We pose many questions to our clients when we engage in strategic family business planning. Although the nature and scope of the questions range, they evoke reflection and demand honesty in order to build trust and lead to developing a strategy for growth and sustainability. A common question we ask is: Is your business a “value business” or is it a “lifestyle business”?
Lifestyle businesses usually generate a nice income for the owner, but focusing on income alone does not mean the business is building value that could be transferrable in the market. Building value should be the business owner’s primary long-term goal, not the businesses income. This may seem like a subtle play on words, but it actually presents a major paradigm shift for many of our lower to middle-market business owners.
Family business owners pour a tremendous amount of energy and soul into their business. Over time, many experience the success of a healthy income derived from that business. We often see that the income leads to a particular lifestyle, which often correlates to the business owner’s personal identity and self-esteem. When this happens, it is easy for the business owner to become hyper-focused on income generation instead of business value generation because they rely on the income from the business to support their lifestyle.
You may be asking yourself, “so what?” or “who cares?” If the business is performing well, why shouldn’t the owner generate a nice income and establish the lifestyle they always wanted? It took a lot of personal sacrifice to achieve this success: all the risk, the years of not paying themselves, the long hours, the worry, the grief that comes with business ownership – they have more than earned this income!
On the surface, this all seems reasonable, but when we take a step back we often see that the business owners not only generate a nice income, but they spend a lot of it too. The hard truth is that many business owners do not have adequate resources outside of the business income to support their lifestyle. This can be particularly frustrating when the business owner learns that a lifestyle business generates less value in the marketplace, resulting in less value for the owner to harvest upon exit. Consequently, the net sales proceeds (after taxes and fees) are not sufficient to support the lifestyle.
The focus on business income distracted the owner from building a value business. A value business prioritizes time, effort and financial resources into building the human, customer, social and structural capital that will generate 80% of business value in the market place.
At Baker Tilly, we challenge our family businesses owners to shift their mind-set and think about the strategies, processes and goals that will build value while also generating income.
About Brandon Zlupko, CPA, CFPA
Brandon Zlupko, a partner in the State College, PA office, has been with Baker Tilly since 2003. He has experience in accounting and auditing both public and private, family owned companies as well as employee benefit plan matters. Prior to joining Baker Tilly, Brandon worked an international accounting firm serving large to mid-sized public and non-public companies throughout the United States. He embraces the notion of being a “value architect” by listening to clients, committing to being of service and collaborating with subject matter experts in order to enhance and retain our clients’ value. Brandon is a member of the Baker Tilly Center for Family Business Strategy.
Brandon leverages his experience and perspective to navigate and address the growth and transition challenges faced by family owned businesses.