A good business plan is crucial for two reasons. First, it is a management tool. Second, it is a means to obtain financing.
While the plan is an essential element in securing financing, it should also be an operating guide to the business, with the goals, objectives, milestones and strategies clearly defined and well-written. This is the best way to demonstrate the viability and growth potential of the business and to showcase the entrepreneur’s knowledge and understanding of what is needed to meet the company’s objectives.
The first reading of a plan is the investors’ initial opportunity to evaluate the individuals who will manage the business and to measure the potential for return on this investment.
A quality business plan is an important first step in convincing investors that the management team has the experience to build a successful enterprise. It also provides measurable operating and financial objectives for management and potential investors to measure the target company’s progress.
The plan should address the following business issues from the perspective of the investor.
* Is the management team capable of growing the business rapidly and successfully, and has it done it before?
* Is the product, service or technology fully developed?
* Is the product unique, and what value does it create so that buyers will want to purchase the product or service?
* Is the market potential large enough?
* Does the team understand how to penetrate the market?
* Do significant barriers to entry exist?
* How much money is required, and how will it be utilized?
* What exit strategies are possible?
* What are the financial projections?
* What is the valuation range?
* What are the market opportunities and risks?
* What is the capital raise/sale process?
The capital raising/sale process
Most often, the first step in dealing with investors is to forward them a copy of the executive summary. And because investors (venture capitalists, potential buyers and individual investors, a.k.a. angels) have to deal with so many proposals, the summary must immediately grab the reader’s attention. The executive summary will either entice investors to read the entire proposal or convince them not to invest further time.
If the summary is of interest, a business plan will be requested. Then the entrepreneur will be contacted for the first of what will generally be several meetings, and the venture capitalist/individual investor may begin the due diligence process.
Since investors are in the business of making risk investments, a thorough analysis of the company’s business prospects, management team, industry, and financial forecasts will precede any investment.
Where an entrepreneur can find capital
An entrepreneur can raise capital from a variety of sources — bootstrapping, friends and family, angel investors, venture capital firms, SBA, vendors, strategic partners, etc. Typically, companies in the following stages their life cycle will seek funding from the following sources.
Start-up and early stage. Bootstrapping, savings, credit cards, friends and family
First and second stage. Friends and family, profits from operations, angel investors, SBA loans, early stage venture capital firms, vendors and strategic alliances
Third and fourth stage. Venture capital firms
Liquidity events. Public markets (IPO), buyout firms, strategic acquisition from competitor or firm in acquisition mode looking to add on to existing platform
John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle market transactions. The firm raises growth equity capital, sells middle market businesses and assists entities with strategic business planning. Reach Bintz at (312) 243-9694 or [email protected].
