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Elements of a Business Plan
So, what goes into a Business Plan? EVERYTHING you can think of that would affect your business, and more! And more? Yes, because frequently, the process of researching the areas of the Business Plan you knew to question, additional questions you never dreamed would affect the business will be spawned.
There are any number of ways to organize and write a Business Plan, and everyone that has written one probably has his/her own recipe. Generally speaking, the topics to be included in the Business Plan should consider the following; but certainly, this is not a complete and all-inclusive list:
Explain Your Product or Service: This should be well defined and specified. If a Temporary Staffing Service is intended, what exact line of personnel would be involved? If it is a Restaurant, what kind of food is to be offered and will it be fast food, informal dining or white linen, etc.? In some cases, this will involve proprietary or confidential information; therefore, your Business Plan should be exclusively restricted to only those outsiders that actually require this kind of information.
Demand: This should directly and specifically relate to your Product or Service. Who are the Customers or Clients? What is the national, regional and local demand, because the national demand can contribute to the local impact? (We once did market projections for a Company in California, and successfully projected a downward turn in the market from trends that were then, only occurring in the Northeast quadrant of the US.)
Supply: Where will you obtain your Inventory, be it candidates for a Staffing Company or food supplies for a Restaurant? How secure is your supply line? (At one time, we refused to represent a local Company that had already invested $500,000 in an electronic device from South Korea, but was running out of money to complete the process of putting the product on the market. It was a great device, but the manufacturer refused to sign any commitment to the local Company. After all of their money and effort, anyone – including the manufacturer – could have completely undermined the local Company and stolen the fruits of its efforts. We could not effectively sell this Company until they obtain protection for the investment.)
Market Relevancy: We have purposefully chosen this term to be all-inclusive. If we were only dealing with technically-based products, it would be viewed as a function of the state of technology and anticipated advances that could affect your product. For example, the overall demand of CB radios and Public Phones were impacted by the increasing availability and lower cost of the Mobile Phone. But relevancy is not only a function of technology. In services, we saw the demand for Nursing Services change as a result of reductions in health care reimbursement philosophies and hospital stays. Being able to understand your own product or service at a level that would permit you to foresee the threats and opportunities, not just next week, but well into the future, is paramount. Certainly, no one can ever know everything that will impact your market; but you MUST know the state of the market and the traits and movement in that market that have the potential to fundamentally affect your business. Continually reading trade publications or looking for reports in business magazines and newspapers for technical changes, proposed legislation and similar movements, is critical. Not just in preparing your Business Plan, but constantly, for as long as you are in business.
Promotion and Selling: How will you let the public know of your business? Look at all avenues, including print, electronic, how to institute word-of-mouth referrals, billboards, and so forth. And following that up – where necessary – the Selling process itself. Will you need to use outside Salespeople? Where will you get them? Train them? Pay them?
Competition: What is the competition? You should know how they operate, how much of the market they control, what their strengths and weaknesses are, in some cases; because you may need to sell against them. A rule of thumb is to never disparage the competition, but if you know of a weakness, you need to demonstrate how your service excels in this area; let the Customer make the comparison to your competitor. And a critical series of questions revolve around how difficult will such competition be to overcome, whether it can be done, how long it will take and whether there is sufficient market remaining to make it worth your while to invest in your project?
Distribution: How will you get a product to the Customers? If it is Pizza, will you deliver? (We once established an Export Company, and one of our products was Beer, produced in the USA. We found that it was impossible to sell, in some, economically challenged areas. The demand was certainly there, but the cost of shipping a heavy commodity like beer was so astronomically high, that they could not afford what we needed to charge, in order to make it worth our while.) With the fluctuations in Fuel that we have experienced in recent years, the costs of Distribution is a huge factor, if trucking and such other delivery methods are required.
Legal Considerations: Do you need a License, to do what you want to do? Liquor Licenses are required to open a Liquor Store or serve Liquor in a Restaurant; but in most areas of the Country, the number of Licenses is restricted by the density of the population. When that allotment is reached, the only way to get a License in that area is to purchase one. That can get extremely expensive. (In one area in which we have operated, buying an existing Liquor License alone can cost $400,000. That is without any business, no inventory…nothing but the License!) In some Maryland counties, Liquor Stores cannot be open on Sundays. In still others, the County is the Distributor and maintains all of the stores where hard Liquor can be sold. InOhio, as we recall, all Liquor stores are State-owned. Again in Maryland, Restaurants can be open 24-hours a day, but Liquor can only be served during certain hours. And some Licenses permit Entertainment, while others do not. These considerations can be radical elements in your planning and your expectations for Revenue/Profit. And as stated in the Market Relevancy segment of this post, what of the future? Is there pending legislation that would impact your business? You need to know this!
Financial: HUGE number of issues! What will it cost to start up such a business? Rent, furnishings, office equipment, maybe vehicles? Advertising costs, not only for the business, but to recruit employees? Deposits for the Lease, Utilities, Phone and others? Costs of Production need to be considered, including Packaging options. Inventory costs are always a concern, not only with the original, opening stock, but product replacement, as well. This is where you can get into trouble: When you finally make that sale, how are you allotting the Revenue? Not all of it can go to Inventory Replacement. There are all of the elements of the business that will demand periodic payment, so careful prioritizing needs to be determined, in advance. And if you are taking Credit Card payments, remember that a certain percentage of each sale immediately comes off the top, to the Credit Card company, while some Credit Cards companies pay more slowly than others.
Projections: This is where you project the findings of your Financial research, in relationship to all other issues you have identified. Most people believe it is the toughest part of the Business Plan. Yet, it is really the most vital. When you go to get a loan, we have seen Bankers completely ignore the remainder of the Business Plan and go straight to the Projections. The vast majority of businesses will take months, if not years to break even on monthly operations. Your projections should include realistic expectations for success, which includes consideration for initial losses, and perhaps periodic losses even after you reach overall profitability. This can occur if you have a Ski Shop, as an example; how much of a loss will you take in every July and August (in the Northern Hemisphere,) and how will you work to minimize those cyclic losses? Projections should be documented as a Monthly Pro Forma P&L (Profit and Loss) Statement, then Annualized. Profits and Losses should ideally be carried over the years of the projection. Until your business finally breaks even, you will need to know and be prepared financially to support the Losses with sufficient Capital Reserves to allow you to survive, until that break-even point is reached. This is important to Investors and Lenders, as well as yourself. This section provides the basis for making a decision of whether it is more beneficial to start up a business, or buy an already operating one. (We have a previous post on this blog that addresses this issue.)
Exit Strategy: Many people will ask us – when they consider selling their businesses – when they should put an Exit Strategy together. Our response is normally, when you wrote your initial Business Plan! Of course, it depends on whether you started the business for the purpose of launching an investment opportunity for yourself, or whether it is just to create yourself a job. If you are a one-person shop and the entire enterprise is centered on you, your personality, your own specialized talents and skills, your chance of selling the business is exceedingly limited. If, however you plan to grow the company, install others to take over part of the functions of the business and distance your own personality and face from the company, you stand a much better chance of realizing the fruits of a real investment. That comes over years, not over weeks, and planning is involved from the beginning.
Resumes: To provide some semblance of proof that you have the skills to execute the activities that will need to be performed, as described in the Business Plan, it is best to provide your own Resume, as well as those of key people you have identified (if applicable) in your company. When applying for a Loan, particularly with the SBA, experience is critical. No one wants to lend any money to an entrepreneur that has absolutely no understanding of the business he/she wants to start or buy. And having documented, pre-existing skills and experience are things that can make or break your ability to get that loan.
Executive Summary: The Executive Summary appears at the beginning of your Business Plan, but is normally written at the end, because it reflects the findings of your research and the conclusions stated in the sections listed, above. Ideally, it is a one-page essay that gives the reader your best “pitch” for your business and the reason you want the person to read your Business Plan. If you cannot sell them in the first page, they are not going to wade through the rest. So, if you are writing to an Investor, you need to impress them BRIEFLY with the reasons yours is a winning concept, your capabilities in executing the Plan, the money it will require – which is why you want them to read the Plan – and what the Return on their Investment would be projected to be. The rest of the Business Plan then provides evidence that the assertions and claims in your Executive Summary are viable.
Index: It is always best to have an Index and numbered pages established for your Plan. It demonstrates a professionalism that the Lender, in particular wants to see. It also provides easy access, should questions arise. Many Lenders initially use some sort of a “checklist”, in order to determine whether they will even consider the opportunity. We have invariably gotten calls from clerical personnel in the Lenders’ offices, who have never read the Business Plans sent to them, but are charged with looking for specific details that the Lender him/herself demands. Those calls routinely involve the Clerk saying, “There is no ‘X’ in the Business Plan.” Because of the Index and page numbers, we can just as routinely say, “It is in Section ‘Y’, on page ‘Z’”. This gets the Clerk the information he/she needs, gets us off the phone more quickly and (more importantly) gets the Loan Application more quickly to the people who actually make decisions about you and your Loan.
Overall, the Business Plan must be believable, and that means providing evidence to support your allegations and projections, throughout the document. “I think” and “I feel” have no place in the Plan. Statistics and quotes from reliable studies and sources are vital. Objectivity by those sources is to be highly desired; your emotional attachment to the project…not so much!
And make it unique. Lenders see a lot of Business Plans. The more attractive and noteworthy you can make your Plan appear, the better off you are – without being unprofessional about it. An illustrated cover, photos and the like are apt to be far more appealing than simple text. In advertising, it is universally agreed that white space appeals to the eye, so segment your text to add emphasis and attract the eye through the use of such spacing. Binding the Plan professionally is far better than a staple at the upper left of the package. You need this to be a PROFESSIONAL document, if it is going to an outsider to read it.
A Business Plan does not guarantee success; but it sure helps in any number of immeasurable ways, whether for a Lender, or to satisfy yourself that you are making the right decisions with perhaps the most important investment of your life!
(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.)