Gcobani Ndabeni
The life cycle of a business is such that it grows until the stage where it settles and then starts to decline gradually.
As to how long this journey is depends on the pedigree of the owner or management and the market conditions.
We start businesses for different reasons, but the bottom line is that we want to make good money to support our livelihoods and to create wealth for our retirement days.
In fact, the real money can be made when you sell your business.
However, you can still make good money from your business even if you hold on to it until the end, provided that it is a very profitable business.
In this case a “fat” salary or dividends can be used to draw the profits from the business and hopefully some of it will be saved for retirement.
If selling is an option, it therefore makes sense to sell a business when it is still at its peak.
But most owners only think of it when their businesses are no longer profitable and try their luck by pricing them at unrealistic amounts, which does not work.
Nobody will buy a business that is not making profit.
An exit strategy is very important especially for a business that has reached a milestone of five years.
My opinion, the first five years are the years of grinding where the focus is on growing the business, establishing a solid client base and paying back the loan(s) raised to fund the business.
The next five years are the years of reaping the rewards – I call them the benefit years.
At this stage, the business is supposed to generate sufficient sales and profits, and with the loans already paid up, there is sufficient cash to “play around” with until the business is sold, if that is the exit strategy.
Depending on the nature and size of the business, 10 years should be the right time to consider selling provided that the conditions are conducive to do this.
I recommend 10 years because it will be fair for the next owner to go through the same process while the business is still profitable.
Fairness in business is really part of the game. In fact, buyers should also be careful and do their homework and not let the excitement of the prospect of owning a business cloud their judgement.
They must be convinced that the businesses they want to buy can make it through to the next 10 years.
Some businesses are formed to support the lifestyle of individuals and their families and some are formed to create a legacy that will pass from generation to generation.
In these cases the exit strategy might not be necessary. The plan is basically to run the business until it cannot generate any more profits and then close it down.
The benefits are enjoyed as soon as the business makes profits and there is really no expectation of a big pay-out at some time in the future.
The trick here is to keep the business to continue generating cash as long as it takes by re-engineering it, diversifying and introducing other ways of keeping it going.
But, the problem starts when such a business has gone through all the phases and no longer has anything to offer, and then the owner goes into a state of denial. He or she continues to run the business even though it is not making money. Chaos then ensues.
So, the story of the life cycle of a business is simple – it has a beginning and an end and the end can be bad if you do not do things smartly.
Go in, make money and get out while things are still fine, and move on to the next project.
- Apart from serving entrepreneurs through his consulting work, Gcobani Ndabeni is also the operations director of Small Business Connect. Send your views on small business related matters to [email protected].