Read an Excerpt
How to Write Your Own Business Plan in Order to Get Financing for Your Business
Excerpted from Financing Your Small Business by James E. Burk and Richard P. Lehmann ©2004
A business plan is a blueprint of what your business is and what you want it to become. The business plan describes a serious problem suffered by individuals or organizations. It shows how your solution to that problem is much better-not just marginally better-than those that already exist. The plan shows how you will implement your solution, grow your company, and create ownership value.
Generally, business plans take two forms-one is the plan you write to raise capital and the other is the plan that represents ongoing evolution of your business. You will find that both forms must be updated frequently to incorporate your latest progress and achievements.
This section focuses on the plan you write to crystallize your business strategies and raise capital. Numerous resources exist in print and online to assist you in writing a business plan. These sources range from business plan software like BizPlanBuilder (www.jian.com) to the Small Business Administration's website at www.sba.gov, to classic works such as the Venture Capital Handbook by David Gladstone.
The private placement memorandum (PPM) is a somewhat stylized disclosure document, prescribed by federal and state securities laws. The PPM serves a different function than the business plan. The PPM is a legal retail document and the business plan is a strategic wholesale document. In other words, when you go to individual investors to raise capital, you use the PPM as your offering document. When you approach larger investors, sometime called angels and institutional investors, including banks or financing institutions, they are more likely to ask for your business plan.
A business plan allows you to address the essential issues of your new business, such as the unique benefits and competitive advantages of your products or services, your market opportunity and marketing plan, and how you intend to capture a defensible share of the market. The financial statements (income statement, balance sheet, and cash flow analysis) accompanying the plan will give you, your management team, and potential investors a roadmap of the next three to five years of your business. Your financial projections should not exceed five years, as too much can change in that amount of time. Three years is generally sufficient. What matters is that you select a reasonable time frame during which you can achieve your stated goals.
STRUCTURING YOUR BUSINESS PLAN
Before discussing the contents of a business plan, it needs to be clear that a business plan is a management tool-it is not a legally required document. If you have an existing business and intend to continue that business without specific plans for expansion or other significant change, then you may not yet need a business plan. If you are going to register with eBay to sell your grandmother's china online, you may never need a business plan (although you do need your grandmother's permission or that of her estate).
A business plan should be a living document that evolves with the business and is constantly a work in progress. Business planning is a constant process, not a brief project. Internally, the business plan is a useful management tool when it is continually updated to reflect the marketplace. It should not be treated as a paperweight. Externally, the business plan often secures bank financing and attracts private or institutional investors. When your company is more mature, a business plan may serve as a basis for a strategic alliance, a merger, or an acquisition.
Assuming the business has been determined to be generally feasible, turn to the specifics of the plan. Investors want to know some very fundamental information.
? What is your business?
? What is the market for the product or service?
? How big is the market for the product or service?
? Have you segmented the market into digestible pieces?
? What is the revenue model (i.e., how does the business identify and sell to its customers)?
? What have you done to develop the business model?
? Have you identified all the resources you need to support the revenue model?
? How does the business make money?
? Why is this product or service unique?
? What qualities give it a competitive advantage over existing products or services?
? How is it better, faster, and cheaper than other choices available to your customers?
? What tangible assets does the company own?
? What intellectual property (trademarks, patents, trade secrets) does the company own?
? Who is in management and what are their backgrounds?
? What does the investor get for the investment?
? How much will the business be worth?
? How long will it take to be profitable?
? What is a reasonable risk assessment?
Do not be intimidated by these questions. Very few beginning businesses will have all of these questions fully answered from the start. However, sophisticated investors get hundreds of business plans to read. Your task is to write a business plan that is sticky-a plan that piques the interest of an investor to look further at your business. It has been said that one of the purposes of writing a business plan is to get a meeting with a capital source. A general outline for a business plan follows.
Cover Sheet and Table of Contents
The cover sheet should contain the name of your business, CEO, and contact information (including the address, phone, fax, and email for both). If you have a spiffy logo, the cover page is good place to introduce it. The next item should be a table of contents of the major topics contained in the business plan. Some reviewers like to have the various sections tabbed for easy reference.
This is the most important part of the business plan because it is the part read first and determines whether the reader goes any further. The executive summary gives a brief synopsis of:
? the company's strategy for success;
? the company's unique business proposition;
? how your business proposition offers a competitive advantage;
? the market you are addressing;
? a description of the product and services offered;
? the management team's qualifications;
? key financial data and a statement of funds required; and,
? a statement of how you will either pay the funds back or how the investors will receive a return on their investment.
All of these brief topic descriptions will be expanded in the business plan. The executive summary should be brief, usually no more than two pages. Typically, the executive summary is the section written last, after the whole business plan is completed.
Statement of Purpose or Mission
This is where you articulate the vision of the company and its management. Some writers have called this the distinctive value proposition of the company-the formula you have devised that delivers goods and services to your customers better than the competition does.
Description of the Business
In this section, you are giving the history of the business entity. For start-ups, the following information is recommended:
? name of the business;
? legal form of the business (corporation, LLC, partnership, etc.);
? state of organization;
? when it was organized;
? location of the business;
? brief description of the owners/founders; and,
? stage of development of the business-conceptual, start-up, emerging, mature.
Description of the Products or Services Offered
Describe your products and services and show how they are related to your mission. What is your business? Be clear. Many business plans do not begin to discuss the actual business of the company until the middle of the plan. Most investors will not be that patient. Tell it up front and tell it in plain language. If the product is highly technical, save the details for inclusion in an appendix. Keep the discussion on a strategic level. The potential financers are probably not yet interested in tactical details.
On equal footing with the products and services offered is the credibility of the management team of the company. Investors say that the three most important factors for success in business are management, management, and management. In this section you will be providing a synopsis of the management team and their qualifications. You can include full résumés in an appendix. Investors, especially sophisticated ones, would prefer an A management team and a B idea to a B management team and an A idea.
What differentiates the A team from the B team is a history of solid success and accomplishment. It proves the existence of skills and experience that can mean the difference between success and failure. Do not merely state that the marketing executive spent decades with a Fortune 500 company. Instead, specify the revenue growth and profitability results achieved in products and divisions for which the executive was responsible.
Many start-up ventures have difficulty attracting an experienced management team before their business has been tested in the marketplace. One way to offset any lack of depth on the management team is to establish a board of advisors and populate it with persons well-known in the business and professional community. Often, advisors become more interested in the business and can be recruited to join the management team. Alternatively, they may introduce you to qualified management candidates.
Marketplace and the Competition
The marketplace and competition section helps you understand and define your market, the demographics and psychographics of your target customers, your competitor's products or services, and your business risks.
Describe the target market for your product or service and the trends in your industry. For example, your market may be consumers between 25 and 40 years of age in the Rocky Mountain states or the upscale furniture industry in Chicago. Drill down to the specific market niche that fits your situation.
How large is your niche? Investors look for products that have scalable markets; that is, niches capable of expanding with the acceptance of the product in the marketplace.
How large a share of the market can you capture, and over what time? Who are the people who will buy from you? Why will these customers buy from you and not your established competitors?
Describe your competition as specifically as possible and do not ever state that you have no competition no matter how unique your product or service. It is said that the only companies that have no competition are those that have no customers.
Marketing and Sales Plan
The marketing and sales plan section of your business plan includes your advertising, promotion, pricing, profitability, selling tactics, distribution, public relations, and strategic business relationships. It answers the question, What marketing vehicles will you use in your business-advertising in print and broadcast, direct mail, product brochures, trade shows, public relations? You should also discuss how your product would be sold, including your distribution channels and methods.
The financial information section addresses your ability to make money in your proposed business. Your company's capital requirements and the profit and wealth potential are analyzed and demonstrated here. Include any financial history as well as your forecasts in the financial statements. Normally, your projection should forecast at least three years out. Remember that financial projections are only as good as the underlying assumptions, which must be uniformly applied to the cash flow statements, income statements, and balance sheets. Once you have completed the financial statements, review the business plan and make sure the language and examples in your plan are supported by and consistent with the financial statements. Some of the assumptions you will wrestle with are revenues, marketing expenses, research and development costs, general and administrative expenses (G&A), inventory, accounts receivable, property and deprecation, debt and interest expense, and cash. Do not shirk from this task. It will cause you to seriously analyze, perhaps for the first time, the financial essence and feasibility of your business proposition.
Avoid the use of hockey stick financial projections-financial statements that skyrocket during the last year or two of the planning period. It is probably not reasonable to assume that the level of marketing, production, and other resources can grow fast enough to accommodate the hockey stick. It is also unreasonable to assume large sales volume during the first year when your business is still in a conceptual or start-up stage. One venture capital speaker at a recent conference, asked about their internal review of business plans, said "[we] take their projected revenue, cut it in half, double the expenses and then see if it still makes sense."
Some business plan software allows you to prepare financial projections. If you get easily lost in the numbers, this may be a good time to hire an experienced financial executive to help you engineer your business.
Time Frame and Benchmarks
You may wish to provide a section that shows the benchmarks or significant developments in the life of the company and the projected time frame in which these events will occur. For example, at the end of month three-develop a prototype; at the end of month six-solicit manufacturing bids and file for patent protection, etc.
The funding request is a statement of how much money you need, why you need it, how you are going spend it, and how the investor is going to be rewarded. In the case of a loan request, the return to the lender is the amount borrowed plus interest. In the case of an equity investment, an exit strategy (IPO, acquisition, merger, sale of the company, or stock redemption) is required. Determine what the typical wealth creation event is for your industry and how business values are determined.
The advantage of having a shorter business plan is that you can include more lengthy materials in the appendices. At a minimum, include the full résumés of management. You can also insert articles on your product or the industry trends, test results, marketing studies, or any other information that supports the main plan.
You will need a cover letter when forwarding your plan to someone for review. For a start-up company, a summary business plan of approximately ten to fifteen pages may work for you. Most beginning companies do not have an extensive history of operations and therefore do not initially need a twenty- to forty-page plan.
QUESTIONS TO ASK
Burke Franklin, President of Jian Tools for Sale, Inc. and the creator of BizPlanBuilder software, suggests questions to ask in formulating your business plan.
? What type of business do you have?
? What is the purpose of this business?
? What is the key message or phrase to describe your business in one sentence?
? What is your reason for starting your own business?
? What is your product or service?
? Can you list three unique benefits of your product?
? Do you have datasheets, brochures, diagrams, sketches, photographs, related press releases, or other documentation about your product or service?
? What is the product application?
? What led you to develop your product?
? Is this product or service used in connection with other products?
? List the top three objections to buying your product or service immediately.
? When will your product be available?
? Who is your target audience?
? Who is your competition?
? How is your product differentiated from that of your competition?
? What is the pricing of your product versus your competition?
? Are you making any special offers?
? What plans do you have for advertising and promotions?
? How will you finance company growth?
? Do you have the management team needed to achieve your goals?
You can also include this template as an initial summary for bankers or investors. You should have the answers to these questions readily available when seeking a loan or investors for your new venture. Some of these answers may be appropriate to include in a cover letter for the company and may accompany the executive summary document.
CONSULTANTS VS. DO-IT-YOURSELF
You are encouraged to write your own business plan-at least the initial draft. If you are not experienced in this process, use software to assist you. Entrepreneurs need to answer the fundamental questions. What business are you really in? How does it make money and build value? From those questions flow the ways and means of entering the marketplace and how much it is going to cost.
However, you can hire a consultant to help you polish your plan. Many entrepreneurs use an accountant to assist with the financial analysis and projections. Remember, the soundness of financial projections is largely dependent upon the underlying assumptions. Using estimates that are based on sound experience, relevant knowledge, and thorough research will give credible and realistic results.
In expressing financial projections, you may wish to present a conservative version and one or more optimistic versions, or worst case, expected case, and best case scenarios. This can show the investor that your conservative version is viable and more favorable conditions generate better results. Projections have a funny way of coming back to haunt you if you do not meet investor expectations. Be as certain as you can that you can make the numbers.