Are You a Lifestyle Maker or an Empire Builder?

Summer 2005 Issue

BY JULIE GARELLA

Now, this article is not meant as a commentary on which is better; it is simply a reality check, because in order to raise growth capital, succeed with an acquisition strategy, get big deals done, and exit your company at the most opportune time, you must think like an Empire Builder.

Chances are that you started out like all successful entrepreneurs — with a good idea and lots of energy. But, as your company has grown and matured, you have found yourself at certain forks in the road. The personal and emotional factors that have gone into making your decisions at these moments ultimately are the same factors that determine into which the category you fall as a business owner.

Factor Number One: Your Plan

When I first thought about starting my company, McColl Garella, we developed a plan and a strategy. In order to access the viability of the plan, I wanted to first do some research with successful business owners to find out whether there was a real business opportunity.

My partner Hugh McColl and I traveled the country talking with groups of women. The women with whom we spoke were selected on the following criteria: they owned their companies; they were considered to be successful in their industries and communities; and they described themselves as wanting to continue to grow their companies. In each city, we asked the same set of questions:

• How did you start your business?
• How are you growing your business?
• What is your exit strategy?

What was stunning to us was that no matter which city we were in — Boston , Dallas , New York , or Raleigh — we always heard the same answers.

For instance, when we asked these women how they came to be business owners, their universal answer was “by accident.” In nearly every case, these women had started their businesses because of a change in their personal lives, such as divorce, motherhood, losing a job, or the death of a parent or spouse.

When asked how they were growing their businesses, not once did these women say they were growing their firms through acquisition, using outside capital for expansion, or even following a plan they had formulated. Instead, what we heard was that these women-owned companies were bootstrapped and that their growth was happening organically — not because there was a strategy, but because that was just the way it was going.

Growing with the use of outside capital seemed to be a foreign concept to these women business owners. In fact, most of them said they had not thought about using outside capital, wouldn’t know how to get it, and in most cases, wouldn’t know what to do with it. These business owners expressed pride in the fact that they were debt free, even if being so kept them from reaching the next level of maturity. Many of those who said they had tried to obtain a line of credit from a bank said the process proved so difficult that they had just given up trying. Nearly every woman with whom we spoke said she liked owning 100 percent of her company and that the concept of owning a smaller slice of the pie wasn’t one with which they were particularly comfortable.

Our third question, though (the one pertaining to exit strategy) often proved to be the most revealing in terms of the true disconnect between what we were being told about the ability to be in control of one’s own financial future.

Too many of the business owners had no exit or succession strategy; it seemed they were simply planning to die at their desks! Now, it would seem to me that if you were truly interested in being in control of your future, particularly from a financial standpoint, that you would have a plan, a strategy, and you would work toward your end game each and every day. That is what empire makers do.

If you are reading along, nodding and thinking, “This sounds just like me,” then you might have fallen into the Lifestyle Maker trap. Let me explain.

Empire Builders think big and purposefully.

Many may have started their companies out of circumstance, much like Lifestyle Makers do, but Empire Builders have a strategy and a plan that they work on every time they go to work. They understand how to create wealth for themselves, even though this is most often a byproduct of their success, rather than the purpose of their business.

Empire Builders understand the resources available to them — other people’s money (OPM), human capital, professional relationships — and they know how to use them to advance their business plan.

Empire Builders understand that it is actually less risky to use outside capital in order to grow a business, because it means that they are not putting their own capital 100 percent at risk. The whole concept of using and obtaining outside capital is one best left for another time, but it is worth spending a few words now discussing the psychological aspects as they pertain to the two different types of business owners.

One of the observations that interests me the most is the way in which business owners make decisions when their own money is at risk versus when someone else’s money is at risk. Like anyone who is strapped for cash, the undercapitalized business owner tends to think small and conservatively, doing only what is absolutely necessary at that moment to get by.

Now, I am not advocating reckless spending. But, I do believe that proper capitalization is the key to strong execution of a business model.

When the money being spent to execute a strategy is not all yours, it forces you to build a business case for each decision in order to be accountable. This method works well if you have mentally separated your personal identity from the business objectives. However, if you are making decisions based upon emotional attachments, lifestyle issues, or constraints, and not on sound business practices, you will find yourself tormented by the first tough decision you are forced to make to achieve your business objective.

The other issue surrounding the development of a plan and capitalizing yourself properly is that by doing so, you run far less risk of personal peril.

You will notice that people who are financially secure run their companies in a totally different way than those whose number one concern is making payroll. I am a big advocate of business owners taking some cash off the table as soon as they can to secure their nest egg. Similarly, if you are involved with a bank, make sure you are working toward removing those personal guarantees as quickly as possible. Better yet, try not to have them in the first place.

Empire Builders understand that it is easier to run an empire than a village. An empire has a leadership structure, resources, and teams in place that can continue to execute the business plan through times of change.

If you don’t believe me, ask anyone who has grown a business to a meaningful size if it was easier to manage at $200 million in revenue or at $2 million in revenue. My guess is they will tell you that the larger company is much easier and ultimately less stressful to run, because at that level, they have the resources — including other people — to do the things they don’t want to do.

Factor Number Two: Emotions

How do you view your employees? Are they family members, friends, or business associates? Maybe even equity partners? Can you separate the personal relationship from the business relationship?

This is not be confused with developing a culture. Many companies have strong employee loyalty and close-knit cultures at the same time. Their owners have been able to mentally separate their personal relationships from what is necessary to execute their business plan.

If you see your employees as friends and family members, you may fall victim to unnecessary guilt and emotional risk when it comes time to make a decision, such as acquiring another firm or making another business move that may cause some of them to lose their jobs.

Consider the following situation: You have owned your company for several years, and you are ready to expand. After thoughtful analysis, you determine that growth through acquisition is going to be the easiest way to achieve your goal.

Luckily for you, one of your prime competitors in a neighboring marketplace has just put itself on the block, and after proper due diligence, you determine that the acquisition makes sense. Your CFO points out that while there is very little customer overlap, there is a good bit of personnel overlap, but you should be able to generate even greater financial synergies by eliminating the duplication.

As you move through the process, you determine that the sales manager of the company you are acquiring has a much stronger track record and more experience than your sales manger. Clearly, you don’t need two sales managers. However, the trouble is you just came back from a week-long vacation with your own sales manager and her family. She’s been with you from the start, and even though you know you’d be better off with the guy from the other company, you just don’t have the guts, energy, heart, stomach, or whatever it takes to either demote your own sales manager or, even worse, to let her go.

Over the coming weeks, your conscience weighs so heavily on you that you decide to discuss the situation internally. Seeking a consensus before you make a move seems like the right way to go.

So, what happens? First, all of the employees with whom you discuss the situation immediately panic as they think, “What about me? Is my job secure?” Second, they begin to advise you based not upon your business plan, but upon what they believe is in it for them. Finally, after much deliberation, you determine that the stress just isn’t worth it: You were pretty happy and making good money before the opportunity presented itself, so you’ll just let it pass you by.

Decisions from the Other Side of the Desk

It’s not only at the point of acquisition or merger that emotions can lead you to make less-than-savvy decisions. Being too attached to your business also can affect how you grow your company and whether it will be investment-worthy or positioned for sale down the road.

Making decisions from a place of relative detachment isn’t being cold or unfeeling. After all, you do it all the time with your personal portfolio, and you never miss a night’s sleep.

If investments aren’t growing, you divest. If those in charge of your investments are not successful in making them grow, you look for someone who can do that for you. If a new opportunity comes along that you believe will fuel wealth accumulation, you seize it. The same rules should apply to your business — without guilt, or anxiety, or compromise.

As hard as it is sometimes, you need to sit on the other side of the desk and regain your perspective. Recognize that the company you built is the most lasting — and potentially the most lucrative — investment you own.

Factor Number Three: Identity

Who are you?

To answer this question, I often tell people to think of an egg carton. The carton has a dozen compartments. In each compartment is a facet of your life: business, personal relationships, family life, hobbies, travel, financial matters, and the like. Now, think of this egg carton smashed, with all of these facets running all over one another. The more these facets touch one another, the more difficult it is to separate the issues when making a decision. It is very difficult to measure the amount of an important ingredient you need when it’s part of a giant pool.

Let’s take a closer look at how you see yourself. There’s business, and then there’s you, but often times these lines get blurred. Are you the business? What would happen if you were not there? Have you built a team? How do you describe yourself to others? With whom do the important relationships reside?

Frequently, I hear a woman introduce herself along these lines: “I’m Mary Smith, owner of Smith’s Mattress Manufacturing and Distributing. You know, I’m the one in the commercials jumping up and down on the bed like I’m at a giant pajama party.” While there’s certainly nothing wrong with a little advertising, or even tooting you own horn a bit, it does make one wonder if there is any separation between Mary and the mattress company.

For the Lifestyle Maker, it is often the goal to have enough money to live comfortably, to increase community standing as a business leader, and to be involved in church and/or charity to give back. Certainly, these are admirable aspirations that can be obtained with relative ease by any successful business owner.

For the Empire Builder, though, it is often all of the above, but also an intangible extra — that desire to maximize all of the hard work, energy, and resources available. The Empire Builder is often seen standing right next to the Lifestyle Maker. The only difference is that the Empire Builder knows how to leverage her contacts, her resources, and her skills to get the strongest result. Deals seem to fall in her lap, and it’s not just because of who she knows, because the Lifestyle Maker knows the same people. It is because she has a plan. She works her plan, and she uses her best business efforts to advance the business ball.

Now, that doesn’t mean that she is disingenuous; in fact, just the opposite. She is very genuine about her business relationships. But, she knows that her employees work for her company, not for her. Each employee is there to do a job to the best of her or his ability each and every day. She also knows that her outside contacts in the business world are just that — business contacts — and each one of them is evaluated in terms of what they can bring to the table for her company.

Is this a cold, hard, insensitive, person? No. This is the same person you see out enjoying an evening with her family, relaxing on the slopes of Colorado with friends, and entertaining the Board members of her favorite local charity. The difference is that she has managed to draw a line between her personal life and the business, and she is secure in it all.

If you can’t draw the line, or if your company is there just to support a lifestyle, you could be a Lifestyle Maker.

FactorNumber Four: Personal Relationships

This is always a tricky one, so I will do my best to explain the situation as it relates to business. There is no doubt that having a close relationship with a client or a business influencer is important. When I think about this, I am always reminded of the old sales story about the fish on the wall.

In this story, the salesman from New York can’t seem to get any business from his client in Idaho . Every time they meet at a convention or a trade show, they have a great time and leave saying they can’t wait to talk to one another, but nothing happens.

Finally, out of desperation, the salesman flies to Idaho to see if there is something he can do to talk his client into more business. When he gets to the office, he sees a giant fish on the wall. Being an avid fisherman himself, he comments on the fish and the fishing trip he is taking to Los Cabos. Eyes wide, the client says he’s always wanted to do that.

Seizing the moment, the salesman says, “Well, it’s something I do every year with my top clients. It lets me relax and learn more about their businesses so I can service them better.” The salesman invites the client on the trip, and when they return, the orders begin to flow in.

Bribing a client? No. These two people just found something they could relate to on a more personal level, and it helped them bond. The trip, however, was framed in the context that it was for people serious about doing business.

If you don’t know how or can’t network with a purpose to use your business relationships to achieve a business end, you could be a Lifestyle Maker.

Factor Number Five: The World Around You

Understanding what is happening — both in terms of the big picture and on a more microscopic level — is crucial to your business.

The process of building a business starts with a passel of emotions — passion, ambition, a sense of accomplishment, a desire to create something special. But, once you’re off and running, the danger of letting emotions rule in the strategic world of business is a key flaw that inhibits women from creating wealth and achieving true financial security.

It’s painful to watch women ride the business bell curve back down to its bottom — unable to let go at the right time, uncertain of how to bring the business to the next level. Too much of an emotional investment can lead to poor decisions that impact the value and vitality of the company. In the end, there is nothing more heartbreaking for an entrepreneur than to look back on the golden opportunity for financial freedom and business growth that could have been.

The Bell Curve

After conducting a workshop in New York City , an attendee came up to me and told me the kind of story I hate to hear:

“My business was doing $80 million in revenue when someone offered to buy it for $50 million in cash,” she explained. “I turned down the offer because I was doing well, and I figured it would keep on going like this. But, there was more to it than that.

“I really felt like I had given my business a life. I was committed to doing good in the community, and I believed I was fulfilling that mission by taking care of all these people in my company. I had created a culture that I enjoyed, and I saw my employees as my family.

“What I failed to realize was that the bulk of my business was in telecom. When the market crashed, so did my business. I had to let go of many of the people I was trying to protect, and I didn’t know what it was going to take to go to the next level. Today, I’m doing $20 million in revenue, and I have to figure out how to get back to $80 million.”

As she was about to walk away, she commented wistfully, “Do you know the good I could’ve done with $50 million?”

On the other hand, as I write this chapter, my good friend Paul has just sold his company for the second time, earning a tidy sum for himself on both deals. How did that happen?

When Paul started his own investment management firm, the timing couldn’t have been better. Interest rates were coming down, 401Ks were just coming into vogue, and more and more individuals were investing in mutual funds. In general, the economy was healthy, and the future was bright for financial services. Five years later, when approached by a large firm that was executing a role up strategy, he sold out.

What did the future of his company look like then?

Pretty good, but he had come to a crossroad: Did he want to build a boutique or build an empire? What Paul understood was that the business landscape of his industry was changing, and the divide between the small firms and the 800-pound gorillas was growing ever wider, with the mid-size companies ending up nowhere.

Paul studied his options: continue to grow slowly and organically on his own in an increasingly competitive environment, or sell to someone who had the resources to help him execute his vision.

Because Paul thinks like the Empire Builder he is, he sold his company to a major player in the industry and cut himself a very nice deal to stay on and execute his vision. For the next five years, he continued to execute his growth strategy, tripling the client base and the assets he managed.

Then, the unthinkable happened. The stock market bubble burst, and soon after that, the country was hit by the 9/11 terrorist attacks. Suddenly, no one wanted to be invested in mutual funds, and the value of the company declined.

Understanding market cycles, Paul made an offer to buy his company back at a discount of what he sold it for. The parent company was happy to negotiate, because its officers were looking for ways to raise capital and keep their own share price afloat in tough times.

Back on his own, Paul knew he needed capital to continue to execute his strategy, so he raised some debt and equity and stayed focused on growing. Eventually, the market turned, and the cloud lifted over the economy. What did Paul do? He took advantage of the upturn to sell the company again, for almost twice what he paid.

What is the difference between these two tales? Both had hardworking, smart and ambitious owners. But, one had an owner who kept his finger on the pulse of the world around him and made sure that when the timing was right, he was able to move quickly.

There are some things about business that you’ll never be able to control, and one of them is the pace of your opportunities.

Factor Number Six: Making Decisions

I’d like to tell you about Karen, one of my prospective clients. She is one of those inspirational entrepreneurs who started with nothing and yet managed to grow a manufacturing company to $20 million in revenue almost overnight. A sudden demand for her products caused her business to take off in a serious way.

Now, with a company value in excess of $50 million, she knows she needs to make a move, but which one? She doesn’t want to make a wrong decision, and she is frantically busy running her existing contracts, servicing customers, and managing operations on a day-to-day basis.

She has come to the conclusion that, at this moment, she simply doesn’t have time to grow. She’s decided to wait until she has the time to do the legwork, gather all the information, and ponder all the options.

In my experience, she’ll be waiting forever. By the time she does decide she has the time to do something, it will probably be too late.

I don’t want to sound like the voice of impending doom, but there really is something to the saying, “Strike while the iron is hot.”

There’s a right time for the right action. But, faced with the daunting task of identifying, evaluating, structuring, and “doing the deal,” many business owners have a tendency to take the riskiest road — taking no action at all.

The High Cost of Inaction

There are a lot of reasons why women entrepreneurs suffer from inertia, all of them based in fear (fear of the unknown, fear of being tossed aside, fear of the company growing too big and losing that “family feel”) and avoidance of a process perceived to be messy and stressful.

It seems there’s a comforting misconception that to maintain an enterprise at existing levels of growth is to play it safe and sane. The truth is, while you might stay in one place, market demands, competitive strategies, economic trends, and even unforeseen events such as Sept. 11 and the war in Iraq , can place your company in a very different position in a relatively short period of time.

As an investment banker, one of the things I help clients explore is what the “cost of inaction” will be. In other words, if you don’t do anything, what are the potential financial outcomes for your company?

A good example is a nurse staffing company I know — a successful one in what has been one of the decade’s hottest growth industries.

Two years ago, at the height of the market, this particular company had $5 million in earnings and could have traded at 10 times its EBITDA (earnings before interest, taxes, depreciation and amortization), or $50 million. Yet, the owner — anxious and confused about how to propel her company forward — decided to continue building her business and “think things out.”

While she was considering her options, larger companies in the industry were busy, gobbling up smaller companies and contributing to the trend of industry consolidation, a practice that tends to cause a drastic drop in trade value. As a result, that same nurse staffing company’s value went from $50 million to $20 million — in just two short years. That’s the cost of inaction. It’s a heavy price to pay for sitting still.

You Don’t Have to Go It Alone

One option for the business owner who is motivated, but not fully confident of getting all facets of the job done, is to seek out an investment banking firm.

Investment banking firms can be a disinterested third party whose job it is to provide strategic counsel, identify and explore opportunities, crunch numbers, and negotiate the deal. Such firms are partners, not service providers; they only take on clients they believe are marketable and poised for growth. They do charge a fee — a modest retainer and a percentage of the transaction — but generally, those that use their services find it to be well worthwhile.

Another option is to network within business organizations and learn from those who have already “been there, done that.” There also is no shortage of books and courses in this area. But, the bottom line is that you have to be willing to make a commitment to grow and take the first strategic steps toward moving your company to the next level.

It may seem scary, but the investment in time and effort is far outweighed by the financial, personal and professional gains you can enjoy once the deal is done.

Honest Evaluation

Take some time to think about yourself and how you view, and run, your company. There are key differences in being a Lifestyle Maker versus an Empire Builder ― some subtle, some not.

Here’s the mindset of Lifestyle Makers:

• Lifestyle Makers enjoy the challenge of running a business.
• They are successful in their own eyes.
• They enjoy their positions in the community.
• They have developed a certain lifestyle from the income their company is spinning off.
• They tend to be unconcerned with external market factors.
• They enjoy moving the company forward on their own time frame.
• They often think of the company as a child they have birthed, and they are content with watching it grow.
• They think of employees as family members.

On the other hand, here’s the mindset of Empire Builders:

• Empire Builders enjoy the challenge of running a business.
• They have a matrix by which to measure success.
• They keep their personal lives separate from the business.
• They understand exactly what the value drivers are.

The End Game

The end game is where you are when you finally cash out, and this is where the real differences between Lifestyle Makers and Empire Builders become strikingly apparent. Both the Lifestyle Makers and the Empire Builders have worked hard and have lived comfortable lives. At the exit, though, one is going to be worth substantially more than the other.

The Lifestyle Maker who avoided the harder decisions won’t be as profitable, because increasing the bottom line wasn’t a big motivator. Businesses tend to sell on multiples of earnings, and that is important to remember. Also, the Lifestyle Maker may have missed certain opportunities for growth that the Empire Builder has taken advantage of. Ultimately, the Lifestyle Maker may not be able to sell the company, pay taxes, and live the lifestyle to which she has become accustomed.

For example, if your manufacturing business does $10 million in revenue, and you’ve been earning an annual salary of $1 million, your business may be worth $6 million in today’s market. As a Lifestyle Maker, you are living quite well off your salary and business profits, but have you created true wealth? Probably not. When you sell your company, you’ll pocket about $3.5 million and invest about $245,000 in something safe. That is a far cry from the annual salary of $1 million you were accustomed to before!

On the other hand, the Empire Builder, by virtue of growing the business as effectively as possible on a daily basis with the proper capitalization, can easily end up with 10 times the amount the Lifestyle Maker was paid . . . if the game is played right.

JULIE GARELLA is the managing partner of McColl Garella LLC (www.mccollgarella.com), a Charlotte , NC , investment banking firm providing strategic advice to women-owned and women-led companies in the areas of merger, acquisition, and raising private capital. She can be reached at jgarella@mccollgarella.com

Empire Makers Know…

• that an empire is better than a village — and easier to run than a village;
• how to network with a purpose;
• what the resources are and how to use them;
• that capital makes execution easier; and
• at the end of the day, it’s just business.

(This article is reprinted from the Summer 2005 edition of Enterprising Women magazine. Copyright 2005 Enterprising Women Inc.  Reproduction in whole or part is prohibited, except by express permission of the publisher.)