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Chapter 11 Putting the Business Plan to Use

11-1 Introduction . Business plans help entrepreneurs stay on track toward their business goals. Entrepreneurs with a business plan are far more likely to remain focused and on the road to success than are those that haven't invested the time to create a plan.It is also a marketing document.It has other uses besides serving as a road map and helping acquire a bank loan. .

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Chapter 11 Putting the Business Plan to Use

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    2. 11-1 Introduction Business plans help entrepreneurs stay on track toward their business goals. Entrepreneurs with a business plan are far more likely to remain focused and on the road to success than are those that haven’t invested the time to create a plan. It is also a marketing document. It has other uses besides serving as a road map and helping acquire a bank loan.

    3. 11-2 Seeking Capital Various sources of capital are available to the entrepreneur, include lending institutions and equity investors. Each of these capital sources will expect the new venture to provide a business plan.

    4. 11-2a Lending Institutions They are formally operated and tend to require formal documentation as part of the loan origination process. Difficult for entrepreneurs to actually succeed in convincing the bank to give them a loan. To understand the expectations that a bank places on the entrepreneur seeking a loan, it is helpful to understand the structure of the loan origination process. Loan officers who meet with and discuss loan options with the entrepreneur are not the decision makers. Most loan officers have a specific low-credit limit for which they can make a decision on their own.

    5. 11-2a Lending Institutions (cont.) A bank has no resources of its own. The loan officer must be convinced that his or her career will be advanced by securing a loan for the new venture. Presentations to the banker should include: A professional business plan The entrepreneur’s résumé, and résumés of all other executive officers A completed loan package Venture collateral material A brief executive summary of the venture

    6. 11-2b Angel Investors Typically wealthy individuals who allocate a small part of their net worth to investments in high risk/high reward early-stage businesses or businesses that are more mature but have smaller capital needs than more traditional venture capital deals They are far less formal than a lending institution and require different documentation An entrepreneur may seek angel investors for loans or equity investments In most cases, the entrepreneur should approach an angel investor through a referral

    7. 11-2b Angel Investors (cont.) Angel investors often meet face-to-face with entrepreneurs, but not always. The angel and the team may decide on whether to make an investment and how large an investment to make without even meeting with the entrepreneur. Angel investors require a complete business plan in order to make a determination about whether to invest. Other documents that the entrepreneur includes with the business plan when attempting to sell stock to an angel investor include: A subscription agreement A private placement memorandum (PPM) A very brief version of the business plan known as an investor’s executive summary

    8. 11-2b Angel Investors (cont.) An entrepreneur who wishes to raise equity through angel financing should consider the following issues in structuring a deal with angels: Type of securities Rights of first refusal Board of director representation Negative covenants Entrepreneurs who have been executing a plan, completing stated milestones, and operating within their budgets are more likely to receive investment capital.

    9. 11-2c Venture Capital Venture firms are usually partnerships formed by one or more venture capitalists (VCs). Partners in the firm raise money to form a venture fund. The investors in the fund are limited partners, or LPs. All VCs must be concerned with making money for their limited partners. VCs will only be interested in an entrepreneur’s business if it promises to make a lot of money and reach liquidity within a three- to six-year period. VCs also care about creating value, developing new markets and products, participating in the formation and growth of important companies, working with entrepreneurs to build new businesses, and supporting the growth of the economy.

    10. Exhibit 11-2 Organization of a Typical Venture Capital Firm

    11. 11-2c Venture Capital (cont.) Venture capital funds rarely provide capital to start-up ventures. A drop-off in venture capital funding was evident in the wake of the dot-com crash beginning in early 2000. Entrepreneurs will find greater success in obtaining venture capital if they can demonstrate a successful track record of sales to the company’s target market. The ability to generate steady revenues is called traction. Like other industries, the venture fund industry is segmented. Seed funding is money provided to companies that need to determine the feasibility of the business concept. It can be very difficult to find VC funds interested in funding ventures of this type.

    12. Exhibit 11-4 Segmentation of the VC Industry

    13. 11-3 Seeking Partners Entrepreneurs may also need a well-developed plan to entice potential alliance partners to participate with them in joint business ventures. A new venture often lacks market “identity”—its primary market may not recognize its brand. One way to mitigate that problem is for emerging ventures to become associated with well-recognized and respected brands. Entrepreneurs stand to gain tremendous benefits through alignment with well-known and respected brands. To prevent potential to underestimate venture’s contribution to the relationship, the new venture’s business plan should include the benefits it will bring to its partners.

    14. 11-3 Seeking Partners (cont.) Another type of business alignment is associated with the acquisition of customers, referred to as business development. A software venture may align itself with firms that are already selling software products to organizations. Such firms are often called valued added resellers, or VARs. Successful entrepreneurs establish such mutually beneficial business alliances not only by promoting the value of their own venture’s products or services but also by negotiating a contract that provides incentives for the VAR. In a third type of business alliance, a growth-oriented firm or one that has reached the mature stage develops deeper relationships with other business ventures.

    15. 11-3 Seeking Partners (cont.) To be successful, strategic alliances require their own business plan. When a firm is approached to consider a joint venture undertaking, the firm takes time to study the offer, the venture making the offer, and the management team running it. Process of developing a deeper understanding of the potential joint venture partner is known as due diligence. Firms also exchange financial information to determine each company’s solvency and ability to support the joint venture. A business plan is an essential part of the formation stage of a joint venture.

    16. 11-3a Co-Marketing In addition to VAR relationships and joint ventures, many firms today are prospering from so-called co-marketing arrangements. Consumers commonly can pick up fast food from a major brand, such as McDonald’s, at their favorite gasoline station, such as a Chevron station. An entrepreneur with a new and emerging brand can gain rapid awareness and market penetration through a careful co-marketing arrangement. A co-marketing arrangement, like a VAR approach, must provide benefits to both parties to the agreement. A well-crafted business plan is the cornerstone of the established brand’s due diligence process.

    17. 11-3a Co-Marketing (cont.) Finally, all business is about results measured in financial terms. The new venture’s business plan includes marketing information relevant to prospective co-marketing partners. It also projects the benefits that will accrue to marketing partners through a co-marketing arrangement. All entrepreneurs want their own venture to benefit, but the prospective partner’s primary viewpoint is self-interest. Among businesses that are primarily centered on the Internet or have extensive Internet distribution models, the term affiliate program is often used in place of co-marketing.

    18. 11-4 Seeking Resources Two primary resource types require a business plan: Human capital Office space

    19. 11-4a Human Capital Human capital are top-level executives and board members. In addition to recruiting executive officers, the venture may want to establish a board of directors or an advisory board. Although most board members are protected from liability through the firm’s insurance, well-qualified board candidates take their board duties seriously and will not want their reputation affected by a poorly planned venture. Most potential board candidates require a business plan to review in order to evaluate their willingness and ability to assist the entrepreneur.

    20. 11-4b Office Space Because early-stage ventures often have difficulty with cash flow, they will on occasion have trouble paying regular monthly bills. Landlords know this, and they attempt to ward off problems with lease payments through several well-known tactics. Entrepreneurs should be prepared with an up-to-date business plan when seeking office space. The ability to produce a business plan demonstrates to the landlord that the business is organized and well managed.

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