Chapter 6
In This Chapter
Turning your ideas into plans
Satisfying financiers’ concerns
Making your plan stand out
Using software
Preparing to pitch
Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan. If the 2 million plus results that come from putting those words into Google are anything to go by, plenty of interest in the subject exists, and rightly so. Such a plan must include your goals for the enterprise, both short and long term; a description of the products or services you offer and the market opportunities you anticipate; and finally, an explanation of the resources and means that you need to achieve your goals in the face of likely competition.
Preparing a comprehensive business plan along these lines takes time and effort – the Cranfield School of Management estimates anywhere between 200 and 400 hours, depending on the nature of your business and how much data you’ve already gathered. Nevertheless, such an effort is essential if you’re to both crystallise and focus your ideas, and test your resolve about starting or expanding your business.
The core thinking behind business plans and their eventual implementation is strategic analysis. The strategic analysis refines or confirms your view of what’s really unique about your proposition. Or to put it another way, ‘Why on earth would anyone want to pay enough for this to make me rich?’
After completion, your business plan serves as a blueprint to follow that, like any map, improves users’ chances of reaching their destination.
A number of important benefits arise from preparing a business plan. All these benefits add up to one compelling reason: businesses that plan make more money than those that don’t and they survive for longer too.
I cover key reasons for writing up your business plan in the following sections.
Completing a business plan makes you feel confident in your ability to set up and operate the venture because you’ve put together a plan to make it happen. It may even compensate for lack of capital and experience, provided of course that you’ve other factors in your favour, such as a sound idea and a sizeable market opportunity for your product or service.
A systematic approach to planning enables you to make your mistakes on paper, rather than in the market place. One potential entrepreneur made the discovery while gathering data for his business plan that the local competitor he thought was a one-man band was in fact the pilot operation for a proposed national chain of franchised outlets. This discovery had a profound effect on his market-entry strategy!
Another entrepreneur found out that, at the price he proposed charging, he would never recover his overheads or break even. Indeed, overheads and break even were themselves alien terms before he embarked on preparing a business plan. This naive perspective on costs is by no means unusual. (I cover this whole area in Chapter 13.)
Your business plan details how much money you need, what you need it for, and when and for how long you need it.
Because under-capitalisation and early cash-flow problems are two important reasons for new business activities failing, if you have a soundly prepared business plan, you can reduce these risks of failure. You can also experiment with a range of alternative viable strategies and so concentrate on options that make the most economic use of scarce financial resources.
To say that your business plan is the passport to sources of finance is an exaggeration. It does, however, help you to display your entrepreneurial flair and managerial talent to the full and to communicate your ideas to others in a way that’s easier for them to understand so that they appreciate the reasoning behind your ideas. These outside parties can be bankers, potential investors, partners or advisory agencies. As soon as they know what you’re trying to do, they’re better able to help you.
Preparing a business plan gives you an insight into the planning process. This process – not simply the plan that comes out of it – is itself important to the long-term health of a business. Businesses are dynamic, as are the commercial and competitive environments in which they operate. No one expects every event recorded on a business plan to occur as predicted, but the understanding and knowledge created by the process of business planning help prepare the business for any changes it may face, and so enable it to adjust quickly.
If you need finance, examining what financiers expect from you is important if you’re to succeed in raising those funds. (For more on approaching finance, see Chapter 8.)
The media often claim that no shortage of money exists for new and growing businesses, and that the only scarce commodities are good ideas and people with the ability to exploit them. A potential entrepreneur may find this claim hard to believe. One major venture capital firm alone receives several thousand business plans a year (venture capitalists put up risk capital to invest in other businesses on behalf of institutions such as pension funds). It examines only 500 or so in any detail, pursues fewer than 25 to the negotiating stage and only invests in 6 of those.
To a great extent, the decision of whether to proceed beyond an initial reading of the plan depends on the quality of the business plan used in supporting the investment proposal. The business plan is your ticket of admission, giving you your first, and often only, chance to impress prospective sources of finance with the quality of your proposal.
To have any chance at all of getting financial support, your business plan must be the best that you can write and it must be professionally packaged. The plans that succeed meet all the following requirements.
You need to demonstrate that you recognise the needs of potential customers, rather than simply being infatuated with an innovative idea. Financiers usually cold-shoulder business plans that occupy more space with product descriptions and technical explanations than with explaining how products are going to be sold and to whom. They rightly suspect that these companies are more of an ego trip than an enterprise.
But market orientation isn’t enough in itself. Financiers want to sense that entrepreneurs know the one or two things their business can do best and that they’re prepared to concentrate on exploiting these opportunities.
Financiers like to know that your new product or service is going to sell and is being used, even if only on a trial or demonstration basis. For example, the founder of Solicitec, a company selling software to solicitors to enable them to process relatively standard documents such as wills, had little trouble getting support for his house-conveyancing package after a leading building society had tried and approved his product for its panel of solicitors.
If you’re only at the prototype stage, financiers have no immediate indication that, when made, your product is going to appeal to the market. They have to assess your chances of succeeding without any concrete evidence. Under these circumstances, you have to show that the problem your innovation seeks to solve is a substantial one that a large number of people are prepared to pay for.
As well as evidence of customer acceptance, you need to demonstrate that you know how and to whom your new product or service may be sold, and that you’ve a financially viable means of doing so.
Exclusive rights to a product through patents, copyright, trademark protection or a licence help to reduce the apparent riskiness of a venture in financiers’ eyes, because these things can limit competition, for a while at least.
However well protected legally a product is, marketability and marketing know-how generally outweigh ‘patentability’ in the success equation. A salutary observation made by an American professor of entrepreneurship revealed that less than 0.5 per cent of the best ideas contained in the US Patent Gazette in the last five years have returned a dime to the inventors.
Entrepreneurs are naturally ebullient when explaining the future prospects for their businesses. They frequently believe that the sky’s the limit when it comes to growth, and that money (or rather the lack of it) is the only thing standing between them and their success.
When you’re looking for venture capital, the providers of that capital are looking for rapid growth in your business. However, remember that financiers deal with thousands of investment proposals each year, and already have money tied up in hundreds of business sectors. Therefore, they already have a perception of what the accepted financial results and marketing approaches currently are for any sector. Any new company’s business plan showing projections that are outside the ranges perceived as acceptable within an industry is going to raise questions in the investor’s mind.
Make your growth forecasts believable – support them with hard facts where possible. If they’re on the low side, approach the more cautious lending banker, rather than a venture capitalist. The former often sees a modest forecast as a virtue, lending credibility to the business proposal as a whole.
In the following sections, I give you some guidelines to make sure that your plan attracts attention and succeeds in the face of fierce competition. More than 1,000 businesses start up in the UK each day, and many of those are looking for money or other resources that they’re hoping their business plan can secure for them. Making your business plan the best it can be gives it a chance to stand out.
Clearly, a business plan is more effective if you write it with your readers in mind. Doing so involves research into the particular interests, foibles and idiosyncrasies of those readers. Bankers are more interested in hearing about certainties and steady growth, and venture capitalists are also interested in dreams of great things to come. Business angels, who put their own money at risk, like to know how their particular skills and talents can be deployed in the business.
You can benefit from carrying out your reader research before the final editing of your business plan, because you should incorporate something of this knowledge into the way you present it. You may find that you have to create slightly different versions of the business plan for different audiences. This differentiation makes readers feel that you’re addressing the proposal to them rather than them just being the recipient of a ‘Dear Sir or Madam’ type of missive. However, the fundamentals of the plan remain constant.
The following sections help you prepare the plan itself.
No universal business plan format exists. That being said, experience has taught me that certain styles are more successful than others. Following these guidelines results in an effective business plan that covers most requirements. Not every subheading may be relevant to you, but the general format is robust.
Write the executive summary only after you complete the business plan itself.
If you think that you need long-term investment (see Chapter 8 for more about equity financing), you need to say something about who may buy the business and when you may be able to launch it on a stock market.
The first draft of the business plan may have several authors and it can be written ignoring the niceties of grammar and style. The first draft is a good one to talk over with your legal adviser to keep you on the straight and narrow, and with a friendly banker or venture capitalist. This discussion can give you an insider’s view of the strengths and weaknesses of your proposal.
When you’ve revised the first draft, then comes the task of editing. Here grammar, spelling and a consistent style do matter. The end result must be a crisp, correct, clear, complete plan no more than 20 pages long. If you’re not an expert writer, you may need help with editing. Your local librarian or college may be able to put you in touch with a local editor. You can also use websites such as People Per Hour (www.peopleperhour.com) and Elance (www.elance.com) to help you find editors.
Your business plan should be visually appealing. Dense text, poor layout and clutter all serve to put your reader off. Create a favourable impression from the outset and you’ll have the reader onside. Here are the most important guidelines to make your written business plan stand out from the crowd:
The University of Leicester has a useful guide to the role of text, tables, graphs and charts in presenting numerical data; visit www2.le.ac.uk/offices/ld/resources/numeracy/numerical-data.
Finding an investor or a bank to lend to your business may take weeks or months. During that time, potential investors diligently gather information about the business so that they don’t have surprises later about income, expenses or undisclosed liabilities. The business plan is only the starting point for their investigations.
If you and the prospective financiers are strangers to one another, you may be reluctant to turn over sensitive business information until you’re confident that they’re serious. (This issue isn’t as sensitive with banks as it is with business angels and venture capital providers.) To allay these fears, consider asking for a confidentiality letter or agreement.
A confidentiality letter suffices in most circumstances. But if substantial amounts of intellectual property are involved, you may prefer to have a lawyer draft a longer, more formal confidentiality agreement, also known as a non-disclosure agreement (NDA). The confidentiality letter should be limited to their agreement to treat the information as strictly confidential and to use the information only to investigate lending or investing in the business, and to the other terms set out in the letter.
Don’t be surprised if the investor wants to find out about your personal financial status, job or business history. Investors are interested in your financial stability, your reputation for integrity and your general business savvy because they will, in effect, extend credit to you until you deliver them the interest or return they’re expecting on their money. That’s what the due diligence process is all about.
Usually, the due diligence process, which involves a thorough examination of both the business and its owners, takes several weeks if not longer. But that depends on how much money your plan calls for and from whom you’re trying to raise it. (I cover raising finance in Chapter 8.)
Accountants and lawyers usually subject your track record and the business plan to detailed scrutiny. You’re then required to warrant that you’ve provided all relevant information, under pain of financial penalties. The cost of this due diligence process, rarely less than a big five-figure sum and often running into six, is borne by the firm raising the money, but is paid out of the money raised, if that’s any consolation.
You may consider taking some of the sweat out of writing your business plan by using one of the myriad software programmes on the market. You need to take care in using such systems, because the result can be a bland plan that pleases no one and achieves nothing worthwhile.
Don’t buy a package with several hundred business plans covering every type of business imaginable. The chances are that the person who wrote the plans knows far less than you do about your business sector and can add little or no value to your proposition. Worse still, at least an even chance exists that the reader of your plan has seen the fruits of these packaged plans before and may be less than enthusiastic to see yet another one.
You may well find it beneficial to use the test shown in Figure 6-1 as an uncomplicated form of self-assessment, before becoming bogged down in number-crunching software.
The following sections help you understand what software can and can’t do, and where to start finding software to suit your needs.
Good business planning software provides a useful structure to drop your plan into and may provide a few helpful spreadsheets and templates for financial projections and market analysis. It also provides a valuable repository for your work in progress as you assemble the evidence to convince yourself and others that your business can succeed.
What software doesn’t do is write a convincing business proposition by itself. The maxim ‘garbage in, garbage out’ applies to business planning software just as it does to everything to do with computers.
The other danger is that you end up with spreadsheet solutions – numbers just pumped into the financials – without any evidence of the underlying logic to support them.
This section tells you how to access business planning software packages and resources that have been used to good effect:
Anyone backing a business does so primarily because she believes in the management of the business. She knows from experience that things rarely go according to plan, so she must be confident that the team involved can respond effectively to changing conditions. You can be sure that any financier you’re presenting to has read dozens of similar plans and is well rehearsed. She may even have taken the trouble to find out something about your business and financial history.
While the written plan has to be thorough, you need to be equally well prepared to present and defend your proposition in person. That involves thinking through how you’ll come across when you make your pitch and how you’ll react to the inevitable questions and criticism. Think about how people fare in the BBC’s Dragon’s Den programme, and be prepared.
What does any actor do before stepping onto a stage? Rehearse, rehearse, rehearse. As you rehearse, keep in mind the guidance in the following sections for how to really connect with your audience.
Don’t be surprised or disheartened if your business plan doesn’t get the reception you hope for. Anita Roddick’s Body Shop proposition was turned down flat. It was only when a local garage owner, Ian McGlinn, advanced her £4,000 in return for 25 per cent of her company that she got the money to open a second shop; a deal that netted him a couple of hundred million and her considerably more. Tim Waterstone’s business plan was turned down by bank after bank for being too ambitious. They wanted him to open a bookshop, but he’d set his sights on a chain. Eventually, he got backing and went on to build his chain, change the shape of book retailing in the UK and sell his business to his former employers, WH Smith, for £47 million. Business plans are turned down for hundreds of reasons. Venture capitalists turn down 95 propositions for every 100 they receive. Why? Because they’re just not convinced that the plan has been well thought through and/or properly researched, and that the person or team are up to the task.
You never know when the chance to present your business plan may occur – maybe even in a lift between floors (hence the term elevator pitch). You need to know your business thoroughly, and it’s as well to have a 5-, 10- and 20-minute presentation ready to run at a moment’s notice.