Every business goes through four phases of a life cycle: startup, growth, maturity and renewal/rebirth or decline. Understanding what phase you are in can make a huge difference in the strategic planning and operations of your business. I’ve met many business owners who believe they are growing because sales are increasing at 2% each year when they're actually declining because they are losing small customers and only slightly growing big ones. These owners aren’t investing in the necessary systems and people to begin a renewal phase. Alternatively, many businesses in the growth phase aren’t allocating the proper resources to fuel the continued growth and miss valuable market share.
How do you identify which phase your business has entered, and what can you do about it? Here are the telltale signs of each phase and how to ensure success at every step.
Startup
During the startup phase, you spend your time meeting people, coming up with new ways to sell your products or services and consistently implementing new ideas. At this point, you won’t have many processes and you should be tweaking your business model to get a sense of the market and how to turn a profit. Your employees are wearing many hats. Few job descriptions and titles should exist because you're still creating a corporate structure.
Although it's an exciting time, it's where most businesses fail. The cash demands often mean you can only underpay yourself and key employees for so long because you'll only retain people for a short period before they will feel like they need to move out to move up in their careers. Use this time to figure out a business model that allows for sustainable cash flow, consistent growth and the ability to hire other people to run it. A business that can't succeed without you working 100 hours per week as the sole “chief, cook and bottle washer” won't grow.
Growth
In the growth phase, your clients should be able to explain your business model to other prospects. Keep your pricing level with modest increases for new clients. Existing client relationships should be maturing past the three- to four-year mark. Turnover should be decreasing and you should no longer be worried about making payroll and keeping employees.
The growth phase is where your business solidifies its stance in the marketplace. Turn your focus inward as you build teams and hire higher-level people to run operations. Spend your time on activities that help the company grow and identify what barriers could inhibit your growth. Take the time to strengthen your relationships with clients. Invest in your employees and push them to take more ownership of both internal processes and client relationships.
The growth phase will require investment. You will have to give back profitability to fund growth or seek outside investment capital either through investors or debt. With investors, you give up equity and gain advisors. With debt, you retain all your equity but will likely have to sign personal guarantees with banks to secure funding.
Maturity
Your business should be growing about 5% annually and your first employees are now reaching eight- to ten-year tenure. You should feel more secure than you have at any other point since you started out. You are probably able to take regular dividends out of the company. Professional management should be running the day-to-day business. And while some emergencies demand your attention, things are relatively predictable.
Mature businesses may not set the world on fire, but they are dependable and consistent. Many mature businesses have a strong cash position and grow through acquisition or spin-offs of other product lines. Mature businesses can defend their market position and expand into new territories using their brand recognition. Operations are relatively smooth and people don't feel burned out. Revenue is steady and predictable. Enjoy this period but be on the lookout for signs that you need to start making a change. At this point, you’ll be able to decide to cash out or reinvest in the business to further growth and sustainability.
Renewal/Decline
Many owners whose businesses are in decline have no idea. They feel that that the top customers they have are growing and demanding more of their services. They see the market as relatively stable.
If revenue has declined for three consecutive quarters, you probably entered the declining phase two or so years ago. Take action and start looking for ways to innovate. If owners are focused on what they can take out of the business before they retire and aren’t willing to invest in new technology, people or marketing, it’s a sign that they're in decline.
If this is you, then you need to decide to cash out or reinvest. Most businesses don’t begin investing in the renewal phase until they are already in a state of decline. Strong business leaders identify that their business and/or the market is changing and will decide to start renewal efforts early.
If you choose to cash out, assemble a team of investment bankers, accountants and others knowledgeable about mergers and acquisition.
If you decide to reinvest in the business, talk with sales and marketing to figure out how to pivot to meet changes in the market. You might need to modify your current offering to meet the needs of new customers or innovate a completely new business. Either way, it’s going to cost money and time.
Every business falls somewhere on this spectrum and many owners never take the time to identify where they are and take action. According to the Exit Planning Institute, 80% of businesses with less than $50 million in annual revenue never sell. Their owners don’t acknowledge where they are in the business life spectrum or make a decision to change. By the time they decide to sell, their business isn’t worth much to potential buyers. You don’t want to get stuck in this situation.
Take honest stock of which of these phases your business is currently in and ask the tough questions. Are you doing the right activities now to ensure your business will have lasting power?
Opinions expressed by Entrepreneur contributors are their own.
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From the moment you make the decision to set up a business, you're in the "business lifecycle." This will see you journey from idea to startup, and if successful, through to the growth and maturity phases.
While it's fair to say that business is never not challenging, a look at each of the stages of the business lifecycle highlights a unique set of obstacles to deal with and overcome. You will have to be flexible in your thinking and adapt your strategy as you move along. Indeed, different approaches are required for market penetration versus, for example, what may be required to achieve growth or retain market share.
According to the recent Startup Genome Report, an estimated 90% of those startups that fail do so primarily due to self-destruction. It was their founders' own bad choices or lack of preparedness rather than so-called "bad luck" or market conditions that were out of their control. Understanding your position in the business lifecycle just might help you stay a bit ahead of the game here and defy the odds, as you anticipate the potential challenges and obstacles that are upon you or are on the way depending on what phase you are in or about to transition to.
Simply put, as your business grows and develops, so too do your business aims, objectives, priorities and strategies– and that's why an awareness of what stage of the business lifecycle you are currently in can be helpful.
Stage 1: Seed And Development
This is the very beginning of the business lifecycle, before your startup is even officially in existence. You've got your business idea and you are ready to take the plunge. But first you must assess just how viable your startup is likely to be.
At this stage, you should garner advice and opinion as to the potential of your business idea from as many sources as possible: friends, family, colleagues, business associates, or any industry specialists you may have access to. Ultimately the success of your business will come down to many factors– including your own abilities, the readiness of the market you wish to enter and, of course, the financial foundation in place (how are you going to finance your launch?).
In some ways, this is the soul-searching phase. It's where you take a step back and consider the feasibility of your business idea, and also ask yourself if you have what it takes to make it a success.
Related: You Have Nothing To Lose (And Everything To Gain) By Putting Yourself Out There
Stage 2: Startup
Once you have thoroughly canvassed and tested your business idea and are satisfied that it is ready to go, it's time to make it official and launch your startup. Many believe this is the riskiest stage of the entire lifecycle. In fact, it is believed that mistakes made at this stage impact the company years down the line, and are the primary reason why 25% of startups do not reach their fifth birthday.
Adaptability is key here, and much of your time in this stage will be spent tweaking your products or services based on the initial feedback of your first customers. It can even get to the point where you are making so many changes to your offering that you start to feel a bit of confusion. That's just noise, and the main advice here is to power through the blurriness, because extreme iterations upfront will naturally seem confusing. Rest assured the clarity will once again come.
Stage 3: Growth And Establishment
If you're at this stage, your business should now be generating a consistent source of income and regularly taking on new customers. Cash flow should start to improve as recurring revenues help to cover ongoing expenses, and you should be looking forward to seeing your profits improve slowly and steadily.
The biggest challenge for entrepreneurs in this stage is dividing time between a whole new range of demands requiring your attention– managing increasing levels of revenue, attending to customers, dealing with the competition, accommodating an expanding workforce, etc.
Hiring smart people with complementary skillsets is necessary to make the most of your company's potential during this phase, and so any good founder will be spending a lot of time directly involved in the recruitment process.
It is essential that you start to come into your role as head of the company in this stage. While you'll still be on the front lines often enough, you need to be aware of how your expanding and highly qualified team is going to be taking over a great deal of the responsibilities that were previously tightly under your control. It is your job now to start establishing real order and cohesion as you mobilize the teams according to clearly defined and communicated goals.
Related: Seven Things To Look Out For When Going For Your Second Raise
Stage 4: Expansion
At this stage you might feel there is almost a routine-like feel to running your business. Staff is in place to handle the areas that you no longer have the time to manage (nor should you be managing), and your business has now firmly established its presence within the industry. Here you might start to think about capitalizing on this certain level of stability by broadening your horizons with expanded offerings and entry into new geographies.
Businesses in this stage often see rapid growth in both revenue and cash flow as the blueprint has now been established, but be warned about getting too comfortable. In business, if you are not moving forward you are moving backwards, and without a constant, almost nervous itch or desire to expand, complacency can set in, and you might get caught off guard.
There are, of course, two sides to this coin, with the other involving a risk of expanding too carelessly. While there is no crystal ball and it is very hard to get an idea of what will be the results of your undertakings, you can give yourself the best possible chance of continued success through careful planning. Look at your resources, be realistic about the effort and cost and potential returns, and always keep an expert eye on how expansion might impact the current quality of service you provide your existing customers.
Remember, while having a successful business model behind you is undoubtedly an advantage, it is not a guarantee that it will work elsewhere within other markets, or that new offerings will result in the same success. The business graveyard is littered with organizations that took on too much and failed. Your task is indeed to take on new challenges as you look to constantly expand, but measure your risk and do your best to secure the company for all eventualities.
Stage 5: Maturity And Possible Exit
Having navigated the expansion stage of the business lifecycle successfully, your company should now be seeing stable profits year-on-year. While some companies continue to grow the top line at a decent pace, others struggle to enjoy those same high growth rates.
It could be said that entrepreneurs here are faced with two choices: push for further expansion, or exit the business. If you decide to expand further, you will need to ask yourself the same questions you did at the expansion stage: Can the business sustain further growth? Are there enough opportunities out there for expansion? Is your business financially stable enough to cover an unsuccessful attempt at expansion?
And, perhaps most importantly, are you the type of leader who is up for the task of further expansion at this stage? In fact, many companies change leadership here, bringing in a seasoned CEO who is more fit to navigate the new challenges.
Many at this stage also look to move on through a sale. This could be a partial or full sale, and of course depending on the company type (for example, public or private), the negotiation may be a whole new journey in itself.
Navigating The Business Lifecycle
Not all businesses will experience every stage of the business lifecycle, and those that do may not necessarily experience them in chronological order. For example, some businesses may see astronomical growth right after startup, and the founders may decide to cash out right away, jumping straight to that "exit" stage.
For many companies, though, there will be some sort of resemblance to the stages defined above, and awareness may help you anticipate what is coming next and how you can best prepare yourself and your team to maximize your chance of success. Making the right decisions at each stage is another thing altogether, however, and that will require your usual mix of gut instinct and practical business sense.
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