In the book The Thought Leaders Practice, author Matt Church defines and notes the distinction between a practice and a business. According to Church, recognizing this difference is essential, especially when it comes to financial considerations, marketing outreach, operations and even your future retirement.

What Defines a Practice?

A “practice” is a commercial establishment that delivers a service based on the professional expertise of the principal or partners of the firm. It is very common in the medical and healthcare fields (podiatrists, dentists, surgeons and general practitioners, for example) but also extends to consultants, speakers, authors, trainers, mentors, coaches and other service providers who fulfilled educational and/or licensing requirements. While a practice can employ others, they work in a supportive role and do not perform the services offered by the principal or others with the same specialized training. In a practice, the success and value of the entity are highly dependent on the quality of services provided by the experts.

What Defines a Business?

A business, on the other hand, does not rely on the expertise of an individual or group of individuals. Instead, it relies on tangible products and the developed systems and procedures that are in place to get work done. In The Thought Leaders Practice, Church states, “A successful business can operate separately from its founder or owner and, if it’s set up right, can be sold. It is essentially about leveraging something other than the owner to make money.” This leverage might be a product, a technology, a piece of machinery, or even your staff’s time and skills. With the right systems in place, a business can endure despite who signs the paychecks.

6 Questions That Define a Business vs. a Practice

A business and a practice operate in different ways to achieve success. To determine which applies to your firm, ask yourself these six questions.

1. Do you have a small team or large team? Generally, practices require a few staff members to make sure operations run smoothly. On the other hand, a business will constantly need more personnel to keep up with demand as it grows.
2. Is the startup cost high or low? With the exception of medical equipment, the initial cost to open a practice is relatively low. Beyond office space, supplies, computers and support staff, the startup cost is not as high as it is for, say, opening a manufacturing plant. With a practice, the successful operation is based on the principal’s expertise and his/her ability to market that expertise in order to build name recognition and visibility in the marketplace. Initially, a practice simply requires a client who is willing to pay for the firm’s expertise. The cash flow of paying clients funds the growing pratice. A business, on the other hand, can require a large initial investment to design, develop and produce a product. Funding often comes from outside investors or financial institutions willing to make a business loan. While the goal of a business is to generate revenue and profit from the sale of its products or services, the influx of additional capital from time to time is very common.
3. Can it be sold? Due to the nature of a practice, it is often more difficult to sell than it is to sell a business. Since it relies on the expertise of one or several individuals whose skills, training, reputation and earned loyalty are hard to replace, the worth and value can be intangible. With a business, revenue and profits are not dependent on an individual. This means with marketable products, a balance sheet that makes sense and established systems and procedures, business owners can sell their companies. When they do, the businesses will continue to operate in the same manner with complete transparency.
4. Is the profit margin high or low? Both practice and business owners want to maximize their profit margins. In order for a practice to succeed, it’s important to keep operating costs low to produce the desired profit margins. Since practices may have a smaller (or maybe even a finite) number of paying clients, ensuring repeat business, customer loyalty, referrals and personal relationships are key. On the other hand, businesses can operate with lower margins, relying on higher customer volume to thrive and remain competitive over time.
5. Is it responsive and agile to the market? In a competitive marketplace, both practices and businesses need to adapt to the desires, expectations and changing needs of their clients (practice) and customers (business). In practice environments, the little difference can make all the difference. However, in a business, it takes more steps to initiate change in product development or enhancements, delivery systems and internal operating policies.
6. Is the entity reliant on an “expert” or around products and systems? A practice is based around the delivery of specialized services performed by an expert. Regardless of who that person is, the foundation of the practice rarely changes. A business, however, may be built with an expert’s ideas, but their ideas are transformed into a product or products with defined production methods and systems to ensure quality control, repeatable and predicable delivery, outbound sales and other integrated processes. In Michael Gerber’s book, The E-Myth, he suggests an entrepreneur “systemize whatever you can so that the ‘lowest common denominator’ staff can operate with the highest level of efficiency.”

Which Game Are You Playing?

Matt Church advises, “It’s important to know which game you’re playing.” Without a clear idea about whether your company is a practice or a business, it’s easy to head toward the wrong goals. It can affect your budget, marketing, customer relationships, staff and strategy. Be sure your goals align with your company’s foundational characteristics to drive better decisions.