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AREAS TO COVER IN YOUR BUSINESS PLAN AND ITS UNIQUE

ESSENTIAL AREAS TO COVER IN A BUSINESS PLAN; IMPORTANT COMPONENTS OF AN EFFECTIVE BUSINESS PLAN

A business plan’s main purpose when raising finance is to market your business proposal. It should show potential investors that if they invest in your business, you and your team will give them a unique opportunity to participate in making an excellent return. The business plan should be considered an essential document for owners and management to formally assess market needs and the competition; review the business’ strengths and weaknesses, and identify its critical success factors and what must be done to achieve profitable growth. It can be used to consider and reorganise internal financing and to agree and set targets for you and your management team. It should be reviewed regularly.

The company’s management should prepare the business plan. Its production frequently takes far longer than the management expects. The owner or the managing director of the business should be the one who takes responsibility for its production, but it should be “owned” and accepted by the management team as a whole and be seen to set challenging but achievable goals that they are committed to meeting. It should emphasise why you are convinced that the business will be successful and convey what is so unique about it. Private equity investors will want to learn what you and your management are planning to do, not see how well others can write for you.

HOW TO MAKE A BUSINESS PLAN?

Essential areas to cover in your business plan

Many businesses fail because their plans have not been properly thought out, written down and developed. A business plan should be prepared to a high standard and be verifiable. A business plan covering the following areas should be prepared before a private equity firm is approached.

Executive Summary

This is the most important section and is often best written last. It summarises your business plan and is placed at the front of the document. It is vital to give this summary significant thought and time, as it may well determine the amount of consideration the private equity investor will give to your detailed proposal. An executive summary should be clearly written and powerfully persuasive, yet balance “sales talk” with realism in order to be convincing.

It needs to be convincing in conveying your company’s growth and profit potential and management’s prior relevant experience. It needs to clearly encapsulate your company’s USP (i.e. its unique selling point – why people should buy your product or service as distinct from your competitors).

The summary should be limited to no more than two to three pages (i.e. around 1,000 to 1,500 words) and include the key elements from all the points below:

(1) The market
(2) Product or service
(3) The management team
(4) Business operations
(5) Financial projections
(6) Amount and use of finance required and exit opportunities

Other aspects that should be included in the Executive Summary are your company’s “mission statement” – a few sentences encapsulating what the business does for what type of clients, the management’s aims for the company and what gives it its competitive edge. The mission statement should combine the current situation with your aspirations. You should also explain the current legal status of your business in this section. You should include an overall “SWOT” (strengths, weaknesses, opportunities and threats) analysis that summarises the key strengths of your proposition and its weaknesses and the opportunities for your business in the marketplace and its competitive threats.

WHAT ARE THE MAIN AREAS OF A BUSINESS PLAN?

(1) The market

You need to convince the private equity firm that there is a real commercial opportunity for the business and its products and services. This requires a careful analysis of the market potential for your products or services and how you plan to develop and penetrate the market.

(a) Market analysis

This section of the business plan will be scrutinised carefully; market analysis should therefore be as specific as possible, focusing on believable, verifiable data. Include under market research a thorough analysis of your company’s industry and potential customers. Include data on the size of the market, growth rates, recent technical advances, Government regulations and trends – is the market as a whole developing, growing, mature, or declining? Include details on the number of potential customers, the purchase rate per customer, and a profile of the typical decision-maker who will decide whether to purchase your product or service.

This information drives the sales forecast and pricing strategy in your plan. Finally, comment on the percentage of the target market your company plans to capture, with justification in the marketing section of the plan.

(b) Marketing plan

The primary purpose of the marketing section of the business plan is for you to convince the private equity firm that the market can be developed and penetrated. The sales projections that you make will drive the rest of the business plan by estimating the rate of growth of operations and the financing required. Explain your plans for the development of the business and how you are going to achieve those goals. Avoid using generalised extrapolations from overall market statistics. The plan should include an outline of plans for pricing, distribution channels and promotion.

(c) Pricing

How you plan to price a product or service provides an investor with insight for evaluating your overall strategy. Explain the key components of the pricing decision – i.e. image, competitive issues, gross margins, and the discount structure for each distribution channel. Pricing strategy should also involve consideration of future product releases.

(d) Distribution channels

If you are a manufacturer, your business plan should clearly identify the distribution channels that will get the product to the end-user. If you are a service provider, the distribution channels are not as important as the means of promotion. Distribution options for a manufacturer may include:

  • Distributors
  • Wholesalers
  • Retailers (including on-line)
  • Direct sales – such as mail order and ordering over the web, direct contact through salespeople and telemarketing.
  • Original Equipment Manufacturers (OEM), integration of the product into other manufacturers’ products.

Each of these methods has its own advantages, disadvantages and financial impact, and these should be clarified in the business plan. For example, assume your company decides to use direct sales because of the expertise required in selling the product. A direct salesforce increases control, but it requires a significant investment. An investor will look to your expertise as a salesperson, or to the plans to hire, train and compensate an expert salesforce. If more than one distribution channel is used, they should all be compatible. For example, using both direct sales and wholesalers can create channel conflict if not managed well.

Fully explain the reasons for selecting these distribution approaches and the financial benefits they will provide. The explanation should include a schedule of projected prices, with appropriate discounts and commissions as part of the projected sales estimates. These estimates of profit margin and pricing policy will provide support for the investment decision.

(e) Promotion

The marketing promotion section of the business plan should include plans for product sheets, potential advertising plans, internet strategy, trade show schedules, and any other promotional materials. The private equity firm must be convinced that the company has the expertise to move the product to market. A well-thought-out promotional approach will help to set your business plan apart from your competitors. It is important to explain the thought process behind the selected sources of promotion and the reasons for those not selected.

(f) Competition

A discussion of the competition is an essential part of the business plan. Every product or service has competition; even if your company is first-to-market, you must explain how the market’s need is currently being met and how the new product will compete against the existing solution. The investor will be looking to see how and why your company can beat the competition. The business plan should analyse the competition (who are they, how many are there, what proportion of the market do they account for?). Give their strengths and weaknesses relative to your product.

Attempt to anticipate likely competitive responses to your product. Include, if possible, a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in this analysis.

All the aspects included in the market section of your business plan must be rigorously supported by as much verifiable evidence as possible. In addition to carrying out market research and discussions with your management team, customers and potential customers, you may need input from outside marketing consultants.

(2) The product or service

Explain the company’s product or service in plain English. If the product or service is technically orientated this is essential, as it has to be readily understood by non-specialists. Emphasise the product or service’s competitive edge or USP. For example, is it:

  • A new product?
  • Available at a lower price?
  • Of higher quality?
  • Of greater durability?
  • Faster to operate?
  • Smaller in size?
  • Easier to maintain?
  • Offering additional support products or services?

With technology companies where the product or service is new, there has to be a clear “world-class” opportunity to balance the higher risks involved. Address whether it is vulnerable to technological advances made elsewhere.

  • If relevant, explain what legal protection you have on the product, such as patents attained, pending or required. Assess the impact of legal protection on the marketability of the product.
  • You also need to cover of course the price and cost of the product or service.
  • If the product is still under development the plan should list all the major achievements to date as well as remaining milestones to demonstrate how you have tackled various hurdles and that you are aware of remaining hurdles and how to surmount them. Specific mention should be made of the results of alpha (internal) and beta (external) product testing.
  • Single product companies can be a concern for investors. It is beneficial to include ideas and plans for a “second generation” product or even other viable products or services to demonstrate the opportunities for business growth.
(3) The management team

Private equity firms invest in people – people who have run or who are likely to run successful operations. Potential investors will look closely at you and the members of your management team. This section of the plan should introduce the management team and what you all bring to the business. Include your experience, and success, in running businesses before and how you have learned from not-so-successful businesses. You need to demonstrate that the company has the quality of management to be able to turn the business plan into reality.

The senior management team ideally should be experienced in complementary areas, such as management strategy, finance and marketing and their roles should be specified. The special abilities each member brings to the venture should be explained. This is particularly the case with technology companies where it will be the combination of technological and business skills that will be important to the backers. If some members have particular flair and dynamism, this needs to be balanced by those who can ensure this occurs in a controlled environment.

(4) Business operations

This section of the business plan should explain how your business operates, including how you make the products or provide the service. It should also outline your company’s approach to research and development.

Include details on the location and size of your facilities. Factors such as the availability of labour, accessibility of materials, proximity to distribution channels, and the availability of Government grants and tax incentives should be mentioned. Describe the equipment used or planned. If more equipment is required in response to production demands, include plans for financing. In case your company needs international distribution, mention whether the operations facility will provide adequate support. If work will be outsourced to subcontractors – eliminating the need to expand facilities – state that too. The investor will be looking to see if there are inconsistencies in your business plan.

READ MORE: IMPORTANCE OF BUSINESS PLANNING
(5) Financial projections

Developing a detailed set of financial projections will help to demonstrate to the investor that you have properly thought out the financial implications of your company’s growth plans. Private equity firms will use these projections to determine if:

  • Your company offers enough growth potential to deliver the type of return on investment that the investor is seeking.
  • The projections are realistic enough to give the company a reasonable chance of attaining them.
(6) Amount and use of finance required and exit opportunities

You need to determine how much finance is required by your venture as detailed in your cash flow projections. This needs to be the total financing requirement, including fixed asset and working capital requirements and the costs of doing the deal. Ascertain how much of this can be taken as debt as this is a cheaper form of finance than equity. This will depend on the assets in the business that can be used to secure the debt, the cash flow being generated to pay interest and repay amounts borrowed and the level of interest cover, ie. the safety margin that the business has in terms of being able to meet its banking interest obligations from its profits.

Then determine how much management can invest in the venture from your own resources and those of family and friends. Include any government sources of finance available to you also. The balance is then the amount you are seeking from the venture capitalist. In this section of the business plan you need to:

  • State how much finance is required by your business and from what sources (i.e. management, private equity firms, banks and others) and explain for what it will be used.
  • Include an implementation schedule, including, for example, capital expenditure, orders and production timetables.
  • Consider how the private equity investors will make a return, i.e. realise their investment. This may only need outlining if you are considering floating your company on a stock exchange within the next few years. However, it is important that the options are considered and discussed with your investors.
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