Channel markets, Mergers and Acquisitions, Mergers and Acquisitions

5 Stages of Your Business

It's time to shift your mindset. Even as you focus on day-to-day priorities, you need to step back and see the bigger picture -- a much bigger picture involving your overall business.

Regardless of your company's age and business size -- you're on a long-term journey from entrepreneur to exit (E2E). During that journey, you'll witness dramatic market evolutions. You and your business must evolve, too.

ChannelE2E's Mission is to help IT service providers successfully navigate each business stage, maximizing your performance every step of the way. VAR. MSP. CSP. Total Service Provider (TSP). The technical jargon doesn't matter when you focus on the bigger picture -- which involves five critical stages for your business. Take a look:

Stage 1 Startup Icon1. Startup Stage

This begins with your initial business development and seed initiative. You and your co-founders have "a great idea" that deserves some time, attention and testing.

Maybe it's a new way to offer IT services. Maybe it involves actual intellectual property. Whatever the case, you've got a germ of an idea -- and you want to incubate it. If the testing goes well, perhaps you'll formalize an IT product or service. If you survive the initial business development, cash and management challenges, you'll onboard your first customers.

Typical challenges during this stage include:

  • The ownership: Who owns percentage stakes in the company? What are the buy-sell triggers in the ownership agreement to protect all co-founders over the long-haul?
  • The concept: Shaping a business idea that has a real path to profits.
  • The funding: Most IT service providers bootstrap their businesses. It's rare, but if you're developing intellectual property you may attract dollars from angel investors and perhaps even a VC.
  • The assets: What assets are you going to trademark and/or potentially patent?
  • First wins: Gaining early market acceptance from a few trusting customers.
  • Who does what?: Establishing an initial business structure of roles and responsibilities.
  • Stage 1 Example Company: Deep Information Sciences, a data-centric solution provider that emerged from stealth mode earlier this year.

Stage 2 Growth Icon2. Growth Stage

If you survive the startup stage, chances are you don't want to rest on your laurels. Instead you want to scale the business. You're starting to align  the business's growth and the business's value to your net worth. Even if you consider the company to be a "lifestyle business" -- you want to enjoy growing profits.

That won't be easy. Only about half of all companies are still alive five years after launch, according to the Small Business Administration. To keep the lights on -- and grow -- you need develop and document actual business methodologies, a sales model, a marketing model, an operations model and so on, notes Yahoo.

Ideally, you'll establish at least one product or service that pushes you toward mass critical adoption -- whether you define that as local, regional or global success. Within your own business, you're starting to deploy a mix of IT management systems: CRM, RMM (remote monitoring and management), PSA (professional services automation) and other systems that manage your help desk, customer visibility, finance and more.

Some tech companies will favor "growth-at-all-costs" during this stage, but in the IT service provider segment most startups will want to pursue profitable growth.

Typical challenges during this stage include:

  • Growth: Managing growth on all fronts (revenues, customers, finance, talent).
  • Cash flow: What's going out the door? What's coming in -- and when? How do you navigate the peaks and valleys?
  • More Funding: If you have intellectual property, is it time to raise seed, angel or VC dollars?
  • Talent: Your first round of hires across technical engineering, sales and marketing.
  • Rivals: Dealing with competitors that now consider you a threat.
  • Diversification: Adding new products and services to round out your portfolio.
  • Reach: Moving into new regions or markets.
  • Example Stage 2 Company: OwnBackup, a cloud-to-cloud backup company led by former Intronis CEO Sam Gutmann.

Stage 3 Sustain Icon3. Sustained Performance Stage

Congratulations. You survived the growth stage. Chances are, you emerged from that stage with plenty of bruises.

In many cases, you relied on manual business processes -- or had no processes at all. In terms of your own IT systems, you likely have islands of data -- multiple views of the customer and multiple views of your own business. But what you really need is an integrated, end-to-end system that optimizes your own operations -- and the customer experience. You begin to leverage APIs to tie together multiple systems -- PSA, RMM, CRM and more. Some folks are even talking about analytics and data-driven decisions.

You evangelize automation throughout your company -- but can you keep up with the world's top help desk providers and automation pros who despise manual processes that choke productivity?

During sustained performance, you begin to witness the first real staff turnover within your company. Some folks are simply burned out from the growth stage. Others can't adjust to the new, more formalized processes for sustained performance. Either way, staff turnover is now real. In some cases, you'll need to hire more seasoned talent to bring order to your business.

Typical challenges during this stage include:

  • Automation: You activate it across all aspects of the business -- which can trigger cultural and technical challenges across the company.
  • Turnover: Potential staff turnover, including potential stress in the co-founder ranks. Who wants to stay for the long haul and who wants to exit now?
  • Benefits: Introducing more employee benefits and perks -- better health care plans, a retirement plan, bonus plans -- and managing all the associated costs.
  • Revenue blend: Balancing your VAR, MSP, CSP and application development services. Achieve the right balance, and you're a total service provider.
  • Example Stage 3 CompanyLong View Systems, an early mover into the cloud and managed services market that has added IT procurement services as a major focus area.


Stage 4 Pivot Icon4. Pivot Stage

Congratulations. You survived the Sustained Performance stage. But one or perhaps two new inflection points have arrived. The first inflection point involves some of your aging products and services. Alas, they're not performing as well as they have in the past. The second inflection point may involve a new market opportunity or niche that may -- or may not -- warrant pursuit.

Either way, it's time to make some big decisions.

Typical challenges during this stage include:

  • Aging products and services: What do you keep, what do you kill -- and what does that mean to customer retention, revenues, profit margins, staffing and more.
  • Unexpected disruptors: You're no longer the startup. Now, startups are disrupting you. How do you respond -- if at all?
  • Emerging opportunities: Some customers or employees may point out new market opportunities worth pursuing. But do you have the stomach, team and financing to push into new markets?
  • Leadership: Your company founders led the go-go years. Can they evolve to lead a business in transition -- or is it time for them to exit as well?
  • Example Stage 4 Company: Datto, which is both growing (Stage 2) and pivoting (Stage 4) -- pushing beyond cloud backup into small business WiFi routers sometime in the fall of 2015.

5Stage 5 Exit. Exit Stage

This milestone can appear at anytime. And it doesn't always involve a company sale. Instead, it may involve your personal exit from the company -- through an executive transition, retirement, coup d'état... and even your death.

Face it: You are going to exit the business at some point. Every IT service provider will eventually go through a leadership change or an ownership change. (After all, you can't outrun mortality.) With that reality in mind you might as well maximize your upside -- and your company's upside.

Ideally, you've regularly grown bookings, recurring revenues and net income -- steadily increasing your company's valuation from year to year. Also, you have a clear ownership agreement in place (from Stage One) outlining how ownership and leadership changes are managed.

The exit stage may involve (A) an unsolicited bid to acquire your company or (B) retaining a financial advisor/broker to help sell the company. This stage could also involve an IPO (initial public offering), which allows earlier-stage investors, vested employees and designated shareholders to take money off the table.

This stage could also involve a wind-down -- during which ownership basically closes the business because there's no value in moving forward.

Typical challenges at this stage include:

  • Information access: If co-owners don't have cross-function access to all financial and business accounts, basic company tasks like payroll could stop if one owner is incapacitated.
  • Executive stress: Which leaders want to sell, which leaders want to retain ownership, and what does that mean in terms of an overall business transition?
  • Valuation: What's the business actually actually worth, and what metrics determine the valuation?
  • Finding the 'right' exit: Whether it involves new leadership or new ownership, you'll need expert advisors to find either the right talent or the right buyer.
  • Customer and staff retention: Any chatter about ownership or leadership changes could spook customers and team members.
  • Timing: Will new ownership want existing leadership to remain with the company -- in what roles and for how long?
  • Contingency planning: What if no buyer is found?
  • Example Stage Five Companies: Check our list of recent VAR and MSP M&A deals.

Balance IconBalancing Strategic and Tactical Planning

Each stage of your business is part of your strategic path forward. Even as you put certain strategies in place, your team must also manage tactical day-to-day tasks. The latest sale. Customer onboarding. Support. Payroll. And so much more.

As our name suggests, Channel E2E looks forward to documenting each stage of your journey -- from entrepreneur to exit.

Research IconBackground: The Business Stages

As we developed ChannelE2E's content and business plan, we carefully reviewed "business stage" concepts from American ExpressHarvard Business Review; Just In Time Management; and Yahoo Small Business (among other sources).

Next, we considered our personal journey from entrepreneur to exit -- launching, building and then selling our previous company to Penton Media. While we weren't IT service providers, many of our experiences during that business build-out (2008-2011) and successful exit (2011-2014) potentially parallel the recurring revenue and business transformation journey you're on.

Based on our research, experiences and market view, we came to one conclusion: We had to launch ChannelE2E.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.