Entrepreneurship Chap 4

copyright 2003 Jack M. Kaplan

How to Prepare a Winning Business Plan

Preparing a Business Plan

Patterns of Entrepreneurship Chapter 4


Purpose of a Business Plan

Attracts Investors Evaluates Feasibility of Business Concept Serves as an Operating Guide Attracts Potential Business Partners and Key

Employees Attracts Potential Customers and Suppliers


Business Plan Development Guide

Outline: The Executive Summary Business Description Market Analysis The Management Team Operations Critical Risks The Financial Projections Appendix


The Executive Summary

Objective: Capture interest of investors General overview of business idea How will it work Bullet form Emphasize key issues No more than 2-3 pages Should be written last


Include the following: Company profile Nature of the product or service offering

emphasizing any competitive advantages Identify foreign/domestic markets to be targeted Size and growth trend of market Make-up and background of the management

team - include individual skills Financing requirements Key projections (i.e., sales, gross profits, N.I.)

The Executive Summary


Business Description

Objective: Provide a detailed overview of the company and

the nature of the product/service offering. Show long-term commitment to developing the

venture. Show defensible competitive advantage.


Business Description

Include: Mission statement History behind the idea or current business Company’s current or proposed legal form Proposed entry strategy Description of the initial product/service

(including any anticipated competitive advantages)

Product research and development


Market Analysis

Objective: Prepare an opportunity marketing analysis. Demonstrate how to capture a large share to

support the venture. Show how to support claims and customer

interest.


Market Analysis

Address: Description of industry Description of region and/or countries

(international business) Targeted markets Marketing research Competition Barriers to entry Marketing strategy

– deliver products/services to the targeted markets


Management Team

Objective: Show that the team can effectively manage

the product/service into foreign or domestic markets.

Does management have the background and skills to make the venture a success?

Highlight synergistic skills. Show how deficiencies will be covered. Do not give up more control than absolutely

necessary.


Address: Background and primary responsibilities of the

management team Organizational structure Board of directors/advisors/international trade

specialists Ownership

Management Team


Exit Strategy

To be determined up-front Some options include:

– going public– selling the business– a stock buy-back at the going rate– leveraged buy-out– second round of investment


Critical Risks

Objective: Identify potential problems that could

significantly affect the new company. Let potential investors know up-front that there

are risks associated with the venture.


Critical Risks

Internal– loss of key employees– inadequate working capital– unproductive R&D– breakdowns in plant and equipment– bottlenecks in the distribution channels– factors not covered by insurance policies

External– patent violations– changes in technology– changes in government regulation or protectionist

legislation– adverse economic conditions, market changes– unstable banking/financial and transportation/distribution

systems– potential effects on financial plans


Continued: Contingency Plans

– probabilities

Insurance Provisions– fire– liability– automobile– worker’s compensation– key person

Critical Risks


Operations

Objective: Focus on relevant cost. Demonstrate ability to carry out implementation. Integrate operation costs with the financial

section.


Address: International Considerations

– market development activities– transportation– export documentation– foreign contacts and personal relationships

Future Research and Development Plans– cannot be built around a single service or product– present the planned directions of R&D– new products– new markets– improve on existing production processes

Operations


Continued: Production Plan

– procuring and transforming critical resources– internally– externally– time line of events

Customer Support– focus on getting and keeping customers– customer service– what role it plays in achieving sales goals

Operations


Continued: Personnel

– creating management and infrastructure charts– hiring– training

Operations


The Financial Projections

Objective: Convince the investor that the venture makes

sense from a financial standpoint. Projections must address:

– allocation of expenses– return on investment– cash flow management


Historical financial data First year financial projections by month Balance Sheet Income Statement Cash Flow Statement Second year financial projections by quarter Five year annual forecasts Break-Even Analysis Ratio Analysis

The Financial Projections


Valuation

“Residual Value” commonly used by investors. Should be done before meeting with investors. Will help you to assess what ownership you may have

to give up based on the expected ROI for your type of venture.

Use the “time value of money” equation: n Future Value = Present Value (1+i)

i= estimated rate of return investors will require based on the

perceived risk associated with your type of venturen= number of years


Calculate the future value of the up-front investment needed.

Example: Funds needed = $500,000Average annual return on investment (ROI) = 45% 4FV = $500,000 (1+.45)FV = $500,000 (4.4205)FV = $2,210,253

Valuation


Example: Determine the point in time that will be used in

the valuation calculations.Example: 4 years

What are the projected after-tax profits?Example: $1,855,050 (year 4)

Determine the valuation factor by looking at similar companies in your industry.

Example: 10 times after tax earnings$1,855,050 x 10 = $18,550,500

Valuation


Determine the amount of equity you may have to give up, based on the value of the venture, and the future value of the potential investors’ initial investment.

Example:

$2,210,253-------------- = 12% $18,550,500

Valuation


Balance Sheet

WC Position Capital Asset Position Capital Structure

Pro Forma Balance Sheet:Current Assets Current LiabilitiesFixed Assets Long-term DebtIntangible Assets Equity

Total Assets = Total Liabilities + Equity


Cash Flow Statement

Objective: Demonstrate that you have sufficient cash to run

the operation. Assess the timing of future cash flows. Develop a plan for subsequent rounds of

financing.


Cash Provided (used) from OperationsNet income (loss)DepreciationAdjusted net income (loss)

Cash Provided by Working CapitalAccounts receivable (increases) decreasesInventories (increases) decreasesAccrued liabilities (decreases) increasesPrepaid expenses (decreases) increases

Cash Provided (used) by Continuing Operations

Cash Flow Statement


Continued:

Cash Provided (used) from Financing ActivitiesLong-term debt (decreases) increasesInterest on notesCash dividends paidIssuance of stock

Total Cash Provided (used) from Financing Activities

Cash Flow Statement


Continued:

Cash Provided (used) from Investment ActivitiesPurchase of property, plant and equipment Proceeds from sale of assetsOther acquisitions

Cash Provided (used) from Investment ActivitiesIncrease (decrease) in cashCash at beginning of periodCash at end of period

Cash Flow Statement


Income Statement

Revenue Projections Cost Relationships Tie into the Operating Strategy


Income Statement

Pro Forma Income StatementRevenue- Cost of Goods SoldGross Profit Margin- Operating ExpensesNet Income Before Interest and Taxes- Interest- Taxes Net Income (Loss)