Developing a Business Plan Chapter 3 Why a Business Plan is Important What Goes into a Business Plan? How to Create an Effective Business Plan
Why Businesses Fail • According to the U.S. Small Business Administration (SBA), over 50% of small businesses fail within the first 5 years • Lack of experience • Insufficient capital • Poor location • Poor inventory management • Over investment in fixed-assets • Poor credit arrangements • Personal use of business funds • Unexpected growth • Competition • Low sales
The Business Plan • Business Plan • A written document that describes all the steps necessary for opening and operating a successful business • It describes your • products • manufacturing methods • customers • management • suppliers • competitive strategies • how business will earn a profit • future growth plans
The Business Plan • Business plans may be internally or externally focused • Internally – to educate employees on new business directions • Externally – to make outsiders aware of your business; specifically investors • Bank Loans • Angel Investors • Venture Capitalists
Investors • Bank Loans • SBA Loan Programs • 7(a) Loan Program • Up to $750,000 • Available to start ups with less than $7 million net worth • Most require 2-3 years of financial statements and some owners equity in business • 504 Loan Program • Supplies funds for asset purchases (i.e. land or equipment) • Up to $1,000,000 • 40% from a Certified Development Company (CDC) • 10% equity of the borrower • 7(m) Microloan Program • Up to $35,000 • Must enroll in technical assistance classes administered by the micro-lender intermediaries
Investors • Angel Investors • An affluent individual who provides capital for a business start-up, usually in exchange for ownership equity • U.S. Angels invest a total of around $20 billion per year in around 60,000 businesses. • Angels invest in around 1 out of every 10 business investment deals considered, or 10%. • The average Angel Investor is 47 years old, college educated, and self employed • The average angel investor has an annual income of $90,000, a net worth of $750,000, and invests $37,000 per venture. • 9 out of 10 angel investments are devoted to start-ups with fewer than 20 employees, and 7 out of 10 angel investments are made locally (within 50 miles of the Angel’s home). • 9 out of 10 angels provide additional support via personal loans or loan guarantees to the firms in which they invest. • Angels expect a 26% average annual return at the time they invest – and expect about one-third of their investments to result in a substantial capital loss. • Angels spend an average of 3.5 months conducting due diligence on each investment. • The most common reasons angels reject deals are insufficient growth potential, overpriced equity, insufficient talent of the management, or lack of information about the entrepreneur or key personnel.
Investors • Venture Capitalists • A firm that manages the pooled money of others in a professionally-managed fund • Venture capitalists (VCs) invest a total of around $30 billion per year in around 4,000 businesses. • VCs invest in only about 1 out of every 100 business investment deals considered, or 1%. • VCs look at substantially more deals than Angel Investors. • The average VC invests $7.5 million per venture and expects a 25% average annual return. • Although most VC firms have a website and other ways of sending in cold call solicitations, it is best to be referred to a VC by someone who is known to the VC. • VCs conduct significantly more due diligence than angel investors do, spending an average of 5 months on due diligence for each investment. • Overall, VCs have more sector experience, invest in larger firms, and conduct more sector research. They meet an entrepreneur more often before investing, take more independent references on the entrepreneur, and analyze the financials more thoroughly. VCs demand a more comprehensive business plan from the entrepreneur; incur more research costs; document their investment process more; consult more people before investment; and take longer to invest.
Purposes of a Business Plan • A business plan: • explains the idea behind your business • how your product or service will be produced and sold • sets specific objectives and how your business will achieve them • describes the experience of the people who will run the business
Importance of a Business Plan • A business plan: • makes you think about all aspects of your business • may help you secure financing • helps you communicate your ideas to others • can serve as a tool for managing your business
Basic Elements of a Business Plan • The main body of a business plan should be organized into the following elements: • Introduction • Marketing • Financial Management • Operations • Concluding Statement
Introduction • A detailed description of business goals • Ownership and legal structure of the business • Your skills and experience • The competitive advantages of the business
Introduction • Detailed Description • Describe how you came up with your business • Outline the business goals for the • Short-term • Medium-term • Long-term
Introduction • Ownership and Legal Structure • sole proprietor, partnership, or corporation • identify leadership team • list number of shareholders
Introduction • Skills and Experience of the Leadership Team • list all of your relevant business experience • paid work • volunteer work • hobbies • list all of the relevant business experience of your leadership team
Introduction • Advantages • Performance • Quality • Reliability • Distribution • Price • Promotion • Public image or reputation
Marketing • Products and/or services • Market • Industry • Location
Marketing • Products and/or services • What are you providing • How is it different from your competition • Unique features/benefits
Marketing • Target Market • Market Segmentation – breaking down a group of consumers into smaller groups with shared common characteristics • Demographics • age, marital status, gender, ethnicity, education, income, etc. • Example: women business owners b/w 25 – 40 who earn $50,000+ per year • Psychographics • tastes, opinions, personality traits, lifestyle habits • Example: people who live in the city and like to listen to jazz • Geographic Data • geographic criteria—nations, states, regions, countries, cities, neighborhoods, or zip codes • Example: number of people who live within 5 miles of your business
Marketing • How is it different from your competition • SWOT Analysis • Strengths, Weaknesses, Opportunities, and Threats
Marketing • Industry • External factors affecting your business • Growth potential • Economic trends • Technology trends
Marketing • Location • One of the most important decisions when starting up a new business • Is the facility easily accessible to your potential customers? • Is the location convenient to where you live? • Can you find a number of qualified employees in the area in which the facility is located? • Are the lease terms and rent favorable? • Is the facility consistent with the image you'd like to maintain? • Is the facility located in a safe neighborhood with a low crime rate? • Are neighboring businesses likely to attract customers who will also patronize your business? • Are there any competitors located close to the facility? If so, can you compete with them successfully? • Is parking space available and adequate? • If your business expands in the future, will the facility be able to accommodate this growth?
Financial Management • Identification of Risks • Prospective lenders and investors will want to know what risks your business faces and how you plan to deal with them.
Financial Management • Financial Statements • pro forma financial statement • a financial statement based on projected revenues and expenses • Funding Request and Return on Investment • borrowed money • personal investment • anticipated return on investment
Operations • Daily business management • Hiring and personnel procedures • Insurance • Lease or rental agreements • Equipment
Operations • Harvest Strategy • the way an entrepreneur intends to extract his or her money from a business after it is operating successfully • Also known as an Exit Strategy
Concluding Statement • Summarize goals and objectives. • Emphasize your commitment to the success of your business.
Completing the Business Plan • Introductory Elements • Cover letter • Title page • Table of Contents • Statement of purpose • Executive Summary
Completing the Business Plan • Cover Letter • a letter that introduces and explains an accompanying document or set of documents • Generally one page at most in length
Completing the Business Plan • Title Page • Table of Contents • Statement of Purpose • Explanation of why you are asking for a loan and what you plan to do with the money
Completing the Business Plan • Executive Summary • Short restatement of the report • Should be well-written and clearly state your main points • Often this is the only page executives read and can determine whether or not they even consider your request • Should include the following information: • Description of your business concept; what is unique about it • Sales projections, costs, and profits • Needs assessment (inventory, land, building, equipment, etc.) • Capital requirements (how much you want to borrow)
Completing the Business Plan • Appendix • Includes supporting documents that provide additional information to support the body of the report • Anything potential investors would want to know before lending you money… • Tax returns • Personal financial statement of the owner • Copy of proposed lease • Copy of licenses and other legal documents • Copy of resume of the owner • Letters of recommendation • Copy of letters of intent from suppliers • Copies of any large sales contracts
Business Plan Outline • Introductory Element • Cover Letter • Title Page • Table of Contents • Statement of Purpose • Executive Summary • Main Body • Introduction • Marketing • Financial Management • Operations • Concluding Statement • Appendix or Supporting Documents
How to Create an Effective Business Plan ? • Research • Most entrepreneurs spend 50 to 100 hours developing their business plans. • Resources • Realistic
Resources • Small Business Administration (SBA) • an independent agency of the federal government • helps Americans develop new businesses • Small Business Development Centers (SBDC) • a cooperative effort of the private sector, the educational community, and federal, state, and local governments • provides free help for businesses that cannot afford a private consultant • Service Corps of Retired Executives (SCORE) • retired executives provide free, confidential advice to entrepreneurs • either in person or over the Internet • business related workshops • both short-term and long-term assistance is available
Resources • Chamber of Commerce • provides information on local business trends • Trade Associations • organizations that are made up of professionals in a specific industry • provide educational and networking opportunities • Professional Consultants • experts who will provide business assistance for a fee • Financial Institutions • Bankers and accountants can provide information about loans and financial statements
Resources • Print Resources • Library • Magazines • Government Documents • Online Resources • provide information similar to print information • websites targeted to entrepreneurs and small business owners • provide business plan templates
Mistakes in Business Planning • Avoid making the following mistakes: • Unrealistic financial projections • An undefined target market • Poor research • Ignored competition • Inconsistencies in the business plan