The vast majority of entrepreneurs don't actually know if they're building a scalable company or a job for themselves--just with a fancier title.

Especially if it's your first venture, this can be a tough thing to differentiate. Lots of people think they are creating or starting a business, but in reality it's just another 9-5 job for them to work. And the big reason why this happens is because they have no idea (or don't try to figure out) how big their market actually is, which means they never have the ability to grow enough to receive anything more than a salary. After all, if your business is operating in a market that has a very low ceiling, then it's mathematically impossible for you to exceed that limit.

Now, I'd like to just say that building a small business is great for a lot of people. Our country is built on small businesses, and many of them give the owners a nice paycheck--and the ability to "run their own shop" and do something they enjoy (hopefully). All I'm saying is, don't fool yourself by thinking you're this hot shot entrepreneur building a company, when in essence all you've created is a new job for yourself.

Here's how to tell the difference:

1. Is it possible for you to grow beyond your current salary?

The whole purpose of being an entrepreneur is for your value to come from the equity you hold in the thing you're building--not the size of the paycheck you're taking home.

So, let's say your salary is $100,000. First of all, that's a terrific salary, especially if you're getting to do something you love. But if you really want to become an entrepreneur, then you have to ask, "At what point will my business be worth 10x my current salary?" How much revenue would you need to bring in? How many employees would you need on staff? What are the variables keeping you from achieving a level of scale where your equity in the company is worth tremendously more than your yearly paycheck?

2. Are you built for a liquidity event?

One of the biggest problems small businesses face is they are entirely incapable of being bought by a larger company. There is no possibility of a liquidity event.

The reason is because most small businesses have nothing scalable about them--and even if they do, the second problem is they have poorly documented processes. Think about the bike repair shop in your home town. They have a small staff. Maybe they bring in a nice amount of revenue for a local bike shop, but when you walk in, you know how things are going to go because "that's just how Dave, the bike mechanic works." Which is great, until Dave decides he wants to sell the business and retire. But since Dave hasn't documented or created any internal processes for other people, when Dave leaves, the bike shop can't really run anymore.

You'd be amazed how many businesses struggle with this problem exactly.

So, if you set down the path to become an entrepreneur thinking one day you'll sell your business and become rich, then you need to ask if what you're building is "sellable" in the first place.

3. Is this a lifestyle business?

For some people, a business built around something they personally enjoy is great. Think: a rock climber who builds a small business taking tourists rock climbing.

While this can be a terrific way to turn your passion into a revenue stream, it's important to understand how different this is from a business that has potential to scale. Again, if the business is dependent upon you, then you are the business. Which is why so many entrepreneurs work hard to essentially remove themselves from their business. They want to know that they can keep hiring, keep scaling, and keep improving, all without being personally involved in the work--which is a very different, and much harder, goal.

This is something I talk a lot about in my book, All In, where I explain what went into my turning a flea marketing business into a company that ultimately got acquired by Home Depot. I very well could have kept it small, and kept running it like a flea market business--but that's not what I wanted.

I wanted to build something big, and something that had potential.

If that's what you want to do too, then you have to know the differences between something small, and something that has the potential to grow.

Published on: Mar 26, 2019
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.