The 5 Stages of Small Business Growth

11 min read

In the United States, 99.7% of all businesses qualify as a small business (defined as having fewer than 500 employees). They are responsible for the employment of almost 57 million people.

During the average year, 60% of all new employment opportunities are created from the efforts of small businesses.

Even small businesses that have fewer than 50 employees make a large impact on local economies. 39% of the job opportunities which are created in the average year come from the smallest businesses that are currently operational.

That means there’s a huge variety in small businesses.  Yet, remarkably, most small businesses encounter the same challenges and opportunities as they grow through similar stages.

hbr 5 stages

In 1983, a famous Harvard Business Review article pointed this out:

Categorizing the problems and growth patterns of small businesses in a systematic way that is useful to entrepreneurs seems at first glance a hopeless task. Small businesses vary widely in size and capacity for growth. They are characterized by independence of action, differing organizational structures, and varied management styles.

Yet on closer scrutiny, it becomes apparent that they experience common problems arising at similar stages in their development. These points of similarity can be organized into a framework that increases our understanding of the nature, characteristics, and problems of businesses ranging from a corner dry cleaning establishment with two or three minimum-wage employees to a $20-million-a-year computer software company experiencing a 40% annual rate of growth.


By understanding the 5 stages of small business growth, you’ll be able to manage the growth of your company more effectively.



Stage 1 of Small Business Growth: Existence

Congratulations! You’ve officially taken the first steps toward small business ownership. That automatically puts you into the first stage of small business growth.

At this stage, your business takes its very first steps. You begin to take the seeds of an idea and let them grow into something that bears the fruits of revenues in time.

In the first stage of growth, there are two primary problems which must be immediately addressed. The small business must be able to obtain customers, then deliver the product or service which has been promised.

To address these issues, you must find answers for these three key questions.

  • Is it possible to get enough customers, deliver products, and provide services in a manner which allows for an idea to become a viable business?
  • Could one key pilot production process, or customer production process, be expanded into a broader sales base?
  • Is there enough money available to cover the various demands for cash that happen during the start-up phase of the business?

Unless a business has downgraded from an upper stage of growth, much of the work that happens in this first stage occurs before the business is officially incorporated.

As the owner of this business, you will be testing out your ideas to see if it is something that can be brought to the market. You’ll gather feedback from your family and trusted friends.

You might even let a few people you’ve identified as a potential future customer try out your idea to see if they like it. If you have a B2B idea, you might work with specialists in your industry to determine if there is value in your idea.

You must determine if the idea you have is really worth pursuing.

In the stage of small business growth, most organizations are very simple. The owner or founder of the business does everything. If there are employees hired, the owner/founder directly supervises them.

All workers must have some type of experience in the industry where the business wishes to operate. There are few formal plans or systems being followed.

In short, if you’re the small business owner, then you are the business.

Any business which has not yet been able to stabilize their product quality, or their production, qualifies to be in this stage. Most small businesses never make it out of this initial stage.

small business survival

In 1989, Bruce Phillips and Bruch Kirchhoff, concluded that a new business with 500 or fewer employees has an average survival rate of 39.8% after 6 years. Even then, there were variations in that figure based on the industry and type of business being studied.

The Small Business Administration puts it this way:

About 50% of all new establishments survive for 5 years or more, and about 33% will survive 10 years or more. As one would expect, the probability of survival increases with the age of a business.

In the United States, a small business is defined as a company with fewer than 500 employees. That is why Phillips and Kirchhoff approached their study in that specific way.

At some point in this stage, you will need to incorporate your business. You must turn your business into a legal entity.

You will then finish developing your products or services to create a value proposition for your targeted audience. Then you’ll take the initial feedback from all these efforts to refine your products, services, and presentation.

If your business is able to survive the demands of energy, time, and financial well-being, then it will graduate to the second stage of small business growth. If not, then you’ll be out of business and searching for a new opportunity to enter again at this entry-level stage.


Stage 2 of Small Business Growth: Survival

If your small business is able to reach this stage, then it has demonstrated that its proof of concept is viable.

You have enough customers to stay in business. You’re able to satisfy their needs in a way that is deemed to be sufficient.

That means your core issues shift toward a better relationship between the revenues you’re able to generate and the expenses you incur.

There are three primary issues which must be evaluated at this stage of small business growth.

  • Do you have enough cash generation capabilities to break even and cover maintenance expenses when capital assets begin to wear out?
  • Does enough cash exist to keep the company in business when there may be a period of economic decline which occurs?
  • Is the cash flow enough to allow your business to earn an economic return on the assets and labor which exists under your banner?

Any business can transition from Stage 1 to Stage 2. At the second stage of business growth, employees are generally required to meet obligations.

As the founder or owner, you would continue to directly supervise the company. You may hire a supervisor, foreman, or manager to oversee a team of people who are working to carry out the duties of your general operational needs.

To be efficient, your manager must receive explicit instructions with clear definitions to create the continued results your small business requires.

Your manager would then direct their team according to those instructions.

During this stage of development, the goal is still survival, even though you’ve made it past the initial stage. There is minimal formal planning within the context of the company. Your systems development is still minimal.

You continue to be the face of the business as its owner or founder.

It is not unusual for small businesses to stay in this stage over the course of their entire existence. Family businesses often stay here, working hard for profits, while taking growth opportunities if they come along.

When the family is tired of operating the business, then they close up shop, retire, or move onto the next project.

You can be successful as a small business owner and never get out of these survival stages. Don’t judge yourself harshly if it happens to you.



Stage 3 of Small Business Growth: Success

Once a small business is able to stabilize its existence, build consistent cash flows, and earn consistent positive returns, it graduates to the third stage of small business growth.

At this stage, there is an important decision to make.

Do you try to exploit the accomplishments earned by the company to keep expanding? Or do you keep the company in a stable pattern of revenues that is profitable?

What you decide will determine the path your company follows in the future. If you fail to make a choice, your company will slide back into Stage 2.

We’ll call the two substages of this third stage “growth” and “disengagement.”

If you choose to continue growing your small business, your resources must be marshaled toward new growth.

You will be taking your cash and your borrowing power to finance more growth. That can be a risk which puts everything on the line for you once again.

To limit your growth risks in this stage, you must take steps to ensure that your business remains profitable. If you run out of cash, then your growth (and your business as a whole most likely) ceases. To make this transition profitably and successfully, you’ll expand your pattern of hiring to bring on people who specialize in specific areas.

You will also need to install systems which anticipate your upward scalability. Budgets are required to plan future strategic decisions. This process still involves the owner or founder, but at a reduced level when compared to the previous stages.

If the efforts to grow are successful, then your company will graduate to the next stage of small business growth. If not, then then the disengagement substage might be the better option for your company.

Under the disengagement substage, you make the decision to begin stepping away from the company. It has reached what you feel is the peak of its potential.

Your company has the right size for market penetration. Processes are in place to keep the company profitable almost indefinitely. You have functional managers which are able to maintain this status without your input.

There are still planning requirements and operational budgets to create. Your job is to monitor the company to ensure it is able to maintain the status quo.

As the business matures, you can move apart from the operations of the business entirely, profiting from your role in building that growth in the first place.

Many small businesses which have the goal of being sold to a larger company often move toward this substage purposely, as it encourages others to perform regular valuations of the company.

Small businesses which choose the disengagement option do not advance to the next stage of growth.

If your small business is unable to survive either substage at this point, then it will drop back into one of the previous two stages.


rocket launch

Stage 4 of Small Business Growth: Taking Off

When your small business reaches this stage, you may find that growth happens very rapidly. You will be tasked with how you’ll be able to finance that growth in some way.

Delegation is one option to consider. Some small business owners are able to improve company management by bringing in people who have knowledge on how to manage a business that is developing more complexities.

By stepping back to let others handle rapid growth, you can stay focus on the creative elements which helped you to create the business in the first place.

Far too often, however, a small business owner decides that they’ll delegate, then not really do it.

“Your most important task as a leader is to teach people how to think and ask the right questions so that the world doesn’t go to hell if you take a day off,” says Professor of Organizational Behavior Jeffrey Pfeffer, based at Stanford’s Graduate School of Business.

“Most people will tell you that they are too busy to delegate,” says Carol Walker, who is President of Prepared to Lead, “that it’s more efficient for them to just do it themselves.”

There are plenty of excuses that can be used to explain a lack of delegation. The problem for the small business owner is that it can be difficult to recognize the difference between a fact and an excuse.

People who need to delegate in this stage of small business growth, but fail to do so, typically experience these common symptoms.

  • You are working long hours on a consistent basis.
  • You feel completely indispensable to the company.
  • Your employees are not as energized about the company as you are.
  • You feel like your team doesn’t take ownership of the projects you ask of them.
  • You feel like you’re the only one who actually cares about your business.

There are a variety of reasons why these symptoms begin to appear.

Some small business owners are unchecked perfectionists. They truly believe it is easier for them to get work done to their standards. Some might even feel like their approach is better than any other approach.

There is an issue with power and delegation for small business owners as well. Some owners feel that passing on some work to someone else detracts from their own overall importance.

Confidence issues come into play as well. Small business owners who feel like their employees might upstage them will often hoard work as a way to feel confident without feeling threatened.

No matter how confident you may be in yourself, these biases are always lurking. They tend to strike when you least expect them.

That is why this stage of small business growth requires you to be proactive about who you are, what you can do, and what others in your company can do for you.

There is still the issue of cash to consider when your business begins to take off as well. Are you going to have enough cash around to satisfy the demands which come with rapid growth?

Can you tolerate a debt-to-equity ratio that is going to be high?

When you reach this stage, most small businesses have become siloed and de-centralized. You’ll likely have a C-Suite supporting you at the executive level, then a senior level of management to support them, and a series of entry-level supervisors which run your teams.

Your teams must work on refining your systems to help them resist the growing pains they continue to endure.

You must have operational planning and strategic planning as points of emphasis with your leadership team.

In this scenario, an owner is able to step away from the business if they wish. Their presence, influence, and control can still be felt in many ways, especially if they’re able to maintain a controlling interest in company stock.

This separation may be voluntary or involuntary.

This high-growth stage creates a turning point for every small business. Many businesses slip away from growth because they run out of cash, are unable to delegate, or the market loses interest in what is being offered.

Companies can continue at an equilibrium state under the third stage of development after failing at this stage. Some may drop back down to the survival stage.

For those who experience success, the final stage of small business growth is waiting for them in the future.



Stage 5 of Small Business Growth: Maturity

Once a small business reaches this final stage, there are only two primary concerns which must be addressed.

The financial gains which came from the successes in rapid growth must be consolidated in some way. Then the staffing within the company must expand fast enough to reduce or eliminate inefficiencies which tend to develop when growth occurs.

At this stage, your ownership of the company and the identity of the company become quite separate. You have arrived.

Companies in the final stage of small business growth experience the advantage of size. They have access to stable financial resources. They’re able to recruit experienced leaders.

Although there isn’t another growth stage to reach, it is possible for a company to fall out of this mature stage. That tends to happen when the company loses its identity. It may also happen if the company engages in conduct that is immoral or illegal.

If your company is unable to bring in people that can provide innovative input, then it will fall out of this growth stage if the market or environment experiences a major change.

One of the key challenges for mature businesses is that small businesses in earlier stages of growth can often be better suited to identifying new trends and opportunities and become disruptors.

Consider A Mentor

The challenge of running and growing a business never ends.

But recognizing that almost all businesses faces certain similar challenges at certain stages of growth can not only be comforting when you’re stressed, it can help you to identify outside resources.

Though your challenges may feel unique, other leaders have inevitably been there and done that.  Many are delighted to help others navigate these challenges.  Consider finding an appropriate mentor to help you.