What's the End Game for a Lifestyle Practice?

I took a long summer break to refresh and rejuvenate. During my time off, I reflected on a variety of issues, including the challenges that our industry faces. As I sat on a beach overlooking the ocean, I was struck by the number of firms that had run into difficulties while seeking to be merged or acquired. It wasn't until I began to peel the layers of the proverbial onion that I realized the source of these difficulties. They had run lifestyle businesses and now wanted someone to pay for it!

What do I mean? A lifestyle business or a lifestyle practice is a firm established for the purposes of supporting the partner’s or owner’s lifestyle. In short, it is a personal piggy bank. The opposite of a lifestyle practice is an equity business. An equity business is one in which the business exists to provide a profit and long-term corporate strength to its staff and its clients. Don't get me wrong...there are thousands of lifestyle practices out there that do well alongside thousands of equity businesses, but you need to know which of these you are or want to be.

Why? I prescribe an arduous path forward when a firm owner calls me and says they want to sell their business because they don't have the internal capacity for the next level of leaders. Often, part of the reason they lack such capacity is that the firm has been run as a lifestyle business for 20 years. It takes a significant amount of time and effort to change direction.

Staff aren't naive. They may not know a lot about "buying equity" in a firm but they know enough not to invest in someone's personal piggy bank. Junkets, expensive "client lunches,” spouses or siblings "working" without defined outcomes or expectations, running personal expenses through the business or showing annual losses to avoid taxes are all signs of a lifestyle business that staff will not invest in. More importantly, they are all signs of a poor investment (i.e., acquisition or merger).

Know your end game. If your long-term play is to position your firm for a merger or acquisition, you'll need at least five years to clean up your financial house and to position your potential emerging leaders for a transition. If you hadn't thought about it before now...now is the time.

Karen Compton, CPSM. Karen Compton is principal of A3K Consulting (Glendale, CA), a business development and strategic planning firm specializing in the architecture, engineering and construction industries. Ms. Compton is also the founder of Industry Speaks™, a web-based business-to-business portal that connects AEC firms with experienced consultants, provides peer reviews of consultants, reports on key industry trends, and publishes expert reviews of professional courses and books. Contact her at kcompton@a3kconsulting.com.