The 5 life-cycle stages of a business
Businesses are not static beasts, they change and evolve over time - and as they do, their needs vary. By understanding the different life-cycle phases of a business, owners have the ability to position themselves differently and focus on different facets which will drive enhanced returns.
Broadly, there are 5 distinct life-cycle stages;
- Established / Expansion
All of these naturally share some characteristics, but each life-cycle has its own identity.
It starts with an idea and then a business is born. The barriers to starting a business are pretty low, so many businesses start - but a number fail to thrive and prove up the business concept.
- Start-up businesses generally lack definition around just about every element of the business. Systems and processes are being created as required, marketing does not exist in any formal fashion and sales just occur when they can. Products and services are being built on the run and there are few hands in the business to support it. Most start-ups are undercapitalised and will have underestimated the amount of resource (time and money) required to build a real business.
- As I have said many times, its cheap to plan on paper, but very expensive to experiment in the real world - so every start up needs and benefits from a good business plan. Considered thought on what is required and where to prioritise the finite resources of time and money will get faster and better results. Margins need to be well understood (and tracked) with some objective milestones assessed to ensure that the business concept is actually viable. Setting up the right corporate / business structure will assist in the medium to long term. Finally, every business needs to be monitoring their cash position and be “mean with the money".
This is where the business owner can see the potential of their business concept and has sufficient confidence to hire / build more capacity. The business concept has been shown to be viable, with consistent trading profits now being made.
- Often this is where you see growing pains, as the systems and processes which have been used to get the business going, are now struggling. The owner is now also having to share control as the business has grown beyond what they can do / control personally. Growth also requires more cash, so money is generally tight with lots of rapid change with more software, more delegation, more people and sometimes, new premises.
- Time is a key factor at this point, as for most business owners they are no longer across everything as they once were. They can’t be. By building better processes, it means that owners can leverage their time via appropriate delegations and monitoring. People, Marketing and Sales are other areas which are in frame, as the business needs more of the right people to support its growth, with hiring being more formal with job descriptions and KPI’s part of the conversation. Effective marketing for lead generation is important, so focusing on the return from these activities is important - with a realistic marketing budget also required. Sales conversion rates and actual margin analysis are also areas to focus on, with growth typically being a draw on cash resources.
Established / Expansion
At this point, there is a real business operation, with consistent turnover and underlying profits being made. There is a defined management structure with “consistency” and “predictability” being used to describe the business and its performance.
- Complacency and plateauing can be issues, as in all reality - things are working pretty well. What must be considered is that the market place is ever changing, so what worked yesterday, may not work tomorrow. Due to size and positioning, you are also now the one that is being hunted by the competition as you have scale / business that they want.
- Strong internal disciplines around the business - where it is going and how it is going to get there, provide sustainable “self awareness”. Many businesses in this area no longer feel that they need to be planning for the future - as they know what they are doing. The reality is that they need to be planning more than ever before as they now have so much more at risk. Reviewing the financial metrics of the business for efficiency and return are important, as some of the old ways, may no longer be viable. Product and services may also be ageing and require review along with consideration of the target market and distribution.
Mature businesses have stood the test of time and delivered consistent turnover and profits. The internal mechanics of the business are well structured but may have stopped evolving. Product and services may also be starting to age, but perhaps the most relevant characteristic with mature businesses - is that they no longer want to take the risks associated with further expansion or change.
- Whether it be due to the age of the business owners or simply a view that “our product does not need to change”, the evolution of the business ceases. Technology, people and marketing are all in a holding pattern. The effect of this is that the business has stopped still, whilst the market continues to move forward, so over time the Mature business may fall into decline.
- For mature businesses, there needs to be a particular focus on the 5 year horizon. This includes considerations around succession and sale, as well as what level of change needs to occur to hold its market position. Finances and all of the critical metrics should be monitored carefully, as it is common for efficiency to be dropping on old equipment or processes, or on product margins due to market pressure. Return on investment for marketing spend is another area to check, given an evolving market place.
The inevitable for all businesses, big or small is an exit. Exiting a business provides the opportunity for the release of the owners investment in the business over time. The best exit strategy uses a 3-5 year lead time to ensure that the exit is as favourable as possible.
- The largest factor with most businesses wanting to exit, is that the decision has been forced on the business owner rather than it being a deliberate and well planned choice. This can be due to health, finance, interest, market changes etc, all of which can dilute value. Not every business may be saleable (for a reasonable return) due to; its industry, forward prospects, operating structure, product changes, environment issues, public perception, technology advances, currency fluctuation, overseas products, etc.
- Plan for the exit with a good timeframe in front of you. Make considered changes to optimise the sale prospects of the business, whether these be staffing, product, process or financial - all can make a significant difference (and there are others). If your business is not considered to be saleable, then there may be other strategies which can be adopted to extract value from it.
As you have read this note, you will see that there are many different elements that drive success in a business over its whole life. To assist you in further understanding what's relevant to your business, we have tagged all of our web site articles with the different life-cycle stages for your ease of reference.
If you have further questions about you business and its current life-cycle position, contact us today to arrange for a preliminary consultation.