Some Guidance on Business Plans

Business Plan Overview:

The business plan for a commercial venture is a tool that serves both the internal management needs of the private entity and the informational needs of external entities who are critical to the venture's success. Specifically, the business plan is a guiding document because it establishes the venture's business objectives, strategy and approach to achieving those objectives, and also serves to provide a tool for monitoring and controlling venture operations. The business plan also provides key information on the venture that is essential to the venture's ability to attract significant equity and debt from outside sources, internal corporate financing, and joint venture partners. A business plan provides no assurance of venture success. However, a well-prepared business plan does provide reasonably good assurance that the venture is well-thought out. A venture that is not well-thought-out is almost certainly doomed to failure. Therefore, preparation of a business plan should not be viewed as a drudgery, to be avoided if possible, in starting up a venture. Rather, the preparation of a business plan is an exercise that disciplines decision making - particularly in answering the question of whether the venture should be undertaken at all. Accordingly, the resources and time invested initially in a well-prepared business plan can preclude the subsequent loss of tens of millions of dollars in a misguided venture.

It is important to be mindful that a venture business plan has a rapid shelf life. Therefore, it must be continually updated if it is to maintain its usefulness in providing a critical internal focus as well as key information to third parties who are essential to venture success. Clearly, a private entity can have several business plans - one each for each major capital investment project. That a major capital investment project "generally fits in" with the "company" business plan or a "division" business plan is not good enough. It is imperative that each major capital investment project or "venture" be continually evaluated on its own merits. Each venture, therefore, should have its own business plan even if the venture is totally financed from internal corporate sources. Copies of the business plan should be controlled, and a distribution record should be kept. This will facilitate the updating of the business plan, and help to insure that the plan is not more widely distributed than intended.

Generic Attributes of a Business Plan:

There are several standard sections that should appear in almost every business plan, and they are described below. Every one of these sections should unquestionably reflect the following generic attributes:

Credibility.

Objectivity.

Unambiguous and otherwise specific language.

Reasonableness of key assumptions.

Introduction of sufficient independent corroborating evidence.

Internal consistency.

Demonstrated awareness of critical success factors, key risk areas, and critical vulnerabilities; discussion of corresponding venture planning.

Evidence otherwise of a venture that is based on sound business analysis and judgment.

 

Sections of a Business Plan:

I. Executive Summary

It is critical that the factors that will make the venture successful be effectively communicated in the Executive Summary because outside readers of a business plan do not normally get past the Executive Summary unless they become sufficiently intrigued. Accordingly, the Executive Summary must be both succinct and comprehensive in its goal of quickly beginning to convince potential investors that the venture product can uniquely meet important, current customer needs and that the venture has a distinct and significant competitive edge. The entire business plan should be written from this investor perspective. Therefore, it is critical that the Executive Summary immediately establishes this investor perspective. Even if the venture is internally financed, the corporation is an "investor". The Executive Summary should be written last, contain approximately three pages, and include the following elements:

Well-specified venture concept and corresponding product.

Description of the venture's unique competitive advantage.

Description of venture business and technical development progress to date.

Planned business development and technical milestones.

Identification of the venture's critical success factors and key risk areas.

Required capital investment and timing thereof.

Representation of expected return on investment, return on equity, and payback period.

II. Brief Table of Contents

III. Venture Product

The planned commercial product (allowing the term "product" to also refer to a commercial service) should be clearly identified and described. It should provide the investor with a good layman's understanding of the product, the relative effectiveness of the product in uniquely meeting current customer needs, and the technology upon which the product is based. Accordingly, this section should include the following elements:

Unique relative technological or other advantage which the planned product offers in meeting specific customer needs.

Present state of the venture's development of the technology upon which the product will be based; current technical obstacles in the development or commercial applications engineering of that technology, as well as plans and a timetable for overcoming those obstacles.

Extent to which the venture product relies on innovative technology vs. marginal departures from established technology currently applied on the market.

Present stage of the venture's product development (e.g. idea, prototype, small production runs).

Expected product life cycle, to include considerations of technological obsolescence, and a discussion of factors that are likely to influence the anticipated life cycle.

Patents, trade secrets, copyrights - existing, pending, and planned.

Key aspects of the venture's technology that cannot be patented or otherwise protected, and a discussion of any consequences thereof.

R & D activities in process and associated milestones; anticipated results; comparison with known, relevant R&D; activities of competitors.

Identification and brief discussion of product development risks (e.g. technical, cost overruns, time delays) in terms of impact on venture financial viability.

IV. Target Market and Competition

The market section should demonstrate strong knowledge of the industry and target markets to be penetrated. The target markets should be identified and well-specified in this section. This section should present not only the essence of market research results and analysis, but also the specific venture strategy for penetrating the target market. The market research should demonstrate that there is a sufficiently strong need for the commercial product and that the venture can uniquely meet this need. This section should provide convincing independent support for the claims and projections which are included in this section of the business plan. Accordingly, demand estimates prepared by independent market research specialists provides significantly greater credibility than market estimates prepared internally by venture management. Accordingly, this section should include the following elements:

Identification of the target market in specific terms.

Target market demand - currently, historically, and 5 year projection to include evidence of likely price that the target market will bear as well as indications of price elasticity.

Key characteristics and trends of target market.

Target market major customer groups and key customers; extent of venture reliance on U.S. Government markets or on one or two other key customers.

Identification of the critical needs of the target market and the extent to which these needs are not currently being met.

Target market niche, if applicable, within the target market in terms of unique competitive advantage of the venture.

Evidence of customer interest in the venture product such as contingent contracts, qualified letters of intent, published observations by industry analysts.

Competitive analysis in terms of achieving and maintaining necessary target market position; this analysis will include:

identification and analysis of relative strengths and weaknesses of competing existing and expected new technologies and products, worldwide.

identification and analysis of relative strengths and weaknesses of existing and likely new competing entities, worldwide.

current market position of all such competing technologies, products, and entities;

Identification of barriers to entry into the target market in terms of capital investment required, technology, timing, technical and management personnel, regulatory restrictions.

Clear strategy, with well-defined steps, for penetrating the target market and maintaining and improving market position over the next five years.

V. Company Description and Venture Organization

The purpose of this section is to provide information that will allow an accurate assessment of how well, and where, the venture fits into the strategic planning of the parent entity as well as the appropriateness of the way the venture will be organized. The information in this section should answer the question of whether the venture represents a deviation from the parent entity's area of expertise. Accordingly, this section should include the following elements:

Brief business history of the parent entity and the particular venture in terms of previous and current business segments, indicators of prior and current success of the parent entity - particularly under the leadership of the management that will be in place for the purposes of the venture.

Description of the essence of the venture and the strategic importance of the venture in terms of the company's current and planned future business segments and future financial viability as an on-going entity.

The private entity's distinctive competencies (i.e. personnel, financial and physical resources, particular efficiencies, particular relationships with other private entities) that will be committed to the success of the venture.

Company and venture organization plan to include where the venture fits into the company organizational structure.

Description of parent company's ability to bring the necessary physical, financial, and personnel resources to bear in a timely way for the purposes of venture start-up and maintaining on-going operations.

Planned organizational and legal structure (e.g. corporate profit center, division, subsidiary C, subsidiary S, general partnership, limited partnership) of the venture and why that structure is particularly advantageous.

Identification of existing and planned venture partners and other relationships, the purposes thereof, and the distinctive competencies thereby introduced.

Brief discussion of previous company success regarding other similar start-up ventures in similar industries.

VI. Venture Management

This section should emphasize the venture management's relevant business and technical experience and skills, and describe why these individuals represent a distinct competitive advantage of the venture that is not easily replicated by the competition. The quality of the management team may be the single most important indicator of the venture's likely success. It is important to demonstrate experienced, capable management in all required areas of expertise, especially in key technical areas. Accordingly, this section should include the following elements:

Identification of key business and technical management personnel along with descriptions (perhaps in the Appendix) of relevant prior experience and accomplishments.

Demonstrated venture independence from reliance on only one or two key technical or business development and business operations personnel.

Identification of key vacant positions and plans and timetable for filling these positions; letters of interest or commitment from prospective candidates.

VII. Venture Operations

This section describes plans to develop and produce the commercial product or service. This section should demonstrate an in-depth understanding of the production technologies to be applied in producing the planned product. This section should also describe the extent of venture reliance on specific third party entities for both start-up and continuing operations. Accordingly, this section should include the following elements:

Product development milestone schedule.

Discussion of proposed product development and production methods.

Discussion of required inputs and production facilities in terms of current and planned capabilities and fixed assets.

Identification of competitive advantages regarding planned and demonstrated production capabilities.

Identification of suppliers of critical inputs to production and required existing and planned contractual arrangements with those suppliers.

Anticipated reliance on U.S. Government facilities, technical support, or other resources for venture start-up and continuing venture operations.

Summary of capital investment costs for venture start-up and operations expenses - which are provided in greater detail in the Appendix of the business plan.

VIII. Venture Financing

The purpose of this section is to provide information that will allow an accurate assessment of: a) the current financial position of the venture and, separately, of the parent entity; b) the history of and continued ability of the parent entity to generate sufficient cash from continuing operations; c) the expected ability of the venture to generate a sufficient net position cash flow beginning in the not too distant term; d) a financing plan which identifies the venture's expected financing needs and the corresponding planned sources of that financing. (Notwithstanding financial strength of a corporate parent, it should never be assumed that a corporate parent will underwrite an insufficiently profitable venture.) This section will also include credible cost estimates of all necessary facilities and other fixed assets that are necessary to the venture as well as all other aspects of start-up costs and ongoing fixed and variable operations expenses. Accordingly, this section should include the following elements:

Financial Statements (preferably audited, if available) for the parent company, and for the venture (to the extent that the venture has been in existence) for the past 3 to 5 years to include: Income Statement, Balance Sheet, Cash Flow Statement, Statement of Changes in Financial Position.

Proforma Financial Statements for the parent entity and, separately for the venture, for the next 5 years to include: Cash Flow Statements which include all venture capital investment start-up costs and all projected revenues and expenses of ongoing operations, as well as Income Statement, Balance Sheet, and Statement of Changes in Financial Position.

Specific sources and amounts of planned financing; commitments or contingent commitments obtained to date regarding financing; planned capital structure. (Potential outside equity investors will be particularly interested in the relative amount of equity, from internal venture or parent company sources placed at risk. Potential outside providers of debt financing will be particularly interested in the relative amount of equity, from all sources, placed at risk.)

Summary of significant terms of royalty, licensing, or other agreements with third parties.

Calculation of expected return on investment, return on equity, and timing of these returns over a 5 year period; discussion of significant sensitivities of profitability to various factors such as changes in: sales volume, production expenses, capital investment costs, time delays, costs of financing.

Discussion of risk management plan and related progress to date (i.e. identification of areas of potential liabilities, results of discussions with insurance providers, related contingent commitments of insurers and likelihood of obtaining all necessary insurance at reasonable rates.)

Key assumptions underlying the proforma financial statements.

IX. Appendices and Exhibits

Resumes of key managers.

Pictures of venture products.

Market research study results.

Relevant published venture or parent company information.

Identification of relevant patents.

Significant contracts (e.g. leases, joint ventures, insurance)

Sufficiently detailed and supported work-up of all capital investment costs and operations expenses that are included in the venture's financial proforma statements.

Note: All of the above elements represent a large amount of information. Notwithstanding, a business plan - if it is to be read - should be about 35 pages, not including the Appendix. Therefore, the information must be presented concisely, while still being comprehensive and meeting its objectives. The Appendix should not rival the main body of the business plan in terms of thickness.