Fourth Edition
™
Writing an
Effective Business Plan
This publication contains general information only and Deloitte & Touche LLP is not,
by means of this publication, rendering accounting, business, financial, investment,
legal, tax, or other professional advice or services. This publication is not a substitute
for such professional advice or services, nor should it be used as a basis for any
decision or action that may affect your business. Before making any decision or taking
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person who relies on this publication.
Copyright © 2003 Deloitte & Touche LLP. All rights reserved.
INTRODUCTION
1
THE NEED FOR PLANNING
1 EX TERNAL USES FOR THE PLAN
2
INTERNAL USES FOR THE PLAN
THE FUNDAMENTAL QUESTIONS
2
THE PROCESS OF WRITING A BUSINESS PLAN
3 GATHERING THE RIGHT DATA
4 OUTLINING THE PLAN
DETERMINING THE KIND OF PLAN
5 DESIGNATING RESPONSIBIL IT IES
6 THE FUNDAMENTAL QUESTIONS
3
THE EXECUTIVE SUMMARY
7 KEYS TO AN EFFECTIVE EXECUTIVE SUMMARY
8 HOW THE EXECUTIVE SUMMARY HELPS TO SHAPE THE PLAN
9 USES FOR THE EXECUTIVE SUMMARY
4
THE COMPANY, STR ATEGY, AND MANAGEMENT TEAM
10 YOUR BUSINESS MISSION
THE COMPANY: PAST, PRESENT AND FUTURE
11 THE MANAGEMENT TEAM
THE FUNDAMENTAL QUESTIONS
5
MANAGEMENT AND ORGANIZATION
12 DESCRIBING THE MANAGEMENT TEAM
13 OTHER HUMAN RESOURCE ISSUES
OUTSIDE ADVISORS
THE FUNDAMENTAL QUESTIONS
6
THE MARKET AND COMPETITORS
15
IDENTIFYING YOUR MARKET
16 UNDERSTANDING THE MARKET
17 THE NEED FOR MARKET RESEARCH
18 THE FUNDAMENTAL QUESTIONS
7
THE PRODUCT OR SER VICE
20 PRESENTING THE PRODUCT
PRODUCT DE VELOPMENT ISSUES
21 MANUFACTURING AND OPER ATIONS
22 QUALIT Y CONTROL AND ONGOING SER VICE
RISKS AND REGULATIONS
IDENTIFYING COSTS
23 THE FUNDAMENTAL QUESTIONS
CONTENTS
8
MARKETING AND SALES
24 THE MARKETING PLAN
25 SALES STR ATEGIES
27 THE FUNDAMENTAL QUESTIONS
9
THE FINANCIAL INFORMATION
28 THE FINANCIAL STATEMENTS
32 HO W FINANCIAL EXPER TS EVALUATE FORECASTS
33 THE FUNDING REQUEST
34 PAYBACK AND EXIT STR ATEGY
THE FUNDAMENTAL QUESTIONS
10
PUT TING IT ALL TOGETHER
APPENDICES
A
39 PLANNING INFORMATION CHECKLIST
B
41 ANALYZING FINANCIAL PERFORMANCE
GLOSSARY
47 GLOSSARY OF BUSINESS TERMS
CONTENTS (continued)
I N T R O D U C T I O N
Traditionally considered an exercise in corporate discipline, today’s business plans are at the
heart of obtaining financing, forming alliances and recruiting executives. No longer read
exclusively by insiders and traditional lenders, business plans must do more than demonstrate a
sufficient level of competence. Today’s plans have to withstand stiff competition in attracting
funding, key employees, and other desired relationships.
Despite the enormous impact that a well developed business plan will have on a company, many
executives prepare plans that poorly articulate their company and their vision.
Some executives are tempted to simplify the process by choosing from the impressive array
of software products that provide interactive, menu-driven means to create a complete plan.
The use of integrated business plan software products tends to result in boilerplate plans that
funding sources immediately recognize as derived from a “canned” source. Others choose to
employ a professional consultant. Outside advisors are useful for guidance, general advice,
and to review your plan and suggest possible sources of capital. They should not, however, be
your plan’s original authors. Your business plan should convey your own drive and
determination to succeed, and no one can better add that vital element of enthusiasm than you
and your management team.
Writing a plan must be managed just as most other important business projects are managed.
It requires advance preparation, delegation, refinement, and discipline. The process of
preparing a business plan involves identifying likely users, gathering accurate and convincing
information, and carefully outlining the plan before writing. The key sections of the business
plan are as follows:
Executive Summary This is the most concise form of the business plan, covering all of the
key points. Outside parties typically review the Executive Summary first to determine if your
company is a potential candidate before deciding to read further. As the most important
part of your business plan, this sections should be prepared last.
Company Description This first full section of the business plan covers the company’s
mission, history, current status, strategies, and plans for the future.
Management and Organization Many potential investors consider the management team
to be the most important predictor of a successful business. This section should describe
members of the management team and their backgrounds as well as needs for additional key
people. Key outside advisors and consultants should also be discussed.
The Market and Competitors This section must define the company’s market, the industry,
current and potential buyers, and competitors. The plan should explain the key factors for the
market in terms of how buying decisions are made, how the market is segmented, what
kind of market position you plan, and what sort of defensive strategy you envision to fend
off competitors.
The Product or Service In this section, the features, components, and quality of the product(s)
or service(s) are described in detail. Issues that must be addressed are the amount of research
and development remaining to be completed, how the product or service will be produced and
at what cost, and how the crucial activities of quality control and after-sale service will be
performed. Key regulatory considerations should also be addressed.
Marketing and Sales The business plan must describe the company’s selling methods (such
as direct sales or mail order), how sales staff is trained, and how support is provided. Because
of the substantial expense associated with business development, the plan should consider
and present the most cost-effective options. Your marketing plan should discuss the results of
market research and the value proposition of your product or service. Effective marketing,
often through advertising and public relations, must also be described.
Financial Information The most important elements of this section are the financial
forecasts — the balance sheets and the statements of cash flow and income. They must be
consistent with the discussion of the company’s past performance trends and the data
presented in other sections of the plan. For plans used to solicit financial backing, this section
should also include a funding request that states how much money is needed, why it is needed,
and how it will be used. Finally, you need to consider the likely payback for the investors and
their need for an exit strategy.
Once all of these sections have been formulated, the plan is ready for final rewriting and
presentation. Extensive editing is highly recommended, along with careful attention to
presentation details. The plan should be tailored to the preferences and concerns of its readers,
including insiders using the plan to guide the company. Given the dynamic markets within
which growing businesses operate today, periodic revisions of the business plan will be
necessary in order to maximize its utility as a tool for management and investors.
The purpose of this guidebook is to take the intimidation out of the business plan process and
to highlight key issues worth consideration as you research, prepare, and write your plan. At
the conclusion of applicable chapters, is a listing of the fundamental questions that you should
ask and address as you complete each section. Add your own questions as you go along to be
sure that your unique circumstances are adequately addressed.
Chapter 1
THE NEED
FOR PLANNING
G R O W T H C O M P A N Y S E R V I C E S
A successful business plan is a document that conveys the exciting prospects and growth
potential of your company. It might be best viewed as a selling document. It sells the business
to potential financial and other backers. By effectively selling the business as a whole, a
business plan makes a strong case for specific projects. For instance, a plan may be used to
seek funding to cover the expenses associated with developing and marketing a new product.
Or it may be intended to secure a bank loan for additional manufacturing equipment.
Just as advertising and promotional material sell a company, so should a business plan —
though in a more straightforward, organized, and detailed way. Thus, a business plan should
not only emphasize the strengths of a company, but also be realistic about its problems, risks,
and obstacles, while offering solutions to these issues. To accomplish its goals, 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.
E X T E R N A L U S E S F O R T H E P L A N
The business plan is a company’s first-line tool for obtaining funding and other types of
outside support. Some examples are discussed below.
Investment Funds Private equity investors and venture capital firms will ordinarily
not consider backing a company that does not have a written plan. Investors are seeking
evidence of high growth. In addition, they want to know how they will realize their investment
returns, whether through a public offering, sale of the company, or management buyback.
To assess the likelihood of high returns, investors look hard at the following:
➢ The track records of the company, the market, and the key executives
➢ The feasibility of achieving the forecasts
➢ The uniqueness of the product and its technology
➢ The quality of the management.
Bank Financing Bankers have traditionally focused on when and how the principal and
interest will be repaid and the availability of collaterial to cover any loan losses. As such, loan
application packages tended to consist of little more than past and current financial
statements. However, bankers are putting more emphasis on how a company would survive
possible setbacks. As such many bankers are requiring business plans be included in a loan
applicable package. Also, a high quality business plan can help a company stand out favorably
in today’s intense competition for loan funds.
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Strategic Alliances These arrangements covering joint research, product development,
and marketing have become increasingly vital for young, growing companies. The
arrangement often includes a combination of financial backing and access to well-established
distribution channels. The joint efforts may last three years or more. Major corporations
invariably want to examine a company’s business plan before committing themselves to such
long-term arrangements.
Mergers and Acquisitions As companies increasingly look to acquisitions as a means of
expansion, and to divestitures as a means of gaining liquidity, business plans become more
necessary. Companies seeking acquisition candidates typically use the candidates' business
plans as one of their first screening tools. Similarly, if the managers of an acquisition candidate
want to stay on after an acquisition, they will probably be extremely interested in the long-term
plans of the acquirer.
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.
Large, well-known organizations are often reluctant to enter into arrangements with
companies that are an unknown entity. A convincing business plan can help to dispel doubts.
I N T E R N A L U S E S F O R T H E P L A N
A business plan is an important management tool. It enables management to plan company
growth and to anticipate changes in a structured way. Executives sometimes argue that it is
useless to write a business plan because the marketplace is changing so rapidly that any plan
is quickly outdated. While it is certainly true that change is a matter of course, 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. And it allows benchmarks to be set,
against which the company’s future performance can be measured.
Perhaps most important, the business plan commits the entire management team to the same
goals. The process of working out the plan’s objectives invariably forces executives to reconcile
different visions of where the company stands and where it is headed.
A written business plan can be an important internal document for companies with multiple
locations and operations. Top management can monitor the business plans not only to be
certain that formal planning is occurring, but also to determine whether the finished plans
are consistent with long-term financial and market goals.
T H E F U N D A M E N T A L Q U E S T I O N S
➢ What are the long-term goals of your company? The near-term?
➢ What do you wish to gain from your business plan
(e.g., funding, reconciled internal vision, etc.)?
➢ What are the likely needs and requirements of the readers?
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Chapter 2
THE PROCESS
OF WRITING A
BUSINESS PLAN
G R O W T H C O M P A N Y S E R V I C E S
When it comes to business plans,one size does not fit all. Business plans take many sizes and
forms. All of them, however, have certain purposes in common. They must describe the
product and service to be sold, its market, and how the product will be made or the service
performed. If the plan is intended for external use, it will usually describe who is involved in
the company, how much money the company needs and how the funds will be spent, the form
the proposed financing will take and, most important, how the investors will make a return on
their investment.
All business plans must accomplish these things in a clear, concise, and convincing way.
That is, the reader must come to understand the business and feel confident that the plan’s
objectives are achievable. Given that all plans must have these common attributes, it is
important to properly prepare for the writing process. It is not advisable simply to begin
writing and expect that everything will fall into place. There are four important steps for
preparation: (1) gathering the right data; (2) outlining the plan; (3) determining the kind of
plan; and (4) designating responsibilities.
G A T H E R I N G T H E R I G H T D A T A
Business plans are only as effective as the data on which they are based. One of the worst things
that can happen to executives is to have prospective investors or lenders discover important
information about a company’s industry, market, or technology that should have been in the
business plan.
The writing process becomes much easier — and quicker — if certain data is available before
writing begins. Then writing does not have to be interrupted at critical points in order to gather
essential information. The key data includes the following:
➢ Company Description
Name
Legal form
Location
Financial highlights
Shareholders
➢ Management and Organization
Organization chart
Key management
Board of Directors
Consultants and advisors
Compensation and other employee agreements
Other shareholders, rights and resolutions
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➢ Market and Competitors
Market statistics
Competitor data
Market and customer surveys
➢ Product or Services
Product literature and technical specifications
Contracts and/or purchase orders
Competitive advantages
Patent, license, and trademarks
Regulatory approvals or industry standards
Operations plan
Research and development plans
➢ Marketing and Sales
Marketing plan
Marketing vehicles
Marketing materials
➢ Financial Information
Financial statements for up to past five years
Financial forecasts and projections and assumptions
Amount and timing of needed funding
You may choose to add other sections, depending upon the requirements of your company. A more
detailed checklist of data that you will need to support the written plan is found in Appendix B.
O U T L I N I N G T H E P L A N
You should organize your business plan in clearly defined sections covering the different
aspects of the company. Putting together an outline forces executives to come to some early
decisions about what will be where in the business plan. For example, carelessly organized
plans often describe the market for a product in the same section as the product description,
or describe the product in the market section. Outlining also requires the executives to
understand the necessary level of detail that should be included in the plan.
D E T E R M I N I N G T H E K I N D O F P L A N
People writing a business plan for the first time frequently ask, “How long and how detailed
should it be?” There are no fixed rules. Your plan’s length will depend to a great extent on what
you want it to accomplish and how sophisticated and complex your company’s operations will be.
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Broadly speaking, there are three kinds of business plans:
Summary Plan A summary plan of 10-to-15 pages works best for companies without an
extensive history — a company in the early stages of development. There is not a lot of history to
report, and existing operations are small. A summary plan can also be used by a more
established company interested in testing the investment waters; if found to be inviting, a more
complete business plan can be assembled.
A summary plan may also be appropriate for entrepreneurs with a history of success. If you
are a seasoned manager with a good track record, a venture capitalist may not require as much
information from you in the early stages as from an inexperienced manager.
The summary business plan should include enough information to convince potential
backers that you have done your homework and understand the market — in as short a
form as possible.
Full Business Plan The more traditional business plan of 20-to-40 pages — typically for
financing purposes — spells out a company’s operations and projections in much detail. This
type of plan becomes more desirable as the amount of money being sought increases. For
instance, if you want $5 million to start a high-technology manufacturing company or are
seeking new commercial lending relationships, you will probably need a highly detailed plan
that contains an in-depth market analysis, five-year cost and sales forecasts, detailed research
and development information, and financial data to back up your assumptions and forecasts.
Operational Business Plan For established companies, a business plan can be an important
source of guidance to top managers. It serves as a blueprint for company operations. It also
ensures that all managers understand the company’s direction and their respective roles in
achieving company goals.
Almost of necessity, an operational business plan must be lengthy — typically well in excess of
40 pages and sometimes as long as 100. The greater the detail, the more likely that individual
managers will understand their roles and achieve their goals.
D E S I G N A T I N G R E S P O N S I B I L I T I E S
Business plans can be prepared in several different ways. At first, a work plan detailing
assignments and due dates should be prepared. A common approach is for the head of each
management area — such as marketing and sales — to write the section of the plan that
pertains to his/her area. Then the chief executive reviews the drafts, discusses inconsistencies
with the managers, and revises the material. Another approach is for the chief executive to write
a full draft of the plan and then distribute it to top management for input and revisions.
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Between these two approaches are many variations. One approach is not necessarily better
than the another — provided that everyone involved understands what is expected. If managers
are charged with writing specific sections, they should be involved in the outlining step and be
given a realistic timetable for completing the task.
An approach that should be discouraged is to engage outside consultants to write the plan.
This may seem like a good way to save valuable management time, but most financial experts
likely to read the plan can spot one written by a consultant and will usually disregard it or
discount it heavily. Potential backers want to read management’s plan, not some outsider’s
perception of what one should be.
T H E F U N D A M E N T A L Q U E S T I O N S
➢ Have you committed enough time and resources to gather and
thoroughly analyze the right information?
➢ Are the key members of management committed to researching,
writing and/or providing feedback on the plan?
➢ Have you identified the likely readers of the plan and chosen the
appropriate type of plan to meet their needs?
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Chapter 3
THE
EXECUTIVE SUMMARY
G R O W T H C O M P A N Y S E R V I C E S
The most significant single section of the business plan intended for outsiders is the Executive
Summary. Venture capital and private equity investors, bankers, and corporate investment
officials typically receive many business plans each week — more than could possibly be read
from beginning to end. To help determine if the plans are worthy of further review, financiers
invariably begin by reading the Executive Summary. If the Executive Summary suggests a
promising business for investment or loan funds, then the experts will read further. If not,
then they quickly reject the plan. Essential information that is buried in a later section has no
value if the reader never gets that far. The primary objective of the Executive Summary is to
entice investors to delve further.
K E Y S T O A N E F F E C T I V E S U M M A R Y
What makes for an enticing Executive Summary? First, it is important to remember that it is
not a preface to or abstract of the business plan. Rather, it is the business plan in the most
concise form possible.
An effective Executive Summary describes all of the key elements of a business plan in two to
three pages. It must include the following essential information:
➢ A synopsis of the company’s strategy for succeeding
➢ A concise account of the management team’s qualifications that make the company
successful (be sure to include a description of your team’s contribution to previous
successful business ventures)
➢ A brief description of the market (along with the ingredients for success that make your
company unique in that market)
➢ A brief description of the product or service
➢ Key historical and forecasted financial data, such as annual revenue
and net income, for five years
➢ An estimate of the amount of the funds you need, a statement of how you will use the
money and how lenders or investors will get their money back.
This is a lot to explain clearly in two or three pages. In fact, composing an effective Executive
Summary is one of the most difficult writing tasks any executive will face.
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H O W T H E E X E C U T I V E S U M M A R Y H E L P S T O S H A P E T H E P L A N
Executives cannot realistically expect the Executive Summary that they write at this early stage
of business plan preparation to be polished and ready for presentation. Indeed, they should be
prepared to revise it substantially after the rest of the plan is written.
The preliminary version of the Executive Summary at the early stages of preparing a plan
serves several purposes:
It provides guidance and a sense of the plan. Drafting the Executive Summary forces you to
think long and hard about the factors most essential for business success. It also forces you to
prioritize issues and to set aside for later consideration those of lesser importance.
It builds confidence in the plan. If you outline the key elements up front, you will be less likely
to experience writer’s block and other forms of procrastination later on. Getting the plan’s
main points down in short form will allow you to move on to the full plan with a sense of
direction and vision.
It involves the management team early on. Writing a draft of the Executive Summary
provides an effective way of involving all members of the management team in the analysis
essential for a successful plan. This team effort secures valuable input and consensus on the
main issues.
It leads to a better final product. Rewriting is the key to successful writing. An Executive
Summary drafted to guide the writing of the body of the plan will need to be tackled again at
the end of the process and rewritten as needed. The result will be a better business plan and
a better Executive Summary than would otherwise have been achieved.
Once you have completed all of the other components of the business plan, you should go back
to the draft Executive Summary. First, be sure that the Summary is consistent with all of the
detailed information in the other sections of your business plan and that it addresses all of the
items noted above in the Keys to an Effective Summary section of this chapter. Then ask
yourself the following fundamental questions.
Does the Executive Summary demonstrate:
➢
that the business has been thoroughly planned and researched?
➢ a business proposition that makes sense?
➢ an accurate understanding of the value proposition of your product or service?
➢
that the business proposition offers real competitive advantages?
➢ a knowledge of the industry and target market?
➢ a sense of enthusiasm for the business?
➢ a realistic picture of the risks inherent in the business?
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If it has addressed the basic content and conveyed the basic messages above, it will likely
compel the reader to read further to obtain a fuller understanding of your strategies, plans,
and goals.
U S E S F O R T H E E X E C U T I V E S U M M A R Y
An effective Executive Summary can serve two purposes for executives seeking to
raise financing:
It helps preview the plan and protect the business. If your business plan is lengthy, it may be
cumbersome to distribute. If you are sending your plan to financial sources who don’t know
you who might not be interested in what you offer, you may want to send only the Executive
Summary with a cover letter. If these sources read the summary and are interested in seeing
the whole plan, you can mail it or present it in person. This also will help to protect the
confidential details of your plan.
It involves readers in the plan. An Executive Summary that is concise, well written, and
convincing will capture attention. It makes the plan stand out from the crowd and thus will
make readers eager to learn more about the company.
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Chapter 4
THE COMPANY,
STRATEGY,AND
MANAGEMENT TEAM
G R O W T H C O M P A N Y S E R V I C E S
Every company has a mission and a story to tell — about its past, its future and its key
people.The mission must be more than just a desire to sell more products and services.
It is really the core statement about why you are in business, what “valuable formula” will
distinguish you from your competition, and how you relate to your customers and employees.
This narrative is important information to ground you and the reader in the facts leading to the
request for funding. A start-up company has a background in terms of the motivating factors
that brought the management team together. Every business has members of management
who are key to its success and should be introduced to the reader.
Y O U R B U S I N E S S M I S S I O N
The section of the business plan dealing with the company’s mission affords executives the
opportunity to assess and articulate the overall driving force in the business. Invariably, the
questions that must be answered in writing this section are difficult ones, but they provide
important perspective for everyone involved.
This is really an assessment of the company’s overall approach to producing and selling its
products or services, along with its goals for maximizing success. In order to grow, a company
must have a distinctive value proposition (or “valuable formula”) for products or services that
clearly meet customer needs better than the competition. Strategy can be expressed in terms of
guiding principles or philosophy. The descriptive terms used are not nearly as important as the
thought process and the considerations behind the ideas expressed. The strategy is the basis on
which company activities — marketing, production, sales, and other functions — are
organized and assessed.
T H E C O M P A N Y :
P A S T , P R E S E N T , A N D F U T U R E
It is important for anyone assessing a business to understand its history and current status in
order to project what lies ahead. The section of the business plan on the company, then, should
provide a synopsis of the company’s past, present, and future. The section can be divided into
three parts:
History When was the company founded? Why was it founded? What have been its chief
accomplishments? How has its direction changed? Equally important, what are the
company’s failures and shortcomings? This last question is a subject executives usually prefer
to avoid. While the business plan need not dwell on failures, it should acknowledge them, in the
interests of balanced reporting, to give the business plan credibility. After all, every enterprise
has its disappointments.
Current Status This section should summarize the company’s existing situation. What are
its existing product lines? How many employees does the company have? Where does it stand
in its industry and marketplace? Have there been any sales? Are sales on an upswing, level,
or in a decline? Readers should have a sense of the company’s overall situation and direction as
demonstrated over the previous few months.
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Future This, of course, is the most difficult section to write, but it should provide a sense of
where the company is headed. That is, what are its objectives and goals? Briefly, what does it
plan for new markets and products?
Most important in writing about the company’s future is that it makes sense in terms of the
history and current status. A company that projects sales increases of 20 percent annually for
the coming three years does not make a very convincing case if, during the previous 10-year
history, sales have never gone up more than 10 percent in a particular year.
T H E M A N A G E M E N T T E A M
The first question venture capitalists or private equity investors tend to ask when learning
about a company seeking investment funds is often, “Who are the people?” The experience,
talent, and integrity of the founders and the management team are of primary concern to a
professional investor. In this section you should provide a quick summary, which will lead to a
more detailed description in the next section.
T H E F U N D A M E N T A L Q U E S T I O N S
➢ What business are you in?
➢ What is the purpose of your business?
➢ What are your products and/or services? How are they related to your mission?
➢ What benefits do your products and/or services provide to your customers?
➢ What led you to develop your business, its products or services?
➢ What is your vision for your business? How large do you want to become?
➢ Is your vision statement based in reality and is it aligned with realistic growth objectives?
➢ Why are you uniquely qualified to be in this business?
➢ How you are distinctive from your competition?
➢ What is the legal name of your business?
➢ What is your legal structure and is it appropriate for your future plans?
➢ Where are you located?
➢ What stage are you presently at? Conceptual phase? Start-up? Mature business?
➢ What is your current financial position?
➢ What are your company’s weaknesses and how are you addressing them?
➢ Who are the key members of your management team?
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Chapter 5
MANAGEMENT
AND ORGANIZATION
G R O W T H C O M P A N Y S E R V I C E S
Before agreeing to finance a company, venture capitalists, private equity investors, and lenders
will often conduct a thorough reference check of each key member of the team, focusing
special attention on the president. If the team does not “pass muster,” you will find it difficult
to raise the funds you seek. Investors will focus on the industry and technical qualifications of
your executive team, their entrepreneurial experience, and integrity among other things.
Your business plan should describe how the company is organized and what each individual’s
duties and responsibilities are. An organization chart can help the reader. It is also helpful to
explain how the individual talents of the management team contribute to realizing the
company’s strategy.
This section of your plan should explain any shortcomings in your management team. Are
there any critical skills your team lacks? If so, how and when will you recruit people possessing
these skills? How will your company operate in the interim period without these skills in
management? Your acknowledgement of the need for additional management talent
demonstrates to the investors that you have carefully analyzed your management team’s
abilities and your company’s needs.
Depending on the nature of your business, human resource issues beyond the management
team are essential to successfully implementing your strategy. Your human resource strategy
and your sources of other talent should be addressed.
D E S C R I B I N G T H E M A N A G E M E N T T E A M
Executives frequently wonder how to best present the management team’s qualifications.
The following is one approach that allows you to explain everyone’s qualifications without
cluttering up the business plan:
The Synopsis Include a paragraph or half-page synopsis of each team member’s background,
including relevant employment and professional experience, significant accomplishments,
and educational background.
The Resume At the end of the business plan, in an appendix, provide complete and detailed
resumes, giving the information necessary to allow the prospective investor to check
references. Each resume should include exact employment information (positions, places
employed, dates of employment, and reasons for leaving), schools attended, degrees received,
and dates. The resume should also paint a personal picture of each executive for the
prospective investor. You many want, for example, to include references to industry and
business affiliations, professional memberships, hobbies, and leisure time activities.
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Compensation You should describe the compensation packages that you offer to the key
members of the management team. Compensation packages can include salary, bonuses,
profit sharing, stock ownership opportunities (options or purchase), and deferred
compensation to name the most common. Be specific about the stock ownership opportunities
available to each key employee. Potential investors will want to be assured that the incentives
offered to key members of management are consistent with their own investment goals and
are tied to increasing the long-term value of the business.
O T H E R H U M A N R E S O U R C E I S S U E S
Other necessary details in this section include the number of employees in the company and
needs to expand the workforce. Your needs may range from engineers with particular skills to
skilled laboratory technicians to support product development or production, or other skilled
production labor. A discussion of unique human resource programs, any union contracts, and
a description of pension and incentive plans should be included. If there is a shortage of skilled
manpower in your area, identify this, explaining how you plan to recruit people with critical
skills. If your industry is changing rapidly then your employees will need to continue to
develop their technical skills. Management should discuss which development programs are
critical to the company’s success.
O U T S I D E A D V I S O R S
Your outside advisors may include a formal Board of Directors or an informal group of
counselors. You may have some key consultants that can provide added credibility for your
product or service in the marketplace. Your potential investors will want to understand these
relationships and the depth and quality of these advisors.
T H E F U N D A M E N T A L Q U E S T I O N S
➢ Why is the CEO qualified to lead the company?
➢ Do the strengths and experience of the management team match the goals and
strategies of the business?
➢ Does the management team have both technical and business acumen?
➢ Are your compensation arrangements aligned with the goals and objectives
of the business?
➢ Do you have any strategic alliances that give you access to talent that is not resident
in your management team?
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➢ If your management team is not complete, what is your action plan to add the
necessary talent? What impact is this having on current operations?
➢ Are your compensation programs competitive enough to attract and retain the
right human resources?
➢ How will you address the ongoing development needs of your workforce?
➢ Who are your outside experts and what will it cost to retain them?
➢ Does your Board of Directors or advisors bring relevant experience to your
management team?
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Chapter 6
THE
MARKET AND COMPETITORS
G R O W T H C O M P A N Y S E R V I C E S
Every day, brilliant and innovative people come up with ideas for “fantastic” products. The
ideas are worthless, however, unless there is a market for these items. Consequently, the
market section of your business plan is often the one that potential financial backers will turn
to next, after the Executive Summary.
This section of your business plan must convince potential backers that a market exists for
your product or service and that you understand the market forces affecting your company.
The results of your research will form the foundation of the marketing and sales plan that is
discussed in Chapter 8.
I D E N T I F Y I N G Y O U R M A R K E T
The market and competition section of the business plan should begin by describing your
company’s market. Essentially, this means answering several basic questions, including:
What are the trends in your industry? The market section of your business plan should begin
with an assessment of the industry in which you will operate, including a description, an
analysis of trends, and an assessment of the business opportunities. Our economy is typically
divided into six general categories: service; manufacturing; technology; commerce; energy,
and healthcare. There is further segmentation by industry. Many businesses are formed
around the intersection of several industries making an analysis of trends that would
impact future growth dependent on several variables. The research you do here will support
your financial projections so it should be well documented. If you will be affected significantly
by regulation, you should be asking questions about the risks of increased regulation or the
opportunities that may be created by deregulation. Changes in technology have affected all
businesses and are expected to continue to do so. However these changes vary among
industries. The typical distribution channels in your industry will influence the course of
your marketing and sales plans.
What is the target market? This question is usually answered in terms of a particular category
of buyer. That is, the market may be consumers between the ages of 28 and 40, or it may be
upscale restaurants, or process manufacturers. Beyond that, each market has characteristics
that determine customer location, and purchase and payment preferences. These should be
described as they pertain to your product or service. Although you may be tempted to define
your market very broadly it is usually best to be as specific as possible.
How large is the market? You need to provide some data as to how many individuals or
businesses make up the market you are trying to reach. Getting the information may require
extrapolating from various sources. For instance, if you are selling a pesticide designed for use
with peach trees, you may need to determine the number of farmers cultivating peaches as
well as the number of peach trees in order to estimate the size of the market for the pesticide.
Moreover, you must decide whether to extend your calculations from the United States to
Mexico and Central America, or limit them to your immediate region, such as the southeastern
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United States. Your assessment of the size of the market should also take into account market
trends, demographics, geography and other key variables. You must assure the readers of your
plan that the potential market will be large enough to support your business proposition. On
the other hand, if your target market is too large it may be too costly to effectively serve it.
What is the competition? Executives often neglect this question. They tend to feel that their
product or service is so superior that competition won’t be significant. Underestimating the
competition can be fatal. Competitors that are well established and prospering are doing so for
very good reasons, and it is up to you to determine those reasons. Readers of the business plan
are likely to be concerned about the competition, so this issue must be addressed directly by
listing the companies that will be your primary competitors and assessing their respective
strengths and weaknesses. Describe how you intend to compete with them and what you
expect their response to your market plans will be. New ideas are often pursued by multiple
companies simultaneously vying for first-to-market advantage. Many may also boast strong
financial backing. Be sure to elucidate why you believe you will claim the edge. You should also
address future competition, particularly if you believe that there are relatively low barriers to
entry for potential new competitors. A concise and honest appraisal of your competition will
lend a great deal of credibility to your business plan.
U N D E R S T A N D I N G T H E M A R K E T
Beyond providing an overview of the market’s composition and organization, executives must
demonstrate an understanding of key market dynamics. Shifts in markets or customer
behavior can leave you vulnerable. These, too, can be considered in terms of several key
questions:
What motivates buying decisions? Individuals invariably purchase benefits rather than
specific products or services. They buy convenience, status, and savings of time or money.
They may buy a luxury car to impress friends or a computer to avoid adding personnel.
Executives must be aware of the factors that determine how buying decisions are made and
describe this decision-making process for the company’s product or service in the business plan.
How is the market segmented? Market segmentation is very important and frequently
overlooked. You cannot assume that because a product’s price varies over a wide range, its
customers are distributed evenly over that range. For example, if the price of a basic product
varies among competing manufacturers from $50 to $100 per unit, you cannot assume that if
you sell your product for $75, you will get one-half of the customers. Upon a closer look, you
may discover that the higher-priced product ($90 - $100) accounts for only 10 percent of all
sales and that the basic model with lesser capabilities and fewer enhancements ($50 - $60)
accounts for the bulk of the sales. In this case, your $75 version may have very few customers.
Your understanding of this principle and your description of your product’s place in its market
are essential to getting financial backing.
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How will your product or service be positioned in the market? Positioning begins with
the crucial issue of pricing. Your price should be set according to how much the market will
pay for your product or service, not how much it will cost you to manufacture, deliver or sell it.
If you determine the maximum selling price of your product and then find you cannot make
and distribute it at a profit, you will have to modify the product concept (e.g., Is your product
so “cutting edge” that it is unclear how to price?). You will need to find a way either to sell
your product for more money or to manufacture it at a lower cost. Other positioning
considerations include:
➢ Technology Leadership Is your company perceived as a technological leader or follower?
➢ Management Style Is your company aggressive and not averse to risk, or do you plan to
grow carefully and slowly?
➢ Service Philosophy Have you acquired a reputation for stable and reliable service or
do you expand your business only as quickly as your service organization can support it?
➢ Product Quality Do you aim for the high-priced, high-quality end of the market, or does your
company try to make an adequate product that can capture a large market share by selling at
a low price?
What is your defensive strategy? If your product or service threatens any of your competitors,
you must consider how they might fight back and what your reaction will be. If your product
represents a significant advance in technology or application, your competitors may seek to
divert or at least delay your efforts until they can catch up. Many people expect large, entrenched
companies to react slowly to changes in the marketplace. When their primary market is
seriously threatened, however, such companies can act swiftly and commit substantial
financial resources to a competitive effort.
T H E N E E D F O R M A R K E T R E S E A R C H
Analysis and description of the market as recommended in this chapter require complete,
detailed information. That information comes from market research.
The term market research suggests complex matters such as regression analysis and academic
studies. More often, it is a straightforward accumulation of data available from published
sources such as government or industry-association statistics and news articles, as well as
from executives’ inquiries.
Needed information can also come from the experience that management team members
have had in working for other companies in the market. If your executives have held
management positions elsewhere in your industry, they will know which companies are the key
players and how buying decisions are made.
The most important aspect of market research, however, is feedback from current and
prospective buyers. How do they feel about the product or service you are offering? What do
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they like, and what do they dislike? How likely are they to buy under various conditions and
at different prices?
Getting such information, of course, requires that you speak with these customers and
prospects or get them to fill out questionnaires. If you have an established business and are
in contact with your customers, gathering the information you need will be easier than if
you are starting a new business.
In any case, the more hard data you have from current and potential buyers about their needs
and preferences, the more convincing the marketing section of your business plan will be. Too
often, executives avoid this part of market research and simply extrapolate from raw data to
arrive at market projections. They take the total number of prospective customers, estimate
that their company can secure some percentage, say 3 or 5%, as customers, and then calculate
sales. This is not only unconvincing to outside readers of the plan; it is dangerous for internal
planning purposes as well.
T H E F U N D A M E N T A L Q U E S T I O N S
➢ In which industry or industries do you operate?
➢ How are these industries changing? How fast?
➢ What changes will affect the need for your product or service?
➢ Are there changes in the political or regulatory landscape, or social values,
that affect the need for your product or service?
➢ How will changes in technology change your industry?
➢ What is/are your specific target market(s)?
➢ Who are your customers today and are they in the identified target market(s)?
➢ What market trends/changes may affect your customers’ ability to afford your
product or service?
➢ What is the approximate size and geographic spread of your target market(s)?
➢ What is the approximate growth rate of your target market(s)?
➢ Which companies and which types of companies make up your competition?
➢ What are the barriers to entry for your competition?
➢ Have you honestly analyzed your competitors’ strengths and weaknesses?
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T H E F U N D A M E N T A L Q U E S T I O N S (cont.)
➢ What are the key factors motivating customers to buy your product or service?
➢ How does your product or service integrate with other products or services? Does the
sale of your product or service depend on the sale of another product or service?
➢ Is it costly for your customer to change product or service providers? Are they loyal
to your competitors?
➢ Is your product or service vulnerable to substitution?
➢ How is your product or service differentiated from the competition’s on a basis
other than price?
➢ Is your market price sensitive? If so, where is your product or service positioned
on the price curve?
➢ Is there perceived value in higher prices?
➢ How are you pricing related items such as service and support? What are your credit terms?
➢ How will your competition respond to your pricing strategy?
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Chapter 7
THE
PRODUCT OR SERVICE
G R O W T H C O M P A N Y S E R V I C E S
Your business plan should completely, yet concisely, describe your products or services and
explain how they are produced or delivered. You need not describe every nut and bolt or service
provision, but you should explain what your product or service is and what need it fills. Your
description should give the potential investor some idea of how your product or service differs
from that of the competition. The potential investor must be convinced that your offering is
more effective or efficient than that of the competition.
The challenge in this section of the business plan is not so much describing the product or
service in positive terms — most company executives can easily do that — as truly analyzing
it in terms of features and the cost of those features. This means developing a list of the key
features and making some judgments about their importance. This list often raises important
questions. For example, it could be that including a newly developed electronic component in
the specialty equipment you sell will improve performance slightly, but not enough to justify
the increased cost and potential for breakdown.
In addition, this section of the business plan must convince potential backers that you can do
what you say you can do with regard to production or service delivery. They must feel confident
that your company can produce the product or service described, on schedule, with high
quality, and at the cost anticipated.
P R E S E N T I N G T H E P R O D U C T
If you have already built a working model or a prototype of your product, you may want to
include a photograph of it. If it is small or inexpensive enough — such as a type of food or other
consumer product — you might even consider including a sample or sending one as a follow up
to receipt of the business plan.
If you have not built the product, it could be helpful to include an artist’s rendering or at least a
conceptual diagram. Furthermore, if your product or service is derived from a new technology
or an innovative application of an existing technology, you should explain this fully.
In describing your product or service, keep in mind that most investors and bankers are not
scientists. You should endeavor to explain your technology in lay terms. The financial backer
may want to employ a consultant to examine your product, so you should have sufficient
information available for this purpose or be prepared to provide it.
P R O D U C T D E V E L O P M E N T I S S U E S
The following are some ways to address the subject of product development in your
business plan:
Describe the R&D requirements fully. If you intend to use funding to complete research &
development of your product, your plan should clearly explain this. You should include an
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R&D plan, budget, key development goals and milestones, and list your schedule for meeting
them. The technical risks inherent in your R&D should also be fully explained and, as many
new products use recent technological innovations as the cornerstone of their design, describe
your reliance on any other “leading edge” technologies.
Assess competing technologies. You should discuss other technologies that will affect your
product, and consider new technologies being developed by others as well as existing
technologies. Many executives make the mistake of assuming that their company is
the only one working on a new technology.
Explain where the product or service will lead the company. An important area is product
evolution. Investors seldom like to back “one-product” companies. You should explain your
existing products and what new products or services may evolve from your technology, how
you will decide which of them you plan to develop, and when you expect to introduce them.
Explain what is proprietary. Investors are especially interested in knowing how you can delay
or even prevent competitors from jumping in once your product or service has shown signs of
success. Your business plan should discuss how you propose to protect your idea while it is in
the development stage. Is your product or your technology capable of being patented, or can it
be protected by copyright? If not, how do you plan to ensure the secrecy of your product or
service until it can be developed and marketed? If your product can be patented, how
comprehensive will these patents be?
M A N U F A C T U R I N G A N D O P E R A T I O N S
You must explain how you will manufacture the product or perform the service. This means
answering a number of essential questions about site selection, capacity, manufacturing
processes, and suppliers. The reader will want to know how much of the process you will do
yourself and how much will be contracted out to others. If your product is complex, you may
need to describe key processes, the impact that technology may have on those processes or
other investment needs to support production. You may also want to address how you will
package and ship your product and what level of inventory you will need to carry in order to
meet customer needs and expectations.
Your discussion of manufacturing and operations should also cover manufacturing costs
including any plans you have to reduce or control manufacturing costs.
At some point, the backers will ask to see a detailed manufacturing cost breakdown.
Although this information need not be included in the business plan, it should be available.
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Q U A L I T Y C O N T R O L A N D O N G O I N G S E R V I C E
The business plan should describe your philosophy and approach to quality control. You need
not go into great detail, but you should indicate how you intend to avoid defects and what
monitoring or inspection is built into the production process.
Then, you should explain how your company will deal with products that develop defects or
that require further attention to make them operate as the customer requires. This means
addressing the questions of whether you will have an in-house service department or
outsource the function.
R I S K S A N D R E G U L A T I O N S
Your business plan should explain fully any government regulations that may affect your
business, such as those concerning waste disposal and worker safety. You should include
copies, or at least synopses, of such regulations and describe the steps you will take to get your
product or service approved for sale. If the Environmental Protection Agency requirements
are applicable to your business, historical compliance records should be reviewed.
In addition to federal regulations, you may also have to comply with state and local regulations
and laws that affect the manufacture of your product. If the manufacturing process will be
subject to health restrictions, safety regulations, special permits, or government inspections,
you should explain the steps you intend to take to meet these requirements.
Finally, insurance questions should be addressed. What steps have you taken to cover
buildings and valuable machinery and other equipment? Are there product liability
contingencies that call for special insurance?
I D E N T I F Y I N G C O S T S
As suggested at several points in this section, costs associated with such activities as research
and development, manufacturing, quality control, insurance, and other aspects of production
should be assembled. They can be noted briefly in this section, and they will become especially
important in putting together the financial section of the plan.
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T H E F U N D A M E N T A L Q U E S T I O N S
➢ What are the key milestones in the research and development process? At what stage are
you in that process? When will your product be ready to sell?
➢ What are costs to complete the development of the current product? What are the
ongoing costs?
➢ Are you capable of monitoring the need for product improvements and changing the
production cost structure as the industry, competitor products, and customer needs change?
➢ How much are you spending on research and development? How much is the
competition spending?
➢ How do you select new products for research and development?
➢ Do you have any intellectual property?
➢ Is your product or product name registered with appropriate governmental bodies?
If your business is expected to be global, have you taken into account international patent,
intellectual property and other legal influences?
➢ How much manufacturing space will you need?
➢ What type of capital equipment will you require? What impact will changing technology
have on your equipment needs?
➢ Will you build all of the product in house or subcontract out a portion of the
production process?
➢ Are there any critical processes that have not been developed?
➢ Are any parts or supplies difficult to get, or do they require long-lead times? How reliable
are key suppliers?
➢ Are there any parts that can be obtained only from a single source or only from overseas?
➢ What are the backup sources for these materials?
➢ How will you monitor quality? How can customers contact you if they have comments
or problems?
➢ Have you identified business risks and developed a risk management strategy to
address them?
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Chapter 8
MARKETING
AND SALES
G R O W T H C O M P A N Y S E R V I C E S
Marketing and sales are two distinct but related activities.
Marketing involves increasing customer awareness, delivering a message about your product
or service, and identifying customer prospects. Selling involves various efforts to convince
those potential customers to buy.
T H E M A R K E T I N G P L A N
Your marketing plan should be built on the results of your market research and the specific value
proposition of your product or service. The key factors you should consider about the market
and your competitors are summarized in Chapter 6. Armed with the research, you can then
devise a plan to reach that market and deliver a targeted message to your key prospects.
First you must position your product or service. A clear understanding of how your product or
service is positioned will help keep all your messages strategically focused on your unique
value proposition.
There are many marketing vehicles that you can use, ranging from simple product brochures
to complex broadcast media advertising to get your message across. The choice of marketing
vehicles must be consistent with your image and must be effective in reaching your targets.
Choosing the right marketing vehicles and the appropriate mix will help you stay within an
affordable budget. Marketing vehicles include:
➢ Descriptive product or service brochures
➢ Advertising in print, broadcast or electronic media
➢ Direct mail
➢ Premiums and advertising specialties
(e.g., items imprinted with your company name and/or message)
➢ Sampling programs
➢ Public relations
Advertising The most costly marketing vehicle is often advertising. It is the primary means
used by companies to create a public image for themselves in the marketplace. For most
growing companies, promotion is a challenge and an opportunity. It is a challenge because
the traditional means of promotion are expensive. Advertising, in particular, is quite costly,
especially when growing companies are competing with major corporations with multi-
million-dollar ad budgets.
Certain products and services, such as automobiles, must be advertised. If yours is one of
these, the business plan should explain your advertising approach. The advertising philosophy
and program should reflect your positioning in the market. If you are aiming at the high end
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of the market with an expensive, high-quality product, this should be clearly expressed in
your advertising.
Your advertising plan should also take into account the availability of your product. Some
companies make the mistake of advertising their products long before they become available.
Customers may then become disappointed when they cannot get the product right away.
Premature advertising also serves to notify your competitors of your intentions and gives them
more time to react to your entry into the market.
Public Relations Many companies overlook the value of public and press relations (“PR”) in
spreading news about their products. The attractive part of PR is that it can often be obtained at
little or no out-of-pocket cost. Editors and news directors are always looking for stories about
new companies and innovative products. If you explain your idea and describe your product in
ways that are likely to be interesting to your readers, they may decide to publish stories about
your company. Depending on your product or service, this “free advertising” can produce more
sales than paid advertising. What appears in the press can be very valuable in positioning your
company, your product, and your service.
Consideration shou