S643: Digital Entrepreneurship Spring 13 Developing a business plan I. What is a business plan? Why they are needed Why it is important II. How they are

S643: Digital Entrepreneurship Spring ‘13

Developing a business plan

I. What is a business plan?

• Why they are needed

• Why it is important

II. How they are created

• Research

• Reflection

III. Overview of the main sections

• Executive summary, finances, business description



The Small Business Act defines a small business as “independently owned and operated and … not dominant in its field of operation”

This size varies from industry to industrySubsector 425: Wholesale Electronic Markets and Agents and Brokers

425110 Business to Business Electronic Markets 100

Subsector 519: Other Information Services

519120 Libraries and Archives $7.0

Sector 54 Professional, Scientific and Technical Services

Subsector 541:Professional, Scientific and Technical Services

519130 Internet Publishing, Broadcasting, Web Search Portals 500

541611 Administrative, General Management Consulting Services $7.0



In 2010 there were ~27.9 million small businesses representing 99.9% of the nation's employers

64% of net new private-sector jobs,

49.2% of private-sector employment,

42.9% of private-sector payroll,

46% of private-sector output,

43% of high-tech employment,

98% of firms exporting goods

33% of exporting value

These firms are the engines of innovation in the US



Small business types

Home-based business 52.0%

Franchise 2.0%

Sole proprietor 73.2%

Corporation 19.5%

Employer business 21.5%

Nonemployer (business without employees) 78.5%

Small firms accounted for 11.8 million (64%) of the 18.5 million net new jobs created 1993-2011

67% of new jobs since the recession began in 2009



2009: ~552,600 new employer firms opened and 660,900 firms closed

This is a 10% annual turnover

~61,00 bankruptcies

Survival rates

70% new employer firms survive at least 2 years,

50% at least 5 years

33% at least 10 years

25% stay in business 15 years or more



Credit conditions are improving

Mid-2010, commercial banks eased tight lending and loans under $1 million totalled $695 billion

VC investment increased in mid-2010

Small businesses rely heavily on owner investment and bank credit, averaging about $80,000/yr

Startups rely equally on owners’ cash and bank credit

Young firms receive 75% of their funds from banks via loans, credit cards, and lines of credit

10% of startups and about a 30% of young firms do not use capital injections



VC funds raised $20.6 billion in 2012, 10% more than 2011

Concentrated into 182 funds, down 3% from 2011

55 new funds formed in 2012

$8.1 billion invested in 812 companies, the highest total since Q2 of 2001

Strong emphasis on mobile investments and seed funding

22% of all deals happened at the seed stage Q2 1012, compared to 12% from Q2 2011



Deals

46% were internet companies

17% were healthcare startups

13% (102 deals) was in the mobile sector, an all-time high, with 30% of those companies involved in photo or video technology

Two different types of funds

Large firms investing across stages and industry sectors

Smaller early stage, industry/region specific firms



gigaom2.files.wordpress.com/2012/07/mobileinvestment.jpg



goldenstateoutlook.files.wordpress.com/2012/04/top-10-states.jpg



There are 474,239 small businesses in Indiana

109,079 small employers in 2009 (<500) employing 1.2 million workers

94.4% of the state’s employers

76.9% had no paid employees

Most in construction, retail, health care and social services, professional, scientific and

technical services (34.5%)

~50% male owned, ~25% female owned, ~25% jointly owned

www.sba.gov/sites/default/files/in11_0.pdf



www.businessplanshawaii.com/Business-Plan-In-Trash.gif



A business plan is a document which:

Sets out your company's plans

Shows how those plans can be achieved

Demonstrates that the planned outcome meets the requirements of the reader

It sells the business to financial and other backers

By effectively selling the business as a whole, it makes a strong case for specific projectsCorporate Finance Advisory Services. (2010). How to write an effective business plan: Lifting you up towards your success. Deloitte and Touche. www.deloitte.com/assets/Dcom-Luxembourg/Local%20Assets/Documents/Brochures/English/2010/lu_writebusinessplan_01042010.pdf



It should emphasize the strengths of a company

It should be realistic about its problems, risks, and obstacles, while offering solutions to these issues

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 requirementsDeloitte and Touche. (2003). Writing an Effective Business Plan. 4th Edition. www.mitarabcompetition.com/images/pdf/writing-an-effective-business.pdf/



A business plan is a blueprint

Outline of the main components of the business

Core value proposition

Description of the business idea

How the business will operate

Financial requirements

Organizational managerial requirements

Description of the business environment

Explanation of the main reasons the business will be successful



A business plan is a blueprint

Outline of the main components of the business

Core value proposition

Description of the business idea

How the business will operate

Financial requirements

Organizational managerial requirements

Description of the business environment

Explanation of the main reasons the business will be successful



A business plan that is carefully thought through:

Allows you to evaluate every aspect of the business

Requires a pre-operating assessment including working capital needs

Provides a chance to anticipate the unexpected, including unforeseen opportunities

Is a sales tool to use to obtain financing

Sets goals and is an important management tool

Requires a careful assessment of the competitive environment



There are three kinds of business plans:

External: objective is to persuade private investors or bankers that a business is suitable for investing in or lending to

Internal: developed by managers and staff of existing businesses

Objective is to make the business more successful

Start-up: objective is explore the feasibility of a new business and what is needed to get the business off the ground

Our focus



External audiences

Investment funds

Private equity investors and VC firms typically do not back companies without written plans

They look for evidence of high growth and ROI through an IPO, sale of the company, or management buyback:

Track records of company, market, and key executives

Feasibility of achieving the forecasts

Uniqueness of the product and its technology

Quality of the management



Venture capitalists are often the most critical readers of a business plan

They invest in riskier situations band usually have a limited background knowledge of your company

Out of 100 plans

60 rejected after a quick scan

25 rejected after reading the plan more closely

10 rejected after reading and due diligence

3 failed negotiations

2 funded



VCs want a substantial ROI, usually 25-60% per annum compound, depending on the risk of a project

Given a 35% ROI, VCs would want to earn 4.5 times the original investment, before inflation, over a five year period

They usually want an "exit route"

They want to know how they will get their money back, and when

IPO, acquisition or management buy-back

A typical period for an exit will be between three and seven years



Bank financing

Bankers focus on when and how principal and interest will be repaid and collateral to cover any loan losses

They also focus on how a company will survive possible setbacks

They are requiring business plans be included in a loan applicable package

Careful attention paid to the financial statements and projections

A high quality business pla helps a company stand out in the intense competition for loan funds



Strategic alliances

Arrangements covering joint R&D, product development, and marketing

Can be important for some young, growing companies

Often includes financial backing and access to well- established distribution channels

These may last three years or more

Strategic partners want to examine the company’s business plan before committing to long-term arrangements



Mergers and acquisitions

Companies are looking to acquisitions to expand and to divestitures to gain liquidity

Start-ups look to M&A as an exit strategy

Companies seeking acquisition candidates use the candidates' business plans as one of their first screening tools

Whether it is a startup or another company's divested division

Managers of an acquisition candidate who want to stay on want to see the business plan 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

Can establish steady cash flow

Can build a loyal customer base

Large, well-known organizations are often reluctant to enter into arrangements with companies that are an unknown entity

A convincing business plan helps to dispel doubts



Internal audiences

Top-level management

A business plan enables management to plan company growth and anticipate changes in a structured way

They can determine whether the plan is consistent with long-term financial and market goals

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



Lower level management and employees

The plan commits the entire management team to the same goals

The process of working out the plan’s objectives forces management to reconcile different visions of where the company is and where it is headed

A written business plan can be an important internal document for companies with multiple locations and operations

Helps employees throughout the company to have a common sense of the vision, mission, and goals



Why is it important?

Planning and preparation can minimize the risks involved in starting a business

It involves evaluating your strengths and weaknesses as a potential owner and/or manager of a small business

It precisely defines the business, identifies its goals, and serves as the firm's resume

It helps allocate resources properly, handle unforeseen complications, and act as a decision making aid



What it means to run a small business

Intrinsic motivation

It’s your responsibility to develop and complete projects and organize your (and employees)

time

Interpersonal skills

You have to develop working relationships with different people: customers, vendors, staff,

bankers, lawyers, accountants, consultants

You have to deal with demanding clients, unreliable vendors, cranky partners if the business requires it



Decision making

You have to make decisions constantly - often quickly, independently, and under pressure

Stamina

Business ownership can be exciting, but can often require six or seven day 12 hour work weeks

Planning and organizing

Poor planning is responsible for most business failures

Good organization of financials, inventory, schedules, and production helps avoid many pitfalls



Commitment

Running a business can wear you down emotionally

Burn out is an issue because the success of their business is yours

Strong motivation helps you through slowdowns and crises

Your network

It’s hard on family and friends

May involve adjusting to a lower standard of living or increased financial risk in the short-term



Why do small business fail?

Poor market analysis leads to misjudging demand moving into the wrong markets

Poor pricing decisions, competition and low sales

Lack of experience, poor credit arrangements

Poor location, poor inventory management

Over-investment in fixed assets, insufficient capital

Personal use of business funds

Poor accounting practices

Bad decision making under conditions of growth







• Research

• Reflection





thereisnobox.files.wordpress.com/2007/07/strategic_plan.jpg



Research

Strategic planning is a management tool used to

Help an organization do a better job

Ensure that members of the organization are working toward the same goals

Assess and adjust the organization's direction in response to a changing environment

A disciplined effort to produce fundamental decisions and actions that shape and guide what an organization is, what it does and why, with a focus on the future



Research

Strategic planning involves matching the strengths of the business to available market opportunities

Effective planning means collecting, screening, and analyzing information about the business environment

It also requires a clear understanding of the business

Finding a niche and understanding resource demands

Focus on strengths and weaknesses

Developing a clear mission, goals, and objectives

To do this well takes time and effort



Strategic planning

Identify the business’ purpose (mission statement)

The client needs that will be met with the product or services

Select the goals the organization must reach to accomplish the mission

Identify specific approaches or strategies that must be implemented to reach each goal

Identify specific action plans to implement each strategy

Monitor and update the plan



Research

Begin with a needs assessment

What is the product or service?

Is it an innovation or an improvement upon an existing product or service?

Is there a market for the product or service (can one be created?)

Does it meet an unserved or underserved need?

Can it meet unserved demand in an existing market?

How can it compete in this market (price, quality, features, convenience, service…)



Then some hard questions

Are there causes (restrictions, monopolies, shortages) that make required factors of production unavailable

(unreasonable cost, scarce skills, energy, material, technology, or personnel)?

Are capital requirements for entry or continuing operations excessive?

Is adequate financing hard to obtain?

Are there potential detrimental environmental effects?

Are there factors that prevent effective marketing?

Hopefully the answers are “no”!!



Then reflection on the purpose of the plan

It defines and focuses your objective using appropriate information and analysis

It sets out a vision and specific goals for the business

It can be a selling tool in dealing with important relationships including lenders, investors and banks

The business planning process can uncover omissions and/or weaknesses in the planning process

It can be used to solicit opinions and advice from people, including those in your intended field of business, who will freely give you invaluable advice







• Research

• Reflection





www.fecconsulting.com/images/business_plan_image_8rzk.gif



Executive summary

This is an overview of the business’ core value proposition, main products and or services and capital requirements

A concise clear explanation of the business and how it will operate

A description of the market size and market need

A discussion of how the business is qualified to fulfill this need

Description of the business’ competitive advantage

Forecast of future growth and development



Executive summary: the value proposition

A business or marketing statement summarizing why a customer should buy a product or use a service

Goal: to convince them that your product or service will add more value or better solve a problem than other similar offerings

Superior features or operation

Clear differentiation

Companies use this statement to target customers who will benefit most from using the product or service

It is concise and appeals to the customer’s thinking



Executive summary: the value proposition’s benefits

Strong value propositions describe tangible results:

Increased revenues

Faster time to market

Decreased costs

Improved operational efficiency

Increased market share

Decreased employee turnover

Improved customer retention levels



Executive summary: the value proposition should

Be closely tied to the product or service

Address the existing or projected market need

Be based on careful research

Differentiate the business from competitors

Clearly articulate the tangible benefits and value for customers

Explain what the business does and who you are simply and clearly



Executive summary: the value proposition should be

More than product explanations

It is common for a value proposition to describe what that company is selling or doing

Quantifiable and specific

These types of statements give potential customers easily understandable information about the business

Instantly credible

The potential customer must quickly understand why you are different



Executive summary: examples of value propositions

“You get a better website from or professional experience”www.waztech.com/home/default.asp

“We give you more reasons to shop with confidence: great support, service and priceswww.bestbuy.com/

“We make inefficient markets efficient. We provide a forum that's an efficient market for buyers and sellers to connect, for products that typically don't have an efficient distribution system.” Whitman - Ebaywww.businessweek.com/bw50/content/mar2003/a3826090.htm



Financing proposal

A description of the capital requirements for starting and sustaining the business

It summarizes the more detailed financial information provided later in the business plan

What is needed to cover raw materials, salaries, equipment, rent (fixed assets), marketing (variable assets)

Budgets: cash flow projections, revenue projections

Requires research and reflection



Financing proposal

Determine the amount of money needed for the business

Be as specific as possible

Explain what the money will be used for

Specify the returns that can be expected

Explain the type of financing being requested

Debt: you are borrowing the money - this must be paid back on a schedule

Equity: people are investing in your business - they expect a piece of the business



Financing proposal

Determine the length of financing

Short-term: to meet temporary or seasonal working capital needs

Repaid as revenues are generated

Intermediate: installment loan with periodic repayment

Used to purchase fixed assets that depreciate

Long-term debt: equity financing to be held for more than a year

Used when there is a shortfall or to finance large projects



Financing proposal

Explain the repayment schedule

Propose a timetable and amounts of loan payments

Propose milestones on the way to profitability for investors

This indicates awareness of the lender’s constraints or investor’s timetable

Makes clear how revenues will be used during the period of the debt or investment

List collateral

Indicate your investment



Business description

Narrative about the basic nature and purpose of the business

What it is, what it does, how it is done, who does it

Where it is now ad where is it going (and when)

Provides basic information that the reader needs to determine whether it is worth studying the plan

Identify the firm: name, address, contacts

Describe the history

Present the mission statement as broad strategic goals




Writing a mission statement

What is the primary business of the firm?

What is the key purpose of the business?

Where will the business be in 1, 3, and 5 years?

What strategy will be used to move the business forward?

What is the market sector in which the business will compete?

Location of market (geographic or virtual)



www.savagechickens.com/images/chickenmission.jpg




A mission statement lays out the firm’s ideology and goals

Core goals: to what goals is the business committed?

Core values: what is it that the people in the organization believe?

Excellent customer service, innovative technology, creativity, integrity, social responsibility

Core purpose: what is the main line of business

Vision: what does the business want to achieve



Business description: example of a mission statement

The Coca-Cola Promise: The Coca-Cola Company exists to benefit and refresh everyone it touches. The basic proposition of our business is simple, solid, and timeless. When we bring refreshment, value, joy and fun to our stakeholders, then we successfully nurture and protect our brands, particularly Coca-Cola. That is the key to fulfilling our ultimate obligation to provide consistently attractive returns to the owners of our business. Abrahams, J. (2007). 101 Mission Statements From Top Companies. Ten Speed Press, 40



Business description: example of a mission statement

The following are some examples of brief mission statements from real enterprises

3M: To solve unsolved problems innovatively

Mary Kay Cosmetics: To give unlimited opportunity to women

Merck: To preserve and improve human life

Wal-Mart: Save money. Live better

Walt Disney: To make people happy

Target: Expect more. Pay less




Market description

Who is the target market and what do you know about them?

Why will they want to buy your product or service?

Describe the business’ operations

How is the product created?

What are the steps involved in delivering the service?

What is the work flow?

What is the source of competitive advantage?




Human resources

Who are the top management team and key personnel and why are they qualified?

Financial summary

What are the projections for return on investment?

What is the timetable for profitability?

Exit strategy

What is the long-term goal of the business?

Going public? Getting purchased? Industry player?



Planning the plan

Understand what information should be included

Decide on section headings and prepare an index

Decide who is to co-ordinate and write the plan

Agree who provides the necessary information: management or advisers

Gather information for each topic and jot down ideas

Organise the information logically

Start writing

Challenge the assumptions and expect revisions



Do not use jargon

The plan should wherever possible be written in layman’s terms avoiding the use of jargon

If the business is technical, include a glossary of the terms as an appendix

Do not repeat yourself

Keep the plan to a reasonable length

Support your claims

Where you have made claims or assumptions which may not be readily accepted by your proposed reader,

include reasonable evidence



Confidentiality

If you are not prepared to reveal your secrets at an early stage, an option is to send the summary to the potential investor or lender

Disclose the remainder to your plan if serious interest is expressed

Do mark your business plan "Confidential”.

Do not be selective

Ensure that all risks are discussed

Do not just select those for which you have a ready answer



A second opinion

It is important to have your plan objectively reviewed before submitting it to your potential investor

Suitable reviewers would include your accountant, lawyer or trusted business colleague

At least two people not directly involved with your company should review it

First appearances count

A reader should be attracted by the appearance of the plan so pay attention to layout and graphics



Deloitte and Touche’s four do's and one don't:

Do provide an index

Do provide a summary

Do number each copy

Do show who the business plan is submitted by

Don’t produce too many copies (or don’t number them)