Remember that song "The Circle of Life" from The Lion King? It reminds us mortal humans how similar we all are. We are born, grow up, get older, and eventually pass away. That's just life. And while you might not need a biology class to understand all of that, you might need a business lesson to teach you how much that very life cycle applies to entrepreneurs running a business, and that your knowledge of this life cycle could mean the difference between failure and success.
It's true! Every day new businesses are "born," go on to grow, achieve some measure of success, and try to maintain that success. And the harsh reality is that every day businesses die, either running their course or succumbing to the many threats that can harm any business.
Whether or not you are aware of it, every successful business inevitably passes through five levels over the course of its lifetime, and not so coincidentally, at times, the business life cycle mirrors that of the owner.
And trying to manage a successful business without understanding this concept is like playing baseball without knowing what inning you're in, if you're winning or losing, or how far into the season you are. Without knowing this, you simply can't know what you need to do next to ensure success. Heck, you don't even know what success looks like or if you have a snowball's chance of achieving it.
Business ownership is not static. Owners lead and manage their businesses differently when they're first starting out than they do when they become successful or when they're preparing to exit a business. Knowing and understanding this fact is vital to business owners' survival and success, but rarely, if ever, does this get discussed.
If you understand the business life cycle, you put yourself in an optimal position to accurately pinpoint where you are, determine appropriate goals, plan and strategize to reach them, measure your effort, and make adjustments as necessary. You'll also be able to better visualize possible threats and opportunities, and know how best to respond to them. And, you will be able to recognize the 'signs or signals' indicating it's time to start thinking about your eventual exit from your business. Unfortunately, many business owners operate without this understanding, and I believe this is one of the major reasons for the extremely high failure rate among business owners.
If you'd like to avoid that pitfall, read on to learn about the five levels of the business life cycle so that you'll be prepared to provide effective guidance as your company matures and grows.
Level 1: Ownership and Opportunity. In this first level of the business life cycle, "risk vs. reward" is the order of the day. Your task is to determine if opportunity exists or could be created. Then, you must consider if the opportunity is attractive based on its potential profit, how much cash and/or credit you'll need, your own criteria for success, and your tolerance for risk. Throughout your business's life cycle, you'll continue to return to Level 1 to make sure your business is focused on the right market opportunities. Markets and customer needs change fast and frequently, and if you aren't constantly focused on the market and its changes, you may quickly be on your way to business failure.
I've heard many people say that starting a new business or buying one is a gamble. This is partially true because there are some variables you can't control. But the biggest factor making owning a business a gamble comes when you don't do your homework and proper preparation. However, with the proper preparation -- both in your particular industry and regarding your understanding of certain business facts -- you'll be taking an informed and calculated risk, which is far different from gambling. At this level in the cycle of self-analysis, gathering accurate and up-to-date information, knowing how to analyze that information, and building a viable business plan are particularly important.
Level 1 is when you begin to consider how much employees will cost, how many you'll need, and which key positions are most important. You should also start creating a realistic sales plan. Think about the gross profit these sales will bring and what the overall expense of operating the business will be. All of these points of consideration are key elements of any business plan. This type of analysis begins at Level 1, because preparation at this level is about dollars needed, bottom line profit, cash flow, and common sense. If the opportunity can't make enough profit, there is no point in wasting any more of your time, getting ahead of yourself, or talking yourself into something that is not financially realistic. This is also the level where owners have to do a self-analysis. Do they have the qualities successful owners have? Or if they are expanding, do they have the energy, experience, and talent to operate a larger business?
Level 2: Creating Your Company's DNA. Now that you've established a clear plan and understand the opportunity and challenges being derived from your Level 1 analysis, it's time to map out how, exactly, your business will operate on a daily, weekly, and monthly basis. In other words, you need to establish procedures and processes that will enable you to realize the results you forecasted at Level 1, ranging from how customers are handled to how and when employees will be trained to how they will interact with each other, and how you will oversee this activity so your business will operate like a "well-oiled" machine. None of this will happen by itself; it all takes preparation.
DNA encompasses any task that requires a standard operating procedure to be in place in order to make sure that your business operates consistently and in line with your definition of quality, cash flow requirements, and net profit. In doing this, you're able to focus on employee accountability, and it becomes easier to spot and fix problems before they become serious issues or crises.
This level also requires quite a bit of vision, because you need to look into the future and determine how things will need to work before they actually start working. Level 2 is one of the most important areas to understand, but it is frequently misunderstood by owners. For those who do get it, Level 2 is one of the most valuable tools used in growing a business and competing in the marketplace, throughout your business's life cycle.
Level 3: From Survival to Success. At this point, your preparation turns into "game day" as you have done all of the essential planning and preparation. Now you have to be relentless in putting all of that into effect, every day. As you move forward, keep your finger on your company's pulse by measuring results to make sure you're accomplishing what you expect.
This sounds simple, but the reality is, many entrepreneurial dreams die at this level. This is because knowing what has to be done to succeed and holding employees accountable to accomplish what is expected takes every bit of energy and focus you have. Especially when employees decide to test your resolve. When you add to this the adversity you'll face and the challenge that comes with figuring out how best to react to it -- you'll find there's nothing simple about it.
You can see why it's so important to have an accurate grasp of reality here. Your company's future depends on your ability to understand the market, your customers, your competition, and your own business's strengths and limitations. As you move through this level, develop as many leaders as possible among your employees, and make sure to focus on motivating, communicating with, and educating them. You'll need a capable, motivated team to help you, because you can't do it all alone.
Level 4: Maintaining Success. If you suspected that Level 4 is similar to Level 3, you're correct -- your company must do everything you did then, but at a higher level and a faster pace. Competing successfully at this level means that no one in your company can be satisfied with being average or achieving limited success. It also means putting relentless pressure on your competitors and demanding more from your employees. After all, the market is a daily competitive war, where your competitors want to take what you have -- there are no trophies or glory for just showing up and hoping for the best.
After first achieving success at Level 3, many entrepreneurs make the mistake of thinking that they have 'made it,' and that they can relax." Not so. More than ever, you have to concentrate on operating at an above-average level. Strive to attract more customers, make greater profits, improve your product and processes, develop your employees, and stay ahead of your competitors.
Level 5: Moving On When It's Time to Go. It may be hard to imagine now, but eventually, you will have to think about exiting the business, whether you sell your company, pass it along to a successor, or simply close it down. Make no mistake: Although this is typically an emotional issue for owners, it must be treated just like any other important business decision you have made -- well thought out and based on facts.
When you fail to think seriously about your exit, you are leaving the when and the how up to chance. Because if you don't pick when to exit and to whom you want to sell or name as your successor, you will leave it to fate, or for others to decide for you, which is never a good thing, especially when it's your life's work on the line.
I can't underscore enough the importance of a well-prepared owner's exit. It doesn't matter if the exit is to go on to something bigger or better, or if you're ready to walk into the sunset. Doing this well is so important -- I know this because I have exited both unprepared and prepared -- and there is a world of difference, especially in your bottom line payout, between the two.
If you think of your business in terms of its life cycle, you can manage the whole process much more successfully. Remember that the five levels are progressive in nature, and that they serve as building blocks to create a strong foundation that will enable your company to become successful and stay successful.
© 2012 Bill McBean, author of The Facts of Business Life: What Every Successful Business Owner Knows that You Don't