. You will be needing to add additional overhead roles (marketing/sales, HR) at some point and your revenue needs to support this.
Sales and marketing – It’s likely that (one of) the owners is responsible for bringing in the majority of the work, often through their personal network and word of mouth. This method of sales isn’t scalable in itself, unless you hire veteran salesmen that bring their own networks with them.
Lack of targets – Setting targets is done in varying degrees in lifestyle business, but they generally lack a culture of tracking and reviewing these consistently.
None of these factors are insurmountable, but the task at hand might look daunting. The business you’ve spent years building might look more like a liability than an asset. How do you even get this process started?
Commit to the Transition
There is a reason why your business plateaued at a certain level. You’ve probably reached the limits of your org chart or have a hard time growing your sales. Moving past this stage requires a serious effort from your leadership team. Not all owners might be interested in putting in this additional effort. There might be differences in levels of ambition, or owners fear seeing their role change within the firm. Growth can be risky, but certainly lead to reduced owner earnings for the short to medium term.
The entire team might be apprehensive about growth as it will often require the formalization of processes and systems (often mistaken by bureaucracy and reduced autonomy) and higher levels of accountability through setting targets (often mistaken by businesses that are managed solely through spreadsheets). While these concerns are valid, they are not the direct result of transitioning from a lifestyle business, but results of company culture and bad implementation.
There are a host of benefits to the team in moving past the lifestyle business stage. These include better job security, more opportunity for personal and professional growth, improved quality-of-work, a codified culture as well as better compensation and benefits in general. While you don’t need explicit buy-in as you would from the leadership team, it is crucial to inform the rest of the team and help them overcome their concerns.
Setting Your Sights
There are few things as powerful as setting a goal and chasing it. Even if you fall short, you probably end up way ahead compared to not setting a goal at all. While setting goals isn’t uncommon in lifestyle businesses, the actual process leaves a lot to be desired and follow through is often lacking. We’ve started implementing EOS over the past months, which required us to set targets for 10-year, 3-year, 1-year and one quarter out.
Having such a range of explicit goals might sound cumbersome, but we’ve already found benefit in having these. The 10-year and 3-year targets ensure alignment within the leadership about the future of the company. Again, you might fall short of these goals as a lot can change within such a time frame, but the discussion that these trigger is invaluable.
Both the 1-year and end-of-quarter targets put you back on the ground and gives you concrete numbers to shoot for. These will help you realize that growing your business is not a linear process; you will be hitting plateaus and times of growth as you restructure your business for the next phase.
Putting the House in Order
You can not build a great house on a weak foundation. As a lifestyle business, odds are you have a very limited foundation that is held together by a lot of elbow grease. At least ours was/is. While you might be tempted to go on a hiring spree, you should optimize what you have first. This will also reveal what roles you will be hiring first.
It’s time to get a grip on where you’re losing revenue. This can be done comparing the Revenue Potential to the actual revenue of your business. As a professional services business this can be as simple as multiplying your Gross Capacity (total hours the team can spend on client work) by your hourly rate. How much money are you leaving on the table and why?
Digging deeper will require to look into the Utilization Rate (percentage of billable work compared to Gross Capacity) and Effective Billings Rate (actual billed revenue). This will let you know whether the team is sitting idle or overshoots on fixed-price contracts. Capturing these metrics on a weekly basis has been the single most important change I made to our business this year.
These metrics confirmed what we knew intuitively. Our design team runs at over capacity, while our tech team lacks budget control. By focussing on fixing these issues first, we expect to see margins improve, allowing for further growth. You can apply the same method for optimizing your costs and parts of your sales process.
Moving past the lifestyle business stage isn’t particularly difficult. The steps you need to take to get there are actually quite simple, but they have to be made while keeping the business chugging along. On a personal level this has been both exhilarating and frightening at the same time. It feels great to shift into a higher gear, but it’s confrontational, too. Do we actually want to make this transition as a leadership team. How "bad" do we actually run our business? Remember there is no such thing, but you will probably need to start doing things differently if you want to mature your organization.