The reading level for this article is Novice
Before you can set goals for a business you must articulate your personal goals. Do you want to attain a certain lifestyle, gain respect, create an innovative product, build an organization that will outlive you, contribute to your community, have an outlet for your talent, or be free from your job? What are the reasons that you wish to start your business?
An entrepreneur’s personal and business goals are inextricably linked. Unlike the manager of a public company who has a fiduciary responsibility to maximize value for shareholders, as the founder of a company you have the ability to build your businesses to fulfill personal goals. If you are unsure of these goals, take out a pen and paper and write down every reason you have for starting a business and what your personal goals are.
The first step is to decide is whether your goal is to build a lifestyle company or a high potential company. Lifestyle companies include small consulting companies, local restaurants, laundromats, barber shops, hardware stores, or any kind of franchise. Generally lifestyle businesses are local businesses that will likely never have yearly sales greater than $1,000,000 in a year. The entity structure of these companies are usually sole proprietorships, LLCs, or S corporations.
The advantages of starting a lifestyle company include being able to control the company, being able to continue to do what you love without having too much risk, having a positive cash flow from the early going, only having to report to yourself, having a relatively constant cash flow, and being able to take time off whenever you want. Disadvantages include not being able to hire top talent (as talented people usually avoid companies that offer no stock options and only limited opportunities for personal growth) and not having the chance for huge gains.
High potential companies, on the other hand, generally are either developing a product (that they will sell internationally), are based on a technological breakthrough or change in regulatory environment, or are raising venture capital to explore a lucrative opportunity. These companies are usually C corporations, and if they succeed, have the possibility of getting at least to the $50,000,000 in sales per year level within five years.
Advantages of starting a high potential company include the possibility for large returns on your investment, the ability to attract outside investment, and the ability to build a great team who will work to make your company succeed. Disadvantages include the usual necessity for the company to take on large amounts of debt or lose significant amounts of equity, a loss of control as investors and employees dilute the founder’s equity, and the long wait to reach positive cash flow.
On the topic of lifestyle versus high-potential ventures, Harvard Business School researcher Amar Bhide, in his article “Questions Every Entrepreneur Must Answer” writes
The company of a lifestyle entrepreneur does not need to grow very large. A business that becomes too big might prevent the founder from enjoying life or remaining personally involved in the work. In contrast, entrepreneurs seeking capital gains must build companies large enough to support an infrastructure that will not require their day-to-day intervention.
There is surely no right or wrong choice here. You just have to make sure the choice you make syncs with your goals. If you are able to take a huge risk and are shooting at a five year payout of $10,000,000 then you will need to start a business that fits within the high-potential category. However, if you are unable or do not wish to to take a large risk, or are content making a few hundred thousand dollars per year, a lifestyle business may be for you.
On the topic of aligning personal and business goals, Amar Bhide continues to say:
If entrepreneurs find that their businesses, even if very successful, won’t satisfy them personally, or if they discover that achieving their personal goals requires them to take more risks and make more sacrifices than they are willing to, they need to reset their goals.
If you have yet to do so, I encourage you to commit your personal goals to writing. Analyze the reasons you wish to start a business. Then take a look at the amount of risk you wish to take at this point in your life and the return you hope to achieve and go from there.
Now that you have aligned your personal goals with your business goals, I encourage you to continue on to my article “Analyzing Your Business Strategy.”