Originally published in Forbes
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.
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.
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.
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.
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?