As a general rule, entrepreneurs wisely want to keep the business model at the heart of their business plan a secret. But, with that in mind, they are in danger of writing as though they will be the main, perhaps even the only, reader.
Unless you intend to start up on your own, using your own money, you should write your business plan with other readers in mind. There are ways to limit the danger of your business idea from being ripped off by anyone reading your business plan – using a non-disclosure agreement (NDA), for example. (Non-disclosure agreements are confidentiality agreements that bind recipients to maintain your ‘secrets’ and not to take any action that could damage the value of that ‘secret’. This means that they can’t share the information with anyone else or act on the idea themselves, for a period of time at least.)
Tip: You can use NDAs with potential clients, suppliers, advisors, investors or even employees if you have to share confidential information that could threaten the success of your venture if it fell into the wrong hands.
Tailoring your business plan
A business plan is not a ‘one size fits all’ document, so the more it appears to have been written specifically for a particular reader the more likely they are to read it and have empathy with the contents. Below are some of the people you may want to show your business plan to, and some ideas on how you should tweak the contents to meet their needs. You don’t have to write completely different business plans for different types of reader. Just include (or limit) certain pieces of information, emphasise some parts more and perhaps change the running order.
Remember, you have to be able to justify every line of your business plan and the thinking behind it. So expect your readers to probe; the style of presentation is just to capture their attention in the first place. The main audiences for your business plan are described below.
Your bank manager
Bankers (and indeed anyone lending you money) are looking for some form of asset security to back their loan – usually a property such as the family home. They also want the near certainty of getting their money back, so they don’t want to hear too much about meteoric growth prospects; that usually just means pumping in more cash before the business becomes profitable. They will also want to charge an interest rate that reflects current market conditions and their view of the level of risk of the proposal. That in turn means bankers will usually expect a business to start repaying both the loan and the interest on a monthly or quarterly basis immediately after the loan has been granted. Bankers also hope the business will succeed so that they can lend more money in the future and provide more banking services such as insurance and tax advice to a loyal customer.
Investors don’t expect a new business to have many assets so they are up for taking a risk. But because the inherent risks involved in investing in new and young ventures are greater than for investing in established companies, they expect the chance of larger overall returns. To do that, fund managers must not only keep failures to a minimum; they have to pick some big winners too – ventures with annual compound growth rates above 50% – to offset the inevitable mediocre performers.
Typically, a fund manager would expect, from any 10 investments, one star, seven also-rans and two flops. It is important to remember that, despite this outcome, venture capital fund managers are only looking for winners. So to appeal to this audience, your plan needs to emphasise the prospects of fast growth and big returns. They will expect you to recruit a team of great people, shell out for patents and be cash hungry for a year or two. Not only are venture capitalists looking for winners, they are also looking for a substantial shareholding in your business. You have to be forming a company from the outset and show that you understand that having 70% of a big business is worth a lot more than a 100% share in a small one.
Tip: If you’re putting together a business plan to raise funding, the plan becomes even more critical in determining the success or failure of your business. “It is the initial selling document and it will either get you in the door or not,” according to Paul Murray of Europe’s largest venture capital firm 3i.
Key employees or partners
When anyone in this audience reads your business plan they want to hear about unlimited growth prospects and exciting opportunities, all to be realised taking very little (or better still no) risk. If the employee you want to recruit is leaving a good job to join you, there is usually a reason. Often they just want the opportunity for recognition or career progression. While a banker may consider creating a management position as an unnecessary overhead for a young business, you will need them if you are to grow. Your business plan is a good way to show how, when the business achieves its goals, there will be opportunities for promotion. Partners share some of the characteristics of employees, but in particular they will want to read about the opportunity to own a part of a worthwhile venture, perhaps also being able to build on that stake as the firm grows.
That’s not to imply that anyone starting a business or planning to grow their business is in any way mad; what would be foolish is to embark on it without a business plan. Preparing a business plan is essential if you are to both focus your ideas and test your resolve about entering or expanding your business. It is also a chance to make your mistakes on paper rather than in the marketplace. Once completed, your business plan will serve as a blueprint to follow, which, like any map, improves the user’s chances of reaching the destination. Despite the obvious benefits, thousands of would-be entrepreneurs still attempt to start without a business plan. The most common among these are businesses that either appear to need little or no capital at the outset, or whose founders have funds of their own. In both cases it is believed unnecessary to expose the project to harsh financial appraisal.
The former hypothesis is usually based on the easily exploded myth that customers will all pay cash on the nail and suppliers will wait for months to be paid. In the meantime, the proprietor has the use of these funds to finance the business. Such model customers and suppliers are thinner on the ground than optimistic entrepreneurs think. In any event, two important market rules still apply: either the product or service on offer fails to sell like hot cakes and mountains of unpaid stocks build up, all of which eventually have to be financed; or it does sell like hot cakes and more financially robust entrepreneurs are attracted into the market. Without the staying power that adequate financing provides, these new competitors will rapidly kill off the entrepreneur. Those would-be entrepreneurs with funds of their own, or worse still with funds borrowed from ‘innocent’ friends and relatives, tend to think that the time spent in preparing a business plan could be more usefully (and enjoyably) spent looking for premises, buying a new car or installing a computer.
In short, anything that inhibits them from immediate action is viewed as time-wasting. As most people’s perception of their business venture is flawed in some important respect, it follows that jumping in at the deep end is risky – and unnecessarily so. Flaws can often be discovered cheaply and in advance when preparing a business plan; they are always discovered in the marketplace, invariably at a much higher and usually fatal cost. There was a myth at the start of the internet boom that the pace of development in the sector was too fast for business planning. The first generation of dotcom businesses and their backers seemed happy to pump money into what they called ‘killer applications’. These were little more than brief statements of intent supported with wishful thinking. Now only ventures with a well-prepared business plan have any chance of getting off the ground or being supported in later stage financing rounds.
For more help on understanding your business’ audience and creating a plan, check out our other start-up business plan essentials: Testing your business idea, Understanding your customers, Sizing up the relevant market, Understanding your market, Preparing for change and growth and Preparing for the oral presentation.
Business Plans for Small Businesses, published by Crimson Publishing, is available to buy now.