In the lower middle market there are basically two types of companies: Lifestyle Companies and Growth Companies. The major difference is that the owners of Lifestyle Companies take most of the profits out on an on-going basis, while the owners of Growth Companies reinvest the profits to grow the company.
The Lifestyle Company
A good example of a Lifestyle company is my Father-in-Law’s (FIL) office supply company. He started the company from his kitchen table shortly after WW2 and with hard work and his outgoing personality he developed his own “tribe” of loyal customers.
His revenue was mostly recurring in that he sold consumables and his customers were very loyal to him. He quickly built the company to a point where he had a “comfortable” income. And then he stopped growing.
Why? Because he had reached an income that supported his lifestyle. Every day he started out early placing orders with vendors, taking orders from customers, personally delivering supplies to customers, and arriving at the Elks club by 3PM. Here he drank, smoked cigars, and played cards with his buddies until dinner time (dinner time varied from day to day). This lifestyle continued well into his eighties when he liquidated the company.
Why did he choose this route for his company? Because he wanted to – he was comfortable and it satisfied his lifestyle.
The Growth Company
A good example of a Growth Company is a software company started by my friend Bob. His intent from the outset was to build the company to a level where he could do a public offering or sell the company to a larger company.
He built the company to a level where he could take a decent salary with the accompanying benefits. He hired good people to handle the day to day operations so he could focus on growing the company. He installed and documented good systems for a smooth running company, and he reinvested profits in product development, marketing, sales, product training and support.
His focus on good people and systems also allowed him the time to network with other business owners, business advisors, and market influencers. This not only helped him grow his company but also to become aware of the market for his company when it came time to cash out.
Bob ended up selling his company to a strategic acquirer that was seeking to expand geographically. The proceeds from the sale provided him with sufficient money for his next venture.
The Takeaway
My Father-in-Law’s company represented the bottom of the lower middle market spectrum. I don’t think he ever reached $500K in total sales and his cost of goods took a big chunk out of that. He was happy and satisfied with his life but, since he built no assets in his company, he had to work well into his eighties. He started at his kitchen table and he ended at his kitchen table!
Your company doesn’t have to be as small as my FIL’s company to be a Lifestyle Company. In fact, the business landscape is littered with companies with revenues well over $1 millionand the business owner is taking home a lot of money. The company’s revenues have hovered around the same number for several years. Again, the business owner is satisfied – the company is providing for his lifestyle.
The problem (and he’s not even aware of it) is that, for a variety of reasons, there’s not a business buyer on the planet that will buy his company. He didn’t invest in his company to make it transferable and sustainable, and he never learned what the business buyers are looking for in an acquisition.
It doesn’t have to be that way. You can have a Lifestyle company or a Growth Company and still create an asset that you can sell when you exit your company. Even my FIL could have done it!
The Lifestyle business owner can make more money and have an asset that he can sell someday and have more time for golf, sailing, or playing poker with his buddies. The Growth business owner can make more money and have more time to grow his company.
To do this you must analyze those company functions that drive value (called Value Drivers), rate and score your value drivers, match your company with a buyer type, and improve those value drivers that your buyer type favors. When you do this you’ll not only make more money but also increase the value of your company when you want or need to sell it.
How will this make more money and give you more free time? Well, business buyers are smart. They know what company functions need to be working effectively and efficiently to increase cash flow; and if your company is running smoothly you’ll have more free time for playing poker – or growing your company.
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