On the face of it, a Business Plan should be relatively straightforward: an executive summary, a company description, market research and information, marketing and sales data, and financial projections. So how come so many business plans miss the mark?
Anyone who’s done Business 101 knows the basic elements of a Business Plan, and anyone who has looked into starting their own venture or sought investor funding has tackled the challenge of writing their own plan – yet so often business plans fail to reach their intended goal.
A business starts with an idea – a seed – but that idea only yields fruit if it’s planted in the right soil and given the right growing conditions. In other words, an idea – even a great idea – isn’t enough if it doesn’t have a market, a realistic plan to reach that market, and an effective team to execute that plan. Most business plans fail not because the idea isn’t great, but because the marketing and financial elements are unrealistic or because the team fails to execute effectively.
Think back to the dot-com bubble – the bursting of the bubble was caused by the huge investments and overvalued stocks in dot-com companies based on little more than a basic idea, the overblown hype surrounding the potential of customer acquisition through the internet, and the success of a few key players (Google, Amazon). The reality was that most of them never actually had sound enough business models that would actually generate business in real terms – and ultimately yield profits for their investors.
So while to you the most interesting part of your business plan is the idea itself, to your potential investors, the most interesting part is the return on their investment. Regardless of how novel the product is, the real value to the investor lies in the business plan answering some very key questions:
- How large is the market and is it a growth market?
- How do you plan to access the market?
- Do you have a sound, sustainable business model that can yield a return on my investment?
- Is there a potential exit strategy for me?
So how do you put together winning data into your Plan?
First of all – make sure your research is thorough and valid! Just as your product should be proven and validated, so should your market and financial data. While some assumptions are acceptable, they should be based in “what is” not on “what should be”.
Industry Background: When you describe your industry make sure you include its current size and projected growth rate, its characteristics, trends, and segments. Once you have an outline of the industry, zero in on your specific target market or segment. For example, if you are targeting the aviation industry, is your focus on commercial aviation, business aviation or military aviation? Are you focused on a specific region, aircraft type, service type, or business model? If your focus is on the consumer side, which variables did you use to segment your market? Geographic segmentation? Demographic? Psychographic? Socioeconomic?
More importantly, look at your target market’s needs and how they are currently being met. What is the size of the segment, who are the major and the secondary players in the industry, and how much share do you think you can gain? How do you plan to gain entry into this market? What is your value proposition and what are your proposed market channels?
Make sure you understand how you fit in the industry big picture, including barriers to entry, regulatory environment and in relation to the competition. What are your competitors’ strengths and weaknesses and how important is your target market to them? If your target market is their primary source of income, then you can be sure that they will fight to maintain their position within the industry and they will have many advantages. Do you have a strategy as the new entrant?
Remember that the more defined your target market (or markets) and the better you understand the competition, the clearer you can be in not only defining your market’s individual needs but also in defining your specific value proposition and target share.
Again – realism is the key. If the total market is $100M and there are 3 key players, each of which has 15% share of the market, then be realistic in your expectations: you are unlikely to gain 10% share in your first year of business!! If you believe that your product is so great that your customer will want to use it on their equipment 8 times a year when the industry standard operating procedure calls for the process to take place 4 times per year, think again! Your sales projections will be severely off the mark unless you have a solid plan to change customer behavior!
Pricing & Profit Margins: Pricing and profit margins can often be a major pitfall when developing a business plan. Make sure your pricing structure – including discounts – is clearly defined and that all relevant costs are included in your profit calculations. Too often, profit margins are grossly over-estimated as key costs are omitted from this calculation. Make sure you understand both your fixed and variable costs as you develop your pricing structure and include a breakeven analysis so you truly understand where you need to be to start making a profit. If your fixed costs are $7,000 a month, you will need considerably more than $7,000 in sales to break even, so make sure you include a realistic estimate of variable costs.
Business Model & Financial Projections: Literature abounds with information on how much detail should be included in the financial projections. What is just as important however, is the business model itself and the knowledge and ability of the management team to execute that model. A good business plan presents the financial projections in multiple scenarios to show how the company would respond and the projections would be impacted if the expected market or environmental conditions were to change unexpectedly.
Think back to 9/11 – a day that not only changed history, but also changed the face of several industries. The aviation industry was changed virtually overnight: airlines and suppliers to the industry went out of business virtually overnight; new entrants came onto the scene; the regulatory environment changed.
While this example is extreme, outside events can – and do – impact a business: regulatory changes, new technologies, new competitors. So a business plan should reflect a business model that can respond quickly to a changing environment. William Sahlman, in his excellent article on writing a business plan, states that “a typical professional venture-capital firm receives approximately 2,000 business plans per year. These plans are filled with tantalizing ideas for new products and services that will change the world and reap billions in the process – or so they say. But the fact is, most venture capitalists believe that ideas are a dime a dozen: only execution skills count.”
Sahlman makes an important point: investors are inundated with ideas and business plans. What you need to focus on when putting together your own plan, is ensuring you have a sound business as well as a good idea.
As always, I’ll leave the final word to an expert, Joe Mansueto
“I found an approach to investing that made enormous sense to me: rigorously analyzing a company’s fundamentals, understanding exactly how it makes money, developing a view on the business’s future prospects, and deciding if it’s a good business.
