Is Your Business a Lean Machine or a Life Style Retirement Company?

We have had the luxury of working with a number of small businesses, some established; some start-up and an interesting observation began to emerge – the motivation and goal of the business owner.

We can categorize these goals/motives into two groups; one that wants to see the company grow to become a significant player in their chosen market, and one that wants to get by just enough to retire and live comfortably. We have observed this in direct discussions with the owners, and in how they run their business on a day to day basis. For the sake of this discussion, we can call the first one the “Lean Machine’ and the other “Life Style Retirement”.

Characteristics of the Lean Machine

  • A business owner who puts ‘skin in the game’. They have put their company first and make decisions that promote the overall wellness of their business. They are disciplined, are willing to listen to others and surround themselves with good people.

Characteristics of a Life Style Retirement

  • The business owner look for ways to pull cash out of the business, their decision making is undertaken with a view to maximize personal wellness, they tend not to trust others and surround themselves with people who follow orders and don’t challenge directions.

These are rather extreme characteristics and most people will fall in between these two points.

When one considers the interests of each of these types of owners it is easy to see why they respond in the way they do. The Lean Machine owner puts the company first; the Life Style owner puts themselves first. The Lean Machine is interested in earnings and ROI growth, the Life Style is interested in monthly spending money. The Lean Machine watches the revenues and expense lines; the Life Style maximizes revenues and tries to see how the company can fund their personal life. The Lean Machine knows that they do not know everything and trusts and has hired good people to guide them whereas; the Life Style owner does not allow others to influence or impact their personal standard of living and therefore does not trust others to make decisions for the company for fear it could impact them personally.

A particularly interesting review of the company’s books can reveal insight if followed up by some detailed questioning. Items such as trips to locations where business has not been conducted in years (usually to warmer climates), expenses, rents and mortgage being charged off to the business for ‘personal use’ items, “administrative assistants” who support spouses and children, salaries to persons who are not active in the business, excessive meals, entertainment and travel to name a few.

Although many of these expenses can be somewhat justified in the owners mind, a prudent business owner would dive in deep to see if there is a return on these expenses. As an example, is a yearly trip to Europe (where you do indeed meet with a distributor of some kind) justified, given you 1) have no sales in Europe, and 2) there have not been any sales in year? Someone running this company for a profit and ROI would say NO! Instead, the money should go into a product launch you have scheduled in the next few months. This would be especially true if the company was struggling to find funds to launch a new product or enter a new market.

The irony of all of this comes to light when, years later, the Life Style business owner tries to retire and wants to sell the business, only to find out that potential buyers are not willing to put the value on the business that the owner expects. The owner had been so busy cleaning the company of cash that he/she starved it from the income and capital it needed to grow.

The investors looked at the books and saw that although there was equity in the business, they also saw that assets were not being kept up to date or replenished and that the investments that were required to get the business operating effectively and efficiently was so much that it ate into the company’s equity and then some.

With the Lean Machine owner, at the point they want to retire and either sells their business or hands it down to a family member, the business is flourishing and is truly one where the value will be seen when they sell or hand it down. The business was most likely well managed so it will be a lot easier hand-off to the one(s) continuing to run the business in the future. These are businesses that last for decades or centuries.

If you are a Life Style owner and want to retire in the next 5 years, it is not too late to turn things around. If you are looking to retire within the next year, and are expecting a certain value, you should get a valuation on your business now before you put it on the market. You may need to spend a few more years in your business making some changes in order to get what you want, or it could possibly still be too late. There is nothing wrong with a Life Style owner as long as you understand the ramifications at the end of the life of your business. There are plenty of owners in this category who may have taken money out and invested it personally or were prepared for retirement. Many of these businesses are just sold off for the assets and are discontinued and is exactly what was expected early on when they started the business.

To view or add a comment, sign in

Insights from the community

Explore topics