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Business Plans: Who needs ‘em?!?
ANYBODY THAT IS THINKING OF BUYING OR STARTING A BUSINESS NEEDS ONE,
People fight writing a Business Plan like they fight going to a Dentist. No – worse!
Why? There are probably a huge number of reasons, as to why. Because it is tedious and their real interest is to get started, earning money from their business ideas; because it is foreign turf and they do not even know where to start; because it is like school; because it is too far removed from what they really want to do, so it is hard to see the ultimate goal when you are elbow-deep in research; because they are arrogant and think they do not need to do something so mundane? Who knows?
The Small Business Administration (SBA) stated statistics for business failures, in a publication that was released some months before the recession was (later) acknowledged to have begun. In that report, the SBA concluded that 70% of new businesses survive at least two (2) years and 51% make it through at least five (5) years.
Some businesses have worse failure rates than others. Restaurants are famous for quick failures. Hobby stores have lousy life spans as well, as a general rule.
And there are some businesses that might do better, if they could overcome some of the Eight Deadly Sins, in starting or buying a business:
This is where the Business Plan comes in…more to follow…
Starting a Business for the Wrong Reasons
You like to cook, so you think you can run a restaurant? WRONG! Restaurants are more about eking out pennies, than it is about “fun with cooking”. It makes no difference that you can cook well, if you cannot plan meals precisely, allot your staffing needs precisely and manage all of the minutia that goes into the daily operation. Your cooking may bring people in, but all of the remainder is what allows you to remain open.
Lack of Adequate Capital
More will be said about this when we post a note on financing a business. But overall, the largest, single characteristic of a failed business is the lack of Capital. The vast majority of businesses do not break even on Operating Expenses on a monthly basis for months – sometimes even years. This means you have to cover those losses until a break even occurs, or you will be out of business very quickly. And keep in mind that you need to pay for a large amount up front for items such as deposits on Leased Space, Utilities and Phones.
Because you represent a new business, (even if you buy a mature operation, you represent new ownership, which is the same thing as a startup as far as suppliers are concerned,) in all probability, you will need to purchase your entire Inventory on a “cash on delivery” basis. With a Gas Station, you will always need to do that; there are almost no credit terms with Gas deliveries. At $3.00 per gallon, in all probability, you will need $40,000 to pay for each and every Gas delivery.
The secret to many businesses – you have heard it before! – is location, Location, LOCATION!!! Believe it! What are you selling? Where are the traffic patterns? What are your demographics? Selling high end Jewelry? Then do not locate your retail store in an area where the local population has high unemployment, and is comprised largely of low-end, wage earning families. Want to open a Bagel Shop? You had better be in the traffic pattern that represents a higher vehicle count in the morning. Most people will not cross traffic in rush hour, for a cup of coffee and a bagel. Getting back into the traffic flow can be too difficult.
Again, to use the Restaurant example, any study on business failures cites a lack of managerial expertise as a huge reason. Knowing the basics of being able to handle finances, marketing, purchasing, hiring, managing people and all of the other issues that go into daily, monthly and annual operations, is vital. Purchasing and resource allotment are particularly critical. As stated above, Restaurant management is about pennies, not dollars. Every purchase you make and how it is used, in order to avert waste and spoilage, can make or break you.
When a business is doing really well, many Business Owners underestimate their financial needs, in expanding their businesses. There are any number of companies that have grown themselves into bankruptcy, as a result. Slow, steady growth is far better than explosive expansion. And planning in advance is a must, for this.
Lack of a Web Site
Even if you are not Amazon, the vast majority of businesses today need a Web Site. Some Residential Real Estate Agents initially fought this kind of promotion, stating that no one would buy a house through the Internet. And they were right! But as many as 95% of home buyers do their initial prospecting through the Net, before they elicit the assistance of an Agent. So, the Real Estate Agent that is not on the Web is at a distinct disadvantage.
As for Twitter, it depends on your business. We know Restaurants that do exceedingly well with Twitter, providing daily specials to the people following them in that manner. Restaurants, Delis and such that cater to business people for lunches on a daily basis, find this promotional technique to be incredibly effective. For others? Well…that’s not our business. But you need to analyze that kind of advertising, ideally in advance, THROUGH YOUR BUSINESS PLAN!
Review and Revise
A Busiless Plan is not a document that is engraved in stone. It should be viewed as constantly changable work in progress. It will change and needs to be updated as your business grows, as new opportunities arise, as the economy changes…you name it! You should review it and update it on a regular basis.
We are sometimes asked by first-time business people to write a Business Plan, as part of our Consulting Services. But there is a limit to what we will do, particularly for that first-time Business Owner. We will work WITH the Client; we will provide them with information about what is needed and how to obtain the information, we will structure the Plan and physically write it. But we WILL NOT make the specific conclusions and decisions that are derived from the investigations.
The whole idea of creating a Business Plan is driving you to understand your own business, the potential for losses, the profit, the general liabilities, the resources and investment required… It is therefore in your very best interests to do the research and make the critical decisions, yourself.
When we take on such a project, our goal for the first timer is in assisting you to organize and direct you in your research; to provide you with the raw materials that will allow you to make an informed, intelligent decision on your own. We do not make decisions for you!
There are a number of reasons to write a Business Plan, and you may find that you need to alter your original to meet each need. We have written Business Plans to determine whether it is even worth it to start or buy a business, to begin with. One we did for an already existing business suggested that the investment was simply not worth it, because the health care industry was changing, and the need would eventually decline. It did so within twelve months.
If a business concept is sound, a question may be whether to buy a mature operation or start one up from scratch. (We have an earlier post on this blog that addresses this specific question, in detail.) Comparing the two approaches can be critical, particularly when trying to obtain funding.
And funding is one of the biggest reasons to write a Business Plan. Providing an Investor or Lender with the reasons why they should bank on you, is critical. No one just hands out money based on your smile, unless it is your Aunt Ethel. And when you write a Plan for a Lender-audience, remember that this is perhaps your ONLY way or presenting yourself, and the first impression is perhaps your only impression. Screw it up and you will probably lose them, forever.
That means your sentences must be clear and correct, in terms of your choice of words and phrasing. Your spelling must be correct: If you cannot spell your own name, how are the Lenders to trust you with other issues? With their money?
The business concept is not the only thing being reviewed. Your own judgment is at stake, here. If you are making outlandish conclusions, that have no relation to the basic information you have presented, your judgment will be suspect. Your requests and justifications are vital. We were recently asked to review a Business Plan and assist in obtaining financing for a startup business. The spokesman was an articulate and rational sounding guy, but the authors of the Business Plan had provided no evidence that they had any experience or history of large-scale business ownership. The technology to be employed was only vaguely described and there was no suggestion that it was secured by patent or agreement with any manufacturer. None of the Principals had provided any proof that any of them had invested anything in getting to this point, and no suggestion that they had any money to bring to the table. Yet, they were asking for $1.5 billion in funding!
Writing a Business Plan is paramount, even if for your own purposes. There is no other way to attempt to account for all of the variables of issues that will confront you, as a Business Owner and Operator. The elements of a Business Plan will be in our next post.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)