Day 3 Morning - Develop the Business Plan

Lead to Win

Lead to Win

Develop the Business PlanMay 21, 2009 Morning

Ken Charbonneau, CA, CPAChuck Colford, CEO

Lead to Win

Upon completion

You will know about:• Effective business plans• Financial projections• The impact of milestones on value creation

You will be able to:• Prepare a business plan that helps founders and appeals

to investors• Determine your funding requirements

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Agenda

• The business plan must convey an unfair advantage• Financial projections are a reflection of your plan• Manage milestones to create value

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Business plan must convey an unfair advantage

Upon completion, you will know about:• Reasons for planning• Content requirements of successful business plans• Unique characteristics of start-up business plans

And you will be able to:• Prepare a business plan that appeals to investors• Articulate the key messages• Understand why business plans fail

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Financing is only one reason to plan

There are many other benefits:• Gets everyone pulling in the same direction• Ensures integration of all the pieces• Sets a foundation for all other activities• Provides a tool for communication

Completing the Business Plan helps you!

(An investor might invest without even reading it).

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The process begins with the end in mind

• Identify your objectives and audience• Draft an outline• Write your plan• Seek input• Revise your plan, seek input…

In the end:• Own your plan• Control distribution

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KISS to be effective in planning

• Company background• The pain and solution• Product or service• Technology• Market• Competition• Organization• Finance• Exit Strategy (if VC Funded)

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Company Background

• Date founded and legal structure• Founders, key shareholders and

management• Business purpose• Highlights of progress and major

developments• Geographic location – cross border

operations• Facilities/equipment

Are there any

skeletons in the closet?

Do the founders

have enough at stake?

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The Pain and Solution

• Who is the customer?• What is the customer’s pain?• How is the customer currently dealing with

the pain?• What is your solution?• Why will the customer buy?

Have the pain points and solution been validated with customers?

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Product or Service

• Concise description – detailed but non-technical

• Status of product development including future products

• Provide pricing structure• Excluded ancillary items

Are the product or service features clearly linked to the pain?

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Technology

• Concise description – detailed but non-technical

• Proprietary vs. integrated technology• Barriers to entry (patents, trade secrets)• Platform technology?• Level of future effort to date (time and $)• Future milestones

Are the

competitive

position and

barriers to

entry clear?

Is the technology unique or a true breakthrough

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The Market

• Size and growth rate• Think global• Key market drivers• Marketing strategy – the other 3 Ps

– Price– Place (distribution)– Promotion

• Segment and tackle pursuant to adoption curve• Innovators, Early Adopters, Early Majority, Late

Majority, Laggards

Have they articulated a sound business model?

How will they access the customers?

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Competition

• Existing and future competition• Assess from a product and company

perspective• Comparison criteria must be relevant to

the customer• Barriers to entry• Don’t forget substitutes and if you’re doing

it so are they!

Has competition been thoroughly analyzed or dismissed?

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Organization

• Current and future organization structure• Management team – strengths, role,

relevant experience, contact network• Board of directors and advisors

Pedigree is

not enough.

Is the team credible and trustworthy?

Does the team have the experience to execute the plan?

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Finance

• Amount raised to date and how spent:– Financing rounds– Amount invested by founders and their ownership

• Historical financial statements, if any• Financial projections

– next 5 years– key assumptions

• Funding requirements and use of proceeds• Exit strategy

Is this and attractive investment – how will I get my money back?

When will they break even?

How much must be raised to fully execute the plan?

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Exit Strategy

• Plan to take yourselves out– Selling your business to someone else– Going public– Succession/transition plans & timeframes– Winding up– Handcuffs

• Who will your acquiring partners be?– Likely players who will acquire your business– Why?– Plans to attract and engage them– Window of opportunity (timeframes, triggers)

• Getting Cash Out– Voting rights – all players not equal– Registration rights– Severance payments– Dissent rights– Capital gains, Dividends (Tax implications, benefits)– Stock or Cash

How are you going to get money out of your business?

Likewise – your investors?

Founder’s plans may differ from the investors!Slide 16

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Executive Summary

• Dual purpose• 2-page maximum; no titles• Summary of key areas detailed in plan• Must compel the reader to take action• Hardest section to write• Most likely section read by investors

What are you doing that is exciting and unique?

Will it provide the return I am looking for?

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Avoid these common mistakes

• Invalid or unsubstantiated assumptions• Overly optimistic projections• Underestimating the competition• Inconsistencies between text and projections• Unprofessional document, poor organization• Too much/too little detail• Underestimating capital requirements

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Adopt best practices

• Spend time on creating a great business plan• Build plan on unfair advantage – one that is

sustainable against competition• Write a super executive summary• Accentuate the excellent management team• Complete detailed market research• Write well• Include graphics and charts• Crisp packaging (2 page summary; 20 page plan)

…and always keep the audience ($) in mind

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Agenda


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Financial projections are a reflection of your plan

Upon completion, you will know about:• Financial planning techniques• The critical role of the revenue projections• Business plan and financial plan interdependency

And you will be able to:• Understand the critical variables for your business • Determine your finance requirements• Determine the use of proceeds• Work effectively to prepare the projections

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Always begin with the basics

• The economic value of your business is a function of the returns expected

• Valuing any economic resource is a forward-looking exercise

• Your company’s financial plan is the tool used to project future returns and risks

• Lack of historical data and good market data makes it a challenging and vulnerable process…

• So, ground assumptions in relevant external data• Test sensitivity to confirm key assumptions

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The devil is in the details

• Financial plans incorporate business plan detail• Projections reveal the strengths and weaknesses of

your business model• Your choice – add credibility or highlight glaring

inconsistencies• Your role

– Get help and then direct the process– Take responsibility for key assumptions– Review the results– Internalize your understanding of the final product– Be prepared to be grilled

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Financial projections made easy

1. Determine the fiscal year end date, start date, desired number of years and frequency of data (monthly, quarterly, annual).

2. Decide the reporting currency.

3. Project revenue and cost of goods sold.

4. Project the head count and capital expenditures required to deliver the projected revenue.

5. Project sales and marketing expenditures.

6. Project other operating expenses (general and administration, research and development, depreciation).

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Financial projections made easy

7. Project when revenue will be collected and expenses paid.

8. Project the assets, liabilities and equity.

9. Determine the cost of financing the capital structure and include in the statement of income.

10.Derive the statement of cash flows from the projected income statements and balance sheets.

11. Create a written summary of the key attributes and assumptions underlying the financial plan.

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Estimating revenue is the critical start

• Set revenue targets• Understand environmental forces driving future

volume growth and pricing (e.g. demographic shifts, cultural changes, regulatory etc.)

• Don’t forget the time lag between a “booking”, a “sale” and recognition as “revenue”

• Use formulas or ratios where appropriate (i.e. service revenue per unit of product sold)

• Ensure consistency with product release schedule• Support estimates (e.g. growth rate) with detailed

market research

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The cost of revenue is the next step

• Cost of revenue has a volume and unit cost component

• Unit costs need to be estimated from the bottom up and then applied as a ratio if appropriate

• Unit costs can have a labour and/or product cost component.

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Expenses reflect activity drivers

• Headcount– Build personnel resource requirements from the bottom up,

by department, over the entire period– Distinguish employees from contractors– Ensure consistency with business plan assumptions

regarding product development timeline

• Capital expenditures– Equipment requirements driven by headcount– Don’t forget equipment upgrades in later years

• Sales & marketing– Ensure that sales and marketing costs increase as revenue

increases

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Use of proceeds - explains the capital requirement

• Capital requirements– Total capital required should be identified as equity– Bank lines of credit and equipment leases can be included

after the company is generating positive cash flow– Create a capital requirement that provides cash for a six

month burn

• Use of proceeds– Determined by the nature of the operating expenses and

capital expenditures incurred during the period immediately following the assumed receipt of funds

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Determine the most sensitive variables

1. Identify critical variables (your key assumptions and milestones)

2. Estimate a high, low and expected value for each critical variable

3. Change the value of each variable individually and in combination.

4. Summarize the impact of each change on the financial projections

5. Revisit and refine your assessment of the critical variables based on the output and determine the impact on the capital requirements

6. Document most likely scenarios for discussion with investors

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Avoid these common mistakes

• Fairy tale revenue projections– Over optimistic selling prices and market share estimates

• Grossly underestimated capital requirements– Unrealistic sales cycles and cost of equipment estimates– Product release slippage

• Not enough scenario analysis• Lack of conventional financial statement formatting

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Agenda


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Manage milestones to create value

Upon completion, you will know about:• Selecting, monitoring and using milestones• Impact of performance on value creation

And you will be able to:• Identify and manage metrics• Improve ability to create value

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Manage milestones

• Resources constraints - $’s & human resources• Improper resource allocation• Failure to prioritize and maintain focus• Failure to delegate• Failure to operationalize the plan• Plans change

How many Business Plans are executed on time and on budget?

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Operationalize the plan

(i) who is going

(ii) to do what

(iii) by when.

The Business Plan does not become an operating plan until you identify

How do you manage to the plan and know whether you are on track?

}Milestones!

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Developing milestones

1. Identify and prioritize events or actions that must occur to achieve the Business Plan

• Focus on those critical to creating value– Product development, customers and employment– Allocate resources to maximize likelihood of success– Minimize cost of failure (Plan B)

• Keep it balanced– Build out all areas of the plan– Remember the sail boat!

Keel

Boat

Sail

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2. Determine event prerequisites and develop a critical path chart

• Building a company is managing a portfolio of projects

• Identify, sequence and allocate resources to the tasks comprising the portfolio

• Document tasks, sequence and resource allocations• Communicate it!!! – post the chart in the boardroom,

lunchroom, bathroom, hallway…

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3. Identify key assumptions on which your company’s success depends

• Business plans are supported by assumptions due to uncertainty

• Recognize explicit and implicit assumptions• Look for opportunities to challenge assumptions and

replace them with “fact” (hypothesis testing)

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4. Monitoring milestone status will provide new information that will replace assumptions in the plan.

Examples:Milestone Status Lesson Learned

Raise $1M Achieved Available resources known

Beta Product Achieved Direct product costs known

1st Paying Customer Not Achieved Need new target market?

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Performance impacts value creation

Milestones are not being achieved

Market feedback and data conflict with the plan

assumptions

Milestones are being achieved or exceeded

Market feedback and data conflict with the plan

assumptions

Milestones are being achieved or exceeded

Market feedback and data increasingly support the

plan assumptionsMilestones are not being

achieved

Market feedback and data increasingly support the

plan assumptions

Keep going(Good time to raise $)

Looks good butrevisit the plan

Revisit milestones and financial requirements(Bad time to raise $)

Go home

Good

Poor

Strong Weak

Business Plan Validation

Per

form

ance

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