Creating a business_plan_that_investors_will_read
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  • 1. © 2010 Scotia Macleod 2010 RESOURCE GUIDE How to Create a Business Plan That Investors Will Read
  • 2. Why You Need a Business Plan Launching a new product or service or expanding into a new market for the first time can be a complicated process. How do you impress investors and lenders to get the money you need to launch or expand your business? What is your target market? Do you have adequate capital? A business plan answers these questions and is an important tool in raising capital. Fundamentally a business plan is your company’s resume. This resume illustrates your market opportunities, management team and competitive advantage. A well written and compelling business plan can get the attention of investors, increasing their belief in your company and help you acquire the capital needed to get your business off the ground. Successful companies work with Scotia Macleod because of their commitment to leadership, excellent team management skills and reliable business strategies. Scotia Macleod can help make your business “investor ready” to raise capital through our services in corporate advisory, strategic planning, operational effectiveness and risk management. www.scotiamacleod.com.au
  • 3. Table of Contents WHY A BUSINESS PLAN IS NECESSARY ......................................................1 COMMON MISTAKES ....................................................................................... 1 WHAT INVESTORS AND LENDERS ARE LOOKING FOR ............................................ 2 COMPONENTS OF A BUSINESS PLAN.........................................................4 EXECUTIVE SUMMARY....................................................................................... 4 COMPANY SUMMARY...................................................................................... 5 INDUSTRY ANALYSIS.......................................................................................... 5 COMPETITIVE ANALYSIS.................................................................................... 6 MARKETING PLAN ........................................................................................... 7 OPERATIONS PLAN .......................................................................................... 7 MANAGEMENT SUMMARY ................................................................................ 8 FINANCIAL PLAN ............................................................................................. 8 PRESENTING YOUR BUSINESS PLAN ...........................................................9 PACKAGING AND PRESENTING TO A BANK ......................................................... 9 PRESENTING TO PRIVATE INVESTORS ................................................................... 9 HOW TO AVOID THE PITFALLS OF A POORLY WRITTEN PLAN.................................. 9 GRAMMAR AND STYLE ................................................................................... 12 MAKE YOUR BUSINESS PLAN STAND APART FROM THE CROWD .......................... 13
  • 4. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 1 Why a Business Plan is Necessary It is hard to get capital. Investors see a lot of business plans and of all that are pitched 95% are rejected. You need to get to the next level and your business plan will be your first (and sometimes only) chance. Private investors look for investments which have the potential for very high rewards. These ventures will always have a high growth potential component. No lender or investor in the world will be willing to gamble on your venture based solely on your confidence that it’s going to be great. They want to know that you have thought out all aspects of the business before they will invest in you and your venture. They need to be sure you have a profitable product /service; that your business is in a growing industry; that you have a contingency plan to deal with any potential pitfalls that may occur; a detailed marketing strategy is in place; and that a competent management team and staff is aligned to manage day-to-day operations. Common Mistakes Not only must you have a business plan, it must be smart, cohesive and thorough. Common mistakes found in businesses plans include: • Lack of clarity • Content mistakes • Overstating sales projections • Insufficient financial projections • Dismissing competitors' positions • Trying to be all things to all people • Saying you have all the answers (lack of knowledge is OK, just say what you'll do about it) • Too brief or too lengthy Business planning is like plotting a long course on a winding journey. Imagine plotting that course haphazardly or arrogantly assuming that you will know how to find the way and don’t need directions….your trip will be a disaster. You need a well thought out plan! This plan, your business plan, will serve as a "road map" for your enterprise, allowing you to reach both your immediate and long-term goals. It allows the management team to navigate toward a common vision. Once the vision is on paper, the team can then realistically assess the feasibility and the long-term viability of the business.
  • 5. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 2 Without a well developed business plan, you will not be prepared to deal with challenges that may arise as conditions change, such as budgets, operations, sales, and economic fluctuations. Armed with a solid business plan and documented ideas about how business should be conducted, you will be more than prepared to face most anything. What Investors and Lenders are Looking For There are certain areas of the business plan that investors and lenders will focus on more heavily before making the decision to fund your company. These include the following: • Products and Services • Competitive Advantage • Financial Projections • Management Team • Marketing Plan For an investment to have a serious chance of being successful it needs to show that it can reach its potential and achieve the revenue and profit levels to provide a good return on the investment. Plus, it needs to demonstrate the risks, and the exit strategy for the investors. Products and Services: Like most entrepreneurs, you believe that your products or services will satisfy a market demand, however your business plan must effectively convey this idea. How is this product different than what is already available on the market? What is unique about it? What value-added benefits will you provide to your customers? You need to be able to answer these questions in your business plan. Are you impressed by the answers? If not, an investor won’t be either. Competitive Advantage: Competition is fierce and there are many businesses out there vying for the same customer. You will need to know and understand who your customer is, what they want, what they like, what they do, where they do it and how they do it. Your plan must then demonstrate your knowledge of the customer or identify a market niche whose needs are not being met. You’ve got to prove to investors and lenders that your company has a unique advantage over other companies competing within the same industry.
  • 6. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 3 Financial Projections: You believe in your product and you know it will be successful, but again, investors and lenders are not willing to roll the dice on your “hunch”; you can be sure that they will make an informed and wise decision based on likelihood of success and profitability. You will need to prove to them that your plan is sound by including short and long-term financial projections, best-case and worst-case scenarios and income statements. Management Team: No company can truly succeed without an extraordinary team behind it. The success or failure of your company depends on the experience, maturity and common sense of you and your team; that includes partners, board of directors and management staff. It is imperative that the management team have skills in management, marketing, finance and operations. The strength and experience of your management team must be communicated in your business plan. Remember that a company with a formal structure will more likely raise needed capital, and achieve its business goals in less time and with far less expense. Marketing Plan: How will you penetrate your target market? How will you position your company? Your marketing strategy should effectively communicate the answers to these questions. Your plan should include demographics of your product's target customers, industry trends and growth, competitors that share your market, and the strengths and weaknesses of your products or services. This is the place to illustrate to the reader how your company is unique in the market and how you plan to drive your message.
  • 7. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 4 Components of a Business Plan Think of your business plan as a beautifully presented dish at a fine restaurant. It needs to contain the “ingredients” – the different elements and summaries that make up the overall meal, and be presented in such a way that it gets attention. The overall result relies on each part being great, as well as the balance between the elements being correct. And of course, expertly presented. And, to extend the analogy, you are presenting your ‘dish’ to a food critic. Private Equity investors, Venture Capitalists, and Angels receive hundreds of proposals a month – and perhaps only a few percent of business plans and proposals even get read. So to gain attention you need to be brilliant. A business plan needs to contain: • Executive Summary • Company Summary • Industry Analysis • Competitive Analysis • Marketing Plan • Operations Plan • Management Summary • Financial Plan / Financial Model Executive Summary Like most business owners, you are excited about your business plan and you want your reader to be excited as well. The executive summary is where first impressions of the business plan will be formed. This is where you really want to capture the reader’s attention and make them want to continue reading. The executive summary section of the plan can either make or break your company. It explains your entire business plan and therefore, it is usually written after all of the other sections of the business plan have been completed. Here you will list your company’s mission and objectives and state the capital requirements needed for the business to begin or expand operations. Paint a great picture for your reader. This section should not be longer than two pages and should contain brief paragraphs illustrating the following: • Company Summary • Industry Overview & Growth • Competitive Analysis & Competitive Advantage • Management Overview • Capital Requirements & Exit Strategy • Financial Highlights Overview
  • 8. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 5 Company Summary So what does your company do exactly? What is your product going to do for your customers? This should be made very clear in the company summary. If the reader has to guess at the answers, they will abandon the plan and you will likely lose your chance at receive funding. The company summary is a strategic overview of the company that provides a description of company organisation, what products and services it offers (or will offer), its unique qualifications and current market opportunities. This section should provide the reader with the concept of how your business works and why it has a unique chance to shine in the marketplace. It should also address basic information about the business structure, management and location. When writing, make sure you answer the following: • What is the precise nature of your business? • What products and services will you offer? • How will your company be organised? • Where will the company be located? • Who are the founders and who will run the business? Know your business, your competitors and all aspects of purchasing, manufacturing, packaging and distribution. Potential investors or lenders will not lend capital if they don’t have confidence that the business concept has been researched, calculated and thoroughly thought out. If you are unsure of your company identity, or communicate that identity poorly, the investor most certainly will not be confident in the success of your venture. Socrates’ guiding rule was “Know Thyself”…that same rule should apply when you are communicating who and what your business is.
 Industry Analysis Where do you and your business fit in? It’s time to prove that your product or service has value and a definite place in the market with the industry analysis. This part of the plan evaluates the marketplace in which the company will compete. You will need to clearly identify market share and potential market share, industry growth projections, trends, technology developments, consumer buying habits, product development and industry stability. Be realistic. If there are any barriers to entry within your industry, explain them. Barriers to entry may include: high capital costs, licensing and patents, brand
  • 9. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 6 recognition and loyalty, market saturation, production, access to customers and training. Also be proactive and list how industry changes will affect your company such as new technology developments, government regulations and economic fluctuations. The more you know about the industry in which you are trying to enter, the more impressive your business plan will be. Make sure to provide a history, as well as information about the dollar volume involved, any recent market trends and an analysis of your current position in the market. Industry information can be found from the following sources: • Industry Reports • Newspaper & Magazine Articles • Books • Government Census Data • Surveys Competitive Analysis Of course your business stands apart from the rest and your product and service will be the best on the market, of this you are certain. Communicating your advantages, however, can be tricky. In fact, the competitive analysis section can be the most difficult section to compile. Your competitive analysis should identify and expand upon your competitive advantage -- the benefits that your product/service will offer that your competition can't or won't supply. Basically, you will need to communicate how your product or service will blow the others out of the water – or how it will meet the needs of a niche market. The first question you need to ask yourself is who am I up against? In determining who the direct and indirect competition is, you should start by making a list that includes the following information: • What markets or market segments your competitors serve. • What features and benefits do their products/services offer? • Why customers buy from the competitors. • Their products and/or services, pricing and promotion. Do a little investigation -- cyber stalking if you will. Your competitor's business website can be a great asset in learning about their products and services, pricing, benefits and even promotion strategies. Also search for publicly available information about your competitors.
  • 10. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 7 Explain who your competitors are, how much of the market they control, and any other relevant details about the competition. Detail your competitive advantage, explaining why and how your company will be able to compete with these competitors and establish yourself as a successful company. You must demonstrate to the reader that you know everything there is to know about your competition and that you have a clear, definitive plan that will enable your new business to successfully compete and provide superior service or products. Marketing Plan Now that you know who your target customer is and who your competitors are, how are you going to get your name out on the street, reach your customer and blow away the competition? This is your marketing strategy. Your profits will depend on how well you develop and implement your marketing strategy. In this section, identify your target market, including customer demographics, purchasing habits, and how you will uniquely position your products and services. Also define the sales and advertising strategy that will help you reach your target market. Here you can also include a SWOT analysis of the business environment in which the company operates. A SWOT analysis looks at a company's strengths, weaknesses, opportunities and threats. It also provides a way to analyze the company's resources and capabilities in the competitive landscape in which it does business. Operations Plan Now we get to the who, what, when and where of implementing your plan. You have communicated that you know who you are, you know what you do, you know who your customer is and you know who you are competing against. You now need to illustrate to investors that you have all your ducks in a row. The operating plan section will describe the physical necessities of your business operations, such as facilities, supplies, equipment and location. It may also include information about inventory requirements, vendors and the manufacturing process. Explain the quality control measures that you've set up or are going to establish. In this section, you should also list your staffing/personnel plan. You want to illustrate that your business will be run by the best and most experienced people, who can and will execute flawlessly against your plan. Explain what manager will be assigned to which department, how many employees you will have, and if you will utilize outside consultants or contractors. Including an organisational chart will impress your readers.
  • 11. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 8 Management Summary Ultimately, the success or failure of your business rests upon your management team. Potential investors and lenders want to know who will be running the show. They want to see a management team that has the ability to provide the four essential elements of management: planning, organisation, control and leadership. The success or failure of your business will depend on your management team, your partners, your board of directors and advisors. This section needs to list who will be in charge of certain responsibilities and tasks and why they are qualified to manage this specific department or task. Remember that skills in marketing, finance, and operations are essential in creating an effective management team. You will need to really articulate the strengths of your management team in your business plan. An organisation with a formal structure is better able to raise capital and provide leadership and thus achieve its goals. Your future goals are more easily attainable when this structure is put into place first. When assessing your management and organisational structure, include outside consultants and professionals to supply any missing expertise necessary to strengthen your management team. List your board of directors and your advisory board. Also, be sure to include a brief, yet comprehensive resume of the qualifications and experience of each manager. Financial Plan It’s no great epiphany to tell you that a business can’t operate without money. You must be able to prove in your business plan that your venture is viable. The financial plan includes the startup expenses and operating budget, indicating how much capital will be required to keep the business going. This section includes: salaries, wages, insurance costs, accounting costs, equipment costs, legal fees, taxes, cost of goods sold, advertising and promotional expenses. Typical financial statements found in a business plan include: • Income Statement • Sales Forecast • Cash Flow • Balance Sheet
  • 12. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 9 Presenting Your Business Plan Packaging and Presenting to a Bank At this point, your business plan is complete -- your blood, sweat and tears have gone into the creation of this sacred document, the roadmap to your holy grail. You've created your unique product or service, you have a great team behind you and you have developed your budget. It's now time to take your plan to the bank. The best piece of advice that I can give you now is to be absolutely and undoubtedly prepared when you take your business plan to the bank to apply for a business loan. Be ready with a well rehearsed, slam dunk sales pitch that will sell you and your business idea. Your pitch should include the strengths and weaknesses of both your management team and your business. Your presentation will be strong if you present the positive aspects of your business and the opportunities within your market as well as the realistic and negative aspects. Presenting to Private Investors Don't want to ask for a bank loan? Then consider the fact that there really are angels among us. The right angel investor can be the perfect first step in formal funding for the business seeking funding. It usually takes less time to meet with an angel and to receive funds, due diligence is less involved and angels usually expect a lower rate of return than a venture capitalist. The downside is finding the right balance of expert help without the angel totally taking charge of the business. Structuring the relationship carefully is an important step in the process so everyone knows their restrictions. How to Avoid the Pitfalls of a Poorly Written Plan Being armed with a succinct an effective business plan demonstrates to the reader that you know where your company is going and how to get there. Many entrepreneurs have big ideas, but can’t communicate their ideas to prospective business investors, which means the opportunity to acquire capital to get their venture up and running could be lost. A survey conducted by GrowthThink interviewing venture capitalists, corporate investors and angel investors found the ten most common reasons business plans don't get funded.
  • 13. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 10 Pitfall #10: Excluding Successful Companies in the Competitive Analysis Too many business plans want to show how unique their venture is and, as such, list no or few competitors. However, this often has a negative connotation. If no or few companies are in a market space, it implies that there may not be a large enough customer need to support the venture’s products and/or services. In fact, when positioned properly, including successful and/or public companies in a competitive space can be a positive sign since it implies that the market size is big. It also gives investors the assurance that if management executes well, the venture has substantial profit and liquidity potential. Pitfall #9: Over Emphasizing Partnerships with Well-Known Companies Forging partnerships to improve market penetration and/or operations has become commonplace, particularly for “new economy” businesses. The fact is that, regardless of whom the partnership is with, partnerships by themselves have limited value. Rather, what are meaningful are the partnership terms. For instance, while it sounds great to have a partnership with Microsoft, Cisco or Yahoo, it is the details of these partnerships that investors find important. The business plan must explain the partnership’s equitable terms, the extent to which each partner will improve operations and/or sales, and the structure of the partnership. Pitfall #8: Focusing Too Much on the Future Investments and valuations for growth companies are based on a firm’s projected future performance. However, the best indicator of future performance is past performance, or a venture’s past track record. Business plans must show what milestones/accomplishments a venture has achieved. Past success in achieving goals gives investors the confidence that the team will execute in the future. Pitfall #7: Not Tailoring Management Team Biographies to the Venture’s Development Phase The Management Team section should include biographies of key team members and detail their responsibilities. These biographies should be tailored to the venture’s growth stage since different skill sets are needed to launch, grow and/or maintain a venture. A start-up venture should emphasize its management’s success launching and growing ventures. On the other hand, a more mature venture should emphasize how team members have successfully operated within the framework of larger enterprises.
  • 14. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 11 Pitfall #6: Asking Investors to Sign an NDA Most investors will not sign NDAs (Nondisclosure Agreements). This is because a business’ strategy and/or concept are typically not confidential. It is possible that a key partnership is confidential, for example, but for the most part the execution of the strategy and concept is what will make the company successful. If the concept and/or strategy must remain confidential, this often implies that there are no barriers to competitive entry. If a competitor or host of competitors can quickly copy the concept, then the business model is probably not sustainable. On the other hand, proprietary technology is confidential. The business plan should not discuss the confidential aspects of the technology but should discuss the benefits of the technology and how these benefits fulfill a large customer need. A serious investor will review the actual technology during the due diligence process. A discussion regarding signing an NDA would be appropriate at this point. Pitfall #5: Indiscriminately Incorporating Investor Feedback into the Business Plan Investors, like the rest of us, have different tastes. One investor may love a concept and/or business plan while the next may hate both. It is important to understand this as business plans are working documents and are always undergoing iterations. Management teams must not rush to incorporate each potential investor’s comments. Instead, have several investors, partners and other business colleagues review the plan and provide feedback. Incorporate common concerns and probe other comments to determine if they are valid. Pitfall #4: Stressing First Mover Advantage A business plan must include strategies that demonstrate the venture can and will build long-term barriers around its customers. Simply claiming a first mover advantage is not compelling in today’s funding environment. The methods through which the venture will retain customers should be detailed in the business plan. Such methods could include implementing customer relationship management (CRM) tools, building network externalities (e.g., the more people that use the product or service the harder it is for a competitor to penetrate the market), ongoing value-added services, etc.
  • 15. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 12 Pitfall #3: Focusing Too Much on the Venture’s Proprietary Technology While proprietary technology is a significant factor in investment decisions, it is much more important to show how this technology satisfies a large, unfulfilled customer need. Many unsuccessful ventures fail because they do not understand the needs of their customers. Understanding true customer wants and needs, identifying which target markets most exemplify these needs, and outlining a plan to penetrate these markets are critical to funding and execution success. Pitfall #2: Presenting Large, Generic Market Sizes Defining the market size for a venture too broadly provides little to no value for the investor. For example, mentioning the trillion dollar U.S. healthcare or B2B markets are generally extraneous since no venture could reap $1 trillion in sales in either market. Rather, a more meaningful metric is the relevant market size, which equals the venture’s sales if it were to capture 100% of its specific niche of the market. Defining and communicating a credible relevant market size, and a plan to capture a significant share within this market is far more powerful and believable to investors. Pitfall #1: Making Financial Projections Too Aggressive Many investors skip straight to the financial section of the business plan. It is critical that the assumptions and projections in this section be realistic. Plans that show penetration, operating margin and revenues per employee figures that are poorly reasoned, internally inconsistent or simply unrealistic greatly damage the credibility of the entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility. Source: Growthink’s 2001 Business Plan Guide Grammar and Style Be compelling when you describe your company and its purpose or objective, be specific and sell yourself! Draw investors in, make them want to know more about your business idea, entice them so that they will want to be part of it. Thoroughly investigate your industry and target market, the competition and other basics, with a sound business model.

 Spelling, punctuation, grammar and style are all important when it comes to presenting your business plan. If investors or lenders see poor spelling, punctuation and grammar errors, they may wonder what else is wrong with the business and the
  • 16. Creating the Perfect Business Plan © 2010 Scotia Macleod Page 13 abilities of its owners. Don’t let an opportunity slip through your fingers because of something minute and silly like a grammatical error. Make Your Business Plan Stand Apart From the Crowd Make Magic…Bring the Wow! Understand that investors read a ton of business plans each day, you really want, and need, to knock their socks off. It is important that you focus on pushing your business plan to the top of the heap by presenting the information needed, but in such a way that it truly stands out from all the rest. For instance, you can present: • A full color, printed copy with a glossy cover, graphics and images. • A PowerPoint presentation, with bullet points, exciting graphics, vivid colours and animation. • A binder with the basic business information, as well as a pocket for a CD. The object is not to get rid of the business plan concept but to present the information in a manner that is distinctive and informational. Utilize the latest software and video presentations. Present your business plan in an innovative and creative way that sets you apart and demonstrates unquestionably that you are an extraordinary entrepreneur.
  • 17. Scotia Macleod is in the business of significantly increasing the value of your business through corporate advisory, business and process re-engineering, operational effectiveness and risk management. Capital Raising Businesses that are seeking a more orderly exit or capital for growth in their organisation can be confident with access to our sophisticated investors, venture capitalists and private equity. Scotia Macleod will seek to exceed sector average multiples through strategic sales and the realization of synergies between the buyer and seller. Investor Readiness One of the most powerful ways you can impress an incoming buyer of your business, or an investor in your business, is to hand them a file that basically does the due diligence for them. In partnership with you, we will effectively carry out a due diligence process before we go to market. Exit Strategy Scotia Macleod conducts intensive strategy sessions with business owners to maximize the valuation of their business. Our strategy will outline the necessary path that an owner or business needs to take to maximize the valuation of their business, with a view to seeking an investor for partial exit, or a complete exit through trade sale. Turnaround in Crisis Accountable to CEOs and business owners, Scotia Macleod seeks to preserve enterprise value and personal wealth of owners and directors in distress, through the design and execution of a highly focused and effective short-term turnaround strategy. By continually focusing on what is critical in the short time frame, Scotia Macleod can see through the haze of “distracting and mostly irrelevant issues” by getting to the heart of the matter and mapping out a strategic solution for the business. Process Repair & Rejuvenation Distress and business failure always arise from an underlying cause. Scotia Macleod’s expert recovery team will get to the heart of the matter and will work to ensure that your business avoids repeating previous ineffective business patterns. www.scotiamacleod.com.au