By Erik Nelson
I feel that it is more important than ever to have a good business plan. It is a primary means by which potential investors and investment bankers will evaluate a company as an investment. It will become a key tool for management in evaluating the success of the business operations. The value of a well written business plan cannot be over stated. It will benefit both management and investors in the company. During the nearly 20 years since I founded Coral Capital Partners, I have written dozens of business plans and read probably several hundred more. I can honestly say that writing a good business plan is a lot harder than it sounds.
There have been a lot of changes to the capital raising process over the course of the last several years. I feel that the two most significant changes involve the implementation of FINRA Regulatory Notice 10-22 in April of 2010 that requires broker/dealers raising funds for a company in a private placement conduct reasonable due diligence on the client company and its existing shareholders. The second (2nd) major development is the JOBS Act signed into law almost 2 years later in April of 2012. The JOBS Act is designed to make it easier for companies to raise capital; while FINRA 10-22 increases the scrutiny that companies seeking to raise capital will be subject to. This effectively means more competition for companies that are seeking to raise capital, and a higher bar for those seeking to raise capital through broker/dealers.
I think writing a good business plan requires a good understanding of the business and the market for its goods and services. I do not think a software program, regardless of how good it is, can write this. A good business plan requires a human touch. Unfortunately the vast majority of business plans I have read have failed to cover the basics. It is almost as if writing a good business plan has become a lost art; so I thought now would be a good time to take a look at what makes a business plan good.
A good business plan needs to be able to deliver the key points, providing a solid understanding of business, its products, as well as the market the company marketing its products and services towards. The business plan should provide a solid description of who is running the company, as well as its financial prospects. The vast majority of the business plans I have review come up critically short in at least two or more of these important areas, and higher number fail to address at least one key area. I think that is important that we take a look at the key sections of the business plan and what should be included.
Executive Summary: The Executive Summary should be 2 pages in length. This is your best chance to grab the reader’s attention and convince them to spend their hard earned time to read the rest of the business plan. The Executive Summary needs to cover the following areas, devoting 1 to 2 paragraphs to each. It should provide a description of the company, state “the purpose of the business plan,” describe the company’s products and services as well as the market potential for those products and services, provide a brief management description, and a financial snap shot. A lot of business plan writers omit the paragraph on “the purpose of the business plan;” they simply feel it is not necessary. I disagree. I think it is very important to let the reader know why the plan was written and who it was written for. Is the business plan a document designed for professional investors to evaluate the company as a potential investment; or is it a tool for management to guide the growth and development of the business? These two different purposes can create a dramatic difference in the way the plan is written, and in how it is interpreted. It is very important to avoid any excessive fluff or hype in the Executive Summary, or you will lose the interest of the reader; be as straight forward and up front as possible. Remember, the Executive Summary is your best opportunity to grab the reader’s attention and get them interested in reading the remainder of the business plan.
Company Description: The Company Description section of the business plan should provide a good description of the business, an overview of its products and services, its sales and marketing model, as well as other important information that allows the reader to understand the business is going to do and how it plans on doing it. The remainder of the business plan will provide greater detail on what is covered in the Company Description.
Market Analysis: This section of the business plan provides an in depth look at the market for the company’s products and services. It should discuss how big the market is, who the competition is, and the potential for the company to penetrate this market with its products and services.
Product & Services: This section of the business plan provides an in depth look at the product and services of the company. It should discuss how its products are different from those of its competitors, why the company believes its products and services will be more desirable.
Sales & Marketing: This section of the business plan discusses how the company is going to create awareness of its products and services, as well as how the sales process is going to work. It should address how many people will be involved in the process, what are the expected advertising channels, and other information necessary to gain an understanding how it is going to generate its revenue.
Organization and Personnel: This section of the business plan discusses the organizational structure of the company, the staffing requirements, as well as a general description of the key positions and management. It generally includes an organization chart. This is generally not a lengthy section of the business plan as its purpose is to provide a general idea of how the company will be managed and staffed.
Management: This section of the business plan lets the reader know who is the management of the company. It generally provides a brief description of their work experience and educational history. This portion of the business plan has taken on increased importance with the more stringent emphasis on proper due diligence in the market place.
Current Ownership: This is where who currently is an owner or shareholder of the business is disclosed. This section is becoming much more important than in the past. With the heightened due diligence requirements, it is now more important than ever that potential investors are informed who the major shareholders of a business are.
Funds Required and Their Use: This section of the business plan lets the reader know how much money the company believes it needs to implement its business plan. Very importantly it should let you know how the company plans on spending the money it raises.
Financial Projections and Assumptions: This section of the business plan is where you lay out your assumption that were used to build the financial model and your projected financial statements for the business. It is crucially important the financial assumptions are as accurate as possible. It is equally important that all three (3) of the major financial statements, Income Statement, Balance Sheet, and Statement of Cash Flow is included
Exhibits: This is your chance to show the outside information that backs up your statements and claims in the business plan. Do not be afraid to include exhibits that will help make the case for your business.
With the discussion above, I have attempted to provide a good outline of what goes into a good business plan. I would like to point out that companies and industries are not all created the same, and as a result there will always be a reasonable amount of customization that goes into a good business plan, everyone is going to be slightly different in some form or another. Also, it is very important that the business plan is not overly promotion in its statements on the product or its potential sales. I have read countless business plans where the company said that it was going to introduce a never before seen product, become a world leading company overnight, and never have any competition. These sort of overblown claims are an obvious red flag for any experienced investor or investment banker. It is much better to be straight forward and realistic with your statements. I am personally much more comfortable reading a business plan about a company that is going to enter a very large, growing industry, grab a tiny share of it, and make money for its shareholders than I am with a company that thinks it will be the next Apple, Inc. in 24 months. Finally, a good business plan doesn’t necessarily guarantee you will raise money or make a good investment; but it sure can help put the odds in your favor. As always, if you have any questions about anything in this article, please feel free to contact our offices. We are here to help.
About Coral Capital Partners and Erik Nelson
Erik Nelson is the President of Coral Capital Partners, an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. Coral Capital Partners provides cost effective solutions to real world issues and situations. Coral Capital Partners, Inc. provides services to Investment Banks, Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations. This has included international public companies with operations on three (3) continents to smaller privately held domestic companies. Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand. Please feel free to visit our web site at: www.coralcapital.com or call our offices via. telephone # (404)-816-9220 to see how we may be of assistance.
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