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Is It a Business or a Hobby?

How do you know whether your interests will produce monetary returns? We look at decision planning for your great idea.

Introduction

It’s inevitable. If you’re a true entrepreneur, you will eventually begin to analyze every possible venture to see if it would make a viable business. You will look at your spouse’s scrapbooking project and think about the possibility of opening a scrapbooking store. You will think about ways to leverage your son’s after-school lawn-cutting venture to provide service to twice the customers at half the price. When a kind-hearted jogger in the park comments on how she wishes she had a dog, you will mentally calculate how many times you would have to rent out Fido to “dogless” people to break even.

Entrepreneurs are always thinking about business. It’s what sets them apart from other people and makes them visionary. There is, however, the dark side of the moon where ventures that are pure hobby are turned into businesses that are doomed to fail. It’s critical to be able to tell the difference between a business and a hobby. Just because you love to go fly-fishing doesn’t mean that you can make money at it.

Many highly successful entrepreneurs build and invest in businesses without having any personal interest in what the business does. They are only concerned about what growth potential the business has and its profitability. Think about Warren Buffett and Donald Trump. But there are other small-business owners who have parlayed a personal interest or hobby into a highly successful business. These business owners have, however, conducted the same analysis of the business potential as have the Buffetts and Trumps of the world. They have realized that something they enjoy doing has the potential to be a thriving business enterprise. That is not so, however, with all hobbies.

Case Study

The first idea Craig came up with for his new business was operating a taxi service. He had driven a taxi part time when he was in college and he knew a lot about the business. He had even helped the taxi service’s owner develop new routing procedures to lessen the drivers’ down time. After drawing up some preliminary plans, however, Craig realized that owning a taxi service would violate two of his personal goals: having a balanced work/family life and not having a huge upfront investment. A taxi service would require a strong hands-on manager and he would have to fill that role until he could find someone to replace him. It also would require the purchase or lease of a central dispatch office as well as several cars. His estimates showed that he would be working approximately 60 hours per week on average and would have to find an initial investment of $120,000. He decided to leave the taxi business to someone else.

The next business opportunity Craig investigated was cheese-making. Craig had a passion for cheese-making that dated back to his days at his father’s bakery. His father’s brother, his Uncle Nino, had been the cheese-maker in the family. He ran a small cheese shop next door to the bakery for almost as long as Craig’s father had run the bakery. Craig had worked at the bakery out of duty to his father, but he loved the occasional opportunity he got to work with his Uncle Nino making cheese. They made hard cheeses like Parmesan and Romano, and soft ones like Brie and Gouda. Craig still made cheese for his wife in a small basement room.

It made sense to Craig that he start a business based on a skill he was good at and loved. He quickly came to realize, however, that he was following the same path as his father, without the assurance of success. High-quality cheeses appealed only to a small segment of the market, and Craig would once again have to be at the business all the time as he was the one with the skill to produce the cheese. Rather reluctantly, Craig shelved the idea of building a cheese-making empire.

What Is the Difference Between a Business and a Hobby?

Let’s look at the characteristics of a business versus a hobby.

Characteristics of a business:

• Designed on sound business principles

• Tailored to the needs of its customers

• Enjoyment garnered from building or managing the business

• Reasonable expectation of increasing profit over time

Characteristics of a hobby:

• Tailored to the needs of the hobbyist

• Incurs high costs compared to potential return

• Designed based on desires of the hobbyist

• Enjoyment garnered from performing the service

• Little or no expectation of increasing profits over time

A sound business is always centered on its customers. The reason for its existence is to serve its customer base, and customer satisfaction is the measure of its success. An entrepreneur who builds and manages a small business derives his or her pleasure from the process of providing the product or service as opposed to the actual provision.

Let’s use a deep sea diving outfit to demonstrate the difference between a business and a hobby. Maria owns a boat and several sets of dive gear. She has been doing deep sea diving almost all of her life and she wants to take others out to teach them how to do it. If this is simply a hobby for Maria, she will take people out to dive sites that she particularly enjoys and will purchase dive equipment and other supplies without regard to analyzing the cost versus the benefit of such expenditures. She will set hours that are convenient to her and will only book tours during that time. The enjoyment that she gets is in the actual diving itself. She wants to share her hobby with others and has no interest in hiring others to perform the work or in growing or selling the business.

On the other hand, if this is a true business, Maria will spend time upfront “crunching the numbers”: calculating her break-even point by figuring out how many tours she needs to book to cover the capital cost of the boat and its related maintenance, as well as the dive equipment. She will research what tourists are most interested in when they book a diving tour and will adjust her availability to the most popular tourist seasons. If the growth potential is present to allow it, she will most likely hire another experienced diver in order to be able to run more tours. The enjoyment that Maria will get from building this business is in seeing it grow and serve its customers. She will know that she is building something that will outlast her and that she can sell when she wants to pursue other ventures.

It’s definitely true that many successful entrepreneurs have translated their personal interests into highly successful businesses, and potentially, you can too. However, it’s always important to make sure that your reasons for starting the business extend beyond the pure enjoyment of doing what the business does.

It’s Not Always about the Money

Now that we’ve discussed why you should be extremely careful in trying to make your hobby your business, it’s important to make the point that you can still have a hobby. Not everything you do has to produce profit. In fact, the most fun part about a hobby is that you do not have to worry about things like profitability or the satisfaction of others. Trying to turn your hobby into a business may not only be unprofitable, but may also make you end up hating the hobby. Entrepreneurs and small-business owners need to have more interests than just their businesses in order to maintain a balanced lifestyle. If you do nothing except keep your nose to the grindstone in your business all day, everyday, think about what an uninteresting person you’d be!

Chapter Summary

• Entrepreneurs are continually assessing potential ventures to see if they would make profitable businesses, but they run the risk of trying to turn a purely pleasurable pastime into an unprofitable business.

• Although many successful small-business owners have parlayed their personal interests into successful businesses, many more build and grow a business without a personal interest in the underlying activities of the business.

• Businesses are always run for the benefit of the customers, whereas hobbies are undertaken for the benefit of the hobbyist.

• Small-business owners should still pursue hobbies and personal interests to maintain a balance between their personal and business lives.