Business Plan Guide

Hamid Houshmand

Purpose of a Business Plan

• Large company: Business plan from each division/subsidiary or operating unit

• Merger: A business plan• Acquisition: A business plan• Selling off a unit: A business plan• New project/Product: A business/project plan• Acquiring financing for a new growing business• Due diligence: Once buying a company • Reverse due diligence: Once acquiring a new company

Business Plan Functions

• Business plan: Map out the course of company over a period of time

• Determining future projects• Performance over time: Determining how well

goals have been met• Raising money: A dynamic plan can facilitate

financing• Business planning is a continuous activity

Who Read The Business Plan

• Lender/Investor _ Character _ Cash flow_ Collateral _ Equity Contribution

Investors• Venture capital funds

_ Quality of the individual entrepreneur_ Functionality balanced team_ Proprietary Characteristics

• Time table _ Week 1-2 . Initial contact _ Week 3. Mailing executive summary or the complete plan _ Week 4-6. An Initial meeting _ Week 7-18. Follow-up _ Week 18. An offer from a financing source _ Week 19-26. Negotiation of the deal _ Week 26. Closing

• Self, family, friends• Angles• Vendors• Corporate venture capitalists

Partnership Agreement

• Legal• Tax issue• Division of duties• Operating rights and responsibilities • Partnership structure

Due Diligence

Valuation (shareholder value analysis) of the acquisition/merger linked to below act ivies with focus on risks

• Compatibility audit• Financial audit• Macro-environment audit• Legal/environmental audit• Marketing audit• Production audit• Management audit• Information systems audit• Reconciliation audit

Reverse Due Diligence

• Valuation of a company to be kept• Positioning a company for potential sale • Positioning a company for potential financing• Positioning a company for initial public

offering

Looking for investors• How responsive is the investor• What help, beyond financial, do they provide• Do they provide strategic advice• Transparent and share information• How they behave in a crisis _ Calm reaction to pressure • How involved do they get with your business - try to keep this open

ended so you don’t lead the other founder to the answer you want to hear. One founders “very helpful” could be another’s ”smothering.”

• Do they prepare for board meetings• Do they make helpful introductions (customers, potential members

of the team, other funding sources)• Have they been transparent with their time frame to exit

Business Plan _ Contents

• Table of contents• Executive summary• General company description• Products and services• Marketing plan• Operational plan• Management and organization• Structure and capitalization• Financial plan

Executive Summary _ Recommendation

• Be different- solving the problem with a new way• Focus on the things you can do• Be clear on what you want to accomplish• Capitalize on past achievements• Learn from your and others’ mistake• Enlist the help of experts• Check out your ideas with sceptics• Network, Network, Network• Load your mind with a great deal of information• Look forward and never give up

Executive Summary• The essence of the report _ micro version of the entire plan• Should provide a good understanding of the Plan’s concept,

finance, and metrices• Generate an immediate interest• Section by section format is one common format• Functional areas: Product profile, marketing plan, operational

plan (major milestones), business competence, financial plan• Brief sales and profit history• Brief on silent data: anticipated break-even points, return on

equity • Offering a message: a personal assessment on the business

performance or optionally a message on the cover letter

General Company Description• A few pages• Fundamental activities and nature of the company• Manufacturer, retailer, or service business• Where is doing business• Where is it located• What customer is it attempting to serve • What stage the company has reached• Business objectives (realistic and attainable)• Plan to go public, seek to be acquired, develop new line of business• Brief on the management team• Availability of capital• Evaluation of risks and liquidity of company’s investments

Product and Services

• Attention to company’s products & services• Physical description• Use and appeal• Stage of development • Demonstration of prototype

Marketing Plan

• Not a simple concept: Interesting and thought provoking

• The most critical to a company’s success• A real market need• Market intensive business: elaborate

presentation (compelling market plan)

Marketing Plan 2

• Market definition and opportunity• Competition and other influences• Marketing strategy: distribution, advertising,

promotion, pricing, selling incentives • Market research• Sales forecasts• Support material: Industry studies, letter of

support, brochures, reviews or articles

Market Definition and Opportunity

• Summary of industry growth, Trade association, trade literature, industry studies

• The source of demand • The way demand is satisfied• Market share required for success determine

the degree of detail• Identify relevant target markets, their natures

and their importance

Competition and other influences

• Degree of competition • Future sources of competition• Other influences: Regulation, Terrorist or

other threats

Marketing strategy

• How organize and implement its marketing plan

• Sales and distribution strategy• Pricing strategy• Advertising, public relations, and promotion• Site analysis • Related marketing budgets• Future marketing activities

Market Research

• Preliminary market research • Cost/benefit analysis to see the most effective

market research• In some market: secondary research• Databases are available on line by subscription

Sales Forecasts

• Sales by periods• Three forecasts: Typically, conservative, most

likely• Sales by product or service• Sales by customer group • Market share• Support material

Operational Plan

• What is the general approach to manufacturing

• Which processes will be used in manufacturing

• What are the labour requirements• How will suppliers and vendors be used?

Operational Plan

• Product development: The gap between design and an actual product. More detail on technical team and on the technology

• Manufacturing: plant, equipment, material labour, techniques and process, and output

• What processes in-house and what outsourced

• Maintenance and services

Operational Plan

• External influences: _ Changing technology_ Factors affecting productive resources (labour and raw materials)_ Customers_ Regulations_ IP protection, patents and licenses _ Risk of imitation

Management and Organization

• Addressing the company’s personalities :_ Will management be participative or autocratic_ Will personnel share in the company’s financial success_ Will responsibility be sharply defined or will be more flexible

_ Will management be able to set a tone to entire organization

Management and Organization 2

• Management team and principals• Organizational chart: name, title, years of

hiring, and salary • Policy and strategy: Timing, Selection of

employees, and Compensation

Management Team & Principals

• Founding entrepreneurs• Active investors• Key employees• Directors• Advisory board assisting technical, planning,

marketing , operation• Key advisors such as lawyer or accountant

Major Milestones

• Offer date in a generic manner• Financial commitments• Prototype development• First market test• Initiation of production and sales• Attaining break even performance• Expanding operation• Past events• Ambitious but achievable• Leave a margin of comfort in planning

Structure for Capialization

• Legal form – Sole proprietorship – Partnership– Limited partnership– LLC– S corporation – C corporation

Structure for Capitalization• Financial participation– Capital requirements, how much is invested and how much

is needed– Term loans– Line of credit– Convertible bond– Bond with a stock warrant – Preferred stock– Cumulative preferred stock– Convertible preferred stock– Common stock, voting stock and non-voting stock

Financial Plan

• Company’s anticipated financial performance:– Reliable data– More than one financial scenario, due to

uncertainty of data– To review periodically– When necessary revise the projection– Alignment with other part of the business plan

Assumptions on which the projection is based on

• Income statement: typically for five years, reflect quarterly performance

• Cash flow statement: in great details in the first two years, quarterly or annual cash flow

• Current balance sheet: typically for five years• A break-even analysis

Projected or Historic Performance

• Liquidity ratios: Current assets / current liabilities

• Asset management ratios: inventory turnover and accounts receivable turnover

• Debt ratios: debt-to-equity ratio