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When it comes to creating a business
plan that attracts investors, these
tips will help you get it right
the first time.
Every business should have a
business plan. Unfortunately,
despite the fact that many of
the underlying businesses are
viable, the vast majority of
plans are hardly worth the paper
they're printed on. Most "bad" business
plans share one or more of the
following problems:
- The plan
is poorly written. Spelling,
punctuation, grammar and style
are all important when it comes
to getting your business plan
down on paper. Although investors
don't expect to be investing
in a company run by English majors,
they are looking for clues about
the underlying business and its
leaders when they're perusing
a plan. When they see one with
spelling, punctuation and grammar
errors, they immediately wonder
what else is wrong with the business.
But since there's no shortage
of people looking for capital,
they don't wonder for long--they
just move on to the next plan.
Before
you show your plan to a single
investor or banker, go through
every line of the plan with a
fine-tooth comb. Run your spell
check--which should catch spelling
and punctuation errors, and have
someone you know with strong "English
teacher" skills
review it for grammar problems.
Style
is subtler, but it's equally
important. Different entrepreneurs
write in different styles. If
your style is "confident," "crisp," "clean," "authoritative" or "formal," you'll
rarely have problems. If, however,
your style is "arrogant," "sloppy," "folksy," "turgid" or "smarmy," you
may turn off potential investors,
although it's a fact that different
styles appeal to different investors.
No matter what style you choose
for your business plan, be sure
it's consistent throughout the
plan, and that it fits your intended
audience and your business. For
instance, I once met a conservative
Midwest banker who funded an
Indian-Japanese fusion restaurant
partly because the plan was--like
the restaurant concept--upbeat,
trendy and unconventional.
- The
plan presentation is sloppy. Once
your writing's perfect, the presentation
has to match. Nothing peeves
investors more than inconsistent
margins, missing page numbers,
charts without labels or with
incorrect units, tables without
headings, technical terminology
without definitions or a missing
table of contents. Have someone
else proofread your plan before
you show it to an investor, banker
or venture capitalist. Remember
that while you'll undoubtedly spend
months working on your plan, most
investors won't give it more than
10 minutes before they make an
initial decision about it. So if
they start paging through your
plan and can't find the section
on "Management," they
may decide to move on to the next,
more organized plan in the stack.
- The plan
is incomplete. Every
business has customers, products
and services, operations, marketing
and sales, a management team,
and competitors. At an absolute
minimum, your plan must cover
all these areas. A complete plan
should also include a discussion
of the industry, particularly
industry trends, such as if the
market is growing or shrinking.
Finally, your plan should include
detailed financial projections--monthly
cash flow and income statements,
as well as annual balance sheets--going
out at least three years.
- The
plan is too vague. A
business plan is not a novel,
a poem or a cryptogram. If a
reasonably intelligent person
with a high school education
can't understand your plan, then
you need to rewrite it. If you're
trying to keep the information
vague because your business involves
highly confidential material,
processes or technologies, then
show people your executive summary
first (which should never contain
any proprietary information).
Then, if they're interested in
learning more about the business,
have them sign noncompete and
nondisclosure agreements before
showing them the entire plan.
[Be forewarned, however: Many
venture capitalists and investors
will not sign these agreements
since they want to minimize their
legal fees and have no interest
in competing with you in any
case.]
- The plan
is too detailed. Do
not get bogged down in technical
details! This is especially common
with technology-based startups.
Keep the technical details to
a minimum in the main plan--if
you want to include them, do
so elsewhere, say, in an appendix.
One way to do this is to break
your plan into three parts: a
two- to three-page executive
summary, a 10- to 20-page business
plan and an appendix that includes
as many pages as needed to make
it clear that you know what you're
doing. This way, anyone reading
the plan can get the amount of
detail he or she wants.
- The
plan makes unfounded or unrealistic
assumptions. By their
very nature, business plans are
full of assumptions. The most
important assumption, of course,
is that your business will succeed!
The best business plans highlight
critical assumptions and provide
some sort of rationalization
for them. The worst business
plans bury assumptions throughout
the plan so no one can tell where
the assumptions end and the facts
begin. Market size, acceptable
pricing, customer purchasing
behavior, time to commercialization--these
all involve assumptions. Wherever
possible, make sure you check
your assumptions against benchmarks
from the same industry, a similar
industry or some other acceptable
standard. Tie your assumptions
to facts.
A
simple example of this would be
the real estate section of your
plan. Every company eventually
needs some sort of real estate,
whether it's office space, industrial
space or retail space. You should
research the locations and costs
for real estate in your area, and
make a careful estimate of how
much space you'll actually need
before presenting your plan to
any investors or lenders.
- The
plan includes inadequate research. Just
as it's important to tie your
assumptions to facts, it's equally
important to make sure your facts
are, well, facts. Learn everything
you can about your business and
your industry--customer purchasing
habits, motivations and fears;
competitor positioning, size
and market share; and overall
market trends. You don't want
to get bogged down by the facts,
but you should have some numbers,
charts and statistics to back
up any assumptions or projections
you make. Well-prepared investors
will check your numbers against
industry data or third party
studies--if your numbers don't
jibe with their numbers, your
plan probably won't get funded.
- You
claim there's no risk involved
in your new venture.
Any sensible investor understands
there's really no such thing
as a "no risk" business.
There are always risks. You must
understand them before presenting
your plan to investors or lenders.
Since a business plan is more of
a marketing tool than anything
else, I'd recommend minimizing
the discussion of risks in your
plan. If you do mention any risks,
be sure to emphasize how you'll
minimize or mitigate them. And
be well prepared for questions
about risks in later discussions
with
investors.
- You
claim you have no competition. It's
absolutely amazing how many potential
business owners include this
statement in their business plans: "We
have no competition."
If that's what you think, you couldn't
be further from the truth. Every
successful business has competitors,
both direct and indirect. You should
plan for stiff competition from
the beginning. If you can't find
any direct competitors today, try
to imagine how the marketplace
might look once you're successful.
Identify ways you can compete,
and accentuate your competitive
advantages in the business plan.
- The business
plan is really no plan at all. A
good business plan presents an
overview of the business--now,
in the short term, and in the
long term. However, it doesn't
just describe what the business
looks like at each of those stages;
it also describes how you'll
get from one stage to the next.
In other words, the plan provides
a "roadmap" for
the business, a roadmap that should
be as specific as possible. It
should contain definite milestones--major
targets that have real meaning
for your business. For instance,
reasonable milestones might be "signing
the 100th client" or "producing
10,000 units of product." The
business plan should also outline
all the major steps you need to
complete to reach each milestone.
Once you
know what mistakes not to make,
there are still a few steps you
need to take to make your business
plan "bulletproof." Be
sure you . . .
- Think it through.
You might have a great idea,
but have you carefully mapped
out all the steps you'll need
to take to make the business
a reality? Think about building
your management team, hiring
salespeople, setting up operations,
getting your first customer,
protecting yourself from lawsuits,
outmaneuvering your competition,
and so on. Think about cash flow
and what measures you can take
to minimize your expenses and
maximize your revenue.
- Do your research.
Investigate everything you can
about your proposed business
before you start writing your
business plan--and long before
you start the business. You'll
also need to continue your research
while you write the business
plan, since inevitably, things
will change as you uncover critical
information. And while you're
researching, be sure to consult
multiple sources since many times
the experts will disagree.
- Research
your potential customers and
competitors. Is your product
or service something people really
want or need, or is it just "cool"?
Study your market. Is it growing
or shrinking? Could some sort
of disruptive technology or regulatory
change alter the market in fundamental
ways? Why do you think people
will buy your product or service?
If you don't have any customers
or clients yet, you'll need to
convince investors that you have
something people really want
or need, and more important,
that they'll buy it at the price
you expect.
- Get
feedback. Obtain as much feedback
as you can from trusted friends,
colleagues, nonprofit organizations,
and potential investors or lenders.
You'll quickly find that almost
everyone thinks they're an expert
and they all could do a better
job than you. This may be annoying,
but it's just part of the feedback
process. You'll know when you're
done when you've heard the same
questions and criticisms again
and again and have a good answer
to almost everything anyone can
throw at you.
- Hire professional
help. Find a professional you
trust to help guide you through
the entire process, fill in knowledge
gaps (for instance, if you know
marketing but not finance, you
should hire a finance expert),
provide additional, unbiased
feedback, and package your plan
in an attractive, professional
format.
Writing a business
plan is hard work--many people
spend a year or more writing their
plan. In the early, drafting stages,
business plan software can be very
helpful. But the hard part is developing
a coherent picture of the business
that makes sense, is appealing
to others and provides a reasonable
road map for the future. Your products,
services, business model, customers,
marketing and sales plan, internal
operations, management team and
financial projections must all
tie together seamlessly. If they
don't, you may not ever get your
business off the ground.
Andrew
Clarke is the CEO of Ground Floor
Partners, a business consulting
firm that helps early-stage, small
and middle-market businesses grow
through design and execution of
sound business strategies.
This
article originally appeared on
Entrepreneur.com in November 2005.
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