The 5 Stages of Small Business Growth

In Canada, small businesses with fewer than 100 employees account for 97.9% of all businesses. In the US, small businesses make up 99.9% of total organizations. Despite dealing with COVID and uncertain economic climates over the past few years, small businesses remain the true economic engine driving the economy and small business growth is critically important.

While small businesses come in all shapes and sizes, almost every business goes through the same stages from inception to late-stage growth, according to researchers Neil Churchill and Virginia Lewis. In analyzing the lifecycle of businesses, the two researchers uncovered a pattern showing small businesses go through five stages as they mature and grow.

While the length of time a small business stays in any one phase changes business-to-business, within each stage, organizations show remarkable similarities and characteristics that allow them to move to the next stage.

SMALL BUSINESS GROWTH STAGE I: EXISTENCE

The small business growth journey begins at its inception. As small businesses come into existence, their focus is primarily on attracting customers and delivering the goods or services to fulfill transactions.

Organizations at this stage are fairly loose and simple. The owner or founders typically do a bit of everything and supervise subordinates directly. While there may be a formal business plan, the strategy aims to generate enough revenue to be viable.

Quality, production, and processes may be unstable until those in the business start to gain experience. With most small businesses, the owner is the company and drives both strategy and execution.

20% of small businesses never get past this stage and fail within the first year of existence. Another 30% close their doors by the end of the second year. Those that survive evolve into the second stage: survival.

SMALL BUSINESS GROWTH STAGE II: SURVIVAL

As small businesses enter the second stage, they have demonstrated viability. It is attracting and retaining enough customers and generating enough cash flow to survive in the short term.

The organization remains small, although there may now be a few managers focusing on sales or operations at the direction of the owner or founder. The owner still makes nearly every key decision, and the goal remains survival.

Many companies stall at this point. They may earn marginal returns based on their capital and time investment. Many Mom-and-Pop businesses stay in existence but never thrive beyond the survival stage — eventually closing or selling, often at a loss. Conversely, businesses that grow in profitability and develop a strong cash flow to finance growth move onto the third stage: success.

To ensure your business moves onto the next stage, it’s important to work with an advisor to have a strategic plan in place.

SMALL BUSINESS GROWTH STAGE III: SUCCESS

If your business has reached the third stage, congratulations on your small business growth. There’s a lot to celebrate. There are also important questions to ask. Do you want to:

• keep the company fairly small with stable and predictable profitability?
• expand and grow your business for greater profitability (but also at greater risk)?
• step back and pursue other interests or investments while the business continues?

These are questions you should ask yourself and your accountant or business advisor to ensure you have the right plan in place to achieve your goal.

Companies can remain at the success stage for long periods and earn average or above-average returns. In this stage, businesses are more likely to survive economic downturns or shifting consumer demands.

In this stage, companies typically start to add additional executives or oversight, such as a controller. Middle managers may be necessary to drive operations. Financial, sales, marketing, and production systems run more smoothly and are better defined.

Companies willing to take on additional risk, and additional debt, strive to enter the fourth stage: take off.

SMALL BUSINESS GROWTH STAGE IV: TAKE-OFF

If the business is the fire, financing is the accelerant. To turn a business from success to take-off, owners and founders focus on raising capital and fueling growth. Owners and founders begin to delegate more and allow managers and other executives to begin to take a more active role in strategy and higher-level decision-making.

Organizations often begin to decentralize. Formal organizational charts are developed with clear lines of report and hierarchies.

This is a pivotal stage in the business lifecycle. If leaders rise to the challenge, significant growth can occur. If not, the business can stall at this stage, too. Many companies sell before achieving their take-off goals, although at this stage they usually sell for a profit.

If you’re entering this stage of small business growth, you may want to explore your options to restructure your business or sell your business with a strategic partner.

If take-off happens, it’s time to enter the final stage: resource maturity.

SMALL BUSINESS GROWTH STAGE V: RESOURCE MATURITY

As companies enter the fifth stage of small business growth, they need to be concerned about control and consolidation of rapid growth. The business may need to expand rapidly to accommodate the growth and meet consumer needs.  The organization may struggle to retain the entrepreneurial spirit that drove growth in the first place.

In this stage, the company has the financial resources to fund detailed strategic and operational planning. Management runs fairly independently and key positions are staffed by experienced workers. Systems are refined and smooth. Owners and founders are often detached from the business both financially and operationally.

As businesses reach resource maturity, profitability may flatten but be sustainable and more predictable. Yet, many businesses will lose sight of their original mission, stray too far outside their product offerings, or take unnecessary risks to chase even larger growth.

A DELICATE BALANCING ACT

Throughout every stage, it’s a delicate balancing act. For those that can move through the stages, the rewards can be great. However, it takes a careful and strategic growth plan at each stage and the ability to evolve and adapt as the business grows.

If you’d like to discuss where you are on the small business growth chart and how to best position your business for success, book a free consultation and speak with one of our experts.

We work with businesses across all of these stages, helping them grow to the next stage or stay put, making the most of the stage they are in. It all depends on your priorities. We work hard to understand your business needs and help you manage risk, meet reporting obligations and plan strategically for growth.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.