The Life Cycle of a Business: Understanding the Four Stages & the role of Succession Planning

As your business grows, it is inevitable that it will face a range of challenges. Yet to reach its potential heights, it must adapt and push through each stage of its development and any obstacle that may arise.

There are generally four stages in a business lifecycle: establishment, growth and expansion, maturity, and decline. Each stage of the business ownership lifecycle brings with it unique challenges that can only be faced through adequate planning. This article seeks to provide an evolutionary overview to ensure you are prepared as your business transitions through each of these stages.

1. Establishment

The organisation of your business is crucial to its establishment. Normally, when an individual is launching a business – they may face various risks or investment issues. The ability to realise their investment is highly important and should be established at the beginning. Is your ultimate aim to sell the business to a bigger business? To the employees? Or is it just for you, to be wound down when you are finished with the business? Your ultimate outcome, and the structure to best suit this, can be established through critical conversations amongst the business owners themselves, and with lawyers, accountants and tax advisers.

Getting the right advice and choosing an appropriate structure should deliver good tax outcomes and risk mitigation but it should also reflect the values you want to embed in your business. The structure and ownership of the business requires many different considerations. For instance, if you are planning on going into business with a business partner, you’ll need to draft an ownership agreement, covering the main concerns for your business – funding, control, decision making, as well as your relationship between the owners – rights or requirements to exit, restraints post business etc. At this initial stage of establishment, business owners should be considering their “succession plan”. An effective succession plan will ensure that the time and effort invested in building up a business is not jeopardised when a business owner leaves.

2. Growth and Expansion

During the growth stage, your business operates and begins to solidify its place in the market, achieving sales goals and establishing a client base. It is important that you have a clear Terms and Conditions, setting out how clients engage with your business, and your legal obligations to your clients. You may need to hire more employees to meet this demand. Employee contracts, work health and safety policies, privacy and data security policies are critical with this growth to ensure that the duties and rights of all parties are clear from the outset. Allowing you to effectively manage the day to day.

With potential expansion, it is here that your business has become routine, and your confidence as an owner has grown. As you expand, you may seek to raise funds to build the business internally – through a capital raising or loan arrangements. Capital raisings bring their own disclosure requirements, internal approvals, and a revision to the ownership agreements and succession plan. You may also wish to grow through acquisition, in which case you may need assistance preparing a sale or purchase agreement. In either case, expansion opportunities should also be a time for reflection on your internal governance arrangements – are our policies and contracts still fit for purpose? As well as reflection on your succession plan – do we have more owners in the business? Does our ownership agreement need updating? How are we funding the succession plan?

3. Maturity

The maturity stage of the lifecycle sees business continuing as usual, hopefully with sustainable profit growth.

4. Decline

Unfortunately, not all businesses will be able to sustain constant growth and it is important to be aware of the options available.

First, if profit is declining, there are various avenues that you may pursue in this phase. You may wish to reinvent your business through investing in new technologies or emerging markets in order to extend the lifecycle. Your business might merge with, or acquire other businesses, to develop long-term growth or outcomes for your clients.

Alternatively, if the decline is unforeseen and cannot be remedied through acquisition or merger or disrupting your own market, then you may need to consider a sale of the business outright to someone better positioned to own and operate the business or (if there is a risk of insolvency) administration or liquidation. Getting advice early from lawyers, accountants and insolvency practitioners can help manage the process to maximise the business’ chances of survival and minimise any personal liability for the owners.

Good communication between business owners is critical to ensuring the decline phrase can be turned into an opportunity for re-positioning in the market or understanding when to make the decision to wind up. 

Succession planning

Most businesses will go through the stages of growth, maturity, decline and growth again. It is important at each stage to understand what the legal needs of the business might be and to ensure that at all times the strategy to realise the investment in your business remains relevant.

A succession plan outlines who will take over a business when a business owner leaves. An owner might ‘leave’ for a number of reasons and might be voluntary or involuntary. This might be due to retirement, death, disability, a sale of the business, or a falling out between business partners. Creating a plan ensures that you have a strategy in place for the orderly and smooth transfer of business, aiding to maintain economic stability and preserve family and business relationships. The business succession plan can be built into your establishment and ownership documents or can come later separately but it does need to be discussed with the intended beneficiaries and documented so that it can be implemented in a practical and meaningful way. It is important to ensure that the succession plan is funded, whether through a loan or an insurance payout, otherwise the plan cannot be implemented. 

As you have nurtured your business throughout each stage of development, it is important that you consider what is best for your investment in the business and understand its value and how you might realise that value.

If you are thinking about establishing a new business or are a business owner seeking assistance through these stages, please contact the Business & Commercial team on 02 6274 0999 to discuss further.

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