July 15, 2014 Am I Ready? en_US https://quickbooks.intuit.com/cas/dam/IMAGE/A8mq7Zeod/b1cd5a3bc633cca4f1f61b6f1b277770.jpg https://quickbooks.intuit.com/r/am-i-ready/lifestyle-vs-liquidity-business-right Lifestyle vs. Liquidity Business: Which Is Right for You?
Am I Ready?

Lifestyle vs. Liquidity Business: Which Is Right for You?

By Rochelle Bailis July 15, 2014

Thinking of starting a business? Before you formulate your business idea, it’s important to determine the type of business that best fits your goals. There’s a lot to consider:

Which industry best matches your interests and experience? Pet services, food and restaurants, software and IT, auto repair, education, real estate, etc.?

What business structure best suits your business? A corporation, LLC, sole proprietor, non-profit, etc.?

These are common questions for prospective entrepreneurs, but there is another critical business classification that tends to fall by the wayside: do you want a lifestyle business or a liquidity business? No idea what I’m talking about? Let’s walk through the differences between them, and help you determine which is best for you and your professional goals.

What Is a Lifestyle Business?

lifestyle business is designed to support the owner’s financial requirements and support his or her lifestyle. When you choose to operate a lifestyle business, you aren’t necessarily planning to get extremely wealthy, but rather to build a business upon which you can eventually support yourself over the long term.

Although some lifestyle businesses become quite lucrative, the goal from the outset is to create a sustainable venture that will serve as a stable source of income over a lifetime, rather than to grow the business quickly for the purpose of selling or going public. A few examples of a lifestyle company include a law firm, an auto shop or a local tutoring service.

What Is a Liquidity Business?

Also known as a “startup,” a liquidity business refers to one designed to provide short-term financial gains for its founders and investors. When you launch a liquidity business, you should expect to work long hours for several years in an effort to grow the business quickly. The goal is to sell your business for a profit or go public for a large eventual payday.

In order to be successful, a liquidity business often requires more short-term personal sacrifice than a lifestyle business, but it also doesn’t usually require a life-long personal investment of time and resources. Common startups in today’s marketplace include software companies, mobile app and gaming companies, websites, social networks, electronic product companies and online marketing services. Liquidity businesses must be structured as corporations, since that is the only entity that allows for equity investment, liquidity events and shareholders.

Consider Your Reasons for Starting a Business

To ensure your long-term career happiness, it’s essential that prospective entrepreneurs consider their reasons for starting a new business. Both lifestyle and liquidity businesses can require a great deal of work, but studies show that while entrepreneurs work more hours, they are also more satisfied in their careers.

Between a lifestyle and a liquidity business, which business type is best suited for your professional goals? Read on to find out.

Reasons to Start a Lifestyle Business

If you want to launch a business that could support you and your family into retirement while allowing you to participate in the activities you love, a lifestyle business may be the way to go.

One of the premier benefits of a lifestyle business is that it allows entrepreneurs a great deal of flexibility in the way they live their lives. While they usually take longer to start and grow, once a lifestyle business generates a stable source of income, it can allow the owner to take time off for family and travel. For this reason, a lifestyle business can be a great option for retirees or for adults who plan to support a family.

Additionally, lifestyle businesses may reduce the financial stress of starting a business. Whereas liquidity founders are accountable to other owners and investors, in most cases the owners are the only ones who stand to lose if their lifestyle business fails. While its growth might not be as rapid, the financial stability and predictability of a lifestyle business makes it a better choice for those looking for a more reliable source of income.

If it succeeds, a lifestyle business also provides a “career” for the rest of your life, whereas a liquidity business only provides direction for several years, followed by a one-time influx of cash.

Reasons to Start a Liquidity Business

Whereas a lifestyle company is a great choice for entrepreneurs seeking the flexibility to pursue a business they love, liquidity businesses are ideal for those looking to make a quick—and hopefully substantial—profit.

With a liquidity business, the goal is to make money by growing the business quickly and either selling or going public. If you’re considering launching a liquidity business, you should be prepared for the effort that it entails. Along with building a marketable product, most liquidity entrepreneurs must locate advisors, find investors, outpace their competitors and hire extremely talented employees within a small budget.

While most startup founders invest their own money into their business, they also have the ability to seek funding from investors, usually in exchange for equity. This is an extremely risky investment for venture capitalists and angel investors because it offers liquidity entrepreneurs the chance to use investor capital without the requirement of paying it back if they fail, unlike a small business loan.

Because of the fast nature of the startup world, prospective founders should prepare themselves to work long hours. While entrepreneurs of any age can succeed in the liquidity world, a recent study indicated that 40 was the average age for founders, and the most successful startup owners were between 23 and 38.

Although most startups require a great deal of time and effort in the early stages, if they do succeed, the founders stand to see a significant return on investment in the long run. That being said, the likelihood of an extremely lucrative liquidity event is also extremely slim.

The chance of success may be slim, but for an entrepreneur who is unwilling to commit to a lifelong business endeavor, the fast pace of liquidity businesses provides an alternative to the long-term lifestyle business model. While it may take anywhere from 5 to10 years for your liquidity business to succeed (or fail), it allows the entrepreneur the freedom to consider another career path or business after their first venture has ended.

Choosing the Best Business for You

There is, of course, some crossover between lifestyle and liquidity businesses. Some businesses start out as one and become another, while other businesses reside in a grey area between the two business types. For the most part, however, these are two very different approaches to entrepreneurship, with two very distinct outcomes.

The most important thing is that you take the time to consider a business that you are passionate about and a structure that suits your professional and personal needs.

Rochelle Bailis

Rochelle Bailis is a business writer and marketer. Read more