The Business Plan

Economy

Starting a new business or

growing an already existing one Demography Culture
requires careful planning. An Industry
entrepreneur is faced with the
challenge of making decisions in
an ever-changing business
environment, which is impacted Competitors
by external factors, many Political / Legal Global

beyond his/her direct control.

Technology
Source:
Hitt, Ireland, Hoskisson
The Dual-Purpose Document

The business plan is the evidence that the entrepreneur respects the
“seven p’s of business”: proper prior preparation prevents piss-poor
performance.
1. Internal document that helps defining the company’s strategies and provide
a plan for the future growth of the company. It is an evolving, rather than an
immutable, tool.

2. The entrepreneur in the right moment, can present a business plan to a

potential investor for raising capital.
The Business Plan and Financing the Venture

• According to Timmons (1999) “relying on raising money as an

indication that the idea is sound is a cart-before-the-horse approach,
usually results in rejection”.

• Writing and circulating the plan too early can be a costly mistake.
Properties of a Business Plan

• The plan is a logical implication of a set of hypotheses about a

perceived opportunity in terms of what is expected to result if the
opportunity is pursued in a particular way.

• It is easier to attract investors with a plan that sets out explicit

financial projections & milestones.

• Plans of new ventures are different: Based on conjecture, economic

modeling, and analogy to other ventures. They are going to be
scrutinized.
Properties of a Business Plan

• A well-written plan is one that is free of grammatical errors, concise,

and simple to understand. It clearly describes the company’s product
or service and tells the reader the amount of capital being sought
and the way it will be repaid.

• Should be a document understood by an average 14 year old!

• Currently, advice offered by business schools

The Business Plan should

• Tell a complete story about the company, its management team,

product or service, financing needs, strategies, and the financial and
non-financial goals the company expects to achieve.

• Be a balance document highlighting both positive and negative

aspects of the business opportunity.

• Be a forward-looking document with a time frame of at least 3 years.

The Business Plan should

• Provide a realistic data to substantiate claims.

• Propose the deal to investors – what are the expected returns on

their investments, what are the exit or liquidation options available
to investors.

• Provide historical – if any – and projected financial statements.

Successful Business Model
Successful
Business Model
Successful Business Model
Example: This entrepreneur has created a dating
site for Trump supporters http://wapo.st/2iJaZeH
A viable venture opportunity:
creates or meets a customer need, provides an initial competitive advantage, is timely in terms of
time-to-market, and offers the expectation of added value to investors

SWOT analysis considers:

▪ Unfilled customer need
▪ Intellectual property rights
▪ First mover
▪ Lower costs and/or higher quality
▪ Experience/expertise
▪ Reputation value
Screening Ventures
Opportunities
Venture opportunity screening:
assessment of an idea’s
commercial potential to
produce revenue growth,
financial performance, and
value
Our approach:
Qualitative screening: Interview
with the Founder
Quantitative screening: VOS
IndicatorTM
Screening Ventures
Opportunities
Venture opportunity screening:
assessment of an idea’s
commercial potential to
produce revenue growth,
financial performance, and
value
Our approach:
Qualitative screening: Interview
with the Founder
Quantitative screening: VOS
IndicatorTM
Screening Ventures
Opportunities
Venture opportunity screening:
assessment of an idea’s
commercial potential to
produce revenue growth,
financial performance, and
value
Our approach:
Qualitative screening: Interview
with the Founder
Quantitative screening: VOS
IndicatorTM
Sections of the Business Plan

• Executive Summary
– Potential investors will only read thoroughly the executive summary!
– This section may be the only opportunity for an entrepreneur to make a good
first impression on a potential financier.
– It should be concise. No more than 2 pages!
– Clear and simple to understand
– Should include,
• Return on Invested Capital (ROIC)
• The current potential risks
Sections of the Business Plan

• The Company
– Provide information on the background of the company.
– The following issues must be addressed,
• When was the company established and by whom?
• Star-up or ongoing concern
• Type of industry
• Market areas served
• Business legal structure
• Company’s principals and their ownership stakes, experiences and skills
• Number of employees
• Revenue and historical growth
Sections of the Business Plan

• The Industry
– The following issues must be addressed,
• Macroeconomic data
• Regulatory changes
• Description of the industry (major participants, competition, etc.)
• Size of the industry (historical, current, and future trends, etc.)
• Characteristics of the Industry (seasonal, cyclical, countercyclical)
• Trends taking place in the industry that have an impact on the business (consolidation,
deregulation, etc.)
• The key drivers in the industry (R&D, marketing, price, quick delivery, relationships)
• Industry growth rates, past and future
• Customer payment practices
Sections of the Business Plan

• The Market
– The following issues must be addressed,
• Key customer market segments and their sizes
• Their location
• Past growth rates and trends
• Market characteristics
• Any anticipated changes in the primary market?
• How each customer market segment is reached
• How are purchasing decisions made?
Sections of the Business Plan

• Product or Service Description

– The following issues must be addressed,
• Benefits of product or service
• Stage of product or service
• Key product characteristics (performance, quality, duration, price, service, etc.)
• Differentiation strategy
• Positioning strategy
• Pricing strategy
• Chances of product obsolescence
• Legal and regulatory issues (Patents, contingent liabilities, etc.)
Sections of the Business Plan

• Marketing and Sales

– The following issues must be addressed,
• Marketing strategy
• Advertisement of product and service
• Expected return on resources spent on marketing
• Sales growth (Past, current, and expected in 3 years)
• Sales strategy to achieve level of sales growth
• Product distribution strategy
• Sales per employee (present, future and for the industry as a whole)
Sections of the Business Plan

• Facilities
– The following issues must be addressed,
• Description of plants and their operations (size, location, age, and conditions of plants)
• Ownership or lease
• Cost estimates to run the facilities
• Capital equipment requirement
• Condition of equipment and property
• Sales per square foot
• Access to public transportation
• Utilities
• Available parking for customers and employees
Sections of the Business Plan

• Operating Plan
– The following issues must be addressed,
• Business Operations
• Production
• Purchasing
• Labor Force
Sections of the Business Plan

• Management Team
– One of the most important elements that investors look for when assessing the
viability of a business venture is the strength of the management team.
– The following issues must be addressed,
• Names and titles of the key management
• Experience, skill levels, and functional responsibilities
• Anticipated changes in the management team / Succession Plan
• Names of the principal owners
• Members of board of directors
• Names and affiliation of advisers
• Compensation plan for key management team members
• Life insurance policy for the CEO
• Investments
Sections of the Business Plan

• References
– Should include financial (i.e. personal and business).
• Potential Risks
– An assessment of risks currently facing the company, as well as future risks and
how the company intends to mitigate these risks, needs to be presented.
– The objective is to assure the investor that the entrepreneur (1) has a realistic
view of the business opportunities and the risks associated with pursuing the
opportunities and (2) has proactively thought through how to manage and
mitigate those risks.
Sections of the Business Plan

• Potential Risks (continued)

– Potential risks to consider include,
• The advent of recession
• The unanticipated demise or removal of the CEO
• Unanticipated changes in key personnel
• The loss of a major customer
• Problem with suppliers
• A potential strike or labor stoppage
• A capital or financing shortfall
Sections of the Business Plan

• Financial Statements and Pro Formas

– Projecting the future is challenging, but it must be done. Debt and equity
investors know that financial projections that go out 3 to 5 years in the future are
at best guesstimates – they have to be, as no one can predict the future, unless
of course guaranteed future contracts have been signed.
– Potential investors are looking for projections grounded in defensive logic
– Data should include:
• Historical financial statements
• Pro formas (i.e. 3-5 years)
• Three scenarios (best, worst, and most likely)
Sections of the Business Plan

• Financial Statements and Pro Formas

– Data should include:
• Detailed description of banking relationships for business accounts and payroll
• The terms and rates of loans and their amortization period
• Proposed financing plan including,
– Amount being requested
– Sources and Uses of Funds
– Payback and collateral
– Proposed strategy for liquidation of investor’s positions
• Financing plan for the intermediate term, short term, and long term
• Working capital needs
• Line of credit and Cash Flow from Operations
What makes a business plan convincing?

• Evidence of commitment
❑It is not the action but the irreversibility of the action what matters.
❑Timing of the resignation also matters
• Evidence of reputation and certification
• Four “deal killers” according to John Mullins,
1. Failing to identify clearly the customer problem that the venture would address
2. Failing to identify clearly a narrow target market
3. Relying on a business model that lacks the critical expertise the venture needs
4. Failing to recognize the threats and potential problems
Translations by financiers, according to Mullins,

• “Our market is huge” (We do not think it is important to get reliable data about the
market potential of the venture)
• “We conservatively forecast …” (Rather than trying to get reliable information on
critical factors of performance, we have made some guesses that should sound
plausible)
• “Our revolutionary technology …” (Customers have yet to figure out why they might
be interested in what we are doing).
• “We believe that …” (We have been too busy writing the plan to gather any actual
evidence)
• “We have no competition.” (We do not understand our market)