The Role of a Business Plan

Entrepreneuers at all stages of growth know that effective business planning is critical to a company’s long-term success and its ability to raise capital.

As a result, much has been written by bankers, accountants, consultants, and academicians on the preparation of a business plan. Yet it seems that the more information there is, the more confused people get about what a business plan should include. There’s no one “right answer.” A business plan should tell a compelling story, make an argument, and conservatively predict the future, and companies have different stories to tell, different arguments to make, and different futures to predict. It identifies the need or problem in the marketplace and describes your game plan for fulfilling that need for solving that problem in a manner that the customer will find attractive and affordable.

Business planning is the process of setting goals, explaining objectives, and then mapping out a plan on how the company’s management team will achieve these goals and objectives. In essence a business plan is the articulation of why your idea is a valuable opportunity, what resources it will require, who will provide the vision and leadership to execute the plan, and how you will reach your goals. It will also answer these questions:

v  Who are we?

v  What have we accomplished as a team thus far?

v  What do we do?

v  What is our business model? In other words, how do we make money? What problem do we solve? Who are our customers?

v  How do they pay us?

v  How far along is our business?

v  What do we need?

v  What business are we really in?

v  What need are we meeting?

v  Who is on our team?

v  How do we know that our solution works?

v  Who else is offering this solution right now? Who may be offering the same or a similar solution In the near future? The ability to identify and anticipate the competitors that are likely to appear in the future is a critical business planning skill.

v  What advantages do we have over other providers of the solutions?

v  How do our targeted customers make their buying decisions?

v  How do we get them to try us?

v  How do we get them to come back?

v  What is the cost for attracting them?

v  What will it cost to keep them happy?

The critical task is to draft a business plan that anticipates all key investor questions and sets the stage for the initial meeting where wider and deeper diligence will take place as well as any assessment of the quality and integrity of the company’s leadership. Some of the key questions that an experienced investor will always ask include:

• Who is the team (internal and external)? Do they know how to get things done?
• How do we make money? What is the product, the opportunity, the price, the customer, and the competition?
• What bad stuff can happen? What factors outside your control could mess things up? What’s the fallback plan?
• How much do you need? How much money do you really need? For what? Are there alternative ways to acquire these resources? How creative or frugal is the plan? What is the upside? How ugly is the downside? How soon will you come back to us looking for more money? What is our exit strategy)?

 It is critical to understand what the investor is really looking for,  That thing about “if you build it they will come . . .” works only in the movies. The business plan must answer: How crowded is the market? What vehicles will you use to sell the customer your product or service? Why is this the best vehicle, and what will it cost? What market research have you done to ensure that anyone wants to buy this product or service? Does your company truly modify the way business is being done in your industry (as a change agent) or is it more of a fad or a trend? Nobody has a crystal ball to predict what will work and what won’t—neither the most savvy investor nor the most experienced entrepreneur. The better the analysis, the better the chances that most of the goals set forth in the business plan will be achieved. Your business plan explains how and why you selected this path, what resources you’ll need for your journey, and what you hope to achieve along the way—but there is no guarantee you’ll reach your goals.

Before exploring the different kinds of financing available, you should thoroughly understand the fundamentals of preparing a plan because regardless of what kind of capital you’re raising—or how— any lender, underwriter, venture capitalist, or private investor will expect you and your management team to be able to prepare a meaningful business plan. The plan will have to address specific financial questions, such as:

• What market problems and financial opportunities have you identified?
• What services, products, and projects are planned to exploit these opportunities or solve these problems?
• How much capital will you need to obtain the resources necessary to bring these projects to fruition?
• Exactly how will you allocate the capital? How will this infusion of capital increase sales, profits, and the overall value of the company?
• How will you meet your debt-service obligations and provide a meaningful return on investment to your investors and lenders?
• How much equity in the company are you offering to investors?
• How is it being valued?  
• What “exit strategies” will be available to the equity investors?

When preparing a business plan for capital-formation purposes, one of the key goals is to use the plan to work for the blessing of a local market influencer, such as an angel or venture capitalist, who will champion your plan, put some initial money into the company, and most important, show it to others who have the money and the resources to help the company achieve its objectives. Using the plan to convince this first penguin to jump through the ice is an important market validator that will build credibility and excitement for the company and its business model.

Another key aspect of building a business plan for use in the capital markets is to answer a critical question about empowerment. The question that the plan must answer is, “How will the money you seek to raise enable and empower the management team to achieve objectives that it has been unable to achieve to date?” This shows your initial champion and others that you have really thought through the capital-formation process and are not just raising money for the sake of raising money. Business plans are used by both start-up companies and operating companies. For example, a company operating for fifteen years or more will need to draft a business plan in order to raise the necessary capital to reach the next stage in its development.

One commonly asked question is, How long should my business plan be? The latest thinking is that an entrepreneur of a growing company should have three versions—the one-pager, the five to ten-pager, and the thirty- (or so) pager. The one- to two-pager is for the initial introduction to targeted investors and is about the same length as you would describe your business in a thirty-second elevator ride (and it’s often referred to as the “elevator speech”). The one- to two-pager devotes about two sentences to each of the key topics described in the outline that follows. The five- to ten-pager expands the depth of the discussion of the topics to about two paragraphs per topic and is often used as a presentation tool in the sec- ond or third round of meetings with targeted investors. Finally, the thirty- (or so) pager is the detailed strategic game plan to describe exactly how the company will meet its growth objectives and devotes about two or three pages to each of the key topics.