Day 3 - Morning Develop Business Plan Charbonneau Colford

Lead to Win Develop the Business Plan July 30, 2009 Morning Ken Charbonneau, CA, CPA – KPMG Chuck Colford, CEO – Congruance IT, Inc.

Upon completion
You will know about:
Effective business plans
Financial projections
The impact of milestones on value creation
You will be able to:
Prepare a business plan that helps founders and appeals to investors
Determine your funding requirements
Slide

Agenda
The business plan must convey an unfair advantage
Financial projections are a reflection of your plan
Manag e milestones to create value
Slide

Business plan must convey an unfair advantage
Upon completion, you will know about:
Reasons for planning
Content requirements of successful business plans
Unique characteristics of start-up business plans
And you will be able to:
Prepare a business plan that appeals to investors
Articulate the key messages
Understand why business plans fail
Slide

Financing is only one reason to plan
There are many other benefits:
Gets everyone pulling in the same direction
Ensures integration of all the pieces
Sets a foundation for all other activities
Provides a tool for communication
Completing the Business Plan helps you! (An investor might invest without even reading it). Slide

The process begins with the end in mind
Identify your objectives and audience
Draft an outline
Write your plan
Seek input
Revise your plan, seek input…
In the end:
Own your plan
Control distribution
Slide

KISS to be effective in planning
Company background
The pain and solution
Product or service
Technology
Market
Competition
Organization
Finance
Exit Strategy (if VC Funded)
Slide

Company Background
Date founded and legal structure
Founders, key shareholders and management
Business purpose
Highlights of progress and major developments
Geographic location – cross border operations
Facilities/equipment
Are there any skeletons in the closet? Do the founders have enough at stake? Slide

The Pain and Solution
Who is the customer?
What is the customer’s pain?
How is the customer currently dealing with the pain?
What is your solution?
Why will the customer buy?
Have the pain points and solution been validated with customers? Slide

Product or Service
Concise description – detailed but non-technical
Status of product development including future products
Provide pricing structure
Excluded ancillary items
Are the product or service features clearly linked to the pain? Slide

Technology
Concise description – detailed but non-technical
Proprietary vs. integrated technology
Barriers to entry (patents, trade secrets)
Platform technology?
Level of future effort to date (time and $)
Future milestones
Are the competitive position and barriers to entry clear? Is the technology unique or a true breakthrough Slide

The Market
Size and growth rate
Think global
Key market drivers
Marketing strategy – the other 3 Ps
Price
Place (distribution)
Promotion
Segment and tackle pursuant to adoption curve
Innovators, Early Adopters, Early Majority, Late Majority, Laggards
Have they articulated a sound business model? How will they access the customers? Slide

Competition
Existing and future competition
Assess from a product and company perspective
Comparison criteria must be relevant to the customer
Barriers to entry
Don’t forget substitutes and if you’re doing it so are they!
Has competition been thoroughly analyzed or dismissed? Slide

Organization
Current and future organization structure
Management team – strengths, role, relevant experience, contact network
Board of directors and advisors
Pedigree is not enough. Is the team credible and trustworthy? Does the team have the experience to execute the plan? Slide

Finance
Amount raised to date and how spent:
Financing rounds
Amount invested by founders and their ownership
Historical financial statements, if any
Financial projections
next 5 years
key assumptions
Funding requirements and use of proceeds
Exit strategy
Is this and attractive investment – how will I get my money back? When will they break even? How much must be raised to fully execute the plan? Slide

Exit Strategy
Plan to take yourselves out
Selling your business to someone else
Going public
Succession/transition plans & timeframes
Winding up
Handcuffs
Who will your acquiring partners be?
Likely players who will acquire your business
Why?
Plans to attract and engage them
Window of opportunity (timeframes, triggers)
Getting Cash Out
Voting rights – all players not equal
Registration rights
Severance payments
Dissent rights
Capital gains, Dividends (Tax implications, benefits)
Stock or Cash
How are you going to get money out of your business? Likewise – your investors? Founder’s plans may differ from the investors! Slide

Executive Summary
Dual purpose
2-page maximum; no titles
Summary of key areas detailed in plan
Must compel the reader to take action
Hardest section to write
Most likely section read by investors
What are you doing that is exciting and unique? Will it provide the return I am looking for? Slide

Avoid these common mistakes
Invalid or unsubstantiated assumptions
Overly optimistic projections
Underestimating the competition
Inconsistencies between text and projections
Unprofessional document, poor organization
Too much/too little detail
Underestimating capital requirements
Slide

Adopt best practices
Spend time on creating a great business plan
Build plan on unfair advantage – one that is sustainable against competition
Write a super executive summary
Accentuate the excellent management team
Complete detailed market research
Write well
Include graphics and charts
Crisp packaging (2 page summary; 20 page plan)
… and always keep the audience ($) in mind
Slide

Agenda
Manage milestones to create value
Slide

Financial planning techniques
The critical role of the revenue projections
Business plan and financial plan interdependency
Understand the critical variables for your business
Determine your finance requirements
Determine the use of proceeds
Work effectively to prepare the projections
Slide

Always begin with the basics
The economic value of your business is a function of the returns expected
Valuing any economic resource is a forward-looking exercise
Your company’s financial plan is the tool used to project future returns and risks
Lack of historical data and good market data makes it a challenging and vulnerable process…
So, ground assumptions in relevant external data
Test sensitivity to confirm key assumptions
Slide

The devil is in the details
Financial plans incorporate business plan detail
Projections reveal the strengths and weaknesses of your business model
Your choice – add credibility or highlight glaring inconsistencies
Your role
Get help and then direct the process
Take responsibility for key assumptions
Review the results
Internalize your understanding of the final product
Be prepared to be grilled
Slide

Financial projections made easy
Determine the fiscal year end date, start date, desired number of years and frequency of data (monthly, quarterly, annual).
Decide the reporting currency.
Project revenue and cost of goods sold.
Project the head count and capital expenditures required to deliver the projected revenue.
Project sales and marketing expenditures.
Project other operating expenses (general and administration, research and development, depreciation).
Slide

Financial projections made easy
Project when revenue will be collected and expenses paid.
Project the assets, liabilities and equity.
Determine the cost of financing the capital structure and include in the statement of income.
Derive the statement of cash flows from the projected income statements and balance sheets.
Create a written summary of the key attributes and assumptions underlying the financial plan.
Slide

Estimating revenue is the critical start
Set revenue targets
Understand environmental forces driving future volume growth and pricing (e.g. demographic shifts, cultural changes, regulatory etc.)
Don’t forget the time lag between a “booking”, a “sale” and recognition as “revenue”
Use formulas or ratios where appropriate (i.e. service revenue per unit of product sold)
Ensure consistency with product release schedule
Support estimates (e.g. growth rate) with detailed market research
Slide

The cost of revenue is the next step
Cost of revenue has a volume and unit cost component
Unit costs need to be estimated from the bottom up and then applied as a ratio if appropriate
Unit costs can have a labour and/or product cost component.
Slide

Expenses reflect activity drivers
Headcount
Build personnel resource requirements from the bottom up, by department, over the entire period
Distinguish employees from contractors
Ensure consistency with business plan assumptions regarding product development timeline
Capital expenditures
Equipment requirements driven by headcount
Don’t forget equipment upgrades in later years
Sales & marketing
Ensure that sales and marketing costs increase as revenue increases
Slide

Use of proceeds - explains the capital requirement
Capital requirements
Total capital required should be identified as equity
Bank lines of credit and equipment leases can be included after the company is generating positive cash flow
Create a capital requirement that provides cash for a six month burn
Use of proceeds
Determined by the nature of the operating expenses and capital expenditures incurred during the period immediately following the assumed receipt of funds
Slide

Determine the most sensitive variables
Identify critical variables (your key assumptions and milestones)
Estimate a high, low and expected value for each critical variable
Change the value of each variable individually and in combination.
Summarize the impact of each change on the financial projections
Revisit and refine your assessment of the critical variables based on the output and determine the impact on the capital requirements
Document most likely scenarios for discussion with investors
Slide

Avoid these common mistakes
Fairy tale revenue projections
Over optimistic selling prices and market share estimates
Grossly underestimated capital requirements
Unrealistic sales cycles and cost of equipment estimates
Product release slippage
Not enough scenario analysis
Lack of conventional financial statement formatting
Slide

Agenda
Slide

Selecting, monitoring and using milestones
Impact of performance on value creation
Identify and manage metrics
Improve ability to create value
Slide

Manage milestones
Resources constraints - $’s & human resources
Improper resource allocation
Failure to prioritize and maintain focus
Failure to delegate
Failure to operationalize the plan
Plans change
How many Business Plans are executed on time and on budget? Slide

Operationalize the plan (i) who is going (ii) to do what (iii) by when. The Business Plan does not become an operating plan until you identify How do you manage to the plan and know whether you are on track? Slide } Milestones!

Developing milestones
Identify and prioritize events or actions that must occur to achieve the Business Plan
Focus on those critical to creating value
Product development, customers and employment
Allocate resources to maximize likelihood of success
Minimize cost of failure (Plan B)
Keep it balanced
Build out all areas of the plan
Remember the sail boat!
Keel Boat Sail Slide

Determine event prerequisites and develop a critical path chart
Building a company is managing a portfolio of projects
Identify, sequence and allocate resources to the tasks comprising the portfolio
Document tasks, sequence and resource allocations
Communicate it!!! – post the chart in the boardroom, lunchroom, bathroom, hallway…
Slide

Identify key assumptions on which your company’s success depends
Business plans are supported by assumptions due to uncertainty
Recognize explicit and implicit assumptions
Look for opportunities to challenge assumptions and replace them with “fact” (hypothesis testing)
Slide

Monitoring milestone status will provide new information that will replace assumptions in the plan.
Examples:
Slide Available resources known Achieved Raise $1M Need new target market? Not Achieved 1 st Paying Customer Direct product costs known Achieved Beta Product Lesson Learned Status Milestone

Performance impacts value creation Keep going (Good time to raise $) Looks good but revisit the plan Revisit milestones and financial requirements (Bad time to raise $) Go home Good Poor Strong Weak Business Plan Validation Performance Slide Milestones are not being achieved Market feedback and data conflict with the plan assumptions Milestones are being achieved or exceeded Market feedback and data conflict with the plan assumptions Milestones are being achieved or exceeded Market feedback and data increasingly support the plan assumptions Milestones are not being achieved Market feedback and data increasingly support the plan assumptions

Day 3 - Morning Develop Business Plan Charbonneau Colford

by Brian Hurley

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Day 3 - Morning Develop Business Plan Charbonneau Colford Presentation Transcript