The business lifecycle – part 3

In parts 1 and 2, I discussed the first 4 phases of a typical business lifecycle; from its very first days to reaching maturity.

In this article, the last of the series, I’ll discuss typical characteristics of a business that has developed to a stage where its owners are expanding.  I’ll also discuss how to identify a business that has reached its peak and is now declining and the merits of reviewing exit strategies for its owners.  

5. Expansion or transition phase

This life cycle is characterised by a new period of growth into new markets and distribution channels. This stage is often the choice of the small business owner to gain a larger market share to find new revenue and profit channels.  Moving into new markets requires the planning and research of an embryonic or start-up stage business. Focus should be on businesses that complement your existing experience and capabilities.

Moving into unrelated businesses can be disastrous.Add new products or services to existing markets or expand existing business into new markets and customer types.  Funding is likely to be sourced from joint ventures, banks, licensing, new investors and partners.

The business is built. You have watched it grow and mature, now a whole new set of possibilities awaits. Is it time to buy, sell or merge? Are there new growth opportunities? Have you thought about succession planning? What about estate and retirement planning or family wealth management?
 
6. Decline phase

Changes in the economy, society, or market conditions can decrease sales and profits.  This may quickly end many small companies.  Businesses in the decline stage of the life cycle will be challenged with dropping sales, profits, and negative cash flow.

The biggest issue is how long the business can support a negative cash flow. Ask is it time to move on to the final life cycle stage…exit.  You may need to search for new opportunities and business ventures. Cutting costs and finding ways to sustain cash flow are vital for the declining stage.  Funding is now likely to be restricted to your suppliers, customers and owners.

7. Exit phase

This is the big opportunity for your business to cash out on all the effort and years of hard work. Or it can mean shutting down the business.Selling a business requires your realistic valuation. It may have been years of hard work to build the company, but what is its real value in the current market place.

If you decide to close your business, the challenge is to deal with the financial and psychological aspects of a business loss.  Get a proper valuation on your company. Look at your business operations, management and competitive barriers to make the company worth more to the buyer. Set-up legal buy-sell agreements along with a business transition plan.
 
Find a business valuation partner. Consult with your accountant and financial advisors for the best tax strategy to sell or close down the business.

CONCLUSION

Each stage of the business life cycle may not occur in chronological order. Some businesses may quickly move through each life-cycle phase; some may skip some out all together.  Many business owners will choose to avoid expansion and stay in the mature life-cycle stage. 

Whether your business is a glowing success or a dismal failure depends on your ability to adapt to its changing life cycles. What you focus on and overcome today will change in the future. Understanding where your business fits on the life-cycle will help you foresee upcoming challenges and make the best business decisions.

If you are interested in understanding more about why businesses fail and what you can do to avoid it happening to your business, I’ve written a short eBook called “7 common reasons for business failure…and what you can do to avoid it happening to you”.  Further details can be found at:  www.7reasonsforbusinessfailure.com

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Why paying attention to the “ups” and “downs” of the business lifecyle will help you – Part 2
Why it pays to have a network of advisors – part 1

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