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THE GROUNDWORK
The only thing we know about the future is that it will be different.
âPeter Drucker
BEFORE YOU start to write your business plan, you must do some essential preparation. This means gathering the information you'll need to impress your potential backers and getting things organized so that you can prepare a plan that is clear, concise, and convincing. But let's start with the most basic questions concerning a business plan.
The Purpose
What's the purpose of a business plan? Why do you need it? Who's it for? Some guides devote page after page to all the possible permutations of the answers to those questions. That's a waste of time. The essential answers are straightforward: You need a business plan to obtain backing. It is written for your backer.
It's as simple as that. If you are in need of backing, for whatever reason, a business plan is essential. And you'll craft that plan to address all the key issues likely to be raised by that backer.
You may need backing because you are launching a startup. Or your company is set for a liftoff in growth. Or it is facing rough times and needs a cash injection.
In each case you need backing, so you'll need a business plan. Of course, it can be more complicated than that, but only a little. Here are some purposes for a business plan worthy of special mention:
- For a startup
- For raising equity finance
- For raising debt
- For board approval
- For a joint venture partner
- For sale of the business
- For differentiating from a project plan
- For use as a managerial tool
Let's look briefly at each of these purposes in turn.
A BUSINESS PLAN FOR A STARTUP
This plan is not that different from a business plan for an established business seeking growth finance. The chapter headings will be the same, but, as you will see later in this book, certain additional questions must be addressedâfor example, the identification of prospective customers, the crafting of a distinctive value proposition, a pilot survey, and an assessment of competitive response.
The business plan for a startup (or an established business) will be tailored according to whether you are seeking equity or debt finance.
A BUSINESS PLAN FOR RAISING EQUITY FINANCE
Your backer is an investor. Investors look for a return on their investmentâas high a return as possible with as little risk as possible. Investors place as much emphasis on opportunity to exceed plan as the risk of falling short of plan. Each chapter of your business plan must be written with that perspective in mind, exploring upsides creatively but realistically.
A BUSINESS PLAN FOR RAISING DEBT FINANCE
Your backer is a banker. Bankers will be looking to earn fees on the transaction and interest on the loan extended. They want assurance that your business will generate sufficient cash to cover interest payments. And bankers will want some form of guarantee, some security, that they will get their money back, all in one piece, at the end of the loan period.
And remember this: Your banker may not make the decision. That may be for the bank's credit committee members, and they won't meet you. They won't have the benefit of hearing your upbeat version of the future. They'll just examine a cold document: your business plan. So you had better address all the downsides in your plan and convincingly dismiss them. The credit committee won't be remotely interested in the upsideâthat won't benefit them one penny. They only want to know what could go wrong, with what likelihood, and what you will be able to do to mitigate the damage once things have gone wrong.
The whole tenor of a business plan for a banker will be different from a plan written for an equity investor. You will be conservative, cautious, and risk averse. Forecasts must be readily achievable. Risks to such unambitious forecasts must be extremely unlikely.
One of the authors worked in an investment bank for a number of years and had many a memorable session with credit officers. Take it from experience: No matter how conservative you are in your downside case, the credit guy will always go a shade or two more conservativeâhowever unlikely it is. So be prepared and well-armed with the counterargument.
A BUSINESS PLAN FOR BOARD APPROVAL
The majority of business plans fall into this category. You can imagine the scene in the boardroom a month or two beforehand, with the chairman expostulating: âCharlie, you and your team have so many exciting ideas for moving this wonderful company of ours forwardâbut, you know, I'm a bit confused. Where are we going to aim first? Where are our best bets? Which is the more risky path? What could go horribly wrong? Will we have enough cash to fund all this expansion? We need a plan!â
The circumstances may differ, but the business plan itself, when written for board approval, will be no different from a plan written for an external investor. The board is effectively an investorâan internal investorâand should be treated with the same respect.
A BUSINESS PLAN FOR A JOINT VENTURE PARTNER
Joint ventures are like any relationship, commercial or personalâsuccess rests entirely on both parties continuing to benefit from it. If one party obtains a seemingly unfair advantage over the other upon formation of the alliance, it will not last and the breakup will be painful on both sides.
Thus the initial success of a JV depends on the terms agreed on at the outsetâand these terms, in turn, depend on both parties drawing up and exchanging robust business plans. These plans will be written as if for an investor, because in effect your partner is investing in your business and you are investing in your partner's business.
A BUSINESS PLAN FOR SALE OF THE BUSINESS
Many business plans are written for the sale of a business, but too many plans read as if written purely for an equity investor. That's fine if the buyer is a âtrade buyerâ (that is, another company in the same or related line of business), a joint venture partner, or a venture capitalist.
But it's not so good if private equity firms are among the prospective buyers. They will want to structure the transaction with as little equity as they can get away with, and with as much debt as possible without endangering the financial stability of the company.
This means that the financing will require the approval not just of the investment committee at the private equity house, but also the credit committee at the bankâand maybe also the credit committee at the mezzanine provider (i.e., a financier of high-yield unsecured debt with an equity kicker). So, in this circumstance, the business plan should be written to address both the upside for the investor and the downside for the banker. It needs to be cleverly balanced.
A BUSINESS PLAN VS. A PROJECT PLAN
A project plan is similar to, but differs from, a business plan. A project plan makes the business case for a specific investment project. It isolates revenue streams and costs directly attributable to the project and recommends âgoâ or âno goâ decisions accordingly. The decision is typically taken at the board level and is separated for external finance only rarely and on very large projects.
A business plan considers the future of the whole business. That business may be a division or subsidiary of a much larger company, but it has its own income statement and will be forecast in full.
THE BUSINESS PLAN AS A MANAGERIAL TOOL
Annual business planning, while often a most useful discipline in large, multi-divisional, multinational organizations, is largely a waste of time for small and medium-size businesses (SMBs). In theory, it is a great idea. Every year the managing director appoints a capable manager to review last year's three-year plan and prepare this year's plan. Lessons are learned and steps taken to improve performance.
In practice, insufficient time and effort will be invested in the market research and strategy development parts of the annual plan, rendering the three-year forecasts unsubstantiated, often wildly optimistic, and potentially misleading. The only part of the plan for which managers will be accountable (and that's typically reflected in their pay package) will be the next-year budget numbers. So why invest serious time every September producing robust three-year forecasts against which you are not going to be monitored?
The authors have seen medium-size businesses turning over $150 million preparing rolling annual business plans that are meaningless. No manager believes in them, not even the managing director, but some adviser, some time ago, told them that annual business plans are a useful discipline. They are not, unless they are done properly.
And doing an annual business plan properly means investing time and effortâresources that are in short supply in a thriving SMB and generally better directed toward serving customers and improving performance.
The time for an SMB to do a business plan properly is when there is a specific need, such as when the board asks for one, when an investor seeks one, when the bank demands one, or when the business is for sale. Otherwise, management time is better focused elsewhere.
For whichever of these purposes you are writing a business plan, this book will be your indispensable guide. It is a guide designed to address the needs of different types of backers.
The End Result
What should a good business plan look like? Let's get the answer to that question firmly planted in the brain before we delve into other details.
Where do you need to get to? What is the end result of this process? What does a good, winning plan look like and how does a good plan differ from a bad, losing plan?
In short, what is the essential outcome?
Let's look at the outcomes under two scenarios:
- A plan for an established business
- A plan for a startup business
We'll start with the established business, because it's easier to gather the necessary facts and figures for an ongoing enterprise. The business has a track record, both operational and financial, achieved within a historical, recorded context of market demand, industry competition, strategic positioning, and resource deployment. Forecasts will be based as much on fact as judgment.
If you are planning for a startup, you should still read this section because it will help you become familiar with the various components that go into creating a strong business plan. And keep in mind that an established business scenario is where you are aiming to be in a few yearsâ time, when your startup has made a reputation for itself and is poised for the next level.
AN ESTABLISHED BUSINESS
What does a successful business plan look like for an established business?
We'll take a fictional case study of The Gorge Inn and Oriental Spa and run with it throughout this book. Hopefully it will be a case you can relate to, because we're confident everyone has felt the urge, now and again, to flee the rat race and set up a business in some idyllic patch of this earth.
This particular piece of North American paradise is located in the Columbia River Gorge, which carves its dramatic, imposing way between Washington State and Oregon. The Gorge Inn and Oriental Spa is owned and run by Rick and Kay Jones. Rick is a former management consultant, and Kay is a stress management counselor of Eurasian heritage.
The business has been operating for three years and has just started to turn a profit. Rick and Kay have secured planning permission to build a 16-bedroom extension and swimming poolâan investment they believe will transform the profitability of the business. But they have run down their personal funds over the last few years and need a further injection of external finance.
In short, they need a backer. So they need a plan. Here's their executive summary, where you'll see that in a mere couple of pages most of the key questions a backer needs to know can be satisfactorily addressed.
THE GORGE INN AND ORIENTAL SPA BUSINESS PLAN, 2014: EXECUTIVE SUMMAR...