by Scott Balfour
Every business is born from a concept or…a great idea. Each business typically goes through four phases during its life cycle. These phases include the: start-up phase, growth phase, maturity phase, and decline phase. As a business buyer, you need to consider which phase you are most comfortable entering into. Each has its own risks and rewards.
Start-up Phase: True entrepreneurs and visionaries seem most comfortable in the start-up phase. They have an idea and want to do it their way. Typically in this segment of the business cycle, relatively speaking, they invest little money and lots of sweat equity. Decisions are often made emotionally vs. empirically. The business often requires the owner to go quite some time before any thought of taking any money out, even for a salary, can be considered. The risk is often high. Government surveys report that 60 out of 100 start-up businesses fail in the first three years. Conversely, those that hit can provide great personal satisfaction and a high return on capital and energy invested.
Growth Phase: The next phase is the growth phase. This is at the point when the ‘nut’ has been made (breakeven), and the test of time has proven it’s a viable business. In this phase, sales and all aspects of the business are growing in relative proportion with one another (number of employees, physical space demands, equipment, perhaps profits, etc.). This is a very exciting time in the development of a business and those with vast energy resources flourish. This is where the momentum for growth is set and the challenge is to see how high it can go. What is rewarding financially in this phase is that relative to investment the future return in equity build-up is the greatest. The downside is that the growth often requires constant capital investment, both from internal sources and external. Reacting to, and creating change in this cycle is critical.
Maturity Phase: After a point business growth often flattens out or slows down. It seems to repeat the same performance year after year. This is often where great managers feel most comfortable. Their challenge is to tweak the business, to constantly look for ways to improve the business model, and get the best bottom line. The business at this point typically can pay a healthy salary to the owner and produce a profit. Not only do managers have the opportunity to look forward, as they did in the start-up and growth phase, but they also have the benefit of looking backward with plenty of experience, data, and past performance. At this point, some say ‘if it ain’t broke, don’t fix it.’ Others find this a comfortable platform to build from. Either way, this is a good entry phase for those who want to avoid the high risk attached to start-ups and/or need the predictable immediate salary not always obtainable in growth businesses.
Decline Phase: After a point, many businesses just don’t seem to perform as well as they have in the past. This can happen for many reasons. Perhaps the owner has become complacent, there are technological advances that weren’t kept up with, the industry has become saturated with competition, the management has risen to their point of incompetence (The Peter Principle), or some aspect of the business has not been paid attention to, marketing, finance, production, human resources, etc. This type of business is where the turnaround specialist flourishes. They find the problem and fix it. They often tend not to care about leaving their personal mark and often don’t particularly care what industry it is in. They are bottom line driven and like to use their business skills in producing new and quick results through the people and systems in place added to their business savvy and/or capital.