The Ernst & Young Business Plan Guide

Brian R. Ford, Jay M. Bornstein, Patrick T. Pruitt

• Publisher: Wiley
• Year: 2010
• ISBN:
  9781118039168
• Edition: 3
• Topic: Business
• Subtopic: Business General
• Index: Business

In today's competitive business environment, a well thought out business plan is more important than ever before. Not only can it assist you in raising the money needed to start or expand a business-by attracting the interest of potential investors-but it can also help you keep tabs on your progress once the business is up and running. Completely revised and updated to reflect today's dynamic business environment, The Ernst & Young Business Plan Guide, Third Edition leads you carefully through every aspect involved in researching, writing, and presenting a winning business plan. Illustrating each step of this process with realistic examples, this book goes far beyond simply discussing what a business plan is. It explains why certain information is required, how it may best be presented, and what you should be aware of as both a preparer and reviewer of such a proposal. Divided into three comprehensive parts, The Ernst & Young Business Plan Guide, Third Edition outlines the essential elements of this discipline in a straightforward and accessible manner. Whether you're considering starting, expanding, or acquiring a business, the information found within these pages will enhance your chances of success. * Advice on how to write and develop business plans
* A realistic sample plan
* All new sections on funding and financing methodswith provisions for restructuring and bankruptcy
* Tips for tailoring plans to the decision makers

PART I

The Purpose of a Business Plan

In this section, we discuss the basic purposes of a business plan, how the business plan is used as a tool for securing financing, and how to think through the issue of the proper legal form for a newly created or defined business.

Chapter 1 covers the business plan in general. Many people think that the business plan is the unique province of start-up companies and entrepreneurs. In reality, a business plan is an integral tool for any business (or any not-for-profit entity as well) as a way to map out a desired short- and medium-term future.

Large companies often demand comprehensive annual business plans from each division or operating entity in order to allocate corporate resources. A company looking to buy or merge with another entity needs a business plan that shows the implications of such a combination and how the unified business will operate going forward. On the flip side, a company selling off a unit needs a business plan of how it will operate without the sold-off portion.

Companies should require a business plan for any new operating group, division, or subsidiary being formed, and some businesses require a business plan for every new product or project. Indeed, our publisher required of our editor a business plan for this book that detailed content, marketing, distribution, costs, and projected revenues.

Chapter 2 deals with the business plan as a specific tool for acquiring financing for a new or growing privately held business. Just as businesses use business plans to allocate corporate resources within the company, independent investors such as venture capitalists, private equity firms, and “angel” investors, as well as lenders such as banks or finance companies, use business plans to allocate resources to freestanding businesses. If a company is offering stock to the public, or to more than a few independent investors, the Securities and Exchange Commission (SEC) gets involved and spells out what must be included in a special form of business plan, known as a prospectus, that each potential investor must receive.

Since the last update of this book in 1993, the universe of potential investors in privately held businesses has exploded, as private equity groups, hedge funds, and even endowments and pensions have increased their exposure to equity investments in businesses not publicly traded. While venture capitalists and angels have often been seen as “gut feel” investors, because of their heavier fiduciary burden, these new players are often more demanding of detailed and specific business planning before they will invest.

Chapter 3 takes on the issue of the many legal forms a business may take on its founding. The choice of legal form is driven by four general considerations: liability, control, ease of admitting new investors, and taxes. In the 20 years since the first edition of this book appeared, there have been almost countless legislative changes to the United States tax code, as well as numerous legal interpretations of federal, state, and even foreign tax laws as they apply to U.S. businesses.

Perhaps the largest change in legal entity form over the last 20 years is the advent of the limited liability company (LLC). The LLC is often described as a “hybrid” of a partnership and a corporation, and has become the favorite form of legal entity for small businesses, and even for some larger businesses. LLC laws are governed by each state.

Wyoming was the first state to enact an LLC statute, in 1977, which sought to afford small-business owners the legal protection of corporate owners without all of the paperwork. According to the Wall Street Journal, over 300,000 LLCs were formed in 2005 and their total number doubled between 2001 and 2004. The LLC seems to have supplanted the S corporation as the preferred legal form for entrepreneurs.

Finally, Chapter 4 discusses a concept known as “reverse due diligence.” Business plans are written by companies prior to acquiring another company, in an effort to understand how that new company will fit in with the acquiring company’s other corporate pieces. In a situation where a company puts itself up for sale, it may have a half dozen or more companies looking to possibly buy it. Increasingly, the company looking to sell itself hires an outside expert to do a single analysis and makes that analysis available to all potential buyers, so that each potential buyer does not have to hire its own analyst to assess the potential purchase. This makes the process easier for the company to be sold, since there are not experts from one or another potential buyer continually running around the business interfering with the work being done.

CHAPTER ONE

The Business Plan

It felt like it was time to update this book. We called our publisher, John Wiley & Sons, and discussed the ideas we had for a new edition. Wiley “did” a business plan. It may not have been written in the format suggested in this book, but make no mistake, before the company agreed to a new edition, it analyzed the competitive marketplace, determined if it could get a fair return on investment, looked at the credibility of the authors, and decided to invest in the new edition. This is exactly what any potential investor does when reading a business plan.

Keep in mind that entrepreneurs are most often doers rather than proposal writers. They would rather be on the battlefield—the cutting edge of business—than behind the lines planning their assault. They always want “to get on with it.” In addition, many entrepreneurs have difficulty articulating the business concepts that have often become second nature to them. They cannot find a way to share their vision in a manner that is conducive to some of the important sponsors of their project.

The same entrepreneur who can rally his team of employees to achieve breathtaking accomplishments often cannot sell the idea to the capital markets. The entrepreneur’s personal confidence in the venture may be enough to get early investors and key employees on board, but not enough to convince others who do more thorough due diligence before investing. With so many ventures seeking funding, translating ideas and personal qualities into the format needed by a potential investor or lender is not always easy.

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We once worked with an entrepreneur who had what we all thought was a great idea. He saw a need for a single store with carpet, lighting appliances, window treatments, paint, cabinets, tile, and other “home interior” items. It was a great idea. Today, we see this idea alive in many “home stores” including the Home Depot and the Lowe’s stores.

Our entrepreneur friend said the store needed to be a place where men are comfortable. He was right. He had developed this concept after working with a major paint company. He said it has to be all pulled together. He had a team ready to go from each potential department. He knew the vendors. He had scouted out locations in which to run pilots. He had assurances from a team of executives.

He could not, however, get funded! His vision was so clear to the believers on his team and his advisers that no one saw the need to put it all down on paper in order to make a cohesive presentation to possible investors. He preferred extemporaneous conversation to the structured approach. Even use of the business plan concept as an outline for the presentations may have helped. A business plan may have allowed “teaming” with others, who could have helped raise the necessary funds. Many less significant opportunities get funded.

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Consequently, one of the most difficult chores they face is the preparation and actual writing of a business plan. Whatever difficulty the preparation of a business plan may present, a plan is an absolute necessity for any business.

A business plan serves three functions:

1. Determining future projects
2. Determining how well goals have been met
3. Raising money

First and foremost, it is a plan that can be used to develop ideas about how the business should be conducted. It is a chance to refine strategies and “make mistakes on paper” rather than in the real world, by examining the company from all perspectives, such as marketing, finance, and operations.

Second, a business plan is a retrospective tool against which a businessperson can assess a company’s actual performance over time. For example, the financial part of a business plan can be used as the basis for an operating budget, and can be monitored carefully to see how closely the business is sticking to that budget.

In this regard, the plan can and should be used as the basis for a new plan. After some time has elapsed, and thereafter on a periodic basis, the business plan should be examined to see where and even why the company strayed, whether that straying was helpful or harmful, and how the business should operate in the future.

The third reason for writing a business plan is the one most people think of first, that is, to raise money. Most lenders or investors will not put money into a business without seeing a business plan. There are stories of wild-eyed entrepreneurs and venture capitalists with pens at the ready who meet, scribble some projections on a wet cocktail napkin, shake hands, and become “partners” in a hot technology business, but most of those stories are urban legends.

Even during the earlier years of the modern venture capital boom—during the mid and late 1970s—and again in the days of “irrational exuberance”—during the late 1990s—when there may have been less formality and more dynamism in the venture capital world, there was always an orderly process for securing venture capital. A large part of that process is the preparation and examination of a business plan.

If an entrepreneur presents an idea to a commercial lender or a potential investor without a business plan in hand, that money source will ask the entrepreneur to draft one and come back later. Or ...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Acknowledgments
• Preface
• A DEDICATION TO ENTREPRENEURSHIP AND THE ENTREPRENEURS OF AMERICA
• ABOUT THE AUTHORS
• ABOUT ERNST & YOUNG’S STRATEGIC GROWTH MARKETS PRACTICE
• THE ERNST & YOUNG ENTREPRENEUR OF THE YEAR PROGRAM
• PART I: The Purpose of a Business Plan
• PART II: An In-Depth Look at a Business Plan
• PART III: Other Resources for Entrepreneurs
• Index
• End User License Agreement