According to the US Census Bureau, an average of 4.4 million companies are launched every year. Sixty-nine percent of them fall into the category of service businesses requiring a startup budget of under $25,000. In other words, these founders aren’t typically investing their life’s savings, hawking everything they own, or giving up equity to investors in exchange for capital. They’re running capital-light businesses. However, they’re still incurring some serious personal costs, and they need to understand what they are and how to navigate them.
For those of us who have founded professional services firms, “personal costs” aren’t just monetary. They can run the gamut from risking the loss of a partner to suffering from business owner burnout.
There are two primary personal costs a founder of any professional service firm incurs: relationship costs and opportunity costs.
Let’s start with relationship costs. A founder’s relationships with a spouse, kids, extended family members, and friends tend to take a beating during the development of a boutique professional service firm. This phenomenon has become so intense that new terms have entered our vocabulary to discuss it. For example, a wife who has not seen her founder husband much is frequently referred to as an “entrepreneur’s widow.”
This cost is completely understandable, of course. There are only so many hours in the day. Nevertheless, an hour spent working is an hour you did not spend with someone you care about. You can try to multitask: Plenty of founders come to their children’s athletic games with AirPods so they can stay tethered to a Zoom meeting. This is not being present, though, and kids quickly learn what their founder parent deems important. And it is work, not them. Founders have been known to be on a family vacation with grandpa and grandma, only to be late for the group activity because of an urgent email that needed to go out. Unfortunately, years pass quickly. That’s why so many founders wake up and realize they haven’t seen childhood friends or college roommates in a decade or longer.
What about the opportunity cost of running a boutique service firm? Opportunity cost is best described as the loss of the potential gain from a path not taken. Boutique owners are highly employable, but they often work years for below-market wages to build their firms when they could be working elsewhere for a substantial wage at a big corporation. The gap between what they could earn as an employee (including salary, raises, benefits, stock options, 401k matches, etc.) and what they pay themselves is the opportunity cost.
The opportunity cost of running your own business grows with each passing year. So does the gap. Since it takes approximately 15 years to start, scale, and sell a professional services firm, the end result can be pretty hefty. After all, the opportunity cost would be the gap times 15. Not exactly small change.
You can’t get away from the reality that being the founder of a professional service firm will mean incurring some personal costs. Still, you can mitigate the effects of these costs by taking two steps.
A firm is a business that is not dependent on the founder to be successful. In a firm, the founder deliberately surrounds himself or herself with an executive team. The founder then delegates key activities to those team members. Scaling a boutique professional service firm is too much work for one person. A team can get a lot more done faster and with less personal toll on the founder.
In contrast, a practice is over-dependent on the founder to be successful. Practices tend to be run by hero-style founders. They have a bunch of helpers running around carrying out orders, but those helpers don’t have authority or empowerment. Running a practice results in the founder paying a dear personal price as relationships crumble. Why? Because the founder has to do everything.
It’s not unusual for practice founders to work 70- or 100-hour weeks. A founder who runs a firm instead of a practice works hard, too. But only between 40-50 hours. That founder has time to spend time with the people who matter most. A firm founder can maintain meaningful, deep relationships rather than risk losing them.
A firm built using a lifestyle business does not produce enough rewards to compensate the founder for opportunity costs. In most cases, founders running lifestyle firms make less money than they would make working for someone else.
A founder took a risk when starting his firm. He should be compensated for this risk, and earn more than he would working for someone else.
The way to resolve this issue is to scale a firm beyond being just a lifestyle business. That way, the firm will be able to fairly compensate the founder far beyond any opportunity costs. This makes all the risks worth the founder’s time, effort, and energy.
You can’t get around the fact that you will always pay some personal costs as a founder. Just don’t let those personal costs get out of control. They’re very manageable as long as you take measures to mitigate their impact.
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2 Replies to “The Concealed Steep Personal Cost of Being a Founder of a Professional Services Firm”
You have addressed the quintessential balance between the personal and the professional. The entrepreneur’s ambition is to attain them fully, which is incredibly difficult, but not impossible. I appreciate this practical advice.
We can have it all Dan.
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