be. Sure, you might be able to find success without a plan. You might be able to get from Pismo Beach to Cape Hatteras without a map, but wouldn’t it be easier with one?
In addition to helping you create appropriate strategies for your business, a winning plan can help sell your ideas to customers (especially if you are pursuing a business that goes after large contracts) and employees as well. Think creatively and use your plan as a serious marketing tool.
A truly effective business plan should build ownership in key players. Don’t just write the plan on your own and stick it in a drawer. Involve significant others (partners, managers, family) wherever and whenever you can because many of them will play key roles in making your dream a reality. Keep employees and partners involved in the planning, preparation and use of your business plan. Encourage those who will be most impacted by the plan to take an interest in the continuing and evolving life of the plan.
Investors and lenders aren’t out there giving away money with no thought. (If they are, please call me!) Potential funders (loan committees, family, friends, venture capitalists, stockholders) will need to evaluate your business in order to make a decision as to whether or not your business is a safe risk. Your business plan is the document that gives them information they need in order to accurately make an evaluation. It is your chance to sell others on your business idea and strategy. Use your plan to get investors and lenders on board and then continue to use it to lead your business.
It should be noted that when you use your business plan to raise money all the federal and state securities laws must be followed. Typically, a private placement memorandum (or “PPM”) is prepared by a securities attorney. The PPM contains all the risks an investor must be aware of and a subscription agreement for shares whereby the investor indicates he is aware of all the risks. The business plan is incorporated into the PPM so the investor has an understanding of where the company is headed. While a complete discussion of the securities laws is beyond the scope of this book and we recommend that you seek qualified legal counsel and financial advice. We shall also review this issue again in Chapter 10.
Keep in mind that different potential funding entities have different interests when it comes to business investment and they will be making an immediate initial decision as to whether or not you capture their interest. You have maybe ten minutes to get a funder’s interest and instill in him or her a sense of confidence in your ability to pay back or increase his or her investment. Most entities will be looking for an interesting idea, virtually guaranteed cash flow and the business acumen to bring it all together.
Your first chance to wow your audience is with your executive summary. It’s your first impression, so it has to be powerful. It has to be captivating and promising. It lets the reader know that you have a well thought out, winning idea for a business, product, service and/or market niche and the team and systems capabilities to fully capitalize on it. If the executive summary does not deliver, the rest of the plan will not be read.
After the executive summary, potential funders may look to the numbers to see if your ideas can generate the kind of revenues they are looking for. Potential investors and lenders often look first to your income projections and then to the balance sheet and income statement to see if those projections are realistic. Non-equity funders (the kind that are not looking to share in a piece of the business) will look to your forecasts to see if and how you will be able to repay loans. Equity funders (the kind that want some ownership in your business) will also be looking for evidence of a market. But don’t think you can simply state that there is a market for your business. Don’t bother. The reader will analyze the work you present and make a determination on their own.
If the executive summary shows an interesting idea and the financials show a possibility of financial return, then the next (and perhaps last) section the potential lender or investor may turn to will be a quick review of your background and that of other pertinent management personnel. All the great plans in the world will be worthless in the hands of incompetent or less than ethical owners and/or managers. Potential lenders and investors will be looking for experience, education and evidence that you can handle all you have promised.
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Rich Dad Tips
• The executive summary is your calling card. The way it is written will immediately tell a savvy investor or lender if you have the experience and expertise to lead a business. If it isn’t a winner, the plan may never be read.
• When you initially begin sending out your business plan to investors or lenders, send it to a small portion of your potential universe so that you can get feedback. If you are off the mark, you’d rather know early and adjust. Make sure to ask for open and honest feedback (and be ready to hear it) from the people who tell you “no”. They will offer valuable advice.
• Remember again that Money follows great management. Many good business plans don’t attract money not because the deal did not attract cash but because the person controlling the deal did not attract the cash. The key to success is people, people and people. Emphasize you and your team’s track record in the executive summary.
• Keep the plan clear and concise. If complicated and technical writings must be included, place them at the end with supporting documents.
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The preparation of your plan will help you figure out how much funding you need. But don’t skip it if you are fortunate enough to need no outside funding at all. Preparation of your plan will help you plan your income and expenses, your profits and losses, and thus show you whether or not a particular business can realistically be expected to meet your financial goals.
Whether you are preparing your plan to strategize your business or to get funding (or for both reasons), don’t get so caught up in one aspect that you neglect the other. Balance is key. So is remembering that every section of your plan will likely be of primary importance to someone.
What are some of the hassles you might be saved from if you take the time to prepare a business plan? How about quitting your day job only to find your great idea won’t pay the mortgage? Or resorting to high interest credit cards to finance the business? Many businesses fail within the first five years. Of those that fail, a staggeringly high percentage of them do not have business plans. Of course, the credit card companies don’t care if you fail, with or without a business plan. They want their money. So before you risk it all, plan ahead. But be prepared for the unexpected and don’t be afraid to make mistakes.
Gathering Materials
The materials you choose to include in your plan will depend on the specifics of your business and whether or not you are using the plan to secure funding. Most plans that will be used to get funding will include a capital equipment and supply list, balance sheet, break-even analysis, income projection statements, cash flow statements and a loan application. You should also include an explanation as to the assumptions used for projections. Other materials might include: Organizational charts, management bios and/or resumes, market data and a list of who is going to receive the document. And, as mentioned, in many cases the securities laws will have to be followed as well.
The last section of your plan will be Support Materials. Though support materials compose the back end of the business plan, don’t wait until the end to start gathering them. As you write the text of your plan, you will hopefully realize what documents and information you will want to attach. Get a notebook and keep a running list as you write. Take time as you finish each section to determine if you have the support documents listed. If you do not have them, make the appropriate calls to get them. Some documents may take awhile to get to you. By making the requests as you go, rather than waiting to do it all at the end, you will save yourself a lot of time. As you will find, gathering materials almost takes as much time as the more important thought process behind the plan. The actual writing should go smoothly and quickly if you are well organized and have done enough homework to know how turn your idea into a winning business.
As you are going through the time-consuming process of gathering materials and conducting research, keep your eyes and ears open for news that is even remotely related to your business idea. Clip