Chapter 6

Preparing the Business Plan

In This Chapter

Turning your ideas into plans

Satisfying financiers’ concerns

Making your plan stand out

Using software

Preparing to pitch

Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan. If the 2 million plus results that come from putting those words into Google are anything to go by, plenty of interest in the subject exists, and rightly so. Such a plan must include your goals for the enterprise, both short and long term; a description of the products or services you offer and the market opportunities you anticipate; and finally, an explanation of the resources and means that you need to achieve your goals in the face of likely competition.

Preparing a comprehensive business plan along these lines takes time and effort – the Cranfield School of Management estimates anywhere between 200 and 400 hours, depending on the nature of your business and how much data you’ve already gathered. Nevertheless, such an effort is essential if you’re to both crystallise and focus your ideas, and test your resolve about starting or expanding your business.

The core thinking behind business plans and their eventual implementation is strategic analysis. The strategic analysis refines or confirms your view of what’s really unique about your proposition. Or to put it another way, ‘Why on earth would anyone want to pay enough for this to make me rich?’

After completion, your business plan serves as a blueprint to follow that, like any map, improves users’ chances of reaching their destination.

Finding a Reason to Write a Business Plan

A number of important benefits arise from preparing a business plan. All these benefits add up to one compelling reason: businesses that plan make more money than those that don’t and they survive for longer too.

The research on planning generally shows a positive relationship between planning and business performance. Businesses that follow a well-thought-out plan generally out-perform businesses with no plans or informal plans in every relevant category. Businesses that continue to update their plans throughout their life enjoy significantly more success than businesses that don’t.

I cover key reasons for writing up your business plan in the following sections.

Building confidence

Completing a business plan makes you feel confident in your ability to set up and operate the venture because you’ve put together a plan to make it happen. It may even compensate for lack of capital and experience, provided of course that you’ve other factors in your favour, such as a sound idea and a sizeable market opportunity for your product or service.

Testing your ideas

A systematic approach to planning enables you to make your mistakes on paper, rather than in the market place. One potential entrepreneur made the discovery while gathering data for his business plan that the local competitor he thought was a one-man band was in fact the pilot operation for a proposed national chain of franchised outlets. This discovery had a profound effect on his market-entry strategy!

Another entrepreneur found out that, at the price he proposed charging, he would never recover his overheads or break even. Indeed, overheads and break even were themselves alien terms before he embarked on preparing a business plan. This naive perspective on costs is by no means unusual. (I cover this whole area in Chapter 13.)

Showing how much money you need

Your business plan details how much money you need, what you need it for, and when and for how long you need it.

Because under-capitalisation and early cash-flow problems are two important reasons for new business activities failing, if you have a soundly prepared business plan, you can reduce these risks of failure. You can also experiment with a range of alternative viable strategies and so concentrate on options that make the most economic use of scarce financial resources.

To say that your business plan is the passport to sources of finance is an exaggeration. It does, however, help you to display your entrepreneurial flair and managerial talent to the full and to communicate your ideas to others in a way that’s easier for them to understand so that they appreciate the reasoning behind your ideas. These outside parties can be bankers, potential investors, partners or advisory agencies. As soon as they know what you’re trying to do, they’re better able to help you.

Providing planning experience

Preparing a business plan gives you an insight into the planning process. This process – not simply the plan that comes out of it – is itself important to the long-term health of a business. Businesses are dynamic, as are the commercial and competitive environments in which they operate. No one expects every event recorded on a business plan to occur as predicted, but the understanding and knowledge created by the process of business planning help prepare the business for any changes it may face, and so enable it to adjust quickly.

Satisfying financiers’ concerns

If you need finance, examining what financiers expect from you is important if you’re to succeed in raising those funds. (For more on approaching finance, see Chapter 8.)

The media often claim that no shortage of money exists for new and growing businesses, and that the only scarce commodities are good ideas and people with the ability to exploit them. A potential entrepreneur may find this claim hard to believe. One major venture capital firm alone receives several thousand business plans a year (venture capitalists put up risk capital to invest in other businesses on behalf of institutions such as pension funds). It examines only 500 or so in any detail, pursues fewer than 25 to the negotiating stage and only invests in 6 of those.

To a great extent, the decision of whether to proceed beyond an initial reading of the plan depends on the quality of the business plan used in supporting the investment proposal. The business plan is your ticket of admission, giving you your first, and often only, chance to impress prospective sources of finance with the quality of your proposal.

To have any chance at all of getting financial support, your business plan must be the best that you can write and it must be professionally packaged. The plans that succeed meet all the following requirements.

Presenting evidence of market orientation and focus

You need to demonstrate that you recognise the needs of potential customers, rather than simply being infatuated with an innovative idea. Financiers usually cold-shoulder business plans that occupy more space with product descriptions and technical explanations than with explaining how products are going to be sold and to whom. They rightly suspect that these companies are more of an ego trip than an enterprise.

But market orientation isn’t enough in itself. Financiers want to sense that entrepreneurs know the one or two things their business can do best and that they’re prepared to concentrate on exploiting these opportunities.

Demonstrating customer acceptance

Financiers like to know that your new product or service is going to sell and is being used, even if only on a trial or demonstration basis. For example, the founder of Solicitec, a company selling software to solicitors to enable them to process relatively standard documents such as wills, had little trouble getting support for his house-conveyancing package after a leading building society had tried and approved his product for its panel of solicitors.

If you’re only at the prototype stage, financiers have no immediate indication that, when made, your product is going to appeal to the market. They have to assess your chances of succeeding without any concrete evidence. Under these circumstances, you have to show that the problem your innovation seeks to solve is a substantial one that a large number of people are prepared to pay for.

As well as evidence of customer acceptance, you need to demonstrate that you know how and to whom your new product or service may be sold, and that you’ve a financially viable means of doing so.

Owning a proprietary position

Exclusive rights to a product through patents, copyright, trademark protection or a licence help to reduce the apparent riskiness of a venture in financiers’ eyes, because these things can limit competition, for a while at least.

One participant on a Cranfield enterprise programme held patents on a revolutionary folding bicycle that he’d designed at college. No financial institution was prepared to back him in manufacturing the bicycle, but funds were readily available to enable him to make production prototypes and then license the design to established bicycle makers throughout the world.

However well protected legally a product is, marketability and marketing know-how generally outweigh ‘patentability’ in the success equation. A salutary observation made by an American professor of entrepreneurship revealed that less than 0.5 per cent of the best ideas contained in the US Patent Gazette in the last five years have returned a dime to the inventors.

Making believable forecasts

Entrepreneurs are naturally ebullient when explaining the future prospects for their businesses. They frequently believe that the sky’s the limit when it comes to growth, and that money (or rather the lack of it) is the only thing standing between them and their success.

When you’re looking for venture capital, the providers of that capital are looking for rapid growth in your business. However, remember that financiers deal with thousands of investment proposals each year, and already have money tied up in hundreds of business sectors. Therefore, they already have a perception of what the accepted financial results and marketing approaches currently are for any sector. Any new company’s business plan showing projections that are outside the ranges perceived as acceptable within an industry is going to raise questions in the investor’s mind.

Make your growth forecasts believable – support them with hard facts where possible. If they’re on the low side, approach the more cautious lending banker, rather than a venture capitalist. The former often sees a modest forecast as a virtue, lending credibility to the business proposal as a whole.

Writing Up Your Business Plan

In the following sections, I give you some guidelines to make sure that your plan attracts attention and succeeds in the face of fierce competition. More than 1,000 businesses start up in the UK each day, and many of those are looking for money or other resources that they’re hoping their business plan can secure for them. Making your business plan the best it can be gives it a chance to stand out.

Defining your readership

Clearly, a business plan is more effective if you write it with your readers in mind. Doing so involves research into the particular interests, foibles and idiosyncrasies of those readers. Bankers are more interested in hearing about certainties and steady growth, and venture capitalists are also interested in dreams of great things to come. Business angels, who put their own money at risk, like to know how their particular skills and talents can be deployed in the business.

You can benefit from carrying out your reader research before the final editing of your business plan, because you should incorporate something of this knowledge into the way you present it. You may find that you have to create slightly different versions of the business plan for different audiences. This differentiation makes readers feel that you’re addressing the proposal to them rather than them just being the recipient of a ‘Dear Sir or Madam’ type of missive. However, the fundamentals of the plan remain constant.

Creating the plan

The following sections help you prepare the plan itself.

Deciding on content

No universal business plan format exists. That being said, experience has taught me that certain styles are more successful than others. Following these guidelines results in an effective business plan that covers most requirements. Not every subheading may be relevant to you, but the general format is robust.

The following list contains the elements of an effective business plan, one that covers most requirements. You may not need all these sections, and you may need others to cover special requirements.

• The cover should show the name of your business, its website, Facebook/Twitter pages, physical address, phone number(s) including a mobile, fax number(s), email address, contact name and the date on which this version of the plan was prepared. It should confirm that this document is the current view on the business’s position and financing needs.
• The title page, immediately behind the front cover, should repeat the cover information and also give the founder’s name, address and phone number. A home phone number can be helpful, particularly for investors, who often work irregular hours.
• The executive summary is ideally one page, but certainly no longer than two, and contains the highlights of your plan. Writing this summary is a difficult task, but is the single most important part of your business plan. Done well, it can favourably dispose the reader from the outset. If you do the executive summary badly, or not at all, then the plan may not get beyond the investor’s mail room. This one page (or two pages) must explain
  • The current position of the company, including a summary of past trading results
  • A description of the products or services, together with details of any rights or patents and of your competitive advantage
  • The reasons that customers need this product or service, together with some indication of market size and growth
  • A summary of forecasts of sales and profits, together with short- and long-term aims and the strategies that you’ll employ
  • How much money you need to fund the growth and how and when the provider of that finance can benefit

  Write the executive summary only after you complete the business plan itself.

• The table of contents, with page numbers, is the map that guides readers through the business plan. If that map is obscure, muddled or even missing, you’re likely to end up with lost or irritated readers who are in no mind to back your proposal. You should list and number each main section and give it a page number. Elements within each section should also be numbered: 1, 1.1, 1.2 and so on.
• Details of the business and its management should include a brief history of the business and its performance to date, if any, and details of key staff and their work experience, current mission, legal entity, capital structure and professional advisers.
• The description of products and services, their applications, competitive advantage and proprietary position must include details of the state of readiness of new products and services, and development cost estimates.
• The marketing section should provide a brief overview of the market by major segment showing size and growth. Explain the current and proposed marketing strategy for each major segment, covering price, promotion, distribution channels, selling methods, location requirements and the need for acquisitions, mergers or joint ventures, if any.
• Information on management and staffing should give details of current key staff and any recruitment needs. Include information on staff retention strategies, reward systems and training plans.
• The operations section describes how you make your products and services and fulfil orders, how you assure quality standards and how you can meet output.
• The summary of the key financial data includes ratios together with a description of the key controls used to monitor and review performance.
• Include financing requirements needed to achieve the planned goals, together with how long you need the money for. Also demonstrate how the business would proceed using only internal funding. The difference between these two positions is what the extra money helps to deliver.
• E-commerce isn’t just about selling goods and services online, though that’s important. It covers a range of activities that you can carry out online to make your business more efficient. These solutions extend across the supply chain, from ordering your raw materials right through to after-sales service. It can incorporate market intelligence gathering, customer relationship management and a whole range of back-office procedures. Your business plan should show how you plan to tackle this area.
• Include major milestones with dates; for example, get prototype for testing by 20 December, file patents by 10 January or locate suitable premises by such and such a date.
• Risk assessment features high on your reader’s list of concerns, so you should anticipate as many as you can, together with your solution. For example: ‘Our strategy is highly dependent on finding a warehouse with a cold store for stock. But if we can’t find one by the start date, we will use space in the public cold store 10 miles away. This isn’t as convenient but it will do.’
• Detail an exit route for venture capitalists and business angels. Typically, they’re looking to liquidate their investments within three to seven years, so your business plan should show them how much money they can make and how quickly.

  If you think that you need long-term investment (see Chapter 8 for more about equity financing), you need to say something about who may buy the business and when you may be able to launch it on a stock market.

• Appendices include CVs of the key team members, technical data, patents, copyrights and designs, details of professional advisers, audited accounts, consultants’ reports, abstracts of market surveys, details of orders on hand and so on.

Writing and editing

The first draft of the business plan may have several authors and it can be written ignoring the niceties of grammar and style. The first draft is a good one to talk over with your legal adviser to keep you on the straight and narrow, and with a friendly banker or venture capitalist. This discussion can give you an insider’s view of the strengths and weaknesses of your proposal.

When you’ve revised the first draft, then comes the task of editing. Here grammar, spelling and a consistent style do matter. The end result must be a crisp, correct, clear, complete plan no more than 20 pages long. If you’re not an expert writer, you may need help with editing. Your local librarian or college may be able to put you in touch with a local editor. You can also use websites such as People Per Hour (www.peopleperhour.com) and Elance (www.elance.com) to help you find editors.

Laying out and packaging

Your business plan should be visually appealing. Dense text, poor layout and clutter all serve to put your reader off. Create a favourable impression from the outset and you’ll have the reader onside. Here are the most important guidelines to make your written business plan stand out from the crowd:

• Layout: The reasoning behind good layout is to entice the reader to read your words and take the action you want – back your proposition. Give your text room to breathe by leaving plenty of white space around it. You can achieve this look by having wide margins and double line-spacing. Also use headings to break up the text and different font sizes and styles to differentiate between sections of your business plan.
• Font: Don’t be tempted to use a fancy font in the body of the business plan. Stick to serif fonts, those with slight ‘tails’ on the letters that lead the eye from letter to letter. Times Roman, Book Antiqua and Century are good examples of texts that cause less eye strain. Sans-serif fonts like Arial, Calibri and Helvetica can cause eye fatigue, so save these fonts for headings, bullets or short paragraphs outside the main body of your text. Never use a font smaller than 10 point, unless your readership is mostly under 30. For over-70s, the recommended size to cause the least pain is 14 point. However, most business plan writers settle on 12 point as the preferred size.
• Images and charts: Pictures, images, charts, tables, graphs and pictures are powerful ways to convey large amounts of information quickly and efficiently. A picture, so the saying goes, is worth a thousand words– which is excellent because they usually only need the space of 200! Using images and charts is also a great way to break up the text and retain the reader’s attention.

  The University of Leicester has a useful guide to the role of text, tables, graphs and charts in presenting numerical data; visit www2.le.ac.uk/offices/ld/resources/numeracy/numerical-data.

• Packaging: Appropriate packaging enhances every product and a business plan is no exception. Most experts prefer a simple spiral binding with a clear plastic cover front and back. This presentation makes it easy for the reader to move from section to section, and it ensures that the document survives the frequent handling that every successful business plan is likely to get.

Maintaining confidentiality

Finding an investor or a bank to lend to your business may take weeks or months. During that time, potential investors diligently gather information about the business so that they don’t have surprises later about income, expenses or undisclosed liabilities. The business plan is only the starting point for their investigations.

If you and the prospective financiers are strangers to one another, you may be reluctant to turn over sensitive business information until you’re confident that they’re serious. (This issue isn’t as sensitive with banks as it is with business angels and venture capital providers.) To allay these fears, consider asking for a confidentiality letter or agreement.

A confidentiality letter suffices in most circumstances. But if substantial amounts of intellectual property are involved, you may prefer to have a lawyer draft a longer, more formal confidentiality agreement, also known as a non-disclosure agreement (NDA). The confidentiality letter should be limited to their agreement to treat the information as strictly confidential and to use the information only to investigate lending or investing in the business, and to the other terms set out in the letter.

The Intellectual Property Office provides a guide that can help you put together an NDA; see (www.ipo.gov.uk/nda.pdf).

Doing due diligence

Don’t be surprised if the investor wants to find out about your personal financial status, job or business history. Investors are interested in your financial stability, your reputation for integrity and your general business savvy because they will, in effect, extend credit to you until you deliver them the interest or return they’re expecting on their money. That’s what the due diligence process is all about.

Usually, the due diligence process, which involves a thorough examination of both the business and its owners, takes several weeks if not longer. But that depends on how much money your plan calls for and from whom you’re trying to raise it. (I cover raising finance in Chapter 8.)

Accountants and lawyers usually subject your track record and the business plan to detailed scrutiny. You’re then required to warrant that you’ve provided all relevant information, under pain of financial penalties. The cost of this due diligence process, rarely less than a big five-figure sum and often running into six, is borne by the firm raising the money, but is paid out of the money raised, if that’s any consolation.

Using Business Planning Software

You may consider taking some of the sweat out of writing your business plan by using one of the myriad software programmes on the market. You need to take care in using such systems, because the result can be a bland plan that pleases no one and achieves nothing worthwhile.

Don’t buy a package with several hundred business plans covering every type of business imaginable. The chances are that the person who wrote the plans knows far less than you do about your business sector and can add little or no value to your proposition. Worse still, at least an even chance exists that the reader of your plan has seen the fruits of these packaged plans before and may be less than enthusiastic to see yet another one.

You may well find it beneficial to use the test shown in Figure 6-1 as an uncomplicated form of self-assessment, before becoming bogged down in number-crunching software.

The following sections help you understand what software can and can’t do, and where to start finding software to suit your needs.

Recognising the limits of software

Good business planning software provides a useful structure to drop your plan into and may provide a few helpful spreadsheets and templates for financial projections and market analysis. It also provides a valuable repository for your work in progress as you assemble the evidence to convince yourself and others that your business can succeed.

What software doesn’t do is write a convincing business proposition by itself. The maxim ‘garbage in, garbage out’ applies to business planning software just as it does to everything to do with computers.

The other danger is that you end up with spreadsheet solutions – numbers just pumped into the financials – without any evidence of the underlying logic to support them.

Use business planning software as an aid and not a crutch. Go beyond that and you may end up worse off than if you’d started with a blank sheet of paper.

Reviewing packages

This section tells you how to access business planning software packages and resources that have been used to good effect:

• Lloyd’s bank offers Sage Business Planning free to anyone opening an account with them. See http://businesshelp.lloydstsbbusiness.com/starting/business-plan.
• NatWest bank’s Business Planner is easy-to-use software that takes the hassle out of planning (it claims to offer a business plan in 60 seconds!). PC and Mac versions are available. On the website, you can also find tips on writing plans. Visit http://support.natwest.com/business-tools-resources/ where you can find links to their business planning tools. You have to register to get access to them.
• Bradley University, Illinois, provides a range of business planning resources at www.bradley.edu/academic/colleges/fcba/centers/turner/business/planning.

Presenting Your Plan

Anyone backing a business does so primarily because she believes in the management of the business. She knows from experience that things rarely go according to plan, so she must be confident that the team involved can respond effectively to changing conditions. You can be sure that any financier you’re presenting to has read dozens of similar plans and is well rehearsed. She may even have taken the trouble to find out something about your business and financial history.

While the written plan has to be thorough, you need to be equally well prepared to present and defend your proposition in person. That involves thinking through how you’ll come across when you make your pitch and how you’ll react to the inevitable questions and criticism. Think about how people fare in the BBC’s Dragon’s Den programme, and be prepared.

Starring in show time

What does any actor do before stepping onto a stage? Rehearse, rehearse, rehearse. As you rehearse, keep in mind the guidance in the following sections for how to really connect with your audience.

• Be prepared. You need to have every aspect of your business plan in your head and know your way around the plan forwards, backwards and sideways!
• Create empathy between yourself and your listeners. While you may not be able to change your personality, you can take a few tips on presentation skills. Eye contact, tone of speech, enthusiasm and body language all have a part to play in making a presentation successful (see the sidebar ‘Words, tone and body language’).

• Dress to impress. Wearing a suit is never likely to upset anyone. Shorts and sandals just set the wrong tone. Serious money calls for serious people and even the Internet world is growing up.
• Explain your strategy in a business-like manner. Demonstrate your grasp of the competitive market forces at work.
• Provide the latest information on sales, profits, product development, market tests or other evidence-based milestones. This information may be too current to include in your written plan, so here’s the opportunity to add strength to your proposition.
• Use visual aids. If possible, bring and demonstrate your product or service. A video or computer-generated model or diagram can help bring your proposition to life.
• Allow plenty of time for questions. Listen to comments and criticisms carefully and make your replies to questions brief and to the point (avoid a defensive attitude when you respond). If your potential investors want more information, they can ask. This approach allows time for the many different questions that must be asked now or later, before an investment can proceed.

Handling feedback

Don’t be surprised or disheartened if your business plan doesn’t get the reception you hope for. Anita Roddick’s Body Shop proposition was turned down flat. It was only when a local garage owner, Ian McGlinn, advanced her £4,000 in return for 25 per cent of her company that she got the money to open a second shop; a deal that netted him a couple of hundred million and her considerably more. Tim Waterstone’s business plan was turned down by bank after bank for being too ambitious. They wanted him to open a bookshop, but he’d set his sights on a chain. Eventually, he got backing and went on to build his chain, change the shape of book retailing in the UK and sell his business to his former employers, WH Smith, for £47 million. Business plans are turned down for hundreds of reasons. Venture capitalists turn down 95 propositions for every 100 they receive. Why? Because they’re just not convinced that the plan has been well thought through and/or properly researched, and that the person or team are up to the task.

These measures help you to take account of feedback and minimise the chances of ultimate rejection:

• Listen carefully to criticisms when you’re presenting your business plan. If you can tell at the time that you’re going to be turned down, ask two questions:
  • Why?
  • What can I do to improve my proposition?
• Go back over your business plan and see whether you can change anything to make the financial proposition look less risky. Cash pouring out in the early weeks and months on staff, offices and promotion without any significant sales revenue coming in is a big turn-off for financiers.
• Consider whether you’re pitching your proposition to the right audience. Risky technology-based ventures are more likely to appeal to venture capitalist and corporate venture firms. Bankers are more interested in putting up cash for tangible assets such as property and elements of working capital including stock in trade, and financing quality customers taking credit. I cover these funding options in Chapter 8.

Making an elevator pitch

You never know when the chance to present your business plan may occur – maybe even in a lift between floors (hence the term elevator pitch). You need to know your business thoroughly, and it’s as well to have a 5-, 10- and 20-minute presentation ready to run at a moment’s notice.

One entrepreneur was given a chance to make a presentation of her business plan to the most powerful and influential person in her industry. This person could make or break new businesses, and frequently did. The opportunity was a ten-minute ride in a chauffeur-driven car between the Dorchester hotel and Harrods. She had no room to demonstrate the product, set up flip charts or PowerPoint presentations, or involve the team. She had just enough space and time to convey a handful of powerful facts with passion, conviction and authority. Fortunately, the entrepreneur concerned had rehearsed her impromptu presentation and was completely prepared to seize the opportunity presented. Thanks to this successful pitch, she secured the rights to a product range crucial to the success of her business. Barely a decade after taking that fateful car ride, she had built and sold her business for £20 million.