Are You 'Just' A Lifestyle Entrepreneur? Good.
At The Value Builder System, we help owners that run companies with between $1 million and $20 million improve the value of their businesses, and occasionally I’ll hear our market referred to as “lifestyle entrepreneurs”. It usually happens when I’m on the phone with a partner in a private equity group or a highfalutin investment banker and I get my back up every time I hear it.
The label lifestyle entrepreneur is usually used in a condescending tone to describe a business owner who has shunned outside capital in favor of growing more slowly.
The implication is that lifestyle businesses are like hobby farmers or house-league ball players—not terribly good at or committed to what they are doing. According to these folks, the opposite of a lifestyle entrepreneur seems to be someone who is growth-oriented, comfortable with capital markets and willing to risk giving up control of their business for a shot at growing something big.
This simplistic classification overlooks the reality that there are a lot of very serious and committed owners who have chosen not to pursue outside financing because of its obvious downsides. Likewise, I have known a number of naïve owners who have been wooed into the narrative that the only way to really scale a business is to bring in “professional money” only to live to regret life as a minority shareholder.
Hi-Mark Software Rolled The Dice And Won
Recently I had the opportunity to interview Frank Cottle on Built to Sell Radio. Cottle is a sophisticated entrepreneur and private investor who has started and sold many businesses.
Cottle was part of an investor group that bought Hi-Mark Software, a data provider that offered information about travel patterns to the transportation industry. Cottle and his team purchased half of Hi-Mark for around 10 times earnings and injected another $5 million in growth capital. The owner of Hi-Mark was able to pocket some cash but most of Cottle’s money was earmarked for growth.
This form of recapitalization is usually offered by a private equity group and is structured so that the entrepreneur can get the money they need to grow their business and if they are successful, sell their remaining equity at a higher valuation than if they had remained self-funded because of the growth the investment capital underwrites. Private equity people like to sell entrepreneurs on this scheme as the opportunity to “take a second bite of the apple”. Lifestyle entrepreneurs need not apply.
In Hi-Mark’s case, it worked out for everyone. Cottle’s group did a second re-capitalization three years after they invested and then ultimately sold the business to Lufthansa for more than 16 times earnings.
I asked Cottle what would have happened had the founder not met the aggressive growth goals they had agreed to as a condition of investing: “That would have been suicide by investor,” Cottle revealed. In Hi-Mark’s case there were penalties in place so that if Hi-Mark had under-performed Cottle’s investment group would have diluted the founder down to a point where his equity was worth very little if anything.
And that’s where I have an issue with describing owners who want to scale at all costs, regardless of risk, as heroes and the lifestyle entrepreneurs who shun outside capital as their quaint little unsophisticated brothers and sisters. Hi-Mark’s founder took a very big gamble and won, but he might not have. And just because you wouldn’t have rolled the dice, that doesn’t make you any less of an entrepreneur.