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Why Founders Get Trapped in a Lifestyle Business

Life cycle of a boutique professional services firm

Why Founders Get Trapped in a Lifestyle Business

Life cycle of a boutique professional services firm

This article was originally published on CEOWORLD Magazine.

In the boutique professional services industry, there are “young” 10-year-old firms and “old” 10-year-old firms. The difference almost always boils down to the energy level of the founder. If they are energized when they realize that their problems are not theirs alone and seek out collaborative solutions, they tend to prosper. When you understand the nine lifecycle stages and how you need to maneuver through each one, you’ll set your firm up for victory — and avoid founder burnout at the same time.

When it comes to founding a boutique professional services firm, there’s a fine line between running the day-to-day operations of a so-called lifestyle business and aggressively scaling with the intention to sell. I know this from experience, having been the founder and CEO of a management consulting firm from 2006 to 2017 that I have since sold. I had expertise in sales, so the firm experienced rapid growth early. One big-name company after another was hiring our consultancy. We got to break even immediately, and cash flow ramped up exponentially from there.

This rapid success led me to become arrogant. I felt my apparent brilliance and unmatched hard work could make a success out of everything. As a result, I tried to go through all nine lifecycle stages much too quickly. Still in Childhood (stage four), I wanted to become an Adult (stage six) overnight. I attempted to skip the Adolescence stage, ignoring the systems and processes.

As a result, we experienced a crisis by losing some key clients and employees. This hit my pocketbook hard and woke me up fast. My firm was thrown back into Adolescence out of necessity, and I learned that young firms need to go through a trial-and-error period before they attempt to scale. You simply can’t skip the awkward, necessary growth stages.

The professional services industry is one that’s incredibly susceptible to stagnation. These firms can easily become lifestyle businesses because their founders get stuck in one part of the lifecycle instead of growing a service business.

Lifestyle Business vs. Growth Business

Firms can get trapped in the lifecycle and experience stilted growth for a couple of reasons.

First, founders are by-and-large unaware of the lifecycle stages of a professional services firm. Firms are born, grow, age, and die. Second, leadership styles need to change from stage to stage in order to progress successfully. That necessary adaptation usually doesn’t happen. Breakdowns occur during the transition from one stage to another, as founders are not aware of the transitions taking place. Costly mistakes are made. For example, in the early stages, firms need cash to survive; therefore, sales trumps all. However, in the later stages, once survival is not the concern, firms need steady profits. As such, processes and systems need to become the priority.

This lack of lifecycle awareness causes a founder to work too much, not make enough money, and never get to an exit — often leading to founder burnout. This happens because the founder is focused on solving all problems instead of focusing on solving the right problems for the firm’s particular life stage. Much easier said than done, but a founder needs to make the deliberate decision to switch from working harder to working smarter; failure to do so will result in premature founder burnout.

A New Found(er) Perspective

If you find yourself putting out too many fires and feel burnout creeping up as a result, take a breath. This is fixable. As mentioned earlier, it’s all about working smarter and focusing on the right problems for this specific moment. Here are a few recommendations on how to avoid being snagged in the lifecycle churn and get back on track to successfully scale, sell, and exit your boutique firm:

1. Know Exactly What Your Stage Entails

Future-thinking founders should anticipate and prepare for problems before they cripple performance. This is best done by determining where they are in the firm’s lifecycle.

To figure out the correct stage, ask yourself if an individual is running the firm or if a system is running the firm. If it is an individual, the firm is in a pre-Adolescence stage. If it is a system, the firm is past Adolescence. If it is a little bit of both, the firm is squarely in Adolescence (stage 5), and this marks the need for new leadership to move to the next stage. How agile are you?

In the boutique professional services industry, there are “young” 10-year-old firms and “old” 10-year-old firms. The difference almost always boils down to the energy level of the founder. If they are energized when they realize that their problems are not theirs alone and seek out collaborative solutions, they tend to prosper. When you understand the nine lifecycle stages and how you need to maneuver through each one, you’ll set your firm up for victory — and avoid founder burnout at the same time.

2. Embrace the Daily Solving of Problems


When attempting to scale, firms never go from a state of problems to absolutely no problems. It’s never happened and it never will. Firms evolve from one set of problems to the next. Those next problems are more complex and difficult, but you are as big as the problems you contend with, so the correct approach is to match the lifecycle stage of a firm with the skill set of the leader. If you don’t feel capable of solving new problems, it means you need to expand your skill set before your firm can continue to grow. Don’t run from the challenges that arise. Meet them head-on.

In my personal journey, I did four specific things to expand my skill set each time I felt stuck. First, I identified a role model — someone you don’t have access to but can study. While in the management consulting industry, I chose the founding father of this industry, Marvin Bower of McKinsey & Co. I then studied him and modeled his behavior.

Second, I developed mentors — which are different from role models because you must have access to your mentor, and they should not have conflicts of interest. Mentors are people who “have been there and done that,” so they helped me avoid paying full price for dumb mistakes. Third, I joined a mastermind community to surround myself with peers. I found much value in being able to bounce ideas off of people who are in a similar situation. And lastly, I had a coach. The coach worked with me intentionally to develop the needed skills. With a team around me, I was able to get outside opinions on what I wasn’t seeing or where I had room to grow.

While the skill you might be lacking depends on what stage your business or firm is at, some of the common things you should learn include dealing with risk, becoming an effective decision-maker (even with incomplete information), building commitment within your team, and the ability to distribute power. As a leader of your business, you will continually be presented with information that may not be complete or accurate, but you still need to make decisions. This is closely related to risk. You will be taking a risk on the decisions you make with available information, but without risk, there is no reward.

Additionally, one of the biggest ways you can help both yourself and your business is to distribute your power and let others wield it effectively. You can’t lead a growing firm all on your own, so you must trust others to help you — and eventually even take the wheel from you entirely.

3. Keep Pushing for More


Founders of boutique professional services firms often don’t dream big enough. Many start their firms with a modest level of ambition, anticipating that a nice lifestyle business is the inevitable end goal. They hear that professional services firms don’t scale easily. As a result, they settle instead of actively looking for more.

If a founder desires more than a lifestyle business, they must expand their level of ambition and go for it. The path forward is to master the lifecycle stages and learn from peers who are a few stages ahead. Find a community of like-minded entrepreneurs and founders and learn from each other as you stretch to reach those lofty goals.

Founders and operators of firms often come to communities with questions about winning new clients, recruiting star employees, improving pricing, etc. However, the most successful founders come to learn about what might be possible. Yes, they have these problems; however, their dreams and ambitions expand when they meet their peers, many of whom are doing what is thought to be impossible.

Instead of just asking about new clients and pricing, shift your attention from the income statement to the balance sheet — from “how much can I make?” to “how much wealth can I create?” There are millions of founders of professional service firms who make a great living. However, there are few who create real generational wealth. Founders should think like the owners they are, not like an employee.

Avoiding burnout as a founder is hard. Your heart and soul go into cultivating this idea and sharing it with others, but it’s possible to curb burnout by asking the right questions and addressing the problems that fit your firm’s current stage. Sometimes, the best way to do that is by asking more experienced peers.

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Episode 49: The Boutique: WHAT TO DO IF TRAPPED INSIDE A LIFESTYLE BUSINESS?

The opportunity cost of spending your prime in a lifestyle business is too large. On this episode, we discuss a 3-part framework to address this issue and demonstrate how to use it.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to The Boutique case study series with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host. On this episode, I will make the case you do not want to be trapped inside a lifestyle business. The opportunity cost of spending your prime in a lifestyle business is too large. I’ll try to prove this theory by interviewing Greg Alexander, chief investment officer and founder of Capital 54. Greg has developed a three part framework to address this issue, and today he’ll demonstrate how to use it. Hey, Greg, welcome. 

Greg Alexander [00:01:13] Hey Sean, good to be with you, big, big topic today, let’s see if we can help some folks escape the trap of a lifestyle business. 

Sean Magennis [00:01:18] Fantastic. You know, it reminds me of Harry Houdini, right? We’ve got to give you that capability. So Greg, can you provide a brief overview of your three-part framework? 

Greg Alexander [00:01:31] Sure, let’s start by identifying the signs of this trap. Listeners are wondering if they are trapped or will they become trapped. Our listeners tend to be people who do not want a lifestyle business. They want to scale to something more substantial. Here’s some thoughts help diagnose if you are trapped. And Sean, allow me little leeway here, because… 

Sean Magennis [00:01:55] Absolutely. 

Greg Alexander [00:01:56] Sure, please. A lifestyle business is an average business. It’s not a bad business, it’s not a good business. It’s certainly not a great business. It’s OK. It provides a decent living, does not require an unreasonable level of effort. It fits nicely into one’s lifestyle with a wonderful work life balance. It’s better than working for a soulless big corporation. Owners of a lifestyle business are never going to get rich. And for some, that’s OK. Lifestyle firms are never going to quote put a dent in the universe, as the great Steve Jobs used to say. 

Sean Magennis [00:02:33] Yes. 

Greg Alexander [00:02:35] They’re not going to attract the most interesting clients with the most fascinating problems. A lifestyle business will be filled with really nice people, but maybe not top talent. Top talent avoids lifestyle businesses they want to grow, to be stretched and to really go for it. And there’s nothing wrong with the lifestyle business at all. For many, this is perfect. However, many who are operating a lifestyle business today wish they were not. They launched their firms with higher ambitions and with different intentions, but they fell into a trap unknowingly trap is if it ain’t broke, don’t fix it. When things are quote unquote fine, there was no reason to break glass rock the boat. The bills are getting paid. The grief factor is low. The founder is happy. Life is all right. The problem is complacency sets in year after year passes by, the founder has been lulled to sleep. Then one day he or she wakes up and says, I want something more from life, my life’s work should mean something. Someday I’m going to want to retire. I’m going to need to sell my firm. I do not want to keep doing this. It’s my 60s, 70s and God forbid, belong beyond that. I got to turn this into more than a lifestyle business, or I’m never going to be financially secure. This trap carries a huge cost. Cost I’m referring to is the opportunity cost. This cost can be quantified. Let me give you an example. A boutique life cycle is approximately 15 years from cradle to grave. Ask yourself at the end of the 15 years, what do you have to show for your efforts? Compare this to what you might have had if you took a different path, whatever that different path may be. And in my experience, this produces a gap and the gap is big. Let me share some data to make my point. And then we can jump into the three part framework. 

Sean Magennis [00:04:47] Excellent. 

Greg Alexander [00:04:49] A lifestyle business in pro serve has about 20 employees doing about four million in revenue, and approximately eight are in the province. An owner of this type of business will pay him herself about a half million dollars. After taxes this is about, let’s say, 250k 300000, depending on where you live and after you satisfy your living expenses, maybe you can save about $100000 per year. So over a 15 year period, that’s 1.5 million, or maybe a little more due to investment returns that’s rounded up to a goal to make. This is not enough to be financially secure, given inflation and life expectancy increases. In reality, it’s not enough for much of anything. The cost of living 15 years from now is going to be much higher, especially in key areas such as health care. Yeah, under this hypothetical approach, you’re going to work yourself right into the cemetery. If I compare this outcome to the alternatives doesn’t compare, well, heck, you might be better off with a civil service job and 40 hours a week, three weeks vacation and a pension. There are other ways to spend your prime your career that will produce a lot more, and you, the brave founder the person who creates jobs for people. You just you’re worth more than that. And I feel the saddest thing in life is a wasted prime. So I wanted to come and speak to you today and urge you not to waste your prime and avoid the trap of a lifestyle business. That makes sense Sean? 

Sean Magennis [00:06:25] Greg, it makes 100 percent sense. I mean, this is strictly I mean, this is so important, it’s a wake up call for many. I see it all the time, and I know you do. The good news is we are making our listeners aware of it, so hopefully they can avoid this trap. So, Greg, if I’m someone who is concerned with this, what would I do? 

Greg Alexander [00:06:48] OK, good question. So this is where the three part framework comes in. So a founder of a boutique has three options trapped in a lifestyle business. Option number one is to shut the business down and do something else. Option number two is the pivot, this means course correct before it’s too late. An auction number three is to persevere in this means to stay the course. 

Sean Magennis [00:07:10] OK, Greg. So three options shutdown, pivot or persevere. You provided me three checklists, one for each option to help listeners determine which option is best for them, and I’d like to have you demonstrate each checklist for the audience. I’ll take you through each option and get your recommendations on each. So option one is shut the business down and there are four questions to answer. Number one, are we out of moves? 

Greg Alexander [00:07:41] So if you’re contemplating shutting the business down, it’s a tough thing to think about. So are we out of moves? What does that mean? Well, have you tried everything you can? Have you studied all the best practices? Try to get them implemented? Have you sourced all the best advice if you’ve already done all that and you’re still a lifestyle business, shut it down. The opportunity cost is too great. If you haven’t exhausted all of the best practices and the advice it’s available to you, we keep going but make a commitment to yourself that you’re going to implement some of the things that you want. 

Sean Magennis [00:08:12] Excellent. So number two is, are we miserable? Do we hate the clients, our coworkers, et cetera? 

Greg Alexander [00:08:19] Yes. So you’re contemplating shutting the business down? That’s the section where one right now that’s option one. 

Sean Magennis [00:08:24] Yup. 

Greg Alexander [00:08:25] You know, if you’re miserable, you hate coming to work every day. If you find yourself daydreaming about something else to do and your heart’s not in it. So if that if you find yourself in that situation, then you’re better off to shut the business down if you’re not in that situation, if you still love what you’re doing. Then stick with it, because you probably can crack the code. 

Sean Magennis [00:08:45] Excellent. So again, in the context of shutting the business down, this question is do you still believe in the vision for your business? 

Greg Alexander [00:08:55] Yeah. So one thing I learned on my journey is a vision changes over time. You know, I look back at the original vision I had for myself. My ambition was modest as time went on and I had some success. My my ambition kept expanding. So periodically, it’s a wise move to take a pause and say to yourself, Hey, if I realize my current vision, am I going to fulfill my dreams? The answer to that question is yes, don’t shut the business down. Keep going for it. The answer a question is no. Then what do you do when you’re running in place? You’re pursuing a vision that, even if you’re successful, isn’t worth it? 

Sean Magennis [00:09:30] Yep. And then the fourth one and this is is the window of opportunity closing? 

Greg Alexander [00:09:36] Yeah. And this is the one that’s outside the control of the of the founder. So are you running out of time? Are your competitors beating you? Are there lots more competitors coming into the market today? So this window of opportunity, all businesses have, you got to make sure. You know, is that window open? How long is it going to be open for? And that’s a critical thing to consider if you’re contemplating shutting the business down. 

Sean Magennis [00:09:58] Yeah. Excellent. Thank you, Greg. So the next option is to pivot pivot. It’s an overused term. You feel there are seven types of pivots specifically for boutique professional services firms. Let’s see if we can get through these efficiently. So the first one is what you term a zoom in pivot where a single feature becomes the whole service offering. What are your thoughts on this? 

Greg Alexander [00:10:26] So if you’re going to pivot, you’re not going to shut the business down. You want to get out of a lifestyle business. One of the pivots to consider is to zoom into it. This means sometimes founders over engineer their service offerings. So this type of pivot would result in a much simpler service to deliver, which will mean much higher profits. And with those profits, you can fund your expansion plan. And if successful, you’ll get yourself out of a lifestyle business. So if the answer yes to this question, then execute a service offering pivot. If you answer no, then the solution to a lifestyle business trap is not associated with assuming to the excellent Greg. 

Sean Magennis [00:11:07] The next one is a zoom out pivot. The current service becomes only a feature. What are your thoughts on this? 

Greg Alexander [00:11:15] So this is the flip side of that coin. So sometimes a service line is not compelling enough. There are things that need to be added to it to compel clients to buy it. So ask yourself that question. You know the problem that my client is having, can I truly solve? If you can’t, then you’re going to have to add things to your service line, so if you find yourself in that situation, then you might want to execute the zoom out pivot. If you don’t, you probably. You probably should not. 

Sean Magennis [00:11:43] Excellent, Greg. The third is client segment pivot, a shift to a new set of target clients. Unpack that for us. 

Greg Alexander [00:11:54] Yeah, so oftentimes owners of lifestyle businesses are unclear as to who their ideal client really is. And this results in wasting resources, pursuing the wrong business and lifestyle businesses. A resource constraint is there’s only so much time going, so much money going, so many staff members. So you can’t waste these resources. So getting really tight. I knew that client is an ideal client is super important. And ask yourself the client to serve, and today they’re going to get you out of the trap of a lifestyle business. If the answer is no, then execute a client segment. Go after different client with a different set of problems. 

Sean Magennis [00:12:34] Very important. Greg Number four, a client problem pivot. So the current problem of the focus is not urgent enough. This is critical. Greg, what is your what are your thoughts on this? 

Greg Alexander [00:12:47] Yeah. So this is the kissing cousin of the client segment. Right? So sometimes lifestyle boutique partners, they’re selling vitamins, not painkillers. So this pivot would be going after only urgent problems that are clients are willing to pay to solve. I see this all the time somebody launches a firm. It’s a nice to have is a small number of clients that are willing to hire you for that nice to have. And then you stall up because the problem isn’t urgent. It’s not pervasive. So by definition, you’re trapped in a lifestyle business. 

Sean Magennis [00:13:23] Yep, makes total sense. Number five is a business architecture pivot, and there are two types of business architectures. One High margin, low volume we call elephant hunting. Number two low margin, high volume rabbit hunting. What are your thoughts on this? 

Greg Alexander [00:13:43] This is a big one. Problem is trapped in a lifestyle boutique. Try to run two business models at the same time. There’s never enough money. There’s never enough talent to pull that off. This pivot would be to focus on one business architecture and be good at it. The added commentary I’d give you here is we tend to lie to ourselves on this. We like to say we have we apply discretion to the type of business we take. It’s really not true. Sometimes in the early stages, especially if your lifestyle, business or revenue is good revenue. But that’s the trap. That’s the trap that puts you in a lifestyle trap. So avoid that pick the business architecture. You’re going to fall with elephants or rabbits and stick to it. 

Sean Magennis [00:14:27] I like that, Greg very much. Number six is value capture pivot. This is a monetization model change. For example, should you switch from hourly billings to retainers, fixed beds, performance based contracts, licensing subscriptions, events or royalties? What are your thoughts on this? 

Greg Alexander [00:14:49] Yeah. So this is where all the breakouts are happening right now. So we try to roll role model ourselves after companies that have escaped the trap of a lifestyle business. What do they share in common? Well, services firms are prioritizing their services. Which allows them to switch their pricing strategy or their monetization strategy. And because they’re able to do that, they can go from one time fees to recurring revenue. And there’s probably nothing more powerful than escaping a lifestyle business in recurring revenue. So this is what everybody should be thinking about is value capture, pivot and the ingredient to execute that is the ability to prioritize your services. 

Sean Magennis [00:15:28] Greg, I couldn’t agree with you more. And if you and I look at our members within collective 54, those that are truly scaling have recognized the value of this capture pivot. You know, they monetizing their expanding their service line and their revenue sources. It’s remarkable what some of them are doing. And for our listeners, you know, consider looking at collective 54 from that standpoint because it’ll add tremendous value to your enterprise value when you decide to sell one day. Yup. So Greg, number seven, go to market pivot the three types of go to market approaches of a boutique. One is viral. So word of mouth and referrals to what we call sticky landing and expanding in the client, and three paid outbound cold outreach and marketing support to drive inbound. What are your thoughts on this? 

Greg Alexander [00:16:24] Yeah. So historically, the most common cause of being trapped in a lifestyle business is the lack of a commercial sales engine. Founders rely solely on word of mouth referrals. Well, this eventually runs dry as a personal network is finite. So if your only source of leads is word of mouth, you are trapped and you’re going to stay trapped. So if you find yourself in a lifestyle business, are you worried that that might happen to you in the future? You’ve got to build this commercial sales engine that can allow you to scale beyond the benefits of word of mouth. 

Sean Magennis [00:16:56] Greg, that was incredibly thorough. We now know what the term pivot really means to a boutique professional services firm. And this brings us to the final option, which is to persevere. This option would be sticking with the current plan, but executing it better. Give us your thoughts on this, Greg. 

Greg Alexander [00:17:19] Sure, well, executing the current plan better as opposed to pivoting usually means three things. It can mean swapping out the team. It can mean training the team, or it can mean giving the team more time. A word of caution here. Kicking the can down the road and taking no action is not persevering. That’s procrastinating. To prevent yourself from procrastinating. Remind yourself of your opportunity cost. The cost of inaction for a founder trapped in a lifestyle business is very large, and it’s growing every day. Your prime is X number of years. If you think you have the right strategy. And the key to escaping is better execution, take a very hard look at the team. Sean, one of the things that I would like to mention here is that the material that I shared with the audience today is not original material of Greg Alexander. I’m standing on the shoulders of giants people like. Stephen Blank, Eric Rice from the lean startup, etc.. Yes. And and I just wanted to make sure that I gave them proper credit. What I’ve done is I’ve curated it and edited it to make it uniquely applicable to the boutique professional services firm. But there’s a huge body of knowledge behind this topic. Should I shut the business down? Should I pivot or should I persevere? 

Sean Magennis [00:18:48] Outstanding, Greg, and thank you for that acknowledgment because that body of knowledge is accessible to our listeners. I love the way you synthesized it. I love the way you’ve simplified it. And that’s a huge, huge benefit to our listeners. So it’s super clear that answering these three questions do we shut the business down? Should we pivot and course correct? Or do we persevere? Are the keys to getting out of the trap of a lifestyle business? This brings us to the end of this episode.

A huge thank you to you, Greg, for sharing this today.

If you enjoyed the show and want to learn more. Pick up a copy of Greg’s book, titled The Boutique How to Start, Scale and Sell a professional services firm. I’m Sean Magennis.

Thank you for listening.