PORTABLE MBA IN FINANCE AND ACCOUNTING CHAPTER 9 potx

260 9 THE BUSINESS PLAN Andrew Zacharakis The sole purpose of a business plan is to explore and answer questions—crit- ical questions starting with whether the business idea is a viable opportunity. During the dot-com boom of the late 1990’s, many entrepreneurs and ven- ture capitalists questioned the importance of the business plan. Typical of this hyperstartup phase are stories like James Walker. He generated financ- ing on a 10-day-old company based on “a bunch of bullet points on a piece of paper.” He added, “It has to happen quick” in the hypercompetitive wireless- Internet-technology world. “There’s a revolution every year and a half now,” Mr. Walker said. 1 Media stories abounded of the whiz kid college dropout who received venture capital, zoomed to IPO (initial public offering), and cashed out a mul- timillionaire in 18 months or less. The mythology of the dot-com entrepreneur was that he didn’t have a business plan, only a couple of PowerPoint slides. That was all it took to identify the opportunity, secure venture backing, and go public. Why spend the 200 hours or so that a solid business plan often takes? The NASDAQ crash of March 2000 and the subsequent death of many dot-com high flyers provides the clearest answer. Many of these businesses didn’t have the potential to make profits—not then, not now, and not anytime in the fu- ture. The easy money and quick returns of the late nineties have disappeared, and what we are left with is the fact that good opportunities need good execu- tion in order to succeed and a rigorous business plan process can assist in the pursuit of entrepreneurial gold. There is a common misperception that a business plan is primarily used for raising capital. Although a good business plan assists in raising capital, the The Business Plan 261 primary purpose of the process is to help the entrepreneur gain deep under- standing of the opportunity he or she is envisioning. A business plan tests the feasibility of an idea. Is it truly an opportunity? Many a would-be entrepreneur has doggedly pursued ideas that are not opportunities; the time invested in a business plan would save thousands of dollars and hours spent on such wild goose chases. For example, if a person makes $100,000 a year, spending 200 hours on a business plan equates to a $10,000 investment in time spent ($50/hour times 200 hours). However, the costs of launching a flawed business concept can quickly accelerate into the millions. Most entrepreneurial ventures raise enough money to survive two years even if the business ultimately fails. Assuming that the only expense is the time value of the lead entrepreneur, a two-year invest- ment equates to $200,000, not to mention the lost opportunity cost and the like- lihood that other employees were hired and paid and that other expenses were incurred. So do yourself a favor and spend the time and money up front. The business plan process can not only prevent entrepreneurs from pur- suing a bad opportunity but also help them reshape their original visions into better opportunities. As we will explore in the remainder of this chapter, the business plan process involves raising a number of critical questions and then seeking answers. Part of that question-answering process involves talking to target customers and gauging what is their “pain.” These conversations with customers as well as other trusted advisors can assist in better targeting the features and needs that customers most want in a good or service. This prestartup work saves untold effort and money otherwise spent trying to re- shape the product after the launch has occurred. This is not to say that new ventures don’t adjust their offering based upon customer feedback, but the business plan process can anticipate some of these adjustments in advance of the initial launch. Perhaps the greatest benefit of the business plan is that it allows the en- trepreneur to articulate the business opportunity to various stakeholders in the most effective manner. The plan provides the background to enable the entrepreneur to communicate the upside potential and attract equity invest- ment, and the validation needed to convince potential employees to leave their current jobs for the uncertain future of a new venture. It is also the instru- ment that can secure a strategic partner, key customer, or key supplier. In short, the business plan provides the entrepreneur the deep understanding he needs to answer the critical questions that various stakeholders will ask, even if the stakeholders don’t actually read the written plan. Completing a well- founded business plan gives the entrepreneur credibility in the eyes of various stakeholders. TYPES OF PLANS A business plan can take a number of forms depending on its purpose. The pri- mary difference between business plan types is length. If outside capital is 262 Planning and Forecasting needed, a business plan geared towards equity investors or debt providers typ- ically is 25 to 40 pages long. Professional equity investors such as venture capi- talists and professional debt providers such as bankers will not read the entire plan from front to back. Recognizing this fact, the entrepreneur needs to pro- duce the plan in a format that facilitates spot reading. We will investigate the major sections that comprise business plans throughout this chapter. My gen- eral rule of thumb is that less is more. For instance, I’ve seen a number of plans receive venture funding that were closer to 25 pages than 40 pages. A second type of business plan, the operational plan, is primarily for the entrepreneur and his team to guide the development, launch, and initial growth of the venture. There really is no length specification for this type of plan; however, it is common for these plans to exceed 80 pages. The basic organiza- tion format between the two types of plans is the same, however the level of detail tends to be much greater in an operational plan. This effort is where the entrepreneur really gains the deep understanding important in discerning how to build and run the business. The last type of plan is called a dehydrated business plan. This type is considerably shorter than the previous two, typically no more than 10 pages. Its purpose is to provide an initial conception of the business. As such, it can be used to test initial reaction to the entrepreneur’s idea and can be shared with his confidants to obtain feedback before he invests significant time and effort on a longer business plan. FROM GLIMMER TO ACTION: THE PROCESS Perhaps the hardest part of writing any business plan is getting started. Com- piling the data, shaping it into an articulate story, and producing the finished product can be a daunting task. The best way to attack a business plan, there- fore, is in steps. First, write a four-to-five-page summary of your current vi- sion. This provides a roadmap for you and others to follow as you complete the rest of the plan. Second, start attacking major sections of the plan. Although all of the sections interact and influence every other section, it is often easiest for entrepreneurs to write the product/service description first. This is usually the most concrete component of the entrepreneur’s vision. Keep in mind, however, that writing a business plan isn’t purely a sequential process. You will be filling in different parts of the plan simultaneously or in whatever order makes the most sense in your mind. Finally, after completing a first draft of all the major sections, come back and rewrite a shorter, more concise executive summary (one to two pages). Not too surprisingly, the executive summary will be quite different from the original summary because of all the learning and reshaping that the business plan process facilitates. Common wisdom is that the business plan is a living document. Although your first draft will be polished, most business plans are obsolete the day they come off the presses. That means that entrepreneurs are continuously updating The Business Plan 263 and revising their business plan. Again, the importance of the business plan isn’t the final product but the learning that is gleaned from going through the process. The business plan is the story line of your vision. It articulates what you see in your mind and crystallizes that vision for you and your team. It also provides a history, a photo album, if you will, of the birth, growth, and matu- rity of your business. Each major revision should be kept and filed and occa- sionally looked back upon for the lessons you have learned. I find writing a business plan, although daunting, exciting and creative, especially if I am working on it with a founding team. Whether it is over a glass of wine, beer, or coffee, talking about your business concept with your founding team is invigo- rating, and the business plan is a critical outcome of these discussions. So now let us dig in and examine how to write effective business plans. THE STORY MODEL One of the major goals for business plans is to attract and convince various stakeholders of the potential of your business. You have to keep in mind, there- fore, how these stakeholders will interpret your plan. The guiding principal is that you are writing a story. All good stories have a plot line, a unifying thread that ties the characters and events together. If you think about the most suc- cessful businesses in America, they all have well-publicized plot lines, more appropriately called taglines. When you hear these taglines, you immediately connect them to the business. For example, when you hear “absolutely, posi- tively has to be there overnight,” you probably connect that tagline to Federal Express and package delivery. Similarly, “Just do it” is intricately linked to Nike and the image of athletic proficiency (see Exhibit 9.1). A tagline is a sen- tence or fragment of a sentence that summarizes the pure essence of your busi- ness. It is the plot line that every sentence, paragraph, page, diagram, and other part of your business plan should correlate to. One useful tip that I share with every entrepreneur I work with is to put that tagline in a footer that runs on the bottom of every page. Most word-processing packages, such as Microsoft Word, enable you to insert a footer that you can see as you type. As you are writing, if the section doesn’t build on, explain, or otherwise directly relate to the tagline, it most likely isn’t a necessary component to the business plan. Rigorous adher- ence to the tagline facilitates writing a concise business plan. EXHIBIT 9.1 Taglines. Nike Just do it! Federal Express Absolutely, positively has to be there overnight. McDonalds We love to see you smile. Cisco Systems Discover all that's possible on the Internet. Microsoft Where do you want to go today. 264 Planning and Forecasting The key to beginning the story model is capturing the reader’s attention. The tagline is the foundation, but in writing the plan you want to create a num- ber of visual catch points. Too many business plans are dense, text-laden mani- festos. Only the most diligent reader will wade through all that text to find the nuggets of value. Help the reader by highlighting different key points through- out the plan. How do you create these catch points? Some effective techniques include extensive use of headings and subheadings, strategically placed bullet- point lists, diagrams, charts, and the use of sidebars. 2 The point is to make the document not only content rich but visually attractive. Now, let’s take a look at the major sections of the plan (see Exhibit 9.2). Keep in mind that although there are some different variations, most plans have these components. It is important to keep your plan as close to this format as possible because many stakeholders are used to the format and it facilitates EXHIBIT 9.2 Business plan outline. I. Cover II. Title Page III. Executive Summary a. Hook—potential size of opportunity b. Business Concept—company and products c. Industry Overview d. Target Market e. Competitive Advantage f. Business Model g. Team h. Offering IV. Industry, Customer, and Competitor Analysis a. Industry i. Overview—Market Demand, Market Size and Structure, and Margin Analysis ii. Trends iii. Market Space or Segment you will compete in b. Customer Analysis c. Competitor Analysis V. Company and Product Description a. Company Description b. Product Description c. Competitive Advantage d. Entry Strategy e. Growth Strategy VI. Marketing Plan a. Target Market Strategy b. Product/Service Strategy c. Pricing Strategy d. Distribution Strategy e. Advertising and Promotion Strategy f. Sales Strategy g. Sales and Marketing Forecasts VII. Operations Plan a. Operations Strategy b. Scope of Operations c. Ongoing Operations VIII. Development Plan a. Development Strategy b. Development Timeline IX. Team a. Team Bios and Roles b. Advisory Boards, Board of Directors, Strategic Partners, External Members c. Compensation and Ownership X. Critical Risks a. Market Interest and Growth Potential b. Competitor Actions and Retaliation c. Time and Cost of Development d. Operating Expenses e. Availability and Timing of Financing f. Other Risks XI. Offering XII. Financial Plan a. Description of Financial Assumptions b. Income Statement c. Cash Flow Statement d. Balance Sheet XIII. Appendices The Business Plan 265 spot reading. So if you are seeking venture capital, for instance, you want to fa- cilitate quick perusal because venture capitalists often spend, research shows, as little as five minutes on a plan before rejecting it or putting it aside for later study. If a venture capitalist becomes frustrated with an unfamiliar format, he will more likely reject it than try to pull out the pertinent information. THE BUSINESS PLAN We will progress through the sections in the order that they typically appear, but keep in mind that you can work on the sections in any order that you wish. The Cover The plan’s cover should include the following information: company name, tagline, contact person and address, phone, fax, e-mail address, date, dis- claimer, and copy number. Most of the information is self-explanatory, but I should point out a few things (see Exhibit 9.3). First, the contact person for a new venture should be the president or some other founding team member. I have seen some business plans that failed to have the contact person’s name and phone on the cover. Imagine the frustration of an excited potential in- vestor who can’t find out how to contact the entrepreneur to gain more infor- mation; such plans usually end up in the rejected pile. Second, business plans should have a disclaimer along these lines: This business plan has been submitted on a confidential basis solely to selected, highly qualified investors. The recipient should not reproduce this plan nor dis- tribute it to others without permission. Please return this copy if you do not wish to invest in the company. Controlling distribution is particularly important when seeking investment capital, especially to comply with Regulation A of the Securities and Exchange Commission, which specifies that you must solicit qualified investors (high net-worth and income individuals). The cover should also have a line specifying the copy number. You will often see on the bottom right portion of the cover a line that says something like “Copy 1 of 5 copies.” Entrepreneurs should keep a log of who has copies so that they can control for unexpected distribution. Finally, the cover should be eye-catching. If you have a product or proto- type, a picture of it can draw the reader in. Likewise, a catchy tagline draws at- tention and encourages the reader to look further. Table of Contents Continuing the theme of making the document easy to read, a detailed table of contents is critical. It should list major sections, subsections, exhibits, and appen- dices. The table provides the reader a roadmap to your plan (see Exhibit 9.4). 266 Planning and Forecasting Note that the table of contents is customized to the specific business so that it doesn’t perfectly correlate to the business plan outline presented in Exhibit 9.2. Nonetheless, a look at Exhibit 9.4 shows that the company’s business plan in- cludes most of the elements highlighted in the business outline and that the order of information is basically the same as well. EXHIBIT 9.3 Cover of PurePlay Golf business plan. Bringing Information to the Golfer’s Palm www.PurePlayGolf.com Prepared by: Amy Ball, Michael Bear, Christy Long, Geoff Mall, and Hilary Tabor Contact: Geoff Mall, gmall@PurePlayGolf.com PurePlayGolf.com Reynolds Center, Suite 1 Babson Park, MA 02457 (781) 555-5252 (781) 555-5253 (fax) Draft: December 6, 2000 The information in this Business Plan is highly confidential and is provided to you conditioned on your agreement not to disclose or use this information for any purpose other then contemplating an investment in PurePlay Golf. Do not copy, fax, reproduce, or distribute without permission. Copy 5 of 5. The Business Plan 267 Executive Summary (1–3 pages) This section is the most important part of the business plan. If you don’t cap- ture readers’ attention in the executive summary, it is unlikely that they will read any other parts of the plan. Therefore, you want to hit them with the most compelling aspects of your business opportunity right up front. EXHIBIT 9.4 Sample table of contents. 1.0 Executive Summary 3 2.0 Market Analysis 6 2.1 Entertainment Industry 6 2.2 Accessing Music Online 7 2.3 Telematics Industry 8 2.5 Market Research 11 3.0 Competition 13 3.1 Direct Competition 13 3.2 Indirect Competition 15 4.0 Company Description and Services 16 4.1 The Personal Radio Station 16 4.2 Listener’s Choice 16 4.3 The Personal Music Collection 17 4.4 Recurring Royalties 17 4.5 Listener Consumption Data 17 5.0 Strategic Partners 20 5.1 Device Partners 20 5.2 Content Partners 21 5.3 Service Providers and Other 22 6.0 Development Strategy 23 6.1 Engineering Activities 23 6.2 Business Development Activities 24 7.0 Marketing and Sales Activities 25 8.0 Operations 27 8.1 VMC Core of Engineers 27 8.2 VMC Live Services 27 8.3 VMC Customer Service 27 9.0 Management Team 28 9.1 Founding Team 28 9.2 Advisors 29 10.0 Critical Risk Factors 30 11.0 Financials 31 11.1 Economics of the Business 31 11.2 VMC Consumer Assumptions 32 11.3 Service Assumptions 32 11.4 Personal Radio Station Assumptions 32 11.5 Listener’s Choice Assumptions 33 11.7 Break-Even/Positive Cash Flow 34 11.8 Sources and Uses Schedule 35 11.9 Headcount Schedule 35 268 Planning and Forecasting Hook the Reader That means having the first sentence or paragraph highlight the potential of the opportunity. I have read too many plans that start with “Company XYZ, in- corporated in the state of Delaware, will develop and sell widgets.” Ho-hum. That doesn’t excite me; but if, in contrast, the first sentence states, “The cur- rent market for widgets is $50 million and is growing at an annual rate of 20%. The emergence of the Internet is likely to accelerate this market’s growth. Company XYZ is positioned to capture this wave with its proprietary technol- ogy—the secret formula VOOM.” This creates the right tone. It tells me that the potential opportunity is huge and that company XYZ has some competitive advantage that enables it to become a big player in this market. I don’t really care at this point whether the business is incorporated or that it is a Delaware corporation (aren’t they all?). Common subsections within the executive summary include: description of opportunity, business concept, industry overview, target market, competi- tive advantage, business model and economics, team, and offering. Remember that, since this is an executive summary, all these components are covered in the body of the plan. We will explore them in greater detail as we progress through the sections. Since the executive summary is the most important part of the finished plan, it should be written after you have gained your deep learning by going through all the other sections. 3 The summary should be 1 to 3 pages, although I prefer executive summaries be no more than 2 pages. Industry, Customer, and Competitor Analysis (3 – 6 pages) Industry The goal of this section is to illustrate the opportunity and how you are going to capture that opportunity. A useful framework for visualizing the opportunity is Timmons’s model of opportunity recognition. 4 Using the “3Ms” helps quantify an idea and assess how strong an opportunity the idea is. First, examine Market demand. If the market is growing at 20% or better, the opportunity is more ex- citing. Second, we look at Market size and structure. A market that is currently $50 million with $1 billion potential is attractive. This often is the case in emerging markets, those that appear poised for rapid growth and have the po- tential to change how we live and work. For example, the PC, disk drive, and computer hardware markets of the eighties were very hot. Many new com- panies were born and rode the wave of the emerging technology, including Apple, Microsoft, and Intel. In the nineties, it was anything dealing with the Internet. As we enter the twenty-first century, it appears that wireless commu- nications may be the next big market. Another market structure that tends to have promise is a fragmented market where many small, dispersed competitors The Business Plan 269 compete on a regional basis. Many of the big names in retail revolutionized fragmented markets. For instance, category killers such as Wal-Mart, Staples, and Home Depot consolidated fragmented markets by providing quality prod- ucts at lower prices. These firms replaced the dispersed regional and local discount, office-supply, and hardware stores. The final M is Margin analysis. Do firms in the industry enjoy high gross margins (revenues minus cost of goods sold) of 40% or greater? Higher margins allow for higher returns, which again leads to greater potential business. The 3Ms help distinguish opportunities and as such should be high- lighted as early as possible in your plan. Describe your overall industry in terms of revenues, growth, and pertinent future trends. Avoid in this section discussing your concept, the proposed product or service you will offer. In- stead, use dispassionate, arms-length analysis of the industry with the goal of highlighting a space or gap that is underserved. Thus, how is the industry seg- mented currently, and how will it be segmented in the future? After identify- ing the relevant industry segments, identify the segment that your product will target. Again, what are the important trends that will shape the segment in the future? Customer Once the plan has defined the market space it plans to enter, the target cus- tomer needs to be examined in detail. The entrepreneur needs to define who the customer is by using demographic and psychographic information. The bet- ter the entrepreneur can define his customer, the more apt he is to deliver a product that the customer truly wants. A venture capitalist recently told me that the most impressive entrepreneur is the one who not only identifies who the customer is in terms of demographics and psychographics but can also name who that customer is by address, phone number, and e-mail address. When you understand who your customer is, you can assess what compels them to buy, how your company can sell to them (direct sales, retail, Internet, direct mail, etc.), how much acquiring and retaining that customer will cost, and so forth. A schedule inserted into the text describing customers on these basic pa- rameters communicates a lot of data quickly and can be very powerful. Competition The competition analysis follows directly from the customer analysis. You have just identified your market segment, described what the customer looks like, and what the customer wants. Now the key factor leading to competitive analy- sis is what the customer wants in a particular product. These product attributes form a basis of comparison against your direct and indirect competitors. A competitive profile matrix not only creates a powerful visual catch point, it conveys information regarding your competitive advantage and also the basis for your company’s strategy (see Exhibit 9.5). The competitive profile matrix [...]... companies Infotrac Index /abstracts of journals, general business and finance magazines; market overviews; and profiles of public and private firms Dow Jones Interactive Searchable index of articles from over 3,000 newspapers Lexis/Nexis Searchable index of articles Dun’s Principal International Business International business directory Dun’s One Million Dollar Premium Database of public and private... of Business and Industrial Financial Ratios, published by PrenticeHall, or Industry Norms and Key Business Ratios, published by Dun and Bradstreet are excellent sources to use as starting points in building financial statements relevant to your industry Specifically, these sources help entrepreneurs build income statements by providing industry averages for costs of goods sold, salary expenses, interest... Business Review (Jan.–Feb 199 9): 83 93  290 Planning and Forecasting INTER NET LINKS Business Plan Sites www.pasware.com www.brs-inc.com www.jian.com Other Usef ul Sites www.entreworld.org www.babson.edu/entrep NOTES 1 P Thomas, “Rewriting the Rules: A New Generation of Entrepreneurs Find Themselves in the Perfect Time and Place to Chart Their Own Course,” Wall Street Journal, May 22, 2000, R4 2 Running... mentioned in the development plan section, many factors can delay and add to the expense of developing your product The business plan should identify the factors that may hinder development For instance, during the extended high-tech boom of the late nineties and into the new century, there has been an acute shortage of skilled software engineers One way to counter the resulting risk in hiring and retaining... seeking help to write business plans There are numerous software packages, but I find that generally the templates are too confining The text boxes asking for information box writers into a dull, dispassionate tone The best way to learn about business plans is digging out the supporting data, writing sections as you feel compelled, and circulating drafts among your mentors and advisors I also think... Read a Financial Report, 5th ed (New York: John Wiley, 199 9) Classic book on how to create pro forma financial statements and how these statements tie together Sahlman, W., “How to Write a Great Business Plan,” Harvard Business Review (July–Aug 199 7): 98 –108 Bhide, A., “The Questions Every Entrepreneur Should Ask,” Harvard Business Review (Nov.–Dec 199 6): 120–130 Kim, C., and R Mauborgne, “Creating New... Online Profiles of private and public firms with links to Web sites, etc Corp Tech Profiles of high technology firms Bridge Information Services Detailed financial information on 1.4 million international securities that can be manipulated in tables and graphs RDS Bizsuite Linked databases providing data and full-text searching on firms Bloomberg Detailed financial data and analyst reports Company and. .. method and the buildup method After detailed investigation of EXHIBIT 9. 9a Advertising schedule Promotional Tools Budget over 1 Year Print advertising Television advertising Sales promotions Direct marketing Public relations $1,426,440 780,000 100,000 100,000 93 ,560 Total $2,500,000 The Business Plan 277 EXHIBIT 9. 9b Magazine advertisement schedule Publication Golf Digest Sports Illustrated Golf Magazine... strong advisory boards In building an advisory board, identify individuals with relevant experience within your industry EXHIBIT 9. 11 VMC beta of VMC distribution system Telematics development Ongoing innovation and development Wireless device and Innovation and enhancement Telematics beta network appliance R&D Telematics negotiations campaign VMC marketing partnering Wireless device and network appliance... Winfrey show touting shoes for women, designed by women The response was overwhelming In fact, she was so besieged by demand that she couldn’t supply enough shoes As you develop a multipronged advertising and promotion strategy, create detailed schedules that show which avenues you will pursue and the associated costs (see Exhibits 9. 9a and 9. 9b) These types of schedules serve many purposes including . explore in the remainder of this chapter, the business plan process involves raising a number of critical questions and then seeking answers. Part of that question-answering process involves talking. writing any business plan is getting started. Com- piling the data, shaping it into an articulate story, and producing the finished product can be a daunting task. The best way to attack a business. business plan outline presented in Exhibit 9. 2. Nonetheless, a look at Exhibit 9. 4 shows that the company’s business plan in- cludes most of the elements highlighted in the business outline and