Business Plans That Win Profits

Entrepreneurs and investors have a common objective: both are interested in making a profit. A profit is earned if the capital project that the entrepreneur wants to launch has long-term viability. This common objective can be achieved if the entrepreneur is able to sell his project, and equally important, if the investor is able to understand what the project is all about. The instrument that helps to bridge this gap is the business plan. A business plan is the ticket of admission to the process of raising capital funds. Knowing what information to present in a business plan, how, to whom and why it should be presented enhances the chance for both to understand each other's interests.

Sell the Steak, not the Sizzle

Sales people learn early in their careers that if they are to succeed, they must learn to "sell the sizzle, not the steak'. Most sales persons are taught that those who do not succeed in sales are selling the wrong thing: they should sell themselves, not the product.

However, in raising capital funds this basic rule does not apply; investors or lenders are not attracted by the sizzle - it is the steak that captures their attention. In the context of fund raising, a project is the steak, and investors want to know how much it will cost, how much funds are needed, its viability and many other things such as the sales and cost estimates, the profile of the owners, the technical and managerial competence of the management team, the competition, the financial plan, etc. The personality of an entrepreneur plays second fiddle as far as investors are concerned; it is what can be harvested from the project that really counts.

This article illustrates how an entrepreneur can seize the interest of investors by preparing, presenting and selling a business plan. Often, viable projects fail to proceed beyond loan negotiation. If entrepreneurs take the time to make a careful and serious examination of their business plans, many wil receive approval from their investors.

To attract the attention of investors, the entrepreneurs must understand:

  1. What turns them "on" and "off".
  2. What investors or lenders they should deal with.
  3. What investors look for.
  4. The type of information to present.
  5. Why a business plan is important.

What Turns Investors "On" and "Off"

Investors receive hundreds of business plans regularly. Business plans are the instruments that should attract the interest of investors speedily. Here are the most common reasons that turn investors "on" and "off".

The major turn-on factors are:

  1. Lenders like to see evidence that a product or service will sell. They want to see the product, feel it, see it in stores, look at customer reactions and even talk to them for feedback.
  2. They like to be approached early enough. This gives them sufficient time to appraise the proposal and to review and discuss all components of the project with the entrepreneurs.
  3. They like collateral which is a pledge offered by a business in exchange for a loan, or evidence of viability in exchange for equity. A business plan is no more than a "plan"; anything can happen. Collateral is like insurance; if something goes wrong, lenders like to be reassured that they can squeeze enough from the remains of a business if it ever folds. Viability, on the other hand, can be demonstrated by a strong management team, a good marketing program, and so on.
  4. They appreciate an equitable capital structure, i.e. the relationship between the promoters' equity and the funds provided by investors or lenders. The more money the promoters invest in a business, the more confident the lenders or outside investors will be when injecting their own funds in a business.
  5. They also like to see evidence of capacity, i.e. the ability of the business to generate enough cash to meet its financial obligations and the managerial competence and technical ability of the managers in areas such as production, finance, marketing, and distribution.

The major turn-off factors are:

  1. Promoters buy equipment or machinery before approaching lenders.
  2. Sales projections are not realistic. Sometimes, entrepreneurs think that they are alone in the business and will submit unrealistic sales estimates. The project should reflect, as accurately as possible, the capital expenditures required, the viability of the project, and the ability of management to undertake the project.
  3. Entrepreneurs are too product-oriented rather than focusing on the customer or the market.
  4. Cost estimates deviate from industry norms. When an entrepreneur shows, for example, cost of sales to sales revenues at 50 per cent, while the industry norm is in the 65 per cent range, if such information is not substantiated the lenders or investors can readily discredit the entire business plan.
  5. When the management team is nothing more than a one-man band; no one is identified.

What Lenders Look For

In general, lenders look for projects which are viable in the long run. However, some lenders are not willing to take risks (chartered banks, mortgage companies and finance companies) and require collateral as guarantees. Other financiers are willing to take greater risks, but they will demand a greater return on their investment (e.g. venture capitalists). Despite their interests in investing in a capital project, before forming a financial partnership with a promoter, both usually ask questions such as: 'What kind of entrepreneur am I dealing with? Will this project be able to pay its own way? What will happen if the venture goes bankrupt? Is the project part of an industry that is expanding, stable, or contracting? Are the promoters prepared to take a financial risk in the venture? If yes, to what extent?" Irrespective of the type of financier or stakeholder, an entrepreneur who wants to negotiate funds should be able to answer these questions in their business plan.

The dozens of questions asked by potential investors or lenders can be condensed into six words, commonly referred to as the C's of credit. They are: (1) character (reputation, honesty, dependability and integrity of the owners and managers); (2) collateral (assets pledged by a borrower as security on a loan); (3) capacity (ability of the business to meet its obligations and the managerial and technical abilities of the management team); (4) capital (the relationship between the promoters' equity and the external funds provided by other shareholders and lenders); (5) circumstances (the general and immediate environment such as trends in product demand, competition, government regulations); and (6) coverage (insurance coverage on the death of the principal owners, damage to the business resulting from fire, explosion, embezzlement, etc.)

Although traditional lenders such as chartered banks, finance companies or investment dealers analyze umpteen different items in capital projects prior to approving a loan, there are two factors that take priority when venture capitalists examine a business plan. They are: product/service and management.

The first step that venture capitalists use to evaluate plans is the qualitative assessment which is based on the product and the management team. The next step is the quantitative analysis. Here, the venture capitalist assesses the risk level in each case and determines the level of return he or she hopes to obtain from the deal. Venture capitalists are usually looking for an annual return on their investment in the range of 35 per cent to more than 60 per cent.

Presenting a Business Plan that Sells

Since a business plan is the ticket of admission to the process of raising funds, and since hundreds of business plans are received by lenders, the document must have the right appearance, a sound structure, and contain the right type of information.

The nature of the business project should dictate to a large degree the structure and relative importance of the type of information presented in a business plan. Project submissions should therefore be 'tailor-made' to clarify important issues. For instance, a well-established firm may submit a project involving new products and markets. Since the firm is well established, its management capability and financial position will not likely be an issue. Consequently, the business plan should cover these points briefly and concentrate its analysis on factors related to the industry environments, supported by details of project costs, the marketing program, R & D program, etc. On the other hand, a promoter, inexperienced and financially weak, might wish to invest in a sawmill complex - an industry promising favourable long-term performance. In this case, the business plan should emphasize management capability, the availability of raw material, manufacturing process, and financing, with less attention on the industry environment.

By Pierre Bergeron


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