Every business is likely to go through a whole life cycle, from set-up to shutdown. Understanding what stage a business is at in this life cycle will help you to know what their opportunities and challenges may be.
Stages in the business life cycle
Incorporation
All new business ventures start with an idea. An entrepreneur might have an idea about starting a brand new business in order to launch a new product or service. Examples of this would be James Dyson’s idea of a new type of vacuum cleaner or the launch of Facebook by Harvard students. Alternatively, an idea may come from a pre-existing business that wants to head in a new direction, bringing something fresh to the market. Whenever a business begins its life the people with the ideas for that business must decide which business medium to use i.e. sole trader, partnership, limited liability partnership or company. If it is decided that the new business should be operated through a company then the first stage will be to incorporate that company.
Raising Money
If a business chooses to incorporate, it can begin to trade as a company once it has been incorporated. Early in the growth cycle the business will need to raise money to begin its life because it will need to buy the resources needed in order to start to sell its products or services. For some businesses, set-up costs will be low, for example setting up a recruitment consultancy requires very little to get started. For others, for example beginning a brand new chain of restaurants, there will be very high set-up costs associated with recruiting staff, fitting out restaurants and marketing the restaurants to ensure that people come to eat there.
There are two main ways in which a company can raise money, firstly through the issue of shares known as equity finance. This is where the company issues shares in exchange for cash. The shareholders will therefore own a stake in the company and will expect to receive dividends (income) on their shares and a capital return (i.e. a gain over and above what they originally paid for the shares) if and when they sell their shares. Shares could be offered publicly, to friends or colleagues, or even sold to venture capitalists such as 3i. Venture capitalists tend to invest in high-risk start-ups which they believe will offer a high return on investment if they are successful.
The second way a company can raise capital is through debt finance. This is where a company borrows money and in return promises to repay that loan plus interest. A lender, such as a bank, will usually insist on taking some form of security over assets from the company which, through security enforcement processes, will help it to receive back as much of its money as possible if the company defaults on the loan payment or if the company breaches the loan agreement.
Expansion
Successful businesses often want to grow. A business can do this organically, by increasing sales and profit through natural growth of its own business. Expanding the range of products or services or widening the target market can both be effective strategies for natural or organic growth.
A business can also grow acquisitively. If the company buys a competitor, perhaps to gain its customer list and therefore its market share, this is known as horizontal integration. In the 2000s, there were a significant number of horizontal integrations in the pharmaceutical sector, for example between Glaxo Wellcome Plc. and Smithkline Beecham Plc., which subsequently became GlaxoSmithKline Plc. Alternatively the successful business might acquire a business which is part of its supply chain; either a supplier or a distributor. This process can be referred to as vertical integration, an example of which is the takeover by the wholesaler Booker of Budgens and Londis grocery chains.
Insolvency
Finally, if things do not go to plan, the last stage in a company’s life cycle may be insolvency. This is where an insolvency process is commenced in circumstances where the company is not able to pay its debts. Over the past few years there have been a number of high profile insolvencies in the travel and retail sectors, such as Thomas Cook in September 2019, Debenhams, which went into administration in April 2020 and Arcadia Group (owners of brands such as Topshop, Dorothy Perkins, Burton and Miss Selfridge) in November 2020.
Why does this matter to a lawyer?
If you can understand where in the business life cycle the business you are working with is positioned, you will have a better understanding of the types of opportunities and threats they are facing. For example, a company that is teetering on the brink of insolvency will have a very different range of concerns to one which has just been offered a £10 million equity investment by a venture capitalist to develop a new business idea.