Issue link: https://www.e-digitaleditions.com/i/655792
16 FEDA News & Views continued on page 18 "If my wife knew how much debt we were in when I started this business, she would have killed me. If she knew how much money we are making now, she would really kill me." I heard an owner of a distributor say this to his peers in a bar at a distribu- tion trade show. This is the classic life- style business management archetype. Starting a business is a risky proposition. In the beginning, any entrepreneurial business is undercapitalized and chases revenue to create gross margins before running out of cash. Those that succeed quickly react to avoid threats and capital- ize on opportunities. The founder and owner of the capi- tal, or debt, is also the senior operating executive. He is much more concerned with avoiding a bad year than taking any big risks to have a great year. They touch everything in the beginning—making decisions and closely supervising staff while working closely with customers and suppliers. They add expenses at the last minute to keep costs low. With a bit of luck, the business gains some scale. By this time, many of these behaviors are deeply entrenched in the culture of the fi rm. Decisions are made vertically, running them up to the CEO, and then executing. Much has been written on this early foundation-building phase. It describes a lifestyle business perfectly. And a lot has been written on best practices in pro- fessional management, which typically follows. But there is little of practical value out there on making the leap from a lifestyle business to a professionally- managed one. The underlying assump- tion is that this transition to profession- ally managed is good, and all fi rms will eventually do so. The reality is actually quite different. We have worked with lifestyle business- es that have over $1 billion in revenue, and we have worked with profession- ally managed fi rms that have less than $20 million. Size is a predictor but not a decisive one. Here are some of the other indicators of whether your business is a lifestyle or a professionally-managed one: ● In a lifestyle business, most decision making is vertical. Choices move up the organization for a CEO decision. In a pro- fessionally-managed fi rm, most decision making is made horizontally by CEO direct reports. These executives have access to all fi nancial information, and each carries responsibility for aspects of the fi rm's performance. They are man- aged with post-action controls around budgets rather than pre-action, "I've-got- to-get-permission- fi rst" controls. ● In a lifestyle business, the CEO is the fi nal decision maker. In a professionally- managed fi rm, a board of directors has real responsibility and oversight, even if the fi rm is 100-percent-owned by the CEO-entrepreneur. One benefi t of this approach: The CEO has trusted advisors who can provide helpful input and exe- Crossing the Chasm LIFESTYLE VS. PROFESSIONAL MANAGEMENT: What's the Difference? By Michael Marks, Managing Director Indian River Consulting Group cute his/her fi nal wishes if he/she meets an untimely end. ● In a lifestyle business, the CEO does most of the worrying about risks, the future, and how to grow the business. In a professionally-managed business, the load is spread across and carried by the CEO's direct reports. ● In a lifestyle business, most growth is captured by reacting quickly and respon- sively to new opportunities. In a profes- sionally-managed business, most growth is intentional. It was researched, invest- ments were made, and resources were applied to achieve the plan. ● In a lifestyle business, staff and other expenses are only added when they become critical and the business can't move forward without them. In a profes- sionally managed business, some expens- es are made in advance to prepare the business for growth. ● In a lifestyle business, there is a built-in bias to "this is how we've always done it." In a professionally-managed business, innovation and experimentation is bud- geted, often by a functional department rather than a decision by the CEO.