BFA Finance Group - Finance Solutions for Business

Business Plan Outline

Written by Larry Johnson Friday, 06 November 2009 19:45

1. Executive Summary

BFA believes the Executive Summary is one of the most important aspects of a business plan. This is because potential investors examine so many business opportunities that yours has to stand out to get noticed. Focus on the company's distinctive attributes, the factors that will make this company successful in a competitive market.

Develop a short, non-technical and understandable summary description of the opportunity. Remember the audience you are writing for: they are finance people, not experts in your field. Tell a simple but engaging story of why this is the right solution for a specific problem, with the best strategy, and why this management team can execute a thoughtful strategy to make it a winner. The investor needs to understand what is in it for him. Consider the services of a professional communicator.

2. Company Description

This section must provide an overview of how all of the elements of the company will fit together without going into great detail. Most of the subjects will be covered in depth elsewhere in the plan.

Writing this section may be the first real test of the ability to clearly and succinctly communicate the essence of a business. Lack of a clear description of the key concepts of a company indicates to the reader that the business owners may not fully understand the focus and purpose of the business.

3. Market Analysis

The Market Analysis section reflects the entrepreneurs knowledge of the industry. It is important to focus on the size of the industry and current relevant trends. The investor needs to know that this market is big, may be captured with this approach and the timing is right due to current needs and trends.

Present highlights and analysis of good market research that is the most up-to-date available. Ensure that the full market research is in the appendix. Business and technology change at unprecedented speeds and old information may tell an investor of a lazy entrepreneur or one who does not keep up with changing markets.

Tell the potential investor which segment/market is the first priority. Focus is important. No one can do everything at one time, nor can any small business afford to hire enough people to cover all market segments. Therefore, the point must be made that this approach can capture the first market that is ready for your solution, and that there are other markets/segments with similar needs and trends that ensure that your idea is not a "one trick pony." State the distinguishing characteristics of the primary target markets/segments.

Indicate the extent of anticipated market penetration and demonstrate why that level of penetration is achievable based upon market research. This includes demonstrating a knowledge of the market and what influences it. Describe where the business is going to start and how it is going to expand beyond the first target customer. Show investors that there is a detailed strategy. Do not say, "we believe we can capture x% of our target market." It begs the question on how that will be done and leaves the reader with the impression that management doesn't know how it will be done.

4. Products and Services

The emphasis in this area should be on the company's unique ability to satisfy the needs of the marketplace. Talk about the key features, always from the user or customer point of view. Don't describe an emotional involvement with the product or technology. Tell the advantages from the market's point of view so the investor can see why the market will demand the product.

Avoid criticizing any competitor's products. Think broadly about competitors. Competition may not only be from other companies with similar types of products already in the market, but may also come from new entrants into the market. Competition may be from a substitute type of product using a new technology never before applied to this market.

This is the chance to emphasize and resell the market analysis as being valid and a good understanding of the market is demonstrated. Investors do not bet on the second or third version of an idea. They want to find the business that will start first and stay in first place over time.

Do not tell the investor there is no competition for the product. Focus again on product features that will make a particular target customer-set demand this product over others. Include quotes from existing or potential customers. Allow readers to come to their own conclusions about the competition based upon the objective analysis of key features and customer requirements presented in this section and in the Market Analysis section.

Finally, answer the question as to how easy would it be for competitors or new companies entering the market to reproduce this product (barriers to entry). This is the time to state that ownership of intellectual property rights (patents, trademarks, copyrights, licenses, etc.) gives this company a head start and advantage over all other competitors.

5. Marketing and Sales Activities

Both general and specific information must be included in this part of your plan. The objective here is to describe the activities that will meet the sales and margin levels indicated in the prospective financial statements. Do not underestimate the importance of presenting a well-conceived sales strategy here. Explain pricing strategies and indicate units sold as well as dollar value for the product or service. Without an efficient approach to opening the doors of potential customers, companies with very good products and services often fail.

Clearly state how this company will find and capture customers. Will there be a direct sales organization that calls on potential customers? Will channel distribution strategies be part of this business so that value-added resellers (VARS), integrators, etc. will sell this product? What kind of support will the business provide for distributors?

How will the distributors be paid so that they have an incentive to move products off their shelves and the company's margins remain attractive? Are customers initially other businesses or is there a potential for mass-market consumer sales? Why is this strategy going to be better than that of any competitors?

6. Operations

Describe how the company will be structured. Explain lines of authority. Provide an organization chart. Explain how a product or service will be provided from scratch.

7. Management and Ownership

The experience and skills of the management team is one of the key attributes investors must understand. The management teams talents and skills are some of the few truly unique aspects of any company. If this business plan is going to attract investors, this section must be utilized to emphasize managements talents and skills that are relevant to this particular opportunity. Include current, well written and concise resumes of key management in the Appendices that can be updated.

This business plan is marketing to potential investors and must tell them why this management team is a part of this company's distinctive competence that cannot easily be replicated by the competition. Remember that investors invest in people, not ideas. Remember the value of outside advisors.

Recruit recognized and experienced experts to provide resources and act as an informal board of advisors. Potential investors value the involvement of successful leaders in their field. Listing these advisors in the plan gives credibility if they have desirable skills. Also, these advisors can later form the core of a more formal Board of Directors.

Do not use this section of the plan to negotiate future ownership of the company with potential investors. Simply explain the current ownership.

Unless the entrepreneur is an expert in the area of legal forms of businesses, get competent legal, tax, accounting, and securities advice about the advantages and disadvantages of various business structures. Uninformed decisions in this area could lead to major liability and funding problems in the future. There are many potential high growth companies competing for investor money. Most investors will walk away from a business that is poorly structured because of potential liabilities or inadequately protected intellectual property.

8. Organization and Personnel

The objective of the Organization and Personnel section is to indicate who will implement the details of the business plan and their demonstrated experience or competence. Staffing levels and skills must correspond with the prospective financial statements. Some of the biggest challenges and rewards encountered by entrepreneurs will involve the people in the organizational structure in the beginning. Planning for the business evolution will minimize future personnel problems and keep the critical human element of the business in top form.

9. Funds Required and Their Uses

This is a good point to state what has already been achieved and what was accomplished with personal funding or that of friends and family. It is an opportunity to state that a great deal has been accomplished to this point and to restate your commitment to the enterprise.

State how much money is needed and for what purposes. Will it be to take the product from prototype to production? Will it be to attract a Chief Executive Officer, a Chief Financial Officer, Vice President of Marketing? Will the funds be used to capture early sales and develop a channel distribution strategy?

The more specifics provided, the more credible the business will be. If the management doesn't know exactly how the money will be used, investors will lose interest quickly.

Describe previous sources of capital for the company, how much debt is being carried, if angel or other investors are expecting to continue their involvement with the company or if they are expecting reimbursement of their original investment plus some return on their investment. Provide a clear picture of the status of the company and how it reached the point at which additional investor funding is necessary.

There is controversy about stating the valuation of the company here (pre-money valuation). Most experts would advise entrepreneurs not to provide a dollar valuation of the company and to avoid stating a percentage of the company available to investors. Leave valuation and ownership discussions for negotiation when a term sheet is offered. The business plan is the opportunity to sell the value of the ideas and the skills of the management team that can clearly execute the plan.

It is more important to improve a valuation by reducing the elements of risk. Therefore, the more understanding of the market's needs, the more it is demonstrated that this product satisfies the need, the more confidence shown that the management team can sell into and support this market, the more risk is reduced in the plan, the more attractive the company will be for investors.

10. Financial Data

The Financial Data section contains the financial representation of all the information presented in the other sections. The financial statements to be included are:

• Income Statement also referred to as a Profit & Loss Statement (P&L)
• Balance Sheet
• Cash Flow Statements

These statements should reflect the first year of operation on a monthly basis and the following two years on a quarterly basis. Years four and five can be an annual basis. Don't carry the number further than five years. Even year four and year five projections are highly speculative, and it is assumed that those numbers will change.

Include relevant, realistic assumptions about the numbers, such as how much revenue is projected. Provide sales numbers both in units sold and calculations behind setting unit prices. Describe the variables affecting the earnings on that revenue, such as expanding the marketing team. If that is the case, make sure expenses show the salary for any new employees. Include, where appropriate, a description of accounting principles regarding depreciation, Research and Development (R&D), taxes, inventories, etc., especially if you are varying from industry or even GAAP (generally accepted accounting principles) standards.

A good financial section should include:

• Financial forecasts reflecting financial implications of growth
• Estimating sales in specific markets
• Cost of goods sold
• Cost of obtaining and retaining customers
• Selling, general and administrative expenses
• Operating income or operating margin
• Performance goals integrated into financial goals so that return on investment, profitability, and cash flow milestones are understood
• Financials that indicate enough growth potential
• Financials realistic enough to have a chance to succeed
• Month-by-month detailed financials for Year 1 and Year 2 showing growth and spending plans
• The assumptions on which the financials are based

11. Exit Strategy

An investor expects to recover the initial investment in a company and an agreed upon rate of return for using that money for a period of several years. It is important that an investor knows that the entrepreneur recognizes that the business relationship that develops will terminate in four to seven years. The plan needs to include a feasible event that will generate enough cash from the business to reimburse investors as well as indicate the long-term strategy for the company.

Ownership must have a vision for the business that will lead to an acquisition by a larger firm, a merger with another business, an Initial Public Offering (IPO), a reverse merger or any other liquidity event. What is important is that planning for the eventual event begins as the business is being built, that the strategy is appropriate and is clearly stated in the business plan.

Indicate that the business is aware that any sale of company stock must comply with both federal and state securities laws. These laws have as their primary objective the protection of investors. Thus, companies wishing to offer their securities for sale must provide full disclosure of all material information so that investors can make informed investment decisions.

Failure to be forthcoming in providing information can subject the entrepreneur to serious legal consequences. The anti-fraud provisions in both federal and state securities laws mandate that the issuer of securities is legally responsible for any false or misleading statement or omission, whether oral or written. Additionally, an investor who purchases securities without receiving adequate information from the issuer may seek legal action against the issuer, including refund of the purchase price. The government regulators may also pursue claims against issuers, including criminal sanctions, for violating any aspect of federal or state securities laws.

It is strongly advised that entrepreneurs consult an experienced attorney familiar with the securities laws of all applicable states in order to develop a securities law compliance plan specific to the proposed offering. It is critical that all legal requirements be complied with before the first contact is made with any investor. A mistake made in the initial offer will not only cause potential liability to the entrepreneur, but it can also poison the deal, thereby affecting the company's ability to obtain further equity financing in later rounds.

12. Appendices or Exhibits

Any additional detailed or confidential information that could be useful to the readers of the business plan (but not necessarily appropriate for distribution to everyone receiving the body of the plan) can be presented here. Items of relevance could be results of formal market or scientific research, letters of intent or endorsement, key management resumes, expansion of descriptions of the technology, background of advisors, etc. Accordingly, Appendices and Exhibits should be bound separately from the other sections of the plan and provided on an as-needed basis to readers.

In some instances, the thicker the business plan, the less likely a potential source of capital is to read it thoroughly. However, be able to demonstrate to potential funding sources that a complete job has been done in preparing this plan, and that the comments made in the body of the plan are well documented. By properly utilizing appendices and exhibits, the size of the business plan is manageable to its users and still has the additional information readily available.

Many investors use the drill down method when screening business plans. That approach is to quickly read the executive summary. If the executive summary interests them, they will drill to the next level, i.e. the body of the plan. If the succinct, layman's language explaining the technology is helpful, they will go to the expanded technological section of the appendix to read about the more detailed development or theory behind the product or service. Many investors will use this method to go from section to section, as long as the plan is well prepared and responds to the questions the entrepreneur should anticipate.

For some handy tips on writing business plans, check out or "do's and don'ts" of business plans in our News & Notes section.