The Most Important Things about Business Planning In the previous articles, we talked about how to finance your business and what tax benefits are available for small businesses in the United States. We have already said that every stakeholder wants the business to succeed: your friends and family, your government, your investors, and your clients. Friends and family derive natural pride and even financial rewards from their support of a successful business owner; the government sees small business as the primary driver of the economy and as a source of tax revenues; investors are interested in continuous and ever increasing cash flows; and customers vote with their dollars and loyalty to demonstrate how successful you are at satisfying their needs. However, no one is more interested in the success of your business than you are. That is why you are impatiently waiting for our next monthly column which hopefully will provide you with some useful insights into how to make your business succeed. You already know from our previous articles what kind of capitalists you will be dealing with when you decide to embark on a fundraising journey. But what do you approach them with? What do you show to the potential investor you luckily ran into at that BBQ party last Sunday and whose curiosity about your winning business idea you have managed to gain?
Remember that night when you first dreamt of this idea? Remember how you scribbled some seemingly far-fetched thoughts on a piece of paper? This was your first conscious step toward business planning – a process of critical importance to any business person, whether you are a self-starting inventor-enthusiast, a CEO of a multinational corporation, or the owner of a small corner bakery. Business planning is a very painful and time-consuming process, and it can be the death of your undertaking if it is handled improperly. The process starts with a document (or, rather, a set of documents) whose seriousness many underestimate and whose grim ghost haunts many others – The Business Plan.
In this article, I will talk about the Business Plan, what constitutes it, who reads it, what other documents supplement it, what its purpose is, and how to best prepare it.
What Is a Business Plan?
A good definition of a business plan is a “document that spells out a company's expected course of action for a specified period. Frequently, it is used as a prospectus for potential investors and lenders .” From this definition, one can see that a business plan serves two general purposes. First, it is used internally develop the general strategic vision of a company or a new project. It analyzes the situation of the company, the market, the business model, and the viability of long-term success. From this analysis it becomes clear what actions should be taken and how. It specifies the important issues that management and all of the stakeholders should be aware of, and how to deal with them. Secondly, it is used externally to raise capital for new or already existing ventures. The understanding of how to best utilize your business plan comes from an understanding of its audience.
Who Is Your Audience?
The two general uses of your business plan also reflect on the two general categories of the type of audience whose attention you are trying to capture: 1) the audience internal to your business, and 2) the audience outside of your organization.
When you address the various people with a direct vested interest in your company – employees, management, owners (shareholders), and partners – you would like to convince them that the new direction you propose is strategically prudent and financially viable. Obviously, depending on whether you address the management, the employees or the owners, the tone of your business plan should capture their interests. It may even be necessary to adapt the tone of the language you use for these different audiences. This type of business plan should be brief and to the point. It does not need to contain the history of the company, management bios, organizational structure, or other internal aspects of the organization that the existing stakeholders should already be familiar with. The document should have a structure similar to the business plan that you will create in order to find financing. Such business plans provide useful roadmaps for both short and long-term planning depending on the goals of the organization.
It is my guess that a good number of you are reading this article in order to learn where and how to begin your business, and how to acquire the necessary start-up capital. It begins by convincing investors that your idea is an opportunity that meets their two basic criteria – high returns, at the lowest possible risk. Therefore, if your business plan is aimed at the investor community in the hopes of raising money, it will have to do a very good job at demonstrating both of these points from every possible angle.
Language and the Tone of the Business Plan: Making the First Impression My job as a management consultant requires me to read business plans that accompany money raising proposals from companies in a variety of fields. I hate to tell you that most of the business plans I read are sloppy. My guess is that they are written just to satisfy the requirement that “you’ve got to have a business plan”. But really, why do you need one?
Going to the heart of the matter, your business plan makes the first impression of your idea on an investor. It will either earn you the right to present your idea in front of an audience who can write the check you need to make your idea a reality, or it will set you up for failure. Therefore, it is your duty to make that first impression as good as possible.
That’s why it’s crucial to ensure that the writing style is excellent, that the thoughts are presented in a clear and professional manner, that there are no spelling or grammar mistakes, and that the formatting is consistent throughout and is visually pleasing. Think of a job resume. You can be the most outstanding specialist in your field with an Ivy League education and computer skills that would make even Steve Jobs blush, but if your resume does not communicate your abilities to an employer, you will not achieve success. A sloppy resume with spelling errors or inconsistencies would demonstrate that you are not the professional you claim to be. The same is true for a business plan. You will use one to gain access to your investors, and they will see it before they see you. Therefore, read your business plan many times over until you are absolutely certain that you have achieved the impossible – perfection.
The Content of a Business Plan So, what does an excellent business plan consist of? Generally, a business plan must be attractively presented and should satisfy all the potential questions and concerns of any investor. Most importantly, the investor has to know what risks are involved, how they have been minimized, and how a healthy return can be promised on their investment. These requirements will be addressed in the various sections of a good business plan. We will go over these sections one by one.
• Executive Summary One way to immediately gain the interest of an investor is by writing a concise, informative, and persuasive executive summary. This is the first section of a business plan that the investor will read and is also often the last. It precedes the table of contents and must immediately capture the attention of the reader, generating enough interest to make him want to read further. Therefore it is unequivocally the most important part of a business plan. In fact, it is so significant that when you first present your business idea to a potential investor, you will only show the executive summary. The reason for that is that the investor (if he is a sophisticated professional) typically has so many other business ideas to review that he will have neither time nor patience to read the entire 60-100 page document and will only look through the summary to decide whether or not this concept is worth his time. If you imagine having to go over hundreds of such ideas every month, you can easily understand why your business plan has a very, very good chance of ending up in a trash can.
In three to six pages, the executive summary must capture the investor’s interest, impress him with its quality, and convince him that you will be able to provide a unique opportunity that is a sound and profitable investment. Once again, an analogy with a resume is appropriate. Just as a resume has the purpose of getting you an interview, the executive summary has the purpose of getting you a face-to-face meeting with an investor.
This is when other parts of the business plan will come into focus. Your investor might not read the entire set of documents but you will absolutely have to have it on the table to demonstrate your work, commitment, and thorough research. Moreover, you will have to be able to predict any possible question that might arise during the meeting and point to the answer in your business plan, demonstrating your diligence, knowledge, and dedication.
• Table of Contents Just as in any other long and tedious document, a table of contents is needed to guide the reader through the labyrinth. Naturally, it has to be well-organized and well thought out. A very serious warning needs to be issued at this point. Before you are finished with the business plan, it will almost certainly undergo multiple revisions. In fact, you should make sure that revisions do happen! In the final draft, it is extremely important that the organization of the table of contents completely corresponds to the actual organization of the plan and that pages numbered in the table of contents are in line with the page numbers of the document.
• Mission Statement and Objectives Any company has to have a mission in mind and it can’t be just to make money. The most important questions to ask yourself before you start your business are: “What niche am I going to fill in the market? What is my raison d’être? What defect in the market place am I correcting? What is my value proposition? What unmet need for my potential customer am I able to meet and how am I able to do it better than anyone else?” Answers to these questions will have to be reflected in the mission statement and the objectives of your business.
A good mission statement is usually one paragraph long and it should illustrate where your business is heading, what kinds of customers it serves, and what problem it resolves. Examples of mission statements could be found on many corporate web sites or they can be written by professional advisors to your company as part of their work on your business plan. The key issue is for you to have a complete understanding of your own mission: the better you understand your own mission, the better you can convince others of its purpose and communicate its inherent value.
• The Concept and Company Description This section elaborates on the mission statement and explains what product or service the company will sell and what business model is going to be utilized to maximize revenues. The section will present the core of your idea – what your dream is all about, why you think you will succeed, and why your idea is so unique. Uniqueness is extremely important here. What makes you so different from the thousands of other lemonade-makers out there? Are you competing on the basis of quality or cost? How big is your market? Will the business be scalable, and if so, will you be able to gain economies of scale and capture a large percentage of the total market share? At the same time, uniqueness should not overshadow the quality of your idea. If you came up with a concept that you are confident (as evidenced by extensive research) has never been done before and there is no current competition, you have to ask yourself, “Why?” What stops others with more experience and resources from doing it? What makes you believe that this idea, however unique it is, will be profitable and consistently so? Remember that most investors are only interested in a healthy return on their investment, and not in altruistic support for your invention. Sometimes, an improvement on the most commonplace product or service can become more successful and easier to implement than a unique widget that will change the world, if the demand for it is simply not there or the economics of its production are not in line with market realities.
• The Management Team It is always a good idea to put yourself in the investor’s shoes when compiling a business plan. To whom is he going to give his hard-earned cash? How credit-worthy are the people that you are bringing on your team? How good are their management skills? Can they make the business successful and provide the investor with a great return? What experience does the team (or team’s advisors) have in this industry and in this type of business? All these aspects should be reflected in a section that describes your management team. Their background and relevance to the business idea described in the business plan are of paramount importance. The more professional and capable your team appears to be, the better your chances will be that the investor will feel secure. Once again, please remember that even a mediocre, commonplace idea rooted in a well-planned organization with a solid management team will be more successful than a great idea backed by poor business planning and a rag-tag management team.
• The Market Even the most groundbreaking and outlandish business undertakings are related to other businesses in the same or complementary industry, and appeal to similar customer groups. Therefore, it is absolutely necessary to understand what the industry is, who you will be competing against (there is always someone), and who your customers are. As you can see, there are essentially three elements to your understanding of the market: 1) the industry and the niche, 2) the competition, and 3) the customers. Market analysis will have only one overarching purpose: to understand whether the market is worth the investment.
The Industry and the Niche An industry, just like an individual company, has a life cycle, and this is related to how fast you can expect the industry to grow. A market driven by new technologies is less certain but can enjoy higher rates of growth (for example, various IT-related industries) than a mature industry with less potential for tremendous growth but more security as an investment opportunity. The industry’s age and the corresponding growth potential can influence what kind of investors you will be soliciting down the road.
Within each industry there is a niche that your business will occupy, and you will have to make sure to estimate the potential for growth within that industry. Moreover, you will need to compare the growth rate for the niche with the growth rate for the industry. For example, the airline industry may experience a slowdown (traditional airlines such as Delta and Northwest) but the low-fare domestic flights niche (JetBlue and Southwest) might be much more profitable and generally on the rise.
The Competition How does your business compare to others in your industry and your niche? Analysis of the competition will help you see where your company stands compared to others and define what your strategy for growth will be. It is important to have a clear understanding of how you will be able to compete. There are numerous tools available for such analysis (for example, Five Forces and SWOT analyses, which will be later discussed in a separate article on marketing and demand forecasting) and investors will be interested to see what your competitive advantage is as compared to other firms. Is it price? Is it quality? Is it customer service? Is it the best bang for the buck? In short, what can you deliver better than anyone else? How can you sustain this advantage for a long enough time to generate sufficient value for the investors and other stakeholders?
The Customer Who is your typical customer? How many of them are out there? What are the customer’s characteristics – demographics, psychographics? (This includes age, gender, income, ethnicity, social habits, social status, buying habits, preferences, cultural attributes, and so on.) When you understand these, it will also be clear how you should market your goods and services to them in the most efficient manner.
• Strategy and Marketing Now that you (and your investor) know everything about the firm’s market situation, you will need to develop a plan of how to best capitalize on it with the least amount of expenditures. How will you advertise your company’s product or service, and what it will cost? Will you need to do any public relations work, hire a large sales team, or develop strategic alliances? Will you have a very focused and targeted offering or a well-diversified and multilayered one? What are your goals and what is your game plan for achieving them?
Additionally, it is obviously imperative to develop marketing materials such as brochures, flyers, websites, and white papers. You will need materials like logos, letterheads, slogans, and business cards. Consistent branding and design will help to effectively get the word out to everyone in your target market segment about who you are and what you represent. They will create a recognizable and long-lasting stamp or image in the mind of potential customers who come across your materials.
Your marketing strategy should be in line with your specific position in the market. It is easy for a beginner to attempt to target the entire industry without developing a clear sense of where the company will be in a year, two, or ten. Therefore, it is important to see how sustainable the marketing strategy is in the long run. You have hopefully defined your company’s competitive barriers in the previous section – but how good will these barriers be to protect you against new entrants and current competitors, and for how long? What can you do to maintain your position and grow your market share?
• Operations In this section, you will need to be very specific about the day-to-day procedures and processes of your business. Where will the company be located? How large will the building or the offices will be and how much will you pay for the rent, or will you purchase the real estate? What kind and how many units of equipment will be needed for the required levels of production? How many employees will you need to have and how much will they earn? How large will your inventories have to be? What are the strong and the weak sides of your production process? What will your production capacity be? What will the supply chain look like? What procedures do you have in place to minimize any operational risks? In short, this section should contain a very detailed plan with all costs calculated and all processes foreseen. It will have to convince your investor that there will be no surprises in your daily operations and no sudden unexpected additional expenses that will undermine the prospects of the profitability of the business.
• Financial Planning Up to this point everything in the business plan seems to be solid because you have managed to demonstrate how and when you will become profitable. However, many readers might jump straight to this section to find out exactly how profitable the business will be according to your own projections. Your financial projections must be compiled in such a way as to show what your company will look like as a going concern. There are several parts to your financial projections.
An income statement shows your income as a difference between projected revenues and projected costs (including interest and taxes). It details the amount of money the company makes and shows where the money comes from.
A statement of cash flows shows the company’s cash inflows (from Operations and Financing) and outflows (to Investing) over a certain period of time.
A balance sheet demonstrates the balance between your company’s assets and liabilities leaving the difference between the two for owners’ equity in the company.
In addition to providing the financial projections, you might want to consider adding other important elements such as an identification of the revenue drivers, a break-even analysis (the revenue point where your company is just able to cover its expenses), a short and a long-term budget, and how your business ratios compare to others in your industry. This section should also include an explanation and justifications for the amount of financing you are ultimately seeking.
• Exit Strategy This is a crucial part of the business plan since it provides for a clear plan regarding how the liquidity event for the stakeholders will be created. If your investor is an equity investor (which is most likely the case if you are a start-up entity), then there are only two ways for him to get a return on the investment.
The first way is by having the business pay out a regular cash dividend from its profits. However, this is typically never the case for start-up ventures since, even if they are immediately profitable (which is extremely rare), they are still starving for cash necessary to propel the business forward and capture additional market share.
The second way for the investor to earn a return is by liquidating their shares at a higher price than they were originally purchased at, as a result of value that has been created by the company’s management. This is the most sought-after and most common way for an investor to get a return on their investment, because it is the most lucrative and instantaneous option. However, liquidation can happen only as a result of several possible scenarios which I will briefly describe below.
1. IPO – this stands for Initial Public Offering. It rarely happens, and requires the company to meet many stringent requirements and to jump through many hoops.
2. Acquisition – this means that another publicly-traded company acquires the company in order to capture certain synergies, diversify their portfolio, obtain some IP (intellectual property), to gain access to clientele, or for numerous other strategic and financial reasons. In this scenario the old shares are exchanged for shares in the acquirer’s company, allowing the investors to liquidate the shares at a significant premium on the open market.
3. Merger – this is very similar to an acquisition but can often have somewhat different rules. For example, one common possibility is to have a reverse merger with an existing publicly traded shell that has nothing but a trading symbol on a stock exchange and some existing shareholders but which is looking for valuable assets and/or cash flows to be added in order to grow its share price. This can be somewhat complicated and is beyond the scope of this article.
4. Private sale of shares – this means that if an investor is able to find another private party who is interested in an equity stake in the same venture then they could arrange for a private sale of shares between themselves. However, this typically requires that the investor hold on to the stock for at least 24 months from the date of purchase before he is legally able to liquidate. Additionally, this rests on the ability of the current shareholder to solicit the interest of a new party in their shares, which can be a daunting task.
That being said, the investor should be informed from the onset about the potential type of the exit strategy that they can expect from this investment. Moreover, it is also very important for you as the founding member of the company to know what you are striving towards and when this will be expected to occur.
Venture capitalists earn their bread by providing equity investments to a broad range of young companies and are interested in diversifying their portfolio. Therefore, the duration of their investment horizon will be relatively short (3-5 years) and the exit strategy will need to be in line with their plans for your business. On the other hand, angel investors are more flexible with the terms and conditions of investments and, therefore, with your plans for your business.
• Risk Factors Every business has a certain amount of risk associated with it. If there is an opportunity for risk-less profit it is called an arbitrage opportunity, which typically doesn’t exist in efficient economies such as in the U.S. When arbitrage opportunity does exist, it literally lasts for only a few seconds. Therefore, in your business plan you will need to define the risk factors associated with it, particularly the systematic and unsystematic risks.
• A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree (for example, general economic conditions – GNP, interest rates, inflation, oil prices, etc.).
• An unsystematic risk is a risk that specifically affects a single asset or a small group of assets (for example, a company strike, a law suit against the company, the death of a CEO, etc.).
You will also need to define any company-specific risks, legal risks, and operational risks. After that, you should demonstrate how you plan to minimize the risk factors showing potential investors that you do realize that risks exist but also have a strategy in place to reduce their impact and probability.
Other Supporting Documents The business plan by itself is incomplete without other important supporting documents of interest to potential investors.
• PowerPoint Presentation is necessary when your executive summary has impressed the investors to the point where they want to see you and your team in person. Essentially, it is an early marketing tool that should support you in presenting your business plan to the investors in a convincing and effective manner.
• Company Valuation outlines the value of the company and its assets to the investors. There are many techniques for valuing your business and it is always a good idea to use several methods before you can arrive at any final concrete number.
• Past Financials: If you are raising money for an already existing business (or are backed by one), you should be able to show the financials for the past three to five years.
• Future Financial Projections complement the business plan and provide the reader with hard numbers to back up your assumptions and valuation. The projections themselves should be based on other financial statements, including the income statement, cash flows statement, balance sheet, sources and uses of funds sheet, capitalization table, operating budget, demand forecasting, and much more.
• Private Placement Memorandum is a confidential legal document that contains financial, economic and other relevant information about your company. More specifically, it contains information about the exact offering for the investment round that the company is planning to undertake. It outlines the risks associated with this investment and provides a lot of legal protections for the potential investor.
• Subscription Agreement is a contract between your legal entity and potential investors about the terms of sale of the securities issued by your company.
• Term Sheet is a document summarizing the details of a proposed investment into your company which serves as the basis for a final business agreement.
• Detailed Resumes of the Management Team and the Board of Directors are extremely important and are used to demonstrate the value that the team brings to the table.
• Due Diligence Report or an Audit will demonstrate to the investor that a third party has reviewed the financial, economic and other nuances of your business and undersigned an objective neutral conclusion about it.
• Bylaws (or articles of incorporation) are a set of internal regulations and principles that will govern the management of the company, its board of directors and its shareholders. They provide guidelines that regulate the relations between all the parties involved.
Other Essentials Very often, an otherwise good business plan ends up in a trash can because it manages to bore or annoy your investor to a breaking point. Also, the investor might be so lost in a hurricane of data and unfamiliar information that he will feel inadequate to be able to carry out an objective decision regarding whether or not there is money to be made with your company. Therefore, make your investor’s life easier by including visual materials such as pictures, charts and graphs. Additionally, the reader will really appreciate it if you take time to explain your industry jargon in a nice glossary in the end of the document. Never ever assume that your words will be taken as statements of fact that don’t need to be explained or supported – please provide footnotes and cite independent sources for each number or assertion. These essentials will add points to your presentation and allow you to look more professional.
Common Mistakes to Avoid • Failure to Proofread Read your document several times during the process and several times after the final version of the text has been finished. As already explained, nothing can be more upsetting to a potential investor as an apparent lack of professionalism in your writing, even if your business plan is otherwise convincing. It also helps if a few pairs of eyes other than yours read it and provide content, formatting, grammar, and spell check assistance. After reading your document you might become insensitive to mistakes in the text or discrepancies with your numbers.
• Failure to Do Proper Research Have you hoped that investors will be unfamiliar with your target market? How unpleasant will it be for you when one investor on a panel points out something in your research that is not true, missing, or underestimated? Considering that possible source of embarrassment, research your market thoroughly, rely on several independent and trustworthy sources for your information, and let the objective truth be spoken through your business plan. If the truth is not good enough then neither is your business plan.
• Keeping Your Business Idea Secret Paranoia is the Big Sister of many start-up entrepreneurs. It is true, once you have given birth to your wonderful idea, you are afraid that there is someone sneaky out there who is ready to steal your cherished child to make a quick profit. However, keeping silent will prevent you from getting the attention and visibility you need to gather the necessary capital. Moreover, requiring VCs to sign non-disclosure agreements is a futile task that will get you nowhere because they always refuse to do so. Therefore you have to trust other people enough to give them your business plan (without the programming code or the patentable materials) and generate as much interest as possible. If your entire business model rests only on some secret idea, which if uncovered will give the key to anyone else, then it is simply not a business worth pursuing since everyone will discover the secret sooner or later. Being overly protective of your business plan will prevent you from becoming aware of many opportunities that otherwise would appear on your radar screen.
• Using Ready Templates Google “business plan” and you will find a multitude of organizations ready to feed you with all kinds of templates for business plan writing. Unfortunately, the truth is there is no easy way out. Completion of a winning business plan comes at the price of sweat and blood, and you will have to earn your chance to walk through the doors atop Mount Investor Olympus to dine with the gods. There’s one simple reason. Any investor will quickly sense plagiarism and see that no serious work was ever done on your part. If you are not serious about your business, why should anyone else be? The conclusion: don’t use templates!
• Not Using Outside Assistance Once again – you have to spend money in order to earn money. But spend it wisely – third party assistance will surely increase your chances of getting to your goal. Just as you would employ a lawyer to defend your case in court, hiring a business consultant will take most of this burden off your shoulders and allow you to get the job done right from the onset. Moreover, it will dramatically expedite the time it will take to reach the finish line. Professional consulting companies have the necessary manpower to support you on all sides. Can you be equally good at finance, operations, marketing, management, professional business writing, strategy planning, supply chain management, investor relations, accounting, research, and market analysis all at the same time? Probably not. Most reputable and professional consulting firms (such as Aginsky Consulting Group) can provide this diverse expertise.
I hope that I was able to provide some preliminary assistance for your business endeavors. Hopefully my description of the business plan writing process will convince you to take it very seriously. There is clearly a function that business plans serve which is to give birth to your business. You judge the importance of that.
Your personal business Consultant ---------------------------1By: Alexander Aginsky and Michael Voronenko Mr. Aginsky is the Managing Director of a globally recognized boutique management consulting firm – AGINSKY CONSULTING GROUP (ACG - www.aginskyconsulting.com Staffed entirely with multi-lingual MBAs from top schools, ACG provides a wide range of services to companies around the globe. For questions pertaining to this article or any other comments you can contact ACG at info@aginskyconsulting.com.
FROM A LOCAL SHOP TO A GLOBAL CONGLOMERATE Part IV - To learn more about this author, visit Alexander Aginsky's Website.
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