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Considering who you are writing the business plan for is almost as important as understanding why you are writing the plan. Ideally the answer would be that you are writing the plan for yourself…but…most people find they are writing the plan because someone asked them for one. Below are the unique things you need to consider when writing a business plan for one of four different groups: yourself, a lender, an investor or an economic development agency.
1. Yourself – Most entrepreneurs who find themselves in the fortunate position of not needing to borrow money should still write a business plan. The number one reason is to complete market research, plan operations and try to forecast profitability before you make a large investment and a potentially life changing decision.
When writing the plan for yourself, concentrate on the sections that make up the “meat” of the plan: the Business Description, Market Potential, and the Operations Plan. Because this is a condensed version of a plan the executive summary is not necessary. Marketing and promotion should still be explored and media purchases based on your target market/demographics. For most start-ups the owner is the management (and staff) and therefore, you don’t need to outline your own background. Understanding your strengths and weaknesses is still an important exercise. Educate yourself on the skills necessary to run your venture and find opportunities to hone those skills.
2. Commercial Lender – A good place to start would be to read our article Getting a Business Loan so that you understand how lenders analyze a business loan. From that we understand that cash flow is very important to lenders. Before they give you the loan they will look to see that you have done the necessary research to accurately project your sales. They will also look at your operations plan to determine if your expenses are reasonable for the type and size of business you are planning on opening. From there they determine if there is an appropriate amount of collateral to secure the loan and a sufficient investment (equity) from the owners personal funds for working capital needs.
To some extent the business plan is a sales document as much as it is a feasibility study…but be careful. Too much selling and your plan will come off as having something to hide or not believable. Too little and they might feel that you are not confident enough in your own idea or the data supporting your financial projections. For commercial lenders it is all about reducing exposure and making prudent loans to well thought out and researched business ideas.
3. Investors – Understand that investors are looking for a different type of business than your typical start-up. Investors look for high risk high potential return ideas with Nationwide or Worldwide market potential. If your idea is still on paper and not currently in the marketplace most seasoned investors will pass on the investment until the business venture is on the cusp of explosive growth. The timing of an investment is crucial. Too early and they will suffer the same cash burn as the business. Also, future rounds of investing will dilute their ownership and potential return. Too late and the deal will become too expensive (because the company is more valuable now) making it difficult to get the necessary return on their investment to make the deal.
Use your executive summary as a “hot sheet” and dress it up with key financial information. Give hypothetical investment amounts and the potential return on investment. Add graphs and charts and use the document to make it more of a sales document to peek interest. Once a potential investor is interested, give them the full plan after they have signed a non-disclosure agreement. The management section is key for investors. Your experience, education, and character will be scrutinized in a process called “due diligence”. Think of it as an extreme background check. Most investors leave no stone unturned so be prepared to explain any potential bumps in your history. Also, for obvious reasons the financial projections and Market Potential sections are key components for investors.
Economic Developers – From the Economic Development Financing article we understand that developers are looking for three things: Job Creation, Primary Sector Sales, and Targeted Industries. Because job creation is key the employee plan is going to be scrutinized. Most agencies have limits on the amount of money they can provide based on the number of jobs created (a common metric is $10,000 per full time job). Further, your historical sales will be looked at to see if you are truly creating wealth (bringing in sales dollars from out of state) and if that trend can reasonably continue.
Don’t forget, most economic development money is not granted so to some extent they will have similar criteria as a commercial lender although economic development agencies commonly are more liberal in their lending if the three above criteria are met. The Business History, Market Potential and Operations Plan will be eyed closely to ensure they are making a wise investment for their community.
From the above four categories we can see that there are wide and varied priorities depending on who you are writing the plan for. Notice though that the Market Potential section is a key component in every one. The number on reason why businesses fail is because they failed to understand or they overestimated their potential market. The number two reason is lack of sufficient cash on hand. Clearly, if a company projected that it would have more sales than actually occurred it makes sense that they also would have underestimated the amount of cash needed to stay in business. This author would argue that the above two reasons for business failure are one in the same. |
