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  • 1. copyright 2003 Jack M. Kaplan How to Prepare a Winning Business Plan Preparing a Business Plan Patterns of Entrepreneurship Chapter 4
  • 2. copyright 2003 Jack M. Kaplan Purpose of a Business Plan Attracts Investors Evaluates Feasibility of Business Concept Serves as an Operating Guide Attracts Potential Business Partners and Key Employees Attracts Potential Customers and Suppliers
  • 3. copyright 2003 Jack M. Kaplan Business Plan Development Guide Outline: The Executive Summary Business Description Market Analysis The Management Team Operations Critical Risks The Financial Projections Appendix
  • 4. copyright 2003 Jack M. Kaplan The Executive Summary Objective: Capture interest of investors General overview of business idea How will it work Bullet form Emphasize key issues No more than 2-3 pages Should be written last
  • 5. copyright 2003 Jack M. Kaplan Include the following: Company profile Nature of the product or service offering emphasizing any competitive advantages Identify foreign/domestic markets to be targeted Size and growth trend of market Make-up and background of the management team - include individual skills Financing requirements Key projections (i.e., sales, gross profits, N.I.) The Executive Summary
  • 6. copyright 2003 Jack M. Kaplan Business Description Objective: Provide a detailed overview of the company and the nature of the product/service offering. Show long-term commitment to developing the venture. Show defensible competitive advantage.
  • 7. copyright 2003 Jack M. Kaplan Business Description Include: Mission statement History behind the idea or current business Company’s current or proposed legal form Proposed entry strategy Description of the initial product/service (including any anticipated competitive advantages) Product research and development
  • 8. copyright 2003 Jack M. Kaplan Market Analysis Objective: Prepare an opportunity marketing analysis. Demonstrate how to capture a large share to support the venture. Show how to support claims and customer interest.
  • 9. copyright 2003 Jack M. Kaplan Market Analysis Address: Description of industry Description of region and/or countries (international business) Targeted markets Marketing research Competition Barriers to entry Marketing strategy – deliver products/services to the targeted markets
  • 10. copyright 2003 Jack M. Kaplan Management Team Objective: Show that the team can effectively manage the product/service into foreign or domestic markets. Does management have the background and skills to make the venture a success? Highlight synergistic skills. Show how deficiencies will be covered. Do not give up more control than absolutely necessary.
  • 11. copyright 2003 Jack M. Kaplan Address: Background and primary responsibilities of the management team Organizational structure Board of directors/advisors/international trade specialists Ownership Management Team
  • 12. copyright 2003 Jack M. Kaplan Exit Strategy To be determined up-front Some options include: – going public – selling the business – a stock buy-back at the going rate – leveraged buy-out – second round of investment
  • 13. copyright 2003 Jack M. Kaplan Critical Risks Objective: Identify potential problems that could significantly affect the new company. Let potential investors know up-front that there are risks associated with the venture.
  • 14. copyright 2003 Jack M. Kaplan Critical Risks Internal – loss of key employees – inadequate working capital – unproductive R&D – breakdowns in plant and equipment – bottlenecks in the distribution channels – factors not covered by insurance policies External – patent violations – changes in technology – changes in government regulation or protectionist legislation – adverse economic conditions, market changes – unstable banking/financial and transportation/distribution systems – potential effects on financial plans
  • 15. copyright 2003 Jack M. Kaplan Continued: Contingency Plans – probabilities Insurance Provisions – fire – liability – automobile – worker’s compensation – key person Critical Risks
  • 16. copyright 2003 Jack M. Kaplan Operations Objective: Focus on relevant cost. Demonstrate ability to carry out implementation. Integrate operation costs with the financial section.
  • 17. copyright 2003 Jack M. Kaplan Address: International Considerations – market development activities – transportation – export documentation – foreign contacts and personal relationships Future Research and Development Plans – cannot be built around a single service or product – present the planned directions of R&D – new products – new markets – improve on existing production processes Operations
  • 18. copyright 2003 Jack M. Kaplan Continued: Production Plan – procuring and transforming critical resources – internally – externally – time line of events Customer Support – focus on getting and keeping customers – customer service – what role it plays in achieving sales goals Operations
  • 19. copyright 2003 Jack M. Kaplan Continued: Personnel – creating management and infrastructure charts – hiring – training Operations
  • 20. copyright 2003 Jack M. Kaplan The Financial Projections Objective: Convince the investor that the venture makes sense from a financial standpoint. Projections must address: – allocation of expenses – return on investment – cash flow management
  • 21. copyright 2003 Jack M. Kaplan Historical financial data First year financial projections by month Balance Sheet Income Statement Cash Flow Statement Second year financial projections by quarter Five year annual forecasts Break-Even Analysis Ratio Analysis The Financial Projections
  • 22. copyright 2003 Jack M. Kaplan Valuation “Residual Value” commonly used by investors. Should be done before meeting with investors. Will help you to assess what ownership you may have to give up based on the expected ROI for your type of venture. Use the “time value of money” equation: n Future Value = Present Value (1+i) i= estimated rate of return investors will require based on the perceived risk associated with your type of venture n= number of years
  • 23. copyright 2003 Jack M. Kaplan Calculate the future value of the up-front investment needed. Example: Funds needed = $500,000 Average annual return on investment (ROI) = 45% 4 FV = $500,000 (1+.45) FV = $500,000 (4.4205) FV = $2,210,253 Valuation
  • 24. copyright 2003 Jack M. Kaplan Example: Determine the point in time that will be used in the valuation calculations. Example: 4 years What are the projected after-tax profits? Example: $1,855,050 (year 4) Determine the valuation factor by looking at similar companies in your industry. Example: 10 times after tax earnings $1,855,050 x 10 = $18,550,500 Valuation
  • 25. copyright 2003 Jack M. Kaplan Determine the amount of equity you may have to give up, based on the value of the venture, and the future value of the potential investors’ initial investment. Example: $2,210,253 -------------- = 12% $18,550,500 Valuation
  • 26. copyright 2003 Jack M. Kaplan Balance Sheet WC Position Capital Asset Position Capital Structure Pro Forma Balance Sheet: Current Assets Current Liabilities Fixed Assets Long-term Debt Intangible Assets Equity Total Assets = Total Liabilities + Equity
  • 27. copyright 2003 Jack M. Kaplan Cash Flow Statement Objective: Demonstrate that you have sufficient cash to run the operation. Assess the timing of future cash flows. Develop a plan for subsequent rounds of financing.
  • 28. copyright 2003 Jack M. Kaplan Cash Provided (used) from Operations Net income (loss) Depreciation Adjusted net income (loss) Cash Provided by Working Capital Accounts receivable (increases) decreases Inventories (increases) decreases Accrued liabilities (decreases) increases Prepaid expenses (decreases) increases Cash Provided (used) by Continuing Operations Cash Flow Statement
  • 29. copyright 2003 Jack M. Kaplan Continued: Cash Provided (used) from Financing Activities Long-term debt (decreases) increases Interest on notes Cash dividends paid Issuance of stock Total Cash Provided (used) from Financing Activities Cash Flow Statement
  • 30. copyright 2003 Jack M. Kaplan Continued: Cash Provided (used) from Investment Activities Purchase of property, plant and equipment Proceeds from sale of assets Other acquisitions Cash Provided (used) from Investment Activities Increase (decrease) in cash Cash at beginning of period Cash at end of period Cash Flow Statement
  • 31. copyright 2003 Jack M. Kaplan Income Statement Revenue Projections Cost Relationships Tie into the Operating Strategy
  • 32. copyright 2003 Jack M. Kaplan Income Statement Pro Forma Income Statement Revenue - Cost of Goods Sold Gross Profit Margin - Operating Expenses Net Income Before Interest and Taxes - Interest - Taxes Net Income (Loss)