THE BUSINESS PLAN-AN OVERVIEW

IVAN HOFFMAN, B.A., J.D.



        If ever there were a place where vision and reality meet, it is in the business plan.  This document requires the entrepreneur to write enthusiastically about an unknowable future while tempering that vision with the hard world of real money issues.  It is a skill set that requires both left and right brain input.  If you are seeking to raise capital, whether from lenders or venture funding, the issues you must face in writing the plan are essentially the same.

        One fundamental reason that many business plans fail to generate interest is because the entrepreneur has failed to ask himself or herself the very questions the “money” source will be asking or if asked, then left not fully answered:

                1. What is the “space” that this business is to operate in?
                2. What are the entrepreneur’s skills to be in that “space” or this business?

The Space

        The concept of “space” really means: what is the nature of the business, the marketing segment the business intends to fill?  Is this software?  Hardware?  If an Internet business, is it business to business, business to consumer, or some other segment?  In answering this question, the entrepreneur must address the totality of the market for the goods or services the business is going to provide.  This has to be a thorough analysis since it will do neither the entrepreneur nor the investor any good to ignore aspects that can undermine the new venture.

        Once this question is addressed, the plan must respond to the further question of how the business is going to differentiate itself from the balance of that market.  That differentiation can be based upon the product or service being materially different from and presumably better than that which is currently available or that the product or service fills a need that is not currently being fulfilled.  In this regard, the plan must be specific in identifying the need for the service or product for not all services and products, despite their uniqueness or differentiation, are potentially worthwhile as business models.  Perhaps the question should be: “Is there a reason this market space has not been previously filled?”

        Another way of expressing this issue is “what is the nature of the problem that exists in the market and how is this venture going to solve that problem.”  The plan must establish very clearly how the entrepreneur intends to position the business and how it will be different than any other business dealing within the space.  What makes this business unique?  Does the business own any proprietary rights such as copyrights, patents, trademarks or the like that are of marketing leverage to help in this positioning? (see in this regard “The Are You Ready For Funding Check List”.)

        The business model can differentiate itself on the basis of price points as well but in this instance, the plan ought to address the issue of profitability as well since “introductory” pricing to gain market share, if successful, may lead to higher pricing later on.  Additionally, the plan should address the viability of this price point differentiation.  The days when a business could raise capital, in either the private or public markets, without the possibility of showing a profit, at least in some of the near term years, seems a thing of the past.  How, thus, is the business to succeed in the face of the competition from those already established in the space who may have more “staying power?”  Ignoring the competition is not only foolish and transparent from the business plan standpoint but ultimately dooms the venture.

The Skills of the Entrepreneur

        This section of the plan may be even more difficult to write than the marketing aspect above since it requires an objectivity about oneself.  What are your skills and the skills of your associates that qualify you to run this business?  By “you,” I mean of course the entire management team.  In today’s world where ideas seem to be born by the minute, it is becoming ever more clear that a plan that merely demonstrates an idea without the team to execute that idea and make it a viable business is very likely not going to get funded.  The rise of the so-called “incubator,” a place where the idea can be filled in with the technology, the management and elements reaching down to the basics of running a business, demonstrates the need for such skills despite the “good idea.”

        Thus, the plan must address the specifics of your individual and collective skill set to implement the ideas.  What are your strengths and weaknesses?  How do those strengths and weaknesses work to help the business succeed?  Who is on the management team and what are their qualifications?  Do you have one or more attorneys, certified public accountants, other advisors including technical advisors?

The Numbers

        What is the level of funding you are seeking?  What is the use to which the funding is going to be put?  Can you justify the funding level on the basis of using the money to increase the viability of the business such as for product development or increasing market share?  This of course is tied into the section dealing with the “space” and how your business intends to segment itself within that space.  What amount of funding is necessary to establish your niche and sustain your pricing structure, if such be an element of your strategy and how long might it be necessary to raise supplemental capital in order to get past the deficit funding stage?

        Stated another way, what can the investors expect in terms of return on investment (ROI) and over what period of time might such return on investment be achieved?  What might you contemplate in terms of future rounds of funding necessary?  The current buzz term is “burn rate,” that is, the amount of time the company will have before it needs additional funding or other revenue.

        What are your legitimate estimates in terms of costs to run the business for the term for which the funding is sought?  These costs fall into several general categories: personnel  including management salaries, product including development costs, sales costs, capital costs, depreciation and amortization, other direct and indirect overhead costs.  What sort of revenue, if any, can be expected over that time?  Have you done your research, your due diligence, to support these numbers?  What assumptions have been made to reach the numbers and how accurate or logical are those assumptions? Have you compared similar businesses within your space based upon available information and compared and contrasted your model from that other?  Can you provide per unit costs and profit numbers if they are relevant and if so, how were they calculated?

        Finally, at least for the sake of this article, is the plan written in exciting, interesting and relevant language?  Do not make the mistake of simply buying a piece of software and merely filling in the templates.  Anyone familiar with plans will spot that right away.  I am amazed at how often I see the same templates right down to the section numbers.  Instead, work with a skilled writer to incorporate some of the essence of the business into the written word.  Make it exciting and raise some eyebrows.   Do not be afraid to “break the rules” of what these plans are “supposed” to look like.

Conclusion

        Needless to say, there are a large numbers of specifics that must be included in each plan but they will vary in the given instance.  This article is not intended to cover those specifics but rather to demonstrate in the form of the overview, some of the areas to be considered.

        The business plan is your opportunity to work out the bugs of vague thought.  This is your chance to put your vision to its first test.  If you cannot write it down in a lucid manner, chances are your ideas may need further refinement.

© 2000 Ivan Hoffman

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This article is not intended as a substitute for legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  You should consult with an attorney familiar with the issues and the laws.
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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

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