Developing a business plan I. What is a business plan? • Why they are needed • Why it is important II. How they are created • Research • Reflection III. Overview of the main sections • Executive summary, finances, business description 1

I. What is a business plan? The Small Business Act defines a small business as “independently owned and operated and … not dominant in its field of operation” This size varies from industry to industry Subsector 425: Wholesale Electronic Markets and Agents and Brokers 425110 Business to Business Electronic Markets 100 Subsector 519: Other Information Services 519120 Libraries and Archives $7.0 Sector 54 Professional, Scientific and Technical Services Subsector 541:Professional, Scientific and Technical Services 519130 Internet Publishing, Broadcasting, Web Search Portals 500 541611 Administrative, General Management Consulting Services $7.0

I. What is a business plan? In 2010 there were ~27.9 million small businesses representing 99.9% of the nation's employers 64% of net new private-sector jobs, 49.2% of private-sector employment, 42.9% of private-sector payroll, 46% of private-sector output, 43% of high-tech employment, 98% of firms exporting goods 33% of exporting value These firms are the engines of innovation in the US

I. What is a business plan? Small business types Home-based business 52.0% Franchise 2.0% Sole proprietor 73.2% Corporation 19.5% Employer business 21.5% Nonemployer (business without employees) 78.5% Small firms accounted for 11.8 million (64%) of the 18.5 million net new jobs created 1993-2011 67% of new jobs since the recession began in 2009

I. What is a business plan? 2009: ~552,600 new employer firms opened and 660,900 firms closed This is a 10% annual turnover ~61,00 bankruptcies Survival rates 70% new employer firms survive at least 2 years, 50% at least 5 years 33% at least 10 years 25% stay in business 15 years or more

I. What is a business plan? Credit conditions are improving Mid-2010, commercial banks eased tight lending and loans under $1 million totalled $695 billion VC investment increased in mid-2010 Small businesses rely heavily on owner investment and bank credit, averaging about $80,000/yr Startups rely equally on owners’ cash and bank credit Young firms receive 75% of their funds from banks via loans, credit cards, and lines of credit 10% of startups and about a 30% of young firms do not use capital injections

I. What is a business plan? VC funds raised $20.6 billion in 2012, 10% more than 2011 Concentrated into 182 funds, down 3% from 2011 55 new funds formed in 2012 $8.1 billion invested in 812 companies, the highest total since Q2 of 2001 Strong emphasis on mobile investments and seed funding 22% of all deals happened at the seed stage Q2 1012, compared to 12% from Q2 2011

I. What is a business plan? Deals 46% were internet companies 17% were healthcare startups 13% (102 deals) was in the mobile sector, an all-time high, with 30% of those companies involved in photo or video technology Two different types of funds Large firms investing across stages and industry sectors Smaller early stage, industry/region specific firms

I. What is a business plan? gigaom2.files.wordpress.com/2012/07/mobileinvestment.jpg

I. What is a business plan? goldenstateoutlook.files.wordpress.com/2012/04/top-10-states.jpg

I. What is a business plan? There are 474,239 small businesses in Indiana 109,079 small employers in 2009 (<500) employing 1.2 million workers 94.4% of the state’s employers 76.9% had no paid employees Most in construction, retail, health care and social services, professional, scientific and technical services (34.5%) ~50% male owned, ~25% female owned, ~25% jointly owned www.sba.gov/sites/default/files/in11_0.pdf

I. What is a business plan? www.businessplanshawaii.com/Business-Plan-In-Trash.gif

I. What is a business plan? A business plan is a document which: Sets out your company's plans Shows how those plans can be achieved Demonstrates that the planned outcome meets the requirements of the reader It sells the business to financial and other backers By effectively selling the business as a whole, it makes a strong case for specific projects Corporate Finance Advisory Services. (2010). How to write an effective business plan: Lifting you up towards your success. Deloitte and Touche. www.deloitte.com/assets/Dcom-Luxembourg/Local%20Assets/Documents/Brochures/English/2010/lu_writebusinessplan_01042010.pdf

I. What is a business plan? It should emphasize the strengths of a company It should be realistic about its problems, risks, and obstacles, while offering solutions to these issues A business plan must do the following: Discuss the company’s goals for the near-term and long-term future Show how the goals can be achieved Demonstrate that realization of the plan will satisfy the reader’s requirements Deloitte and Touche. (2003). Writing an Effective Business Plan. 4th Edition. www.mitarabcompetition.com/images/pdf/writing-an-effective-business.pdf/

I. What is a business plan? A business plan is a blueprint Outline of the main components of the business Core value proposition Description of the business idea How the business will operate Financial requirements Organizational managerial requirements Description of the business environment Explanation of the main reasons the business will be successful

I. What is a business plan? A business plan is a blueprint Outline of the main components of the business Core value proposition Description of the business idea How the business will operate Financial requirements Organizational managerial requirements Description of the business environment Explanation of the main reasons the business will be successful

I. What is a business plan? A business plan that is carefully thought through: Allows you to evaluate every aspect of the business Requires a pre-operating assessment including working capital needs Provides a chance to anticipate the unexpected, including unforeseen opportunities Is a sales tool to use to obtain financing Sets goals and is an important management tool Requires a careful assessment of the competitive environment

I. What is a business plan? There are three kinds of business plans: External: objective is to persuade private investors or bankers that a business is suitable for investing in or lending to Internal: developed by managers and staff of existing businesses Objective is to make the business more successful Start-up: objective is explore the feasibility of a new business and what is needed to get the business off the ground Our focus

I. What is a business plan? External audiences Investment funds Private equity investors and VC firms typically do not back companies without written plans They look for evidence of high growth and ROI through an IPO, sale of the company, or management buyback: Track records of company, market, and key executives Feasibility of achieving the forecasts Uniqueness of the product and its technology Quality of the management

I. What is a business plan? Venture capitalists are often the most critical readers of a business plan They invest in riskier situations band usually have a limited background knowledge of your company Out of 100 plans 60 rejected after a quick scan 25 rejected after reading the plan more closely 10 rejected after reading and due diligence 3 failed negotiations 2 funded

I. What is a business plan? VCs want a substantial ROI, usually 25-60% per annum compound, depending on the risk of a project Given a 35% ROI, VCs would want to earn 4.5 times the original investment, before inflation, over a five year period They usually want an "exit route" They want to know how they will get their money back, and when IPO, acquisition or management buy-back A typical period for an exit will be between three and seven years

I. What is a business plan? Bank financing Bankers focus on when and how principal and interest will be repaid and collateral to cover any loan losses They also focus on how a company will survive possible setbacks They are requiring business plans be included in a loan applicable package Careful attention paid to the financial statements and projections A high quality business pla helps a company stand out in the intense competition for loan funds

I. What is a business plan? Strategic alliances Arrangements covering joint R&D, product development, and marketing Can be important for some young, growing companies Often includes financial backing and access to well- established distribution channels These may last three years or more Strategic partners want to examine the company’s business plan before committing to long-term arrangements

I. What is a business plan? Mergers and acquisitions Companies are looking to acquisitions to expand and to divestitures to gain liquidity Start-ups look to M&A as an exit strategy Companies seeking acquisition candidates use the candidates' business plans as one of their first screening tools Whether it is a startup or another company's divested division Managers of an acquisition candidate who want to stay on want to see the business plan of the acquirer

I. What is a business plan? Customer and distributor relationships For many growth companies, obtaining a large customer or gaining a commitment from a major distributor can be an important milestone Can establish steady cash flow Can build a loyal customer base Large, well-known organizations are often reluctant to enter into arrangements with companies that are an unknown entity A convincing business plan helps to dispel doubts

I. What is a business plan? Internal audiences Top-level management A business plan enables management to plan company growth and anticipate changes in a structured way They can determine whether the plan is consistent with long-term financial and market goals The process of preparing a business plan is at least as important as the plan itself It forces management to think through the business in detail and to set objectives

I. What is a business plan? Lower level management and employees The plan commits the entire management team to the same goals The process of working out the plan’s objectives forces management to reconcile different visions of where the company is and where it is headed A written business plan can be an important internal document for companies with multiple locations and operations Helps employees throughout the company to have a common sense of the vision, mission, and goals

I. What is a business plan? Why is it important? Planning and preparation can minimize the risks involved in starting a business It involves evaluating your strengths and weaknesses as a potential owner and/or manager of a small business It precisely defines the business, identifies its goals, and serves as the firm's resume It helps allocate resources properly, handle unforeseen complications, and act as a decision making aid

I. What is a business plan? What it means to run a small business Intrinsic motivation It’s your responsibility to develop and complete projects and organize your (and employees) time Interpersonal skills You have to develop working relationships with different people: customers, vendors, staff, bankers, lawyers, accountants, consultants You have to deal with demanding clients, unreliable vendors, cranky partners if the business requires it

I. What is a business plan? Decision making You have to make decisions constantly - often quickly, independently, and under pressure Stamina Business ownership can be exciting, but can often require six or seven day 12 hour work weeks Planning and organizing Poor planning is responsible for most business failures

I. What is a business plan? Commitment Running a business can wear you down emotionally Burn out is an issue because the success of their business is yours Strong motivation helps you through slowdowns and crises Your network It’s hard on family and friends May involve adjusting to a lower standard of living or increased financial risk in the short-term

I. What is a business plan? Why do small business fail? Poor market analysis leads to misjudging demand moving into the wrong markets Poor pricing decisions, competition and low sales Lack of experience, poor credit arrangements Poor location, poor inventory management Over-investment in fixed assets, insufficient capital Personal use of business funds Poor accounting practices Bad decision making under conditions of growth

Developing a business plan I. What is a business plan? • Why they are needed • Why it is important II. How they are created • Research • Reflection III. Overview of the main sections • Executive summary, finances, business description

II. How they are created thereisnobox.files.wordpress.com/2007/07/strategic_plan.jpg

II. How they are created Research Strategic planning is a management tool used to Help an organization do a better job Ensure that members of the organization are working toward the same goals Assess and adjust the organization's direction in response to a changing environment A disciplined effort to produce fundamental decisions and actions that shape and guide what an organization is, what it does and why, with a focus on the future

II. How they are created Research Strategic planning involves matching the strengths of the business to available market opportunities Effective planning means collecting, screening, and analyzing information about the business environment It also requires a clear understanding of the business Finding a niche and understanding resource demands Focus on strengths and weaknesses Developing a clear mission, goals, and objectives To do this well takes time and effort

II. How they are created Strategic planning Identify the business’ purpose (mission statement) The client needs that will be met with the product or services Select the goals the organization must reach to accomplish the mission Identify specific approaches or strategies that must be implemented to reach each goal Identify specific action plans to implement each strategy Monitor and update the plan

II. How they are created Research Begin with a needs assessment What is the product or service? Is it an innovation or an improvement upon an existing product or service? Is there a market for the product or service (can one be created?) Does it meet an unserved or underserved need? Can it meet unserved demand in an existing market? How can it compete in this market (price, quality, features, convenience, service…)

II. How they are created Then some hard questions Are there causes (restrictions, monopolies, shortages) that make required factors of production unavailable (unreasonable cost, scarce skills, energy, material, technology, or personnel)? Are capital requirements for entry or continuing operations excessive? Is adequate financing hard to obtain? Are there potential detrimental environmental effects? Are there factors that prevent effective marketing? Hopefully the answers are “no”!!

II. How they are created Then reflection on the purpose of the plan It defines and focuses your objective using appropriate information and analysis It sets out a vision and specific goals for the business It can be a selling tool in dealing with important relationships including lenders, investors and banks The business planning process can uncover omissions and/or weaknesses in the planning process It can be used to solicit opinions and advice from people, including those in your intended field of business, who will freely give you invaluable advice

Developing a business plan I. What is a business plan? • Why they are needed • Why it is important II. How they are created • Research • Reflection III. Overview of the main sections • Executive summary, finances, business description

III. Overview of the main sections www.fecconsulting.com/images/business_plan_image_8rzk.gif

III. Overview of the main sections Executive summary This is an overview of the business’ core value proposition, main products and or services and capital requirements A concise clear explanation of the business and how it will operate A description of the market size and market need A discussion of how the business is qualified to fulfill this need Description of the business’ competitive advantage Forecast of future growth and development

III. Overview of the main sections Executive summary: the value proposition A business or marketing statement summarizing why a customer should buy a product or use a service Goal: to convince them that your product or service will add more value or better solve a problem than other similar offerings Superior features or operation Clear differentiation Companies use this statement to target customers who will benefit most from using the product or service It is concise and appeals to the customer’s thinking

III. Overview of the main sections Executive summary: the value proposition’s benefits Strong value propositions describe tangible results: Increased revenues Faster time to market Decreased costs Improved operational efficiency Increased market share Decreased employee turnover Improved customer retention levels

III. Overview of the main sections Executive summary: the value proposition should Be closely tied to the product or service Address the existing or projected market need Be based on careful research Differentiate the business from competitors Clearly articulate the tangible benefits and value for customers Explain what the business does and who you are simply and clearly

III. Overview of the main sections Executive summary: the value proposition should be More than product explanations It is common for a value proposition to describe what that company is selling or doing Quantifiable and specific These types of statements give potential customers easily understandable information about the business Instantly credible The potential customer must quickly understand why you are different

III. Overview of the main sections Executive summary: examples of value propositions “You get a better website from or professional experience” www.waztech.com/home/default.asp “We give you more reasons to shop with confidence: great support, service and prices www.bestbuy.com/ “We make inefficient markets efficient. We provide a forum that's an efficient market for buyers and sellers to connect, for products that typically don't have an efficient distribution system.” Whitman - Ebay www.businessweek.com/bw50/content/mar2003/a3826090.htm

III. Overview of the main sections Financing proposal A description of the capital requirements for starting and sustaining the business It summarizes the more detailed financial information provided later in the business plan What is needed to cover raw materials, salaries, equipment, rent (fixed assets), marketing (variable assets) Budgets: cash flow projections, revenue projections Requires research and reflection

III. Overview of the main sections Financing proposal Determine the amount of money needed for the business Be as specific as possible Explain what the money will be used for Specify the returns that can be expected Explain the type of financing being requested Debt: you are borrowing the money - this must be paid back on a schedule Equity: people are investing in your business - they expect a piece of the business

III. Overview of the main sections Financing proposal Determine the length of financing Short-term: to meet temporary or seasonal working capital needs Repaid as revenues are generated Intermediate: installment loan with periodic repayment Used to purchase fixed assets that depreciate Long-term debt: equity financing to be held for more than a year Used when there is a shortfall or to finance large projects

III. Overview of the main sections Financing proposal Explain the repayment schedule Propose a timetable and amounts of loan payments Propose milestones on the way to profitability for investors This indicates awareness of the lender’s constraints or investor’s timetable Makes clear how revenues will be used during the period of the debt or investment List collateral Indicate your investment

III. Overview of the main sections Business description Narrative about the basic nature and purpose of the business What it is, what it does, how it is done, who does it Where it is now ad where is it going (and when) Provides basic information that the reader needs to determine whether it is worth studying the plan Identify the firm: name, address, contacts Describe the history Present the mission statement as broad strategic goals

III. Overview of the main sections Business description Writing a mission statement What is the primary business of the firm? What is the key purpose of the business? Where will the business be in 1, 3, and 5 years? What strategy will be used to move the business forward? What is the market sector in which the business will compete? Location of market (geographic or virtual)

III. Overview of the main sections www.savagechickens.com/images/chickenmission.jpg

III. Overview of the main sections Business description A mission statement lays out the firm’s ideology and goals Core goals: to what goals is the business committed? Core values: what is it that the people in the organization believe? Excellent customer service, innovative technology, creativity, integrity, social responsibility Core purpose: what is the main line of business Vision: what does the business want to achieve

III. Overview of the main sections Business description: example of a mission statement The Coca-Cola Promise: The Coca-Cola Company exists to benefit and refresh everyone it touches. The basic proposition of our business is simple, solid, and timeless. When we bring refreshment, value, joy and fun to our stakeholders, then we successfully nurture and protect our brands, particularly Coca-Cola. That is the key to fulfilling our ultimate obligation to provide consistently attractive returns to the owners of our business. Abrahams, J. (2007). 101 Mission Statements From Top Companies. Ten Speed Press, 40

III. Overview of the main sections Business description: example of a mission statement The following are some examples of brief mission statements from real enterprises 3M: To solve unsolved problems innovatively Mary Kay Cosmetics: To give unlimited opportunity to women Merck: To preserve and improve human life Wal-Mart: Save money. Live better Walt Disney: To make people happy Target: Expect more. Pay less

III. Overview of the main sections Business description Market description Who is the target market and what do you know about them? Why will they want to buy your product or service? Describe the business’ operations How is the product created? What are the steps involved in delivering the service? What is the work flow? What is the source of competitive advantage?

III. Overview of the main sections Business description Human resources Who are the top management team and key personnel and why are they qualified? Financial summary What are the projections for return on investment? What is the timetable for profitability? Exit strategy What is the long-term goal of the business? Going public? Getting purchased? Industry player?

III. Overview of the main sections Planning the plan Understand what information should be included Decide on section headings and prepare an index Decide who is to co-ordinate and write the plan Agree who provides the necessary information: management or advisers Gather information for each topic and jot down ideas Organise the information logically Start writing Challenge the assumptions and expect revisions

III. Overview of the main sections Do not use jargon The plan should wherever possible be written in layman’s terms avoiding the use of jargon If the business is technical, include a glossary of the terms as an appendix Do not repeat yourself Keep the plan to a reasonable length Support your claims Where you have made claims or assumptions which may not be readily accepted by your proposed reader, include reasonable evidence

III. Overview of the main sections Confidentiality If you are not prepared to reveal your secrets at an early stage, an option is to send the summary to the potential investor or lender Disclose the remainder to your plan if serious interest is expressed Do mark your business plan "Confidential”. Do not be selective Ensure that all risks are discussed Do not just select those for which you have a ready answer

III. Overview of the main sections A second opinion It is important to have your plan objectively reviewed before submitting it to your potential investor Suitable reviewers would include your accountant, lawyer or trusted business colleague At least two people not directly involved with your company should review it First appearances count A reader should be attracted by the appearance of the plan so pay attention to layout and graphics

III. Overview of the main sections Deloitte and Touche’s four do's and one don't: Do provide an index Do provide a summary Do number each copy Do show who the business plan is submitted by Don’t produce too many copies (or don’t number them)