Stages of the Business Lifecycle
Whether you are a new business owner or have run your small business for years, it is wise to familiarize yourself with the five cycles of change: startup, growth, maturity, transition and succession. This applies to small retail shops and online business alike, as every type of business may go through several or all of these stages.
Why do you want to start your own business? Maybe your family needs additional income or you’re unfulfilled by your current job and want to work for yourself. Whether it’s out of necessity or desire, you need to evaluate your skills, expertise and the level of risk you want to take on before starting a new venture. This also applies to people who may feel obligated to take over a family business.
According to the U.S. Bureau of Labor Statistics, only half of small businesses survive past five years. As one would expect, after the first few relatively challenging years, businesses tend to become more successful and survival rates improve. These statistics hold true across different industries, including manufacturing, retail trade, food service, hotel and construction.
As a prospective business owner, you should familiarize yourself with what to expect. And remember, no matter the stage, it’s important to take stock of how your company is performing and do everything in your power to stay competitive and successful. Each stage brings new challenges that owners need to address to protect their businesses, and new opportunities to grow and improve.
Before you start a business, you need to be realistic about how much money you’ll need to get up and running. Startup costs can include inventory, office space, equipment, anticipated tax costs and employee payroll. Being passionate about something — owning a restaurant, beauty salon, technical service or construction company — is not enough on its own to guarantee success. The length of time it takes to start a business often depends on the type of business and the location. If it is just one person and no loans are required, it could take as little as a month or two to get started. If it is a larger company with employees and startup funding is required, it could take up to a year to get the business off the ground.
First-time business owners will need to understand the essential steps to follow as they launch their new venture.
- Research the market and competitive landscape. Figure out who your main competitors will be and what your ideal customers look like. You can research this by conducting phone or face-to-face interviews, online surveys or focus groups with potential customers to get their feedback. Consider asking them why they purchase a specific product or service, what they like or don’t like about competitors’ products and what price they would be willing to pay for what your company plans to offer.
- Identify what you’ll sell. Whether you plan to offer a product, service or both, narrow in on what you’ll sell and how you’ll make it different from your competitors’ offerings. Even if you’re selling identical products or services, you could distinguish yourself with your location, customer service or shopping experience.
- Write a business plan. A business plan is a roadmap for the future of your company and often outlines the goals for the first, third and fifth years in business. If you need outside investors to loan you money in order to get started, they will need to review your business plan and financial statements before investing.
- Set financial goals. Get specific about how much money you’ll need to invest, borrow, spend and can reasonably make during your first year in business. Some businesses aren’t profitable for the first few years while they build their reputation and customer base. You’ll need a plan for covering expenses during that time.
- Consider partnership. If you don’t have the funds or expertise to launch a business on your own, consider partnering with someone who has complementary skills or money to invest. A potential partnership could develop over time and offset your startup costs with additional funding from a partner. Another possibility is that you are hired by an owner of a company who wants to sell the business in the future and offers you the opportunity to buy the business in a phased buying process. Instead of needing to have cash on hand for an upfront sale, the owner might offer you a stake in the business for investing a number of years as an employee. This could be a good solution for an aging owner to transition the business and secure the future of their employees, as well as their own retirement.
- Secure funding. From getting small business loans to crowdfunding campaigns, there are many ways you can raise money to start your company.
- Create your business. Make it official by choosing a business name and creating your business entity. You could have to register your business; get federal and state tax identification numbers, permits or licenses; and may want to file for trademarks, copyrights or patents. You can also set up a bank account to manage the business’s money.
- Hire employees. If you hire workers, you’ll want to make sure you’re following state and federal employment laws and learn about managing employees. The U.S. Department of Labor website is a good resource for learning more about labor laws.
- Build your customer base. Once your business is up and running, you’ll want to focus on building your customer base. You can do this by providing excellent customer service, special deals and offering incentives to new customers. A marketing campaign can also help, and it could be as simple as handing out a printed coupon or offering incentives like two-for-one sales.
- Market your product or service. It’s also important to promote your new business and build awareness of the business, which you can do by creating a website, social media accounts and marketing at community or industry events. If you have the budget, consider starting an advertising campaign. You can do this online, in local newspapers or wherever else you think your ideal customers will see the advertisements.
- Monitor cash flow. Keeping an eye on incoming and outgoing cash (i.e., cash flow) is critical to managing a business. Often, unexpected business expenses can put owners into a cash-flow crunch that can impact their ability to pay suppliers and employees.
If your business has hit major milestones during the startup stage and achieved sales goals, your business can begin to explore opportunities for growth. Once your business has established a customer base and become known for a product or service, you can focus on ways to grow your sales and operations.
During a growth stage, your business may begin to make more money, breaking even, becoming profitable or increasing profitability.
If your product or service is taking off, it could be time to look for more funding from investors so you can expand your business. You may need to invest in equipment, hire more employees to expand your best-performing products or services. It may also be time to discontinue or try to improve the products or services that haven’t been selling well.
Throughout the startup stage, most of the burden of running the business might have been on you as the owner. If your business is growing, you may be able to hire and train employees to help manage day-to-day functions. With this staff in place, you’ll have more time to focus on marketing the business and managing others.
This could also be a good time to focus on investing more money into your emergency fund, to help pay for unexpected setbacks or invest in upcoming opportunities.
After several years in business, your company may hit a stage of maturity when it’s more stable and profitable. This is the third stage in the life cycle of a business.
When you first started your business, you may have taken a limited salary. Now, as an owner, you can most likely start taking a regular salary from the company.
Mature businesses should have strong brand recognition and a secure or growing customer base that allows them to expand product lines into new or existing markets.
At this point, you can count on your employees to manage the day-to-day operations as you focus on long-term goals.
The transition stage represents a period where a company must deal with change. The transition may be positive or negative, and it could be due to many factors, including:
- Declining sales
- Changing market conditions that are impacting the business
- A shift in customers’ preferences
- An opportunity for rapid growth
- A personal situation
For some businesses, a larger competitor moving in nearby or a slowing desire for their product or service could result in declining sales. When you’re faced with these threats, you need to figure out how to retain and attract customers.
The transition stage can also be a period of immense growth. Once your business becomes well-known, you may have opportunities to partner with much larger companies or groups of customers. Before taking on a large order from a bigger company or national chain store, make sure you can meet the demand in addition to your other orders coming in. When a small company gets a big break by landing a huge order, it can be an opportunity for growth and increase awareness about your company. Conversely, if you are unable to meet the demand, it could damage your reputation and business.
You may need extra funds to invest in production and sales staff, but it could be months before you reap the rewards of the sales. Managing these large outflows and inflows of money can be a challenge that you’ll need to address to survive a period of rapid growth.
With your long-term goals in mind, you may want to focus on creating tactical plans to guide your immediate responses during a transition. A tactical plan will take your business’s strengths and weaknesses, along with external threats and opportunities, into account; this can help you come up with solutions to problems or opportunities. Each of these solutions can help you achieve those long-term goals.
The final stage of a business’s life cycle is when an owner decides to close, sell or bring in a successor to take over the company.
Owners may decide to move on for a variety of reasons. You might want to try something new, your business may be in decline or you could be dealing with personal or health issues. Or, your business might be doing great, and you think you could get a great price and then retire.
For small business owners, a successor is often a family member, friend or current employee who wants to take over and run the business. However, you could also try to sell your business to someone who you don’t already know.
You may also want to sell the entire business to the person, or retain partial ownership and receive income from the business’s profits even though you’re no longer involved with the day-to-day operations. Some business owners agree to stay on and help train the new owner during the transition.
The sale process can vary depending on the type of business and where it’s located, but it often involves several steps:
- Determine the business’s worth. Evaluate the value of the business based on its assets and sales. A small business may be worth several times its yearly sales, but the value can vary depending on the specifics of the situation. You can hire a professional or company to help determine the business’s value if you’re unsure of what to do. Look for someone who has experience evaluating similar businesses and can use that experience to guide the valuation. If you are determining the value on your own, review some of the steps in the process that you will need to complete.
- Prepare your financial documents. Potential buyers will want to review your business’s records, financial statements and tax returns to get a better understanding of the business’s financial situation and sales history. Make sure all your documents are ready and accurate.
- Find prospective buyers. You may be able to list your business for sale online or in local publications. You could also work with a business broker, a professional who can match sellers with potential buyers in exchange for a cut of the sale price.
- Get financing in order. Many business buyers will need to take out a loan to buy your business. You may also have to lend the buyer money by allowing the buyer to pay you part of the selling price, plus interest, over time. Seller-financing can be important because it shows the buyer, and the other lenders, that you believe in the business’s future.
- Negotiate the terms of the sale. As with many transactions, expect the buyer to negotiate the sale price and terms of the agreement. You may want to hire professionals who have managed small business sales before, including an accountant and attorney, to review everything before the final sale.
- Close the deal. Once you come to an agreement, it’s time to make the sale official by signing the legal contracts that turn over control and ownership to the buyer. These contracts can be difficult to write and understand, and your attorney should likely be involved in this final step.
If you’re unable to find a seller or can’t get a high enough price for your business, you may want to pass the business on to a family member, friend or employee for free. You could still retain partial ownership and have an income from the business.
Or, if the business is already declining and you think it won’t survive for much longer, you may want to close the business completely rather than selling or passing it on.
Closing a business can be a straightforward process if it doesn’t have a lot of debt. You can sell the business assets and end contracts, and may need to file paperwork with your state government to disband your business entity (if you created one). If you don’t officially disband the entity, you may need to continue to pay state filing fees or taxes.
If you can’t afford the business’s debt, you may want to try and work with the creditors to pay over time or settle for a lower amount. Bankruptcy may also be an option depending on the amount of debt and the business’s and your personal financial situation.