Chap 007 ; John Newman, Babson College

The Business PlanMAS

Objective

• Business Model• Business Plan• Entrepreneurial Process

What Is a Business Model?

A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore, we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences.

What Is a Business Model?

Business model is a firm’s plan or diagram of creates value to sustain itself on the basis of

the profits it generates. (Revenue model) how it competes, (Competition model) uses its resources, (Resource model) structures its relationships, (Production &

Distribution model) interfaces with customers, (Customer model)The term is used to include all the activities that define how a firm competes in the marketplace.

What Is a Business Plan?IDENTIFICATION AND ARTICULATION OF: • Opportunity, Market, Customers• Management Capable of Seizing It• Minimal Required Resources• Entry Strategy & Tangible Vision for

Growth• Financial Requirements, Cash Flow • Critical Risks & Assumptions• Harvest Options

For Whom the Business Plan

• The entrepreneur himself• The investors• The lenders• The suppliers• The customers

Goals of a Business Plan

• Evaluate feasibility/viability of the idea• Development of strategy• Guide in organizing the planning

activities: entry, early growth, acquisition, harvest, etc.• Assist in obtaining resources/approvals• Establish credibility

Sample Business Plan Outline 1. Table of Contents2. Executive Summary3. Industry, Products

or Services4. Venture Description4. Market Research5. Marketing Plan6. Management Team7. Operations Plan8. Development Plan

9. R & D10. Schedule11. Assessment of Risks12. Financial Plan13. Proposed Offer14. Appendices• Financial Projections• Start-up Costs• Breakeven Chart

Also see Hisrich 8e Table 7.3 Pp 201

Elements of a Successful Plan• Clear description of the idea• Overview of industry to suggest need/

opportunity• Evidence that demand exists (or can be created

or stolen)• Clear description of resource required:

marketing, operations, financing• Background of management team• Schedule• Discussion of risks & rewards,

BP: Investor Decision Process (1)

Market Attractiveness ………………. Returns• Market Need• Size of Market• Market Growth• Access to Market

Product Differentiation ……………… Returns• Uniqueness• Product Life• Profit Margin• Value Added

BP: Investor Decision Process …… (2)

Managerial Capabilities……………..… Risks• Management Skills• Marketing Skills• Financial Skills• References

Resistance to Threats …………….……. Risks• Barriers to Entry• Obsolescence Risk• Downside Risk• Economic Cycle Risk

BP: Investor Decision Process …… (3)

The decision after considering and weighing Risks and Returns

Key Points to Remember

General Guidelines•Clear, concise, professional style•Well-researched and documented•Consistent and cohesive

Business plans are:•Very specific •Not promotional tools• Selling pitch is subtle

The Industry– Industry Overview• Size, growth rate, segmentation,

trends, regulatory environment•Opportunity

– Product Overview– Competitive Advantage– Fit with Corporate Objectives– Entry and Exit Strategies

Market Research

–Identify Market Area and Size–Description of Primary Customers•Who, how many, what they want, what

they do–Research and Support for Demand–Competitor Analysis• Positioning map, strengths, weaknesses,

likely competitive response

Marketing Plan

– Mission Statement– Product Characteristics

● Features ● Pricing– Sales/Channel Strategies– Promotional Strategy– Sales Projections– On-going Evaluation

The key is to build on your market research

Management Team

– Managerial Positions Required•Responsibilities•Biography

– Ownership Structure– Key Advisors– Professional Support

Design and Development Plans

– Development Status and Tasks– Costs– Difficulties and Risks– Proprietary Issues (partial, not complete)–Research & Development for Product

Improvement and New Products

Operations Plan

– Facility and Location Requirements– Equipment Requirements– Non-managerial staffing– Sources of Supply– Production Process and Controls– Distribution logistics– Regulatory and other compliance

Financial Plan

• Total Cost• Capital Structure• Pro-forma Balance Sheet• Pro-forma Income (P&L) Statement• Pro-forma Cash Flow Statement• Break-Even Analysis• Sensitivity Analysis

Schedule

Gantt Chart showing:• Tasks• Time frame• Cost• Person responsible

Critical Risks: Identification, Evaluation, Mitigation … (1)

– Identify major risks (a list of 7-10 risks is typical)

– Look beyond the simplistic (i.e. sales fall short)

– Evaluate impact should risk occur– Describe how the risk will be mitigated

and how you will respond should it happen

Ask others • what holes they see in your plan? • What can go wrong ?

Entrepreneurs frequently get too emotionally close to their ideas.

thereforeLook for unbiased views here ...

Critical Risks: Identification, Evaluation, Mitigation … (2)

Critical Risks: An Example

Key Member of the Management Team is Injured• Evaluation: Management is in excellent health and will

refrain from dangerous activities. Thus, it is considered unlikely that a member of the management team will be incapacitated.

• Contingency: The company will ensure that key members of the management team undergo physical examinations annually.

• the company may provide key-man life insurance sufficient to protect outside investors’ capital in the event of an emergency.

Financial Plan

– Start-up Requirements (Required Investment – Equity , Loans, Seed money)

– Financial Statements• Sales, margins, profits• IS, BS, CFS

– Return Measures (BE, NPV, IRR, ROI,)• Be careful not to promise

– Breakeven Concerns• Sales level, Time to reach stability

Avoid describing your hopes & wishes. The goal here is to convey the characteristics of your business

briefly.

Financial Plan

Executive Summary (Brief & Persuasive)

– Clear description of idea– Arguments for success• Overview of Industry, Market, Need, Demand• Benefits to Customer / Company• Fit with Company Objectives

– Team– Financial Characteristics• Sales, profits, investment, risk and returns

Written last of all

Appendices: (Back-up materials)

– Lists, specs, pictures of products, systems, software– List of customers, suppliers, references– Appropriate location factors, facilities or technical

analysis– Independent reports by technical expert, consultants– Detailed resumes of founders, key managers– Any critical regulatory, environmental or other

compliance, licenses or approvals– Sales or other financials assumptions (in brief)

Key Considerations

– Have a “story to tell”– Be confident but objective and

dispassionate– Understand the financial characteristics

of your business– Avoid promises and self-aggrandizement– Tease to stimulate interest, never be

boring.

Miscellaneous Tips– Length is typically 20-40 pages, excluding

exhibits– Required appendices

• Financial statements (3-5 years)• Statement of Start-up Costs• Breakeven Chart• Resumes

– Use bullet points, tables, and small charts– Don’t use first person (“I”, “We”, “Our”)– Format and Spellings count (a lot)

Remember

A business plan is a specific plan to open a new business or to expand an existing

one.

It is not the writer’s wishes and dreams!

Pitfalls and Omissions: Traps for Entrepreneurs …(1)

– Unrealistic goals– Objectives not measurable– Lack of commitment– Lack of recognition of threats / weaknesses – Under-estimation of competitive reaction– Seeking premature approval – Believing Plan is more important than

Orders

– Selling the plan to the wrong audience– Selling the plan to right audience poorly– Poor Advisors– Spreadsheet Diarrhea (Financials =

Business)– Poor understanding of product acceptance– Pricing strategy too low– Incorrect Capital requirements estimates

Pitfalls and Omissions: Traps for Entrepreneurs …… (2)

Business Plans: What Investors Look For

– Evidence of Customer Acceptance: Orders

– Evidence of Focus / Niche – Appreciation of Financial Goals– Proprietary Position, Exclusivity– Team with experience, commitment,

and integrity

Business Plans: What Turns Investors Off

– Great Mousetrap Fallacy– Projects which deviate excessively

from industry norms– Unrealistic growth projections– Inadequate management experience/

depth

10 Questions BP Should Answer …(1)1. Is the business just an idea or is it an opportunity with

real potential2. Is the product or service viable? Does it add significant

value to customers? Feasibility studied? If so, what results?

3. Is the business entering an exciting growing phase? Has an attractive position within the industry been identified?

4. Is there a well identified target market?5. Does the business have points of differentiations to

separate from competitors? Are these sustainable?

Barringer Table 4.3 Pp 154

10 Questions BP Should Answer … (2)

6. Does the Business have sound marketing plan?7. Is the management team experienced, skilled,

and up to the task of launching a new firm?8. Is the operation plan appropriate and sound?9. Are the assumptions for financial projections

realistic?10. Are the financial projections made correctly?

If so, do they project a bright future?

Barringer Table 4.3 Pp 154

Thank You

Exit Strategies

• Selling the Business• Transferring the Business to a Family Member• Taking the Company Public• Being Acquired by a Larger Company

Funding Sources:

• Savings• Friends and Family• Financial Institutions / Banks• Government Schemes (PM’s Young Entrepreneurs)• Angel Investors• Venture Capital