Mergers and Acquistions

Why You Need A Business Plan

The downturn in start-up venture capital funding hasn’t ended the need for a thoughtfully crafted, up-to- date business plan. In fact, regardless of industry or stage of business, a written business plan is a profoundly important exercise for any business.

After reviewing and advising clients on business plans for many years, I’ve concluded a written business plan is every bit as important for an established, successful closely-held business as a risky start-up. That sounds counter-intuitive, so let’s explore why a business plan is important, its uses, and what it should contain.

Importance. The apocryphal stories of business plans sketched on the back of cocktail napkins are entertaining, but cocktail napkin sketches represent only the beginning of the critical thought process that is embodied in every business plan.

In broadest terms, a business plan describes a long-term business opportunity and how an enterprise will capitalize on it from its current position. Implicit in the plan is careful thought, questioning, and analysis. What is the future of the business? What markets should be targeted? What are the special competitive business advantages and how can they best be exploited? How much capital and other resources will be required to achieve business objectives? What competitive risks are there, and how will they be dealt with?

Founders of start-ups typically focus a great deal on these issues. However, with an established business there is a tendency to focus on day-to-day operational issues instead of how to best achieve long-term strategic goals. Because its preparation requires focusing on long-term issues, a written business plan is a means of establishing the necessary focus on long-term goals, even with a successful, established, well-capitalized business.

Internal and External Uses. The key benefit of a business plan is the thought process concerning critical issues it requires from owners and management. However, there are a number of other uses for a well-conceived and documented business plan. These include:

• Communication Tool. The business plan helps concretely communicate the vision and goals of a business to management and employees.
• Financing Tool. Bank financing for even established businesses can be difficult. The business plan shows lending sources you understand your business and the general competitive environment.
• Exit Strategy. An old sales maxim is to “sell the sizzle, not the steak”. If you’re interested in selling your business, you aren’t selling just equipment, a product line, a brand name, or real estate. You are selling the future economic prospects and economic value of your business. The business plan can be invaluable in persuading a buyer to pay top dollar for future business potential.

Elements Of Good Business Plans. A well-conceived business plan should incorporate the following elements:

• Executive Summary. This section should be brief and great! If being used to raise money, it must catch an investor’s attention, answer key questions, and entice them about the business opportunity. If being used for internal purposes, it should succinctly communicate where the business is headed. In either case, it should illustrate your company’s distinctive competence and competitive advantage, and how management plans to sustain and exploit that advantage.
• Customer Need and Market Opportunity. Provide a description of the product or technology needs, its uses, and the overall market.
• Management and Key Personnel. Venture capitalists often say they would rather invest in so-so businesses with outstanding management rather than outstanding businesses with so-so management. Management and key personnel are just as critical for an established business. A thoughtful analysis of management’s background and capability is every bit as important in an established business as a start-up because a well-developed management team adds value.
• Marketing Plan. Explain how the business will satisfy the identified customer needs and market opportunity. Include how the market is segmented, distribution channels, sales strategies, plans and forecasts, competition, and product positioning.
• Operations Plan. Explain how various requirements to achieve the business plan, such as engineering, manufacturing, facilities, and administration will be addressed.
• Financial Projections. Pro-forma income statements, balance sheets, and cash flow statements should be included in the business plan and updated regularly. The assumptions for such pro-formas should be explicitly stated and regularly reviewed.

Preparation Guidelines. There are many sources to provide help in preparing business plans. In addition to professional advisors and consultants, many venture groups hold frequent seminars explaining how to prepare business plans. Especially useful are programs that incorporate a review and critique of business plans by experienced advisors and investors. There are also software programs that provide the basic structural elements of a business plan.

Conclusion. There is no substitute for the critical thought and questioning that is required for the preparation of a well-conceived business plan. What do you do better than any other company? What is your competitive advantage? How will you exploit it? In the last analysis, the process of answering those questions is what provides the business plan with its real value.