CandidCapital

Aim of the Chapter

Understand how to write a business plan that is effective in raising finance.

This chapter looks at the key issues for consideration in building an effective business plan for raising finance. The contents and presentation of the plan must be focussed on the particular project and type pf financing. You'll recall that we've included notes about the Business plan notes specific to the type of project which the manager is underatking and which are described at the end of each of the project chapters. There is a business plan check list, reflecting the contents of this chapter, included in Appendix C.

Key issues in this chapter

• A business plan is a selling document
• It must address the basics on which any business depends for success
• It must be relevant to the project which it describes
• It must be candid about weaknesses (and how they will be addressed) as well as strengths

Selling the business

Business plans are schizophrenic things. A business plan is meant to be management's own plan for running its business but it is also used to raise money from equity investors and from lenders. Within selling the project to an investor, the plan also has two purposes: actually selling the project's potential, feasibility and limited downside; as well as selling the management's own competence, experience and realism.

Probably the best way to look at the business plan is to see it as the written part of the whole presentation of the business to the investor. The written presentation is not, therefore, simply the management's own working plan but it must be driven by, and adequately describe, the working plan. Its main aim is to sell the project convincingly without avoiding discussion of weaknesses and how they will be overcome.

The basics of a business plan

As the chapters on the different venture products make clear, there are basics factors which are essential to the success of any business and which must, therefore, be described fully in the business plan. These include:

• The product or service
• The market (ie who is going to buy the product and at what price)
• The management team
• How the finance raised is going to be used to get the product to market profitably

Making the plan relevant to the project it describes

There are enormous differences amongst the range of projects for which a management team may consider rasing finance. These differences will be reflected in the factors which are most critical for the success of each type of project and which must be described in the business plan. For example, a seedcorn investment is very different to, say, a management buy out. Reading two competent business plans, one for a seedcorn and one for a buy out, would highlight these differences, because each would focus on the factors which are critical to its success. In the seedcorn these factors may well be about the product and its state of development and how similar products have been moved to commercial exploitation before. In a buy out the key factors are probably the management team and its track record of success in the industry and the business's ability to maintain margins, generate cash and service the borrowing in the deal. This means that a general purpose business plan template is not likely to provide a convincing case for all possible venture capital projects, at least not if it is used unselectively. It must be horses for courses.

Objectivity

Conventionally, the plan must describe the project in five dimensions:

Product
Market
Production & Operations
Management
Finance

It's sensible to adopt this convention, since the investor expects these issues to be discussed, even if the emphasis on each is very different. A seedcorn plan would be ridiculous if it had a detailed discussion of production management: it needs to focus on the market potential for the new product, to take one important issue. A buy out plan can probably be brief in describing its product, especially if it is a commodity, but needs to be very clear about the production management which will contain costs and maintain margins.

a. Product

The plan must describe the product or service which the company is going to sell. It should be brief and understandable to the layman. It should describe the customer needs which it meets and why its benefits (including price) will give it the edge over competitive products. The comparative features of the product and its competitors should be listed and compared. It is important to remember that competitive products are not just equivalents but also alternatives that meet the same need. The last two points are especially important for a service business.

If the product is technically complex, then it may be sensible to include necessary detail in an Annex. It is sensible to include photographs and diagrams to aid understanding. The description should be frank about any weaknesses or uncertainties. These might be because a product has not yet been produced in production version and the manufacturing economies, and therefore final price, are unproven. If the investor can see obvious weaknesses, which are not discussed, he will lose confidence in the manager's ability.

The uniqueness of the product offers competitive advantage, but can it be protected? The plan should go to some length to show that there are patents, or other intellectual property protection, or that anyone else would need a proprietary process to make and deliver the product competitively.

Finally, what of the future? Investors are nervous of one product companies. There should be a brief description of future product strategy, which shows some thought and which is convincing. If a future product strategy is not an option, then say that the business may well have a limited life and ensure that the plan reflects this.

b. Market

The product's potential must be shown against a market for its benefits. The plan should include and assessment of the market's size, how price sensitive it is and the threat posed by competitive products. This information must be backed up by attributing the sources of market data or showing the specific market research carried out for the project. It should identify by name the important customers who are going to buy, or will continue to buy, the product and assess their future intentions and likely buying policy.

There must be an analysis of competitors and what options are available to them to protect their market share or what threat there is of their trying to increase market share and how they might do this (reducing prices perhaps). The marketing strategy (strategy, not detail of the marketing plan) should be described.

c. Operations and Production

The plan must describe how the business is organised and will be run to achieve the forecast sales and profitability shown in the financial projections. This should include:

(1) Organisation A wiring diagram (organisation chart) is a good starting point for showing the company's organisation. It should be reinforced with descriptions of the responsibilities of the key managerial posts, who will fill each post and what they will be paid.

(2) Marketing & Sales This section should describe the way in which the marketing strategy (outlined in "Market" above) will be implemented. This includes the distribution channels which will be used, what salesforce is to be employed, what use will be made of advertising and promotion and how marketing and selling will be managed.

(3) Production The plan must describe the production process and how it will be managed. This include the degree to which the innovative processes are involved, and demonstrate how they will be tested and proved prior to production starting.

(a) Labour The plan should describe the skilled labour requirement and how workers and managers will be recruited. It should also describe the organisation of labour.

(b) Plant The plan should describe the investment in plant and machinery, showing what can be bought and what can be leased. It should describe why processes are being carried out in house rather than by subcontractors.

(c) Subcontractors If the business is to use subcontractors, then the plan must describe who they are; whether there is a choice; how prices and quality will be maintained and who will be responsible for managing the relationship.

(d) Quality There should be a description of how quality will be controlled and maintained, including mandatory standards (such as BS 5665 for defence suppliers).

(e) Suppliers The plan must detail how suppliers will be found, including alternatives, how the relationship will be maintained and how quality standards will be enforced.

(f) Stock & work in progress Finally the plan should estimate production lead times, the work in progress which will be necessary and the stock of components and finished product which will need to be maintained (these must tie in with the stock levels shown in the balance sheet see Financial Data below).

(g) Financial controls and reporting Investors will be particularly sensitive to the financial controls and reporting system. They will want to understand how often reports will be prepared, how reliable they will be and how they will be reviewed and used to take remedial action. They will be especially concerned to ensure that there is a director who can interpret financial reports and draw the need for action to the board's attention. They must include monthly P&L, balance sheet and cashflow analysis which can be reviewed against forecast. In addition, the business may need to keep a tighter, perhaps weekly or daily, grip on cashflow when it is investing in working capital. Controls should include the procedures by which the management accounts are reviewed, credit is approved and investment agreed.

d. Management

Since management is the most critical factor in a business' success, the plan must present the management's strengths, experience and weaknesses frankly. If possible, the aim of the management section must be to show that the management team have a record of success behind them which is entirely relevant to the project needing investment.

In a buy out this entails showing that the company's success to date is attributable, wholly or principally, to the managers undertaking the project. In a buy in, the burden must be to show that the management team have had profitable previous experience in the same or similar markets with similar products. If the management team is proposing that the investor backs a rescue, the plan must show that it is fundamentally different from the team which failed before, and differs in the areas critical for success.

In a start up, and especially a seedcorn, it will often be impossible to show that there is a complete, experienced management team in place. The plan must discuss the qualities and experience that the proposed, named managers do have but equally be completely objective in identifying those areas which will need recruitment or some other reinforcement. There is nothing more unattractive to an investor than the inexperienced entrepreneur who insists that he can run his company single handedly.

The management section should include full CVs to illustrate the experience and qualifications of the team. A CV should describe the individual's experience and achievements (in profit terms) in each appointment rather than baldly stating the job title and dates it was held. An example of a suitable CV is Appendix .

e. Financial data

The company needs to present its financial performance, past and future in an accessible but comprehensive way.

Profit & loss This will entail profit & loss accounts for at least the previous three years (or since start, whichever is the shorter) and projected forward for three or five years or whatever meaningful period shows the real upside of the project. The first year, at least, after the investment should show monthly P&L forecasts.

Funds flow/Cashflow The profit & loss accounts should be mirrored by source & application of funds statements covering the same periods, but with monthly cashflow forecasts for the first year.

Balance sheets The company's balance sheet should be shown at the end of the last accounting period (not if the proposal is a start up or seedcorn) and projected balance sheets should be shown to match the projected profit & loss accounts.

Overheads breakdown Any business plan should have a detailed breakdown of overheads and expenditure: the investor will want to
see how his money is being used in order to add value. This should, where appropriate, cross refer to the section on Operations & Production. The breakdown should show the headcount and the salaries of the key, higher paid employees; there is a list of the headings which could be included in the breakdown in the business plan check list at Appendix C.

Other financial statements It may be useful to include other financial statements

Assumptions It is absolutely essential to state assumptions clearly. These could include: margin and price structure, interest rates, numbers of employees, interest rates and the number of days in debtors, creditors and stock.

Sensitivity analysis It is critical to show how the envisaged performance of the business will be affected by failure to meet the plan. This could be because sales are lower, margins narrower, the business needed larger overheads to function (or because it simply failed to control them). The effects can be shown by sets of alternative projections (realistic case, best case and worst case see below) or by specific comment on the consequences for profit or cashflow of a change in a particular assumption. It is sensible to relate the Risks section of the plan to the sensitivity analysis or comment on variations in the assumptions.

Alternative projections It may be sensible to include worst and best case financial projections as well as the performance which is expected (realistic case). These need not include balance sheets but should include the first year's monthly P&L and cashflow and further years' P&L and funds flow statements. The changes reflected in the alternative projections should be stated, eg the sales volumes have been reduced by 20% or the gross margin is 25% rather than 30% or any other variable (perhaps interest rates) which is difficult to predict and which will effect the performance of the business.

f. Risks

It is desirable, if not essential, to include an analysis of the principal risks which the project faces. These should be stated, with some assessment of their probability and of their potential impact on profit or cashflow (whichever is more critical). The section should also describe the steps which management will take to remedy the consequences should any of these risks materialise.

In summary, the plan is a presentation of those things that are most important to the potential investor: what return (or upside) the proposal offers; what investment is needed to realise that upside; what risks (or downside) are there, internal and external, to achieving the plan and what mechanisms are proposed for monitoring or reviewing the progress of the business? This book gives a methodology for developing a sound plan and, from it, a persuasive presentation.