While I have benefited in many ways from the writings of Stephen Covey, one of his most memorable principles for me has been his admonition to “begin with the end in mind.” What does that mean to a business owner? While the ideal would be for the owner to craft a clear picture of what he or she wants to the business to look like in the long term, perhaps a good first step is to decide whether he (or she) will follow the “life style” or “legacy” paths for their business. So what’s the difference?
The owner would find themselves on the “lifestyle” path when the primary purpose of operating the business is to provide a nice home, nice car, vacations, ski outings, and toys such as personal water craft, snowmobiles, boats, etc. Most all available cash is drawn out of the business as it is made. The business is used to pay for a lot of “perks” such as auto purchase or lease, auto insurance, expense account, country club membership and other expenses which are a personal benefit to the owner. It is NOT wrong for the owner to use his or her business to finance a nice, maybe even great lifestyle, it is just that they should understand that is what they are doing. The long range impact is that when they are ready to exit their business, there may not be anything (or very little) to sell. They haven’t really invested in their business so the business likely doesn’t have much in the way of asset value. While it might have good cash flow, it may be highly dependent on the participation of the owner. Take the owner out of the business and there is no business.
The owner desiring to leave a legacy sometime in the future conducts there business in a very different manner. As the business grows, they minimize taking money out of the business. Instead they reinvest the profits back into the business, purchasing new equipment, expanding operations, bringing on more employees, increasing inventory and other growth actions. The legacy owner is content to defer their payout into the future. The have trained a management staff so that the business is not dependent upon them. If they go on vacation, like a Timex watch, the business keeps on ticking. They have built a business that will endure beyond them and can serve as legacy for family or employees or be sold to an outside buyer.
The two pathways – lifestyle or legacy – are two very different pathways, with very different decisions made along the way. One style business in not right and other other wrong. The important takeaway from this article is that the owner should know which path they are on as that affects the long range value of the business – such as at the time of exiting the business. Each of the pathways result in very different decisions along the way, affecting numerous items such a present and future tax burden, value of the company at the point of exit and life style that can be attained while growing the business.