Lifestyle vs Enterprise

Which type of business do you have? Which do you want and why?

When I was a teenager, one of my friends’ Dad, let’s call him John, had his own business. He was an incredibly engaging character, full of energy, creativity and humour. Back then, I thought John was a super-hero and I guess the impression he made on me, was one of the reasons I went into business myself. John’s kids, my friends, had whatever they needed. The family lived in a big house, nice cars on the driveway, you get the picture. Once, when having a beer with us, John said that he had a ‘lifestyle’ business. I remember thinking ‘whatever that is, I want one’.

Then one day, they were gone. The family home had been quietly sold and the family had left town. The business was gone too. Many years later another friend explained that John had personally guaranteed a business loan to expand and, well, you can guess the rest. Fast forward to today and I spend much of my time advising the owners of lifestyle businesses. The majority are successful and yet, there is still this stigma around a lifestyle business. The alternative, an ‘enterprise’ sounds appealing to many. The risks are however, significant. So what is the difference?

I used to describe these two types of business with reference to two islands; Lifestyle Island and Enterprise Island. I would paint this picture of a small island, inhospitable on the south coast, much nicer on the north coast, but ultimately a place you want to leave, in pursuit of the glitz and glamour of the other, bigger island. It resonated with the audience. Over time, and based on experience, I softened the imagery and began to paint Lifestyle Island in a more positive light. I’d worked with several ambitious (cursed) business owners, who bought the ticket, boarded the plane and took off from Lifestyle Island, only to hit turbulence. Most returned to Lifestyle Island, a few made it and several re-routed to another place called Acquisition Island, but that’s a story for another day. Their collective experiences led me to question what the differences between these businesses really are and whether an enterprise business was actually viable and/or desirable in professional services.

First, lets try to define them. A lifestyle business is organised to sustain the founder’s lifestyle. Growth beyond the founders span of control is undesirable. Financial independence for the founder is often assumed to arrive with the sale of the firm. For clarity, I think this is dangerous. The value of a business can fluctuate for all sorts of reasons and risking one’s retirement this way can lead to delays, disappointment and disease. It’s also easier to do business from a position of strength. Financially independent business owners have more fun at work. If the founder hasn’t hit this goal already, a plan should be in place and implementation in progress.

In contrast, an enterprise business is one that’s focussed on growth. It’s structured to grow through the efficient allocation of resources. The ability to scale (exponential profit growth) is a prerequisite to this type of business and something we’ll come back to. The distinction between the two types of business, is a question of purpose, rather than a type of business, market or geography. That said, culture does seem to play a part here. US firms are built on a foundation of competition, so you find enterprise is a more common structure. In the UK our culture seems to be more conservative. Once we’re comfortable, the desire to overreach is rare. A nation of shopkeepers.

Origin is important here too. A business that starts life as an enterprise, will raise capital and allocate resources for growth. It will either grow or fail, but it won’t become a lifestyle business. A lifestyle business on the other hand could, in theory, become an enterprise. This direction of travel is often driven by the founders unrealised potential. They build something, give themself a nice lifestyle but are haunted by possibilities. Some are driven to buy the ticket and take the ride. Others sit in the departure lounge of the airport, quietly torturing themselves, as they constantly weigh up risk and reward. And this is crucial. Enterprise firms need investment. One must speculate to accumulate.

This brings us on to capital. The way a business is funded is known in gilet-wearing circles as the ‘capital structure’. Lifestyle businesses use debt if and/or when they need funding. They rarely attract investors, as the desired returns are unlikely to be forthcoming and the founder represents a concentration of risk (single point of failure). In contrast, enterprise firms will use a mix of debt and equity to fund growth, which is their priority. Equity investors are fond of focussed executives with priorities aligned to their own. That’s how they drive returns for their investors.

So why would a professional services firm need capital? The primary resource is professional people and more specifically, their time. Hire more of them as demand builds and you grow. Indeed the original professional services firm structure was of course the partnership. Make money, deduct the cost of professionals (third), deduct expenses (third) and pay out the rest as profits (third). Simple. Nothing retained. Clean slate every 365 days. The oligopolies that dominate accounting, law and consulting, are all based on the partnership structure and were/are largely self-funded.

The time element in professional services is interesting though. Can you use capital to create more time? You normally use capital to compress time; ‘I borrow money that I could earn over a period, buy/create an asset and use it to make enough money to pay back the loan and make a return too’. Remember, an enterprise firm is focussed on growth and that means scale. Professional services firms are primarily reliant on humans, and they don’t scale very well. Or do they?

The main uses of capital in professional services firms in the last decade have been either operational (vertical integration), or to fund growth (buying up retiring adviser’s firms and consolidating them). More recently we see capital being used on tech that stretches the productivity of the adviser, on organic growth projects, to fund recruited advisers through their restrictive covenants and of course for acquisitions.

Tech that stretches the impact of the adviser is interesting. Some firms have strong support teams and actively move tasks away from advisers, pulling them down through the organisation to reduce the cost of delivery. Propositions that include education, a do-it-yourself option and a full service, are starting to emerge and I suspect we will see subscription pricing soon too.

So there may be a place for capital in professional services firms and enterprise professional services firms could become more popular. So what should you be thinking about if you fancy a trip to enterprise island?

Founder’s Financial Independence

There’s a lot less friction involved if you are financially independent. If you plan on adjusting your lifestyle to realise your potential, you must explore what that means, run the numbers and gain the trust and agreement of the people the change will impact.

Investor’s Mindset

Your mindset needs to shift to that of an investor. What is the goal, where are we now, how do we position ourselves to close the gap in the most efficient way and what resources do we need? What is our estimated return on capital and when?

Capital Structure

If you run a lifestyle professional services firm, chances are you’ve never considered your debt coverage ratio, let alone your weighted average cost of capital. While you sit in the departure lounge at lifestyle island, take the time to learn everything you can about capital structures and how to develop and manage them. You do not want to learn this from potential investors and/or creditors.


Your scope of risk is going to expand exponentially as an enterprise business. If you borrow money your creditors will become important stakeholders and if you take on an equity investor, they will become a fellow shareholder. If the market moves against you and you don’t know your drag from your tag you could quickly find yourself in trouble. Understanding the difference between shareholders and directors, where the power lies and how it can be used in certain circumstances, could be useful or essential to your survival, depending on the situation.


If you’ve read this far, you’re probably one of those business owners that has vision and is excited about the possibilities. If you currently own a lifestyle business, understand that it may be exactly what you need. If it gives you a great lifestyle, then that’s hard to argue with, particularly if you’re on track to becoming financially independent without needing to sell. If you’re close or have achieved your financial goals already, and you want to take a trip to enterprise island, know that it is possible, but not probable. We’ve worked with a small number of firms that have both landed safely and thrived on enterprise island. We learned a lot through the process and can help you compress time and move your plans from possible to probable.

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