Business Plan Content Refer To: Chapter 5, DEVELOPING AN EFFECTIVE BUSINESS PLAN Exhibit 5-4, Abbreviated Business Plan Outline in the text (see pages 133 to 134) summarizes the major sections common to most business plans, providing a bird s-eye view of the overall content. A more detailed description of each of these sections is below. Other chapters in the book look at some sections of the business plan in more detail. TITLE PAGE The title page is the first page of the business plan and should contain the following information: Company name, address, phone number, fax number, and website Company logo, if available Names, titles, addresses, and phone numbers of the owners and key executives Date on which the business plan was issued Number of the copy (to help keep track of how many copies are outstanding) Name of the contact person, if other than the owners and key executives TABLE OF CONTENTS The table of contents provides a sequential listing of the sections of the plan, with page numbers. EXECUTIVE SUMMARY The executive summary is crucial for getting the attention of the oneminute investor. It must convey a clear and concise picture of the proposed venture and, at the same time, create a sense of excitement regarding its prospects. This means that it must be written and, if necessary, rewritten to achieve clarity and create interest. If the plan is to be presented to a funder, it should clearly state the amount of money being sought, and the capital structure. Even though the executive summary comes at the beginning of the business plan, it provides an overview of the whole plan and should be written last. Depending on the situation and the preference of the entrepreneur, an executive summary may be in the form of a synopsis or a narrative. SYNOPSIS The synopsis is the more straightforward of the two summary formats. A synopsis briefly covers all aspects of the business plan, giving each topic relatively equal treatment. It simply relates, in abbreviated fashion, the conclusions of each section of the completed business plan. Although it is relatively easy to prepare, the synopsis can be rather dry reading for the prospective investor. - 1 -
NARRATIVE Because the narrative tells the reader a story, it can convey greater excitement than the synopsis. However, composing an effective narrative requires a gifted writer who can communicate the necessary information and engender enthusiasm without crossing the line into hyperbole. A narrative is more appropriate for businesses that are breaking new ground, with a new product, a new market, or new operational techniques. It is also a better format for businesses that have one dominant advantage, such as holding an important patent or being run by a well-known entrepreneur. Finally, the narrative works well for companies with interesting or impressive backgrounds or histories. 1 MISSION STATEMENT AND GOALS The firm s mission statement concisely describes, in writing, the intended strategy and business philosophy for making the entrepreneur s vision a reality. In a few sentences, it should convey how combined efforts in all areas of the business will move it toward its goal. In addition, it should distinguish the firm from all others. Mission statements can and do vary in length, content, format, and specificity. However, it is essential that a mission statement remain simple, believable, and achievable. A mission statement Will tend to be two to four sentences long Does not copy other companies States your key competencies and your unique features Is believed in, by the founders, customers, and employees Shows your values While a good mission statement provides strategic vision and direction, goals are the short-term measure used to accomplish them. Goals are typically developed for functional areas, such as marketing, finance, and operations, and are developed annually. A common guideline for goal development employs the SMART acronym: Specific: state exactly what you want to accomplish Measurable: base the goal upon quantifiable outcomes Action oriented: list the steps to be taken to reach the goal Realistic: the goal has to be realistic to you, and take into consideration other factors such as the level of competition and customer trends Timely: the goal must have a target date Clarity of vision, an important element in any business plan, should be an expression of a company s highest aspirations. The In the Trenches feature illustrates how one successful entrepreneur used visioning to successfully expand his venture. 1 Adapted from Rhonda M. Abrams, The Successful Business Plan: Secrets and Strategies, 2nd ed. (Grants Pass, OR: Oasis Press, 1993). - 2 -
COMPANY OVERVIEW The main body of the business plan begins with a brief description of the firm. If the firm is already in existence, its history is included. This section informs the reader of the type of business being proposed, the firm s objectives, the firm s location, and whether it will serve a local or international market. In many cases, legal issues especially those concerning the firm s form of organization are addressed in this section of the plan. (Legal issues regarding the form of organization are discussed in Chapter 10.) In writing this section, the entrepreneur should answer the following questions: What are the basic nature and activity of the business? When and where was this business started? What has been achieved to date? What changes have been made in structure and/or ownership? In what stage of development is the firm for example, seed stage or full product line? What are the firm s objectives? What is its primary product or service? What customers will be served? What is the firm s distinctive competence? What are the current and projected economic states of the industry? What is the firm s form of organization sole proprietorship, partnership, or corporation? Does the firm intend to become a publicly traded company or an acquisition candidate? PRODUCT AND/OR SERVICES PLAN As its title reveals, the products and/or services plan discusses those products and/or services to be offered to the firm s customers. If a new or unique physical product is to be offered and a working model or prototype is available, a photograph of it should be included in this section of the business plan. Investors will naturally show the greatest interest in products that have been developed, tested, and found to be functional. Any innovative features should be identified and any patent protection explained. Although, in many instances, the product or service may be similar to those offered by competitors electrical contracting, for example any special features should be clearly identified. MARKETING PLAN As stated earlier, prospective investors and lenders attach a high priority to market considerations. They do not want to invest in a product that is well engineered but unwanted by customers. The marketing plan, therefore, must identify user benefits and the type of market that exists. Depending on the type of product or service being offered, the marketing plan may be able to not only identify but also quantify the financial benefit to the user for example, by showing how quickly a user can recover the cost of the product or service through savings in operating costs. Of course, benefits may also take such forms as savings in time or improvements in attractiveness, safety, or health. The marketing plan should document customer interest by showing that a market exists and that - 3 -
customers are ready to buy the product or service. This market analysis must be detailed enough to provide a reasonable estimate of demand. An estimate of demand must be analytically sound and based on more than assumptions if it is to be accepted as credible by prospective investors. Most business plans include a market analysis section, which provides a detailed evaluation of the competitive environment, including industry trends. The research processes described in Chapter 6 outline the customer and competitive research upon which the analysis in the business plan is based. Elements of the proposed marketing strategy, for example, the type of sales force and the methods of promotion and advertising that will be used, will be structured to address the customer opportunity and the competitive position. (Chapters 1, 6, and 7 provide additional coverage of the marketing plan.) MANAGEMENT PLAN Prospective investors look for well-managed companies. Of all the factors they consider, the quality of the management team is paramount; it is even more important than the nature of the product or service. Investors frequently say that they would rather have an A management team and a B product or service than a B team and an A product. Unfortunately, an entrepreneur s ability to conceive an idea for a new venture is no guarantee of his or her managerial ability. The management plan, therefore, must detail the proposed firm s organizational structure and the backgrounds of those who will fill its key positions. Details regarding the human resource plans for the company should be included, with the skill and number of staff, as well as the hiring, training, and compensation processes outlined. Chapter 9 provides coverage of human resources for small businesses. Ideally, investors desire a well-balanced management team one that includes financial and marketing expertise as well as production experience and innovative talent. Managerial experience in related enterprises and in other start-up situations is particularly valuable in the eyes of prospective investors. OPERATING PLAN The operating plan offers information on how the product will be produced or the service provided; its importance varies from venture to venture. This plan discusses such items as location and facilities: how much space the business will need and what type of equipment it will require. (These aspects of the operating plan are discussed at length in Chapter 12.) The operating plan should also explain the firm s proposed approach to assuring quality, controlling inventory, and using subcontractors or obtaining raw materials. FINANCIAL PLAN Financial analysis constitutes another crucial piece of the business plan; it is contained in the financial plan section of the business plan. Pro forma statements, which are projections of the company s financial statements, are presented here for the next five years (or longer). The forecasts include income statements, balance sheets, and cash flow statements on an annual basis for five years, as well as cash budgets on a monthly basis for the first year, on a quarterly basis for the second and third years, and on an annual basis for the fourth and fifth years. It is vital that the financial projections be supported by well-substantiated assumptions and - 4 -
explanations of how the figures have been determined. While all the financial statements are important, statements of cash flows deserve special attention, because a business can be profitable but fail to produce positive cash flows. A statement of cash flows identifies the sources of cash how much will be raised from investors and how much will be generated from operations. It also shows how much money will be devoted to investments in such areas as inventories and equipment. The statement of cash flows should clearly indicate how much cash is needed from prospective investors and for what purpose. Since experience tells them that the eventual return on their investment will depend largely on their ability to cash out, most investors want to invest in a privately held company for only a limited period and want to be told how and when they may expect to cash out of the investment. Therefore, the plan should outline the mechanism available to investors for exiting the firm. (The preparation of pro forma statements and the process of raising the needed capital are discussed in Chapters 13 and 14.) APPENDIX OF SUPPORTING DOCUMENTS One of the key considerations in writing a business plan is the balance of content between the plan itself and the appendices. There must be sufficient content in the plan for the reader to understand each section. Excessively detailed supporting information should be put in the appendices. The appendix should contain various supplementary materials and attachments to expand the reader s understanding of the plan. These supporting documents include any items referenced in the text of the business plan, such as the résumés of the key investors and owners/managers; photographs of products, facilities, and buildings; professional references; marketing research studies; pertinent published research; and signed contracts of sale. - 5 -
Sample Executive Summary A sample executive summary from the business plan of a holistic retail store is shown below. Would you consider the example to be a synopsis- or narrative-style executive summary? WEB EXHIBIT 5-1 An Example of an Executive Summary for a Holistic Retail Outlet EXECUTIVE SUMMARY The Balance Zone will service the growing market niche of those seeking a holistic approach to treat illness and enhance health. The founders, Christine Rose and Tazmina Olio, are experienced industry practitioners with thriving practices. They intend to create an attractive retail space, close to their client base, that will complement their practice. The Balance Zone will address a specific client niche that is currently underserviced and will offer several key differentiating features, including A feng shui designed 350 sq. metre retail and consultation space, in a restored house. Two consultation rooms will allow on-site integrated holistic treatments. A wide range of herbal and vitamin supplements including exclusive distribution of several European and aboriginal lines. Refrigeration units will ensure quality for select lines. The large vitamin collection will be supplemented with a collection of alternative health reading material for purchase, and a cozy waiting area. Tranquil music and water will ensure relaxation. The floor layout has been constructed to optimize natural lighting and air circulation. The customer demand has been carefully researched regarding both usage patterns and demographics. The target market clusters have been selected to reflect statistical research including the results of the Complementary and Alternative Medicine in Canada: Trends in Use and Public Attitudes, 1997 2006 report by the Fraser Institute published in May 2007, which found the proportion of Canadians using one or more holistic services to have increased to 74 percent, with 54 percent of the population annual users. The report also indicated that the most commonly used complementary and alternative medicines and therapies were massage (19 percent), chiropractic (15 percent), relaxation techniques (14 percent), and herbal therapies (10 percent). 2 The primary target market will comprise families in the neighbouring community, with household income greater than $75,000, age 30 to 55. It is recognized that secondary target markets will emerge; Health Canada, in a Health and Policy Research Bulletin indicated that specific user groups include The well-educated concerned well who seek to maintain and enhance their health for the 2 Fraser Institute, Complementary and Alternative Medicine in Canada: Trends in Use and Public Attitudes, 1997 2006, May 2007. - 6 -
long term People with specific health concerns, such as injury, and chronic diseases such as asthma, osteoporosis, diabetes etc. The terminally ill or those with life-threatening disease The management team has sound operational practice, and will rely upon mentors from BDC and the Canadian Youth Business Foundation, as well as an experienced angel investor. Projected financial statements indicate break-even within the first year and a sound profit by the second year of operation. Fact Sheet The Balance Zone Inc. Business Description: A unique integrated holistic centre, located in a refurbished historical building Products and Services: The centre will provide both unique vitamins and herbal remedies, primarily from Germany and the Far East, as well as the booking of holistic professionals for on-site consultation in specially designed feng shui rooms Location and Zoning: Cabbagetown, Toronto, commercial zoned building; City of Toronto business licence has been obtained Legal Structure and Logo: The venture will be provincially incorporated in Ontario, and a logo trademark has been designed. The private company will issue Class A and B voting shares, and Class C and D non-voting shares Number of Founders: Christine Rose and Tazmina Olio Significant Background: Christine is a doctor of holistic medicine, has practised for three years, and is recognized for her practice in aboriginal healing. Tazmina is a specialist in herbal remedies, and has operated a cranial sacrum practice for four years. Staffing: Founders working full-time, three part-time employees until second year of operation Projected Sales Potential: $480,000 in the first year, $750,000 by year three Projected Share of Market: 4.5% of the local market of 23,000 households after 3 years; at least 20% of clientele will be people travelling through the area for work Invested to Date: $2,500 for market research and logo design Collateral Value: The inventory and office equipment has a collateral value of $25,000. Two cars, valued at $16,000, have also been offered for collateral. Estimated Financing Needed: $42,000 Inventory and office equipment - 7 -
Projected Sources of Financing: Investment Units: Terms and Payback Period: Legal Counsel: Financial Counsel and Mentor: $11,000 Leasehold improvements $ 2500 Legal and accounting expenses $22,000 Operating capital (2 months) $77,500 $20,000 Equity (Class A shares) $25,000 Equity (Class B Shares) $15,000 Debt: loan CYBF $17,500 Debt: operating line of credit BDC $77,500 $5000 for each Class B voting share. Shares are nontransferable. Class B shares offer a buyback provision after three years for $7500. The estimated return for Class A shares is 18% for a threeyear period. The loan from the Canadian Youth Business Foundation (CYBF) is payable over a three-year term, prime rate plus 1.5%, no principal paid during the first year. The operating line of credit from BDC is prime plus 3%. Mohamed Zarah LLB Susanna Quinn, Canadian Youth Business Foundation - 8 -