LIFE CYCLE

What Is the Life Cycle?

The life cycle of a business represents all events from inception forward. Small and emerging business owners may find visualizing the end of their business absurd given their current focus on building it. Amore practical way of thinking about company life cycle is to conceive the exit strategy (no matter how far into the future this may be) and all events leading up to it. If a business plan was prepared for the enterprise, chances are an exit strategy was considered or at least mentioned in some form.
In the context of the business plan, an exit strategy defines the point in time and/or circumstances in which the business owner will leave the business or significantly reduce his or her role. Exit strategies outline such events as taking on venture equity, selling the company to a third party (or partners), and final liquidation. It is important to understand that an exit strategy not only defines the end point but outlines the events leading up to it. Events or milestones contributing to an exit may include due diligence related to financing arrangements such as venture equity/debt, a private offering, or bank debt. It also may involve the plan for marketing the business to potential buyers.

The exit strategy is the culmination of the business life cycle. The establishment of milestones in a logical sequence will bridge the gap between present-day operations and future exit strategies. While initially conceptualizing the business, an exit strategy may have already been defined via business plan. Many business owners and executives, however, may not have considered an exit strategy, or if they have, the nature of the business may have changed to a point where the original exit strategy and milestones have become obsolete. Small and emerging business owners must examine the life cycle for the first time (if they haven’t already done so) and revisit it periodically.

Thinking Long Term

Long-term planning may not be a priority now, but it is worthwhile for small and emerging business owners to at least conceptualize major milestones and the prospective steps to achieve them, regardless of the time horizons. Major events such as going public, selling the company, or transferring the company to children are a few examples of major life-cycle milestones. Prioritizing these events and establishing how these milestones will bridge to the exit strategy will take some thought. These questions will help in documenting the milestones the small and emerging business owner will want to achieve:

- At what age will the owner or significant executive retire?

- Is there a succession plan in place?

- Is an expansion planned?

- Do the expansion plans involve growing from within (organic growth) or acquiring other companies?

- How much financing is needed to fit expansion plans?

- What kind of financing would be preferred?

- What burdens will taking on debt create?

- Will it be necessary to refocus the business on other markets and/or other products?

- Is taking on other equity partners beneficial to the business owners?

- Is the small and emerging business owner prepared for the scrutiny involved in taking the company public?

- What would it cost to participate in the equity markets?

- How is the business positioned from a cash perspective to achieve any of the above?

This list of questions is not exhaustive. Because some entrepreneurs are so close to day-to-day operations, taking a step back and looking at the big picture is imperative. When this self-examination is complete, the small and emerging business owner should have an understanding of:

- Firm company succession over the next year, laid out in a step format

- Rough company succession over the next five years (10 years if possible), laid out in a step format. (Succession plans should include market and/or product development goals as well as revenue or asset thresholds.)

- A schematic of the need for financing including the details addressing how much, why, and when it is needed.

- The level of involvement by the business owner.

- Whether the owner wants to continue with a significant role or whether he or she will accept a lesser role.

The ultimate goal of this exercise is to create a rough time line of significant events. The basic premise is that major events do not unfold randomly but rather in a well-thought-out, controlled way. The early years of a business may seem like a struggle for the small and emerging business owner, but the leadership is best served to position the company for the next significant event as opposed to surviving day to day. Approaching the business in this manner will create a strategic culture that will carry it through the short, medium, and long term. Each milestone event should build on the preceding one, creating a succession that leads to each exit event, whether they occur in one or 20 years.

Getting Personal

The line between personal life goals and those of the business may be blurred for the small and emerging business owner. This lack of clarity becomes more complicated when the personal goals of other partners/owners are considered. A cursory understanding of personal goals and the trade-offs owners are willing to endure in order to grow the business will help the strategic vision of the company and prevent conflict between owners as the business matures and the challenges become more complicated. This reasoning suggests that Mark and Andrew Palmer should understand each other’s level of commitment to the growth of the company and the sacrifices needed to achieve it.

It is imperative that Mark and Andrew share and ultimately agree on their intentions for the company’s future. They may find it necessary to discuss:

- How long will they want to stick with this? Their lives are similar from a socioeconomic perspective for now, but what happens as they grow older and family or other personal interests take precedence? Their current commitment to the organization may be undying and equal, but there is no guarantee this will last. The extent to which Palmer Products makes their lives better may not be in proportion to the sacrifices they make in time and attention. They may be motivated to grow as quickly as possible and then sell out, recognizing the temporary nature of the business and their potential waning commitment.

- Is there an industry peer that they can model their organization after? They
may have to rely on more than gut instinct to manage the company as business issues become more complex and the two have more at stake. Issues from inventory management, shipping, support staff, and tax compliance are areas in which they need professional consulting. Companies in similar industries may be the best to mimic in this regard. Establishing some sort of relationship with owners/executives of companies they do not compete with can be worthwhile. Doing so also may allow for a mentor/mentee relationship with more experienced executives.

- What do they have to gain by growing? This may be the most important question for them to address as individuals and collectively. Is the reward they seek financial? Social? Life experience? The answer will provide an understanding of whether they want to continue growing the organization indefinitely or use it as a stepping-stone for other endeavors.

- What are the immediate needs of the business? Vital needs of the business must be addressed with urgency. What are the business needs in the next one, three, and six months? If the company can’t make it to the next year, strategizing will be moot. Immediate concerns may focus on customer acquisition and retention, maintaining good relationships with vendors and suppliers, and financing. Strategizing will build on the initiatives they put in place to handle these issues.

- How recession proof is the business? Depending on how oriented toward the long term the brothers are, external circumstances beyond their control must be acknowledged. Most small and emerging business owners do not waste time thinking about circumstances beyond their control when it comes to active policies. It is important, however, to understand what options or contingencies are in place to address such events. Since no business owner can control the economy, viewing the business in light of a shifting economy is helpful. Is their product a necessity or a space. Does the pricing scheme define their product as a luxury good or an inferior good? Understanding their products will give the Palmers a good indication of what will happen when things are not as good as they are now.

- Can they evaluate the intangibles? What makes the company unique? What aspects of the business can no one else replicate? How will the two preserve this? Can Mark and Andrew value these unique components? If they plan to sell the company, these unique aspects of the business will be considered goodwill and play a major factor in the price they would receive for their life’s work.

- What is the succession plan? What happens if Mark or Andrew leaves the
company? Can the necessary duties be carried on in the short and midterm? How much goodwill will be lost if one leaves? Can this be quantified? If so, can a mechanism be put in place that replaces this?

Establishing the business life cycle will be the most fundamental step needed to strategize not only the finance function but the whole business and its component parts (marketing, production, and research functions). The caveat is that any watershed event will be subject to change and must be adjusted when necessary. Although this 30,000-foot view is very high level for Palmer Products, it will serve as a starting point for their forward-thinking endeavors. The business owner must identify what needs to be done and when—offering a rough schematic of the life-cycle time line. The process of fleshing out will ensue—in which the data customers most likely to be encountered in achieving these milestones are identified.