CH-1-4 Why Plan? – Preparing Effective Business Plans: An Entrepreneurial Approach : Chapter Notes

This Document Contains Chapters 1 to 4 Chapter 1 Why Plan? Key Words Business plan—a written document that carefully explains every aspect of a new business venture Due Diligence—the process investors go through after they tentatively commit to an investment Lean Startup Movement—associated with the school of thought that advocates experimentation and trial-and-error learning gleaned through customer feedback over formal planning Elevator speech—a brief, carefully constructed statement, usually 1—2 minutes long that outlines the merits of a business venture Stealth mode—companies that formulate their business plans in secret, to avoid tipping off potential competitors as to what they’re planning Feasibility Analysis—the process of determining if a business idea is viable; normally conducted prior to writing the business plan Corridor principle—an academic principle which states that once an entrepreneur starts a business, he or she begins a journey down a path where “corridors” leading to new venture opportunities become apparent Chapter Overview This chapter introduces the idea of the business plan, including the rationale for writing one, the multiple purposes that a business plan can serve both inside and outside the firm, and the key audiences for a business plan. Students will also learn about major imperatives in creating a business plan, as well as some potential pitfalls in writing the business plan. The organization of the text is also laid out by topic and associated chapter(s). The outline of the text walks the reader through the process from understanding and conceptualizing the plan, to preparing to write the plan, to creating the plan, and finally, to presenting the plan to potential investors and others. Chapter Summary 1. A business plan is a written document that carefully explains every aspect of a new business venture. 2. The most effective business plans are part of a comprehensive process that includes (1) identifying a business idea, (2) screening the idea (or ideas) to determine their preliminary feasibility, (3) conducting a full feasibility analysis, and (4) writing the plan. 3. There are two primary reasons for writing a business plan: (1) it forces the founding team to work together to hammer out the details of the business venture, (2) it communicates the merits of a new venture to outsiders, such as investors or bankers. 4. The process of writing a business plan forces a team to not only work together, but to turn abstract ideas into concrete realities. 5. The two primary audiences for a firm’s business plan are the firm’s employees and investors and other external stakeholders. 6. It is important to remember that a firm’s business plan, executive summary or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor (or anyone else who reads the plan), and if the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete or sloppy. 7. To make the best impression, a business plan should follow a conventional structure. Typically, the individuals who read business plans are busy people who want a plan that allows them to easily find critical information. 8. 9 It is a good idea to develop a 1—2 minute elevator speech which briefly outlines the merits of the venture. As a business plan is written, the people involved should continually measure the type of company that they are hoping to start against their personal goals and aspirations. 10. There are four types of businesses: survival, lifestyle, managed growth, and aggressive growth. This book focuses on lifestyle, managed growth, and aggressive growth firms. 11. While the preparation of a business plan is essential, it is often an insufficient exercise through which to complete a full and candid analysis of the merits of a new business venture. Steps that logically precede the completion of a business plan, which include the preliminary screening of business ideas and feasibility analysis, are also important. Chapter Outline I. Introduction II. Reasons for Writing a Business Plan a. Internal Reason b. External Reason III. Who Reads the Business Plan—And What Are They Looking For? a. A Firm’s Employees b. Investors and Other External Stakeholders IV. Guidelines for Writing a Business Plan a. Structure and Style of the Business Plan i. Outside resources ii. Appearance iii. Develop an Elevator Speech 1. Four Steps in an Elevator Speech iv. Red Flags in a Business Plan b. Content of the Business Plan c. Measuring the Business Plan Against Your Personal Goals and Aspirations i. Investor expectations ii. Attractiveness of revised business plan d. Recognizing That Elements of the Plan May Change V. Types of Business VI. The Plan for the Book a. Section 1: Starting the Process b. Section 2: What to Do Before the Business Plan Is Written c. Section 3: Preparing a Business Plan d. Section 4: Presenting the Business Plan to Investors and Others Chapter Notes I. Introduction • Research reveals an increased interest in the study of entrepreneurship o More than 2,000 colleges and universities, about two-thirds of the total, offer entrepreneurship coursework ○ 54 percent of millennials (ages 18-34) either want to start a business or have already started one ○ 63 percent of African Americans and 64 percent of Latinos expressed a desire to start their own company • The business plan is a written document that carefully explains every aspect of a new business venture ○ Inside the firm, the business plan is used to develop a “road map” ○ Outside the firm, it introduces potential investors and other stakeholders to the business opportunities • Although a relatively small percentage of entrepreneurs write business plans, there is ample evidence that writing a business plan is an extremely good investment of time and money. II. Reasons for Writing a Business Plan • There are two primary reasons for writing a business plan ○ Internal reason—forces the founders of a firm to systematically think through each aspect of their new venture ○ External reason—communicates the merits of a new venture to outsiders, such as investors and bankers • Investors rely heavily on the business plan to make their decisions regarding initial investment • The business plan helps a new company build credibility by providing detailed information and demonstrating that the entrepreneur has thought through each element of the business • Placing highly or winning a university-, community-, or state-sponsored business plan competition also helps to establish credibility for a firm • There is an emerging school of thought, associated with the Lean Startup movement, that opposes the idea of writing a business plan and advocates experimentation and trial-and-error learning through customer feedback over formal planning III. Who Reads the Business Plan—And What Are They Looking For? • There are two primary audiences for a firm’s business plan a. A firm’s employees—because the business plan articulates the vision and future of the firm, both the management team and the rank-and-file employees can benefit from reading the business plan in order to operate in sync and with purpose b. Investors and other external stakeholders—investors, potential business partners, potential customers, private and government-funded grant-awarding agencies, and key employees who are being recruited are all part of the second audience for a business plan • To appeal to this group, the business plan must be clear, concise, and not overly optimistic or naive IV. Guidelines for Writing a Business Plan • It is important to remember that a firm’s business plan, executive summary, or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor or whomever the plan is presented to • A good business plan will be sensitive to the structure, style, and content of a plan before exposing it to a firm’s employees or sending it to an outsider • Individuals writing the plan should also measure the type of company that they are envisioning against their personal goals, aspirations, and preferred lifestyle a. Structure and Style of the Business Plan • The business plan should follow a conventional structure • Most experts recommend a length of between 25 and 35 pages • Effective business plans should be sharp, but not look expensive to produce or overly flashy • Business plan software can help provide structure, but all of the content should come from the entrepreneur • Outside assistance in putting the plan together is fine, but the enthusiasm of the founder should remain i. Develop an Elevator Speech • An elevator speech is a brief, carefully constructed statement, usually 45 seconds to two minutes long that outlines the merits of a business venture (business plan insight feature) 1. Steps in an Elevator Speech (from business plan insight feature) • Describe the opportunity—45 seconds • Describe how your product or service meets the opportunity—45 seconds • Describe your qualifications—15 seconds • Describe your market—15 seconds ii. Red Flags in a Business Plan (Table 1-2) • Founders with none of their own money at risk • A poorly cited plan • Defining the market size too broadly • Overly aggressive financials • Hiding or avoiding weakness • Sloppiness in any area • Too long of a plan b. Content of the Business Plan • Most plans are divided into sections that represent the major aspects of a new venture’s business (Table 1-1) • The plan should convince the reader that the opportunity is exciting, feasible, defensible, and within the capabilities of the people who will be launching the firm • Details of each section of the plan will be described later in this book in Section 3: Preparing an Effective Business Plan c. Measuring the Business Plan Against Your Personal Goals and Aspirations • Accepting venture capital will almost assuredly force a firm into a fast-growth model from the start ○ Most venture capitalists shoot for a 30 to 40 percent annual return and a total return of five to 20 times their original investment over the life of the investment • Using venture capital also involves surrendering equity in the firm to outsiders in exchange for their investment and accepting heavy scrutiny at all levels • If an entrepreneur places a high value on leisure time or family time or doesn’t want the pressure associated with a group of investors, he or she would be better suited to launch a firm in a target (or niche) market and solicit funds from friends and family or a lender • During the course of writing the plan, the entrepreneur may find that there are aspects to the business that are not as attractive as originally anticipated d. Recognizing That Elements of the Plan May Change • Revisions may be made based on early feedback • The corridor principle is an academic principle which states that once an entrepreneur starts a business, he or she begins an journey down a path where “corridors” leading to new venture opportunities become apparent • The corridor principle also applies during the preparing of a business plan; new insights will invariably emerge that weren’t initially apparent • The business plan is a living, breathing document, rather than something set in stone • Guy Kawasaki suggests that authors of business plans should “write deliberate, (but) act emergent” ○ Create a “deliberate” plan that is a specific blueprint to follow ○ Think “emergent” with a mindset that is open to change and influenced by the realities of the marketplace V. Types of Businesses • There are four distinct types of businesses (Table 1-3) ○ Survival—provides its owner just enough money to put food on the table and pay bills (handyman, part-time childcare) ○ Lifestyle—provides its owner the opportunity to pursue a certain lifestyle and make a living at it (clothing boutique, personal trainer) ○ Managed growth—employs 10 or more people, may have several outlets, and may be introducing new products or services to the market (regional restaurant chain, multi-unit franchise) ○ Aggressive growth—bringing new products and services to the market and has aggressive growth plans (computer software, medical equipment, national restaurant chain) • This book focuses primarily on lifestyle, managed growth, and aggressive growth firms VI. The Plan for the Book a. Section 1: Starting the Process (Chapter 1) ○ A business plan is also an essential document for a firm to have at its disposal, particularly if it plans to reach out to others to try to gain access to resources b. Section 2: What to Do Before the Business Plan Is Written (Chapters 2-3) ○ Writing a business plan is part of a comprehensive process that includes the four steps of the comprehensive feasibility analysis/business planning process ○ There are many steps that logically precede the completion of a business plan, including the preliminary screening of business ideas and feasibility analysis c. Section 3: Preparing a Business Plan (Chapters 4-10) ○ This section provides an explanation of how to complete each section of a business plan d. Section 4: Presenting the Business Plan (Chapter 11) ○ Concrete suggestions for how to make effective presentations using PowerPoint slides, and how to field questions from an audience effectively, will be provided Chapter 2 Developing and Screening Business Ideas Key Words First screen—a mechanism for quickly assessing the merits of a business idea before subjecting it to full feasibility analysis and business planning Brainstorming—a catch phrase that generally describes a session targeted to a specific topic about which a group is instructed to come up with ideas Focus group—a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed Window of opportunity—a metaphor describing the time period in which a firm can realistically enter a new market Barrier to entry—a condition that creates a disincentive for another firm to enter a company’s niche market Chapter Overview This chapter walks students through the process of testing specific ideas to determine if a good business opportunity truly exists. The chapter is divided into two parts: (1) a focus on the three most common sources of new business ideas and (2) the introduction of a tool called the “First Screen.” An explanation of the components of the First Screen is included, including resources that entrepreneurs may use to locate required information. Chapter Summary 1. The three most common sources of new business ideas include: changing environmental trends, unsolved problems, and gaps in the marketplace. 2. The most important environmental trends to follow, in the context of discovering new business ideas, are economic trends, social trends, technological advances, and political action and regulatory changes. 3. Many companies have been started by people who have experienced a problem in their lives, and then realized that the solution to the problem represented a business opportunity. 4. Gaps in the marketplace exist when there are products or services that consumers want but aren’t available through larger firms or aren’t available at all. 5. Three techniques that entrepreneurs use to generate new business ideas include: brainstorming, focus groups, and library and Internet research. 6. The most common way to identify business ideas quickly is through brainstorming. Technically, a brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas. 7. A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas. 8. Often, the best new business ideas emerge when the general notion of an idea is merged with extensive library and Internet research. 9. Once a business idea, or several ideas, have been chosen, it is important to have a way to quickly assess the merits of the idea, before subjecting the idea to a full feasibility analysis. The First Screen provides a mechanism for quickly assessing the merits of a business idea. 10. Although completing the First Screen does take some research and analysis, it is not meant to be a lengthy process. It contains 25 items and should be able to be completed in less than an hour. Chapter Outline I. Introduction II. Three Most Common Sources of New Business Ideas a. Changing Environmental Trends (Table 2-1) i. Economic Trends ii. Social Trends iii. Technological Advances iv. Political Action and Regulatory Changes b. Unsolved Problems c. Gaps in the Marketplace III. Techniques for Generating Ideas a. Brainstorming b. Focus Groups c. Library and Internet Research IV. First Screen a. Part 1: Strength of the Business Idea b. Part 2: Industry-Related Issues c. Part 3: Market and Customer-Related Issues d. Part 4: Founder- (or Founders-) Related Issues e. Part 5: Financial Issues Chapter Notes I. Introduction • Many businesses fail, not due to a deficit of commitment and hard work, but because the idea wasn’t a good one to begin with • New business ideas require good detective work to determine if they are indeed viable • There are techniques that entrepreneurs can use to explore the three most common sources for new business ideas • The First Screen is a tool that provides entrepreneurs with the flexibility to consider multiple business ideas, rather than settling on a single idea from the outset II. Three Most Common Sources of New Business Ideas • The first step in creating an effective business plan is selecting an idea that fills a need and provides unique value to the customer • It is difficult to get people to change habits and behaviors to try a new product even if the new product is better or less expensive a. Changing Environmental Trends ○ Changes in these areas often provide the impetus for new business ideas ○ It is important to distinguish between trends and fads ○ Trends are interconnected and should be considered simultaneously when brainstorming for new ideas i. Economic Trends • When the economy is strong, people are more willing to buy discretionary products and services • It is important to evaluate who has money to spend and what they spend it on (i.e., the increase of women in the workforce fueled a number of boutique clothing stores targeting professional women) • An understanding of economic trends can also help identify areas to avoid (i.e., the advent of online auction sites like eBay has made it easy for people to sell used musical instruments, making this a difficult time to start a company selling musical instruments) ii. Social Trends • Entrepreneurs must also understand the impact of social trends on the way people live their lives and the products and services they need • Often products do more to satisfy a social need than the more transparent need the product fills iii. Technological Advances • Technological advances provide an ongoing source of new business ideas • It is important to recognize how technologies can be used to help satisfy basic or changing human needs • Once a technology is created products often emerge to advance it (i.e., the Apple iPod has created an entire industry that produces accessories) iv. Political Action and Regulatory Changes • New laws create opportunities for entrepreneurs to start firms to help companies and individuals comply with these laws • Occasionally, changes in government regulations motivate entrepreneurs to start firms that differentiate themselves by “exceeding” the regulation (i.e., an “extra safe” crib) • Political change can also create an environment for the emergence of new business ideas (i.e., threat of terrorism resulted in many firms becoming more security conscious and requiring products to meet their changing security needs) b. Unsolved Problems ○ Many companies have been started by people who have experienced a problem and, in the process of solving the problem, realized that they were on to a business idea ○ Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses—entrepreneurs who can develop modified products and services can often capitalize on this opportunity ○ One technique that entrepreneurs use in solving a difficult problem is to find an instance where a similar problem was solved and then apply that solution to their problem c. Gaps in the Marketplace ○ There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all ○ Key large retailers compete on price and target the mainstream customer, leaving gaps in the marketplace that boutiques and specialty shops can fill ○ A related technique for generating new business ideas is to take an existing product or service and create a new category by targeting a completely different target market or geographic area III. Techniques for Generating Ideas • Some people recognize new business ideas through casual observation, intuition, or even serendipity or luck • Some people use the three sources of business ideas to deliberately try to generate new business ideas • This section focuses on three techniques that people utilize to explicitly try to generate new business ideas a. Brainstorming ○ Brainstorming is the most common way to generate business ideas ○ A brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas ○ In brainstorming, the leader asks participants to share their ideas and react to the ideas of other participants in a lively, freewheeling manner ○ A flip chart or whiteboard is often used to record ideas ○ One particularly effective approach to brainstorming is to utilize the three sources for new business ideas as a way of organizing the discussion b. Focus Groups ○ A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed ○ Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated ○ Focus groups are usually conducted by trained moderators who know how to keep the group “focused” and generate lively discussion ○ One hybrid type of focus group is the “College Drop-In,” where college students are provided with a food and snack budget in exchange for the opportunity to hold brief videotaped interviews with partygoers about specific market issues or business ideas c. Library and Internet Research ○ Entrepreneurs would be making the mistake of overly linear thinking to assume that the process of researching does not begin until after the business idea has been chosen ○ Often the best ideas emerge when the general notion of the idea is merged with extensive library and Internet research ○ The best approach to using the library, an often underutilized source of information, is to discuss your general area of interest with a reference librarian ○ Internet research is also important, including the use of search engines and “alerts” using keywords that pertain to your topic of interest IV. First Screen • Once a business idea has been chosen, it is important to have a way to quickly assess the merits of the idea before subjecting it to full feasibility and business plan • The “First Screen” is an entrepreneur’s first pass at assessing the feasibility of a business idea • Completing the First Screen is not intended to be either a lengthy process or a shot in the dark • The First Screen contains 25 items and should be able to be completed in less than an hour (the five items per topic are highlighted below and in the text) a. Part 1: Strength of the Business Idea (five criteria) ○ (1) High potential ideas are typically drawn from one of the three sources of business ideas and are timely in terms of market introduction ○ (2) For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open ○ (3) A new idea must “add value” for its buyer or end user in some appreciable way ○ (4) New business ventures aimed at replacing products that people are reasonably satisfied with may have a difficult time succeeding ○ (5) Investors are typically skeptical of business ideas that require people to make meaningful changes in behavior b. Part 2: Industry-Related Issues (five criteria) ○ Researchers have found that 8 to 30 percent of the variation in firm profitability is directly attributable to industry factors such as • (1) The number of competitors • (2) Current lifecycle stage of industry • (3) The growth rate of industry • (4) The relative importance of the industry’s products or services to its customers • (5) Average operating margins for the firms in an industry are also important c. Part 3: Market- and Customer-Related Issues (five criteria) ○ (1) Identification of the target market in which the firm competes is extremely important. ○ A target market is a place within a larger industry or market segment that represents a narrower group of customers with similar interests ○ (2) The ability to create barriers to entry, a condition that creates a disincentive for another firm to enter the company’s niche market, is an important aspect of any firm’s potential competitive advantage • Economies of scale • Product differentiation • Unique access to distribution channels • Intellectual property protection such as patents ○ (3) Entrepreneurs should also consider the purchasing power of potential customers ○ (4) The ease of making customers aware of the new product or service is also important ○ (5) Another important issue is the growth potential of a firm’s target market d. Part 4: Founder- (or Founders-) Related Issues (five criteria) ○ The potential founder should also complete a self-assessment that is forthright and fair, understanding that few firms will score high on each of the five dimensions ○ The attributes that make for a strong founding team include (1) Experience in the industry the new venture is entering (2) Skills as they relate to the new venture’s product or service (3) Social and professional networks in the industry the firm will be entering (4) Personal goals and aspirations that are consistent with the firm (5) Likelihood that a team can be put together to launch and grow the new venture e. Part 5: Financial Issues (five criteria) ○ (1) The initial capital investment needed to start a firm is important • At this point, the entrepreneur should have a sense of the magnitude of the investment; exact estimates will be developed later if the idea is indeed viable • The average small business is started for about $10,000 with the majority coming from the owners’ personal savings ○ (2) The number of revenue drivers that a business has is also important • Start-ups don’t want to lose focus by creating multiple revenue drivers, but the financial potential of a firm is greater if it has several ways of generating sales ○ (3) The time it takes a firm to break even or recoup its initial investment is also important ○ (4) The next issue to consider is to assess the financial performance of businesses similar to the one you are contemplating ○ (5) The final item in Part 5 refers to your ability to fund the initial product development and initial start-up expenses for your venture from personal funds or via bootstrapping Chapter 3 Feasibility Analysis Key Words Feasibility analysis—the process of determining if a business idea is viable Primary research—original research that is collected by the person or persons completing the analysis Secondary research—data this is already collected Concept test—involves showing a preliminary description of a product or service idea (concept statement) to industry experts and prospective customers to solicit their feedback Buying intention survey—an instrument that is used to gauge customer interest in a product or service Industry—a group of firms producing a similar product or service, such as fitness centers, smart phones, elderly home care, or online education Target market—the limited portion of the industry that a firm goes after or tries to appeal to Chapter Overview This chapter focuses on assessing the feasibility of a business idea. A feasibility analysis is more stringent than the “First Screen” (introduced in Chapter 2) and is designed to take the best idea or ideas that emerge and more fully assess their viability. This chapter includes a template for completing a feasibility analysis, including a description of each of the four steps. Chapter Summary 1. Feasibility analysis is the process of determining if a business idea is viable. 2. Primary research is original research that is collected by the person or persons completing the analysis. It normally includes talking to industry experts, obtaining feedback from prospective customers, and administering surveys. 3. Secondary research probes data that is already collected. The data generally includes industry studies, Census Bureau data, company reports, and other pertinent information gleaned through library and Internet research. 4. Product/service feasibility is an assessment of the overall appeal of the product or service being proposed. Its two components are product/service desirability and product/service demand. 5. A concept test involves showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback. 6. A buying intentions survey is an instrument that is used to gauge customer interest in a product or service. It consists of a concept statement (or a similar description of a product or service) with a short survey attached. 7. Industry/target market feasibility is an assessment of the overall appeal of the industry and market for the product or service being proposed. Its three components are industry attractiveness, target market attractiveness, and market timeliness. 8. Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Its two components are management prowess and (non-financial) resource sufficiency. 9. Clusters of firms arise because they increase the productivity of the firms participating in them. Because the firms are located near one another, it is easy for the employees to network with one another, and it is easy for the firms to gain access to specialized suppliers, scientific knowledge, and technological expertise native to the area. 10. Financial feasibility analysis is conducted to determine if a new venture is feasible from a financial perspective. Its three components are: total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture. Chapter Outline I. Introduction II. Template for Completing a Feasibility Analysis III. Product/Service Feasibility a. Product/Service Desirability i. Concept Test b. Product/Service Demand i. Buying Intentions Survey IV. Industry/Target Market Feasibility Analysis a. Industry Attractiveness b. Target Market Attractiveness c. Market Timeliness V. Organizational Feasibility Analysis a. Management Prowess b. Resource Sufficiency VI. Financial Feasibility a. Total Start-up Cash Needed b. Financial Performance of Similar Businesses c. Overall Financial Attractiveness of the Proposed Venture Chapter Notes I. Introduction • Feasibility analysis is the process of determining if a business idea is viable • The feasibility analysis step, along with the idea screening step, is investigative in nature and is designed to critically asses the merits of a business idea • The most compelling facts a company can include in a business plan are the results of its own feasibility analysis, especially feedback from industry experts and prospective customers II. Template for Completing a Feasibility Analysis • Template is shown in Table 3-1. A fuller version is provided in Appendix 3.1 at the end of the chapter • The four parts of feasibility analysis are product/service feasibility, industry/market feasibility, organizational feasibility, and financial feasibility • Completing a full feasibility analysis takes longer than a First Screen and should include both primary and secondary research III. Product/Service Feasibility • Product/service feasibility is an assessment of the overall appeal of the product or service being proposed a. Product/Service Desirability • The first component of product/service feasibility is to affirm that the proposed product or service is desirable and serves a need in the marketplace • The proper mindset is to get a general sense of the answers to your product desirability questions rather than try to reach final conclusions i. Concept Test • A concept test involves showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback • A concept statement is normally a one-page document which includes the following: (1) description of product or service, (2) intended target market, (3) benefits of product or service, (4) description of how the product or service will be positioned relative to competitors, (5) description of how the product or service will be sold, and (6) a brief description of company’s management team • Concept statement should be shown to 5 to 10 people who are familiar with the industry the firm hopes to enter • Attached to the concept statement should be a survey that asks participants to (1) tell you three things they like about the product or service idea, (2) provide you three suggestions for making it better (tell you whether they think the product or service idea is feasible), and (3) share additional comments or suggestions b. Product/Service Demand • The second component of the product/service feasibility analysis is to determine if there is demand for the product or service i. Buying Intentions Survey a. A buying intentions survey gauges customer interest in a product or service b. The buying intentions survey consists of a concept statement with a short survey attached c. The statement and survey should be distributed to 15 to 30 potential customers d. The statement and survey typically features a question that asks how likely the subject would be to buy the product or service IV. Industry/Target Market Feasibility Analysis • Industry/target market feasibility is an assessment of the overall appeal of the industry and the target market for the product or service being proposed • Most firms do not try to service their entire industry, only a specific target market within the industry • It’s important to assess both the broad industry and your specific target market a. Industry Attractiveness i. In general, the most attractive industries for start-ups are large and growing, are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated ii. Some industries are characterized by such high barriers to entry, or the presence of one or two dominant players, that potential entrants are essentially shut out iii. You should also note the degree to which environmental and business trends are moving in favor of rather than against the industry b. Target Market Attractiveness i. By focusing on a target market, a firm can usually avoid head-to-head competition with industry leaders, instead of serving a specialized market very well ii. The challenge is to find a target market that’s large enough for the proposed business, yet is small enough to avoid attracting larger competitors iii. Often, information from more than one industry and/or market must be collected and synthesized to make an informed judgment, especially if the firm is pioneering a unique area of the marketplace c. Market Timeliness i. Determine if the window of opportunity for the product or service is open or closed ii. Study the simple economics of the industry to determine whether the timing is right for a new entrant iii. Firms that fail to conduct a thorough industry and target market analysis often find that the market is not large enough to maintain and grow the business V. Organizational Feasibility Analysis • Organizational feasibility analysis determines whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business a. Management Prowess i. A start-up should assess the prowess, or ability, of its initial management team ii. Individuals starting the firm should conduct honest and candid self-assessments iii. Two of the most important factors are passion for the business and understanding of the markets in which the firm will compete iv. Additional factors that define management prowess include prior entrepreneurial experience, depth of professional and social networks, degree of creativity, experience in cash flow management, and whether the team has college degrees b. Resource Sufficiency i. The focus in organizational analysis is on non-financial resources because financial feasibility is considered separately ii. Identify the 8 to 12 most important and potentially problematic non-financial resources and assess whether they are available iii. Examples of non-financial resources include office space, manufacturing space, key management employees, key support personnel, and support from state and local governments if applicable iv. One easily overlooked resource sufficiency issue that should be considered is proximity to similar firms, creating a cluster that can increase productivity of the participating firms VI. Financial Feasibility • For feasibility analysis, a preliminary financial analysis, is normally sufficient. • The most important issues to consider at this stage are total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture • More complete financial projections will be included in the business plan a. Total Start-up Cash Needed i. Try to determine total cash needed to prepare the business to make its first sale ii. A detailed explanation of where the money will come from should be provided iii. If money will come from friends, credit cards, or a home equity line of credit, a reasonable plan should be stipulated to repay the money iv. When projecting start-up expenses, it is better to overestimate rather than underestimate the costs involved b. Financial Performance of Similar Businesses i. Estimate a proposed start-up’s potential financial performance by comparing it to similar, already established businesses ii. Utilize archival data available online, including financial reports on firms iii. Some industry trade associations publish data on the sales and profitability of firms in their industries iv. Basic Internet searches are also helpful v. Simple observation and leg work can also be used to gauge the type of sales to expect by estimating the number of customers and average purchase amount at various times of day c. Overall Financial Attractiveness of the Proposed Venture i. The extent to which a proposed business appears positive relative to each factor is based on an estimate or forecast, not actual performance ii. Important factors include the extent to which sales can be expected to grow during the first few years of the venture, percentage of recurring revenue to anticipate, the likelihood that internally generated funds will be available within two years, and the availability of exit opportunities for investors if applicable Chapter 4 Introductory Material, Executive Summary, and Description of the Business Key Words Business plan—a written document (usually 25 to 35 pages) that carefully explains every aspect of a new business venture Cover page—includes the name of the company, its street address, its e-mail address, its phone number (land based and cell), the date, the contact information for the lead entrepreneur, and the company’s Web site address, Facebook page and Twitter account if it has one Table of contents—follows the cover page and lists the main sections, subsections, and appendices to the plan along with their corresponding page numbers Executive summary—a short (should not exceed two single-spaced pages) overview of the entire plan provides a busy reader with everything that should be known about the venture’s distinctive nature Mission statement—defines why a company exists and what it aspires to become Position—how a product or service is situated relative to its rivals Founder’s agreement—(also called a shareholders’ agreement) a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the “sweat equity,” they put into the firm, and how long the founders will have to remain with the firm for their shares to be vested Brand—the unique set of attributes that allow consumers to separate it from its competitors Chapter Overview This chapter begins Part III of the text, Preparing a Business Plan. Chapters 4 through 10 will walk the reader through the preparation of each component of the business plan. This chapter focuses on the executive summary and company description, along with the cover page and table of contents. Chapter Summary 1. The executive summary and the company description are arguably the most important sections of a business plan because if the reader’s interest isn’t captured early on the plan is unlikely to get read. 2. The cover page should include the name of the company, its street address, its e-mail address, its phone number (land based and cell), the date, the contact information for the lead entrepreneur, and the company’s website address if it has one. 3. The table of contents should follow the cover page, and should list the main sections, subsections, and appendices to the plan along with their corresponding page numbers. 4. The executive summary is the first item that appears in a business plan. It is a short overview of the entire plan and provides a busy reader with everything that needs to be known about the new venture’s distinctive nature. 5. The most important thing to remember when writing an executive summary is that it’s not an introduction or a preface to the business plan. Instead, it is meant to be a summary of the plan itself. 6. Even though the executive summary appears at the beginning of the business plan, it should be written last. The plan itself will evolve as it’s written, so not everything is known at the outset. 7. The main body of the business plan begins with a general description of the company. While at first glance this section may seem less critical than others, it is extremely important. It demonstrates to your reader that you know how to translate an idea into a business. 8. The subsections under company description category are: company history, mission statement, products and services, current status, and legal status and ownership. It is best to follow this order. 9. A mission statement defines why a company exists and what it aspires to become. 10. The primary consideration in naming a business is that the name should complement the type of business the company plans to be. Chapter Outline I. Introduction II. Cover Page and Table of Contents a. Cover Page b. Table of Contents III. Executive Summary a. Format b. Content IV. Company Description a. Company History b. Mission Statement c. Products and Services d. Current Status e. Legal Status and Ownership V. Selecting the Name for a Business a. Primary Consideration in Naming a Business i. Customer-Driven Companies ii. Product- or Service-Driven Companies iii. Industry-Driven Companies iv. Personality- or Image-Driven Companies b. Legal Issues Chapter Notes I. Introduction • A business plan is a written document (usually 25 to 35 pages) that carefully explains every aspect of a new business venture • The business plan describes why the business is starting and how it will make money • Experts vary on the order of the topics in a business plan, but most follow a fairly standard format • The first two steps in a business plan, the executive summary and the company description, will be discussed in this chapter along with the cover page and executive summary • The executive summary and company description are arguably the most important sections of a business plan because they must capture the readers’ interest if the entire plan is to be read • Business plans should be written with extreme empathy for the reader; make them clear, concise, easy to follow, and interesting II. Cover Page and Table of Contents a. Cover Page • Includes key information pertaining to the new venture centered at the top of the page: ○ Name of the company ○ Street address of the company ○ E-mail address ○ Phone number (land based and cell) ○ The date ○ Contact information for the lead entrepreneur ○ Company’s website address if it has one • A confidentiality notice should be placed on the bottom of the page • Company logo (if already developed) should be placed near the center of the page • A sharp-looking photo or sketch of the product or service, or an appropriate stock photo image, can be included to make the plan more visually appealing and professional in appearance b. Table of Contents • The table of contents follows the cover page • The table of contents lists the main sections, subsections, and appendices to the plan along with the corresponding page numbers II. Executive Summary • The executive summary is a short overview of the entire plan, and is the first item that appears in the business plan • In many instances, an investor will first ask for an executive summary and will only request a full business plan if the executive summary is convincing • Rather than serving as an introduction to the plan, the executive summary is intended to be a summary that provides readers with a good sense of the entirety of the plan itself a. Format • The executive summary should not exceed two single-spaced pages • The cleanest format follows the structure and order of the plan on a section-by-section basis • There should be two versions of the executive summary: ○ One summary that is part of the business plan ○ One summary that is a standalone document for individuals who want to review an executive summary before deciding whether to request the full business plan • Some investors ask for a short PowerPoint (10 to 15 slides) overview rather than a traditional executive summary • Entrepreneurs should write the executive summary last to make sure it accurately reflects the entirety of the business plan b. Content • Each section of the executive summary contains a synopsis of the same section in the broader business plan • It’s important that the first section of the executive summary, covering the company description, begins by describing the opportunity and shows how the proposed business meets the opportunity • Most experts recommend that the executive summary state the amount of funds being requested and the amount of equity the business is willing to surrender (in a section called “Status and Offering”) if the summary is being shown to investors III. Company Description • The company description should start with a brief introduction that provides an overview of the company and reminds the reader of the reason it is starting • There are two major points to be mindful of as you start writing this section: ○ A business plan is a story about an opportunity and how a business will take advantage of the opportunity ○ You must establish credibility by using facts and providing proof of research a. Company History • This section should explain where the idea for the company came from • If the company has been in existence for a while, provide a brief timeline in narrative form and talk about its major achievements • You should also talk about the history of revenues, net income, and sales growth b. Mission Statement • The mission statement defines why a company exists and what it aspires to become • Written carefully, it can define the path a company takes and act as a financial and moral compass • Articulate the mission or purpose of the company in as few words as possible • Some companies also have mottos or taglines; these should be mentioned in this section of the plan • There is no set procedure for how to come up with a mission statement or tagline; founders often get together and simply brainstorm ideas c. Products and Services • The products and services section should explain your product or service, including a description of how it is unique and how you plan to position it in the marketplace • Discuss how your company differs from others in terms of the products it offers, its location, and its price range • Identify who your clientele will be and why they would patronize your business instead of others • This is the ideal place to report results of your feasibility analysis • Explain any proprietary aspects to your product or service or explain how you will create barriers to entry • If you fail to candidly address difficult issues, such as creating barriers to entry, you will lose credibility d. Current Status • This section reveals what major milestones in development your company has already reached • Three issues are particularly important to address: ○ The current composition of your management team • If you are an early-stage venture, you should mention future staffing plans ○ Early customer reaction to your product or service • Summarize any results of feasibility analyses and indicate how close your product is to being market-ready ○ The financial status of your company • How has the company been funded? • Do you have any debt, or have you surrendered company equity? • Clearly state how much funding you are seeking and for what purpose e. Legal Status and Ownership • This section should indicate who owns the business and how ownership is split up • Describe the founders’ agreement, outlining how ownership is to be shared among founders, if one has been established • If you have multiple founders and no founders’ agreement, indicate that this step is pending to maintain credibility with your readers • Indicate your current form of business ownership ○ You are a sole proprietorship or general partnership if you have not yet incorporated or created any other type of business entity ○ Better options for the long term include a subchapter S corporation, a C corporation, or a limited liability company (LLC) ○ You will need to retain an attorney to help you resolve this matter ○ If you have not determined the type of business ownership, indicate this step as pending so that you maintain credibility with your reader V. Selecting the Name for a Business • Selecting the name for your business is not a part of the formal business planning process, but it’s an important activity • A company’s name is normally the first thing that people associate with a business, and it can be an integral part of the company’s branding strategy • The brand is a unique set of attributes that allow consumers to separate it from its competitors; you want a name that will facilitate rather than hinder the differentiation strategy a. Primary Consideration in Naming a Business • The company name should complement the type of business the company plans to be • There are four categories to discuss when considering this issue: i. Customer-Driven Companies • If a company plans to focus on a particular type of customer, its name should reflect the attributes of its clientele (e.g., Big and Tall Guys or Parent Watch) ii. Product- or Service-Driven Companies • If a company focuses on a particular product or service, the name should reflect the advantages that its product or service provide (e.g., 1-800-FLOWERS, XM Satellite Radio, Whole Foods Markets, and Jiffy Print) iii. Industry-Driven Companies • If a company plans to focus on a broad range of products or services in a particular industry, its name should reflect the category it is participating in (e.g., General Motors, Linens N Things, Home Depot) iv. Personality- or Image-Driven Companies • Some companies are founded by individuals who place an indelible stamp on the company. In this case, it may be smart to name the company after its founder (e.g., Ben & Jerry’s Homemade, Liz Claiborne, Magic Johnson Enterprises) b. Legal Issues • The general rule for business names is that they must be unique • To determine whether a name is available in a particular state, the entrepreneur must contact the secretary of state’s office • Instructions for how to go about obtaining a trademark on a name and a logo are available at the USPTO website • The process for finding a name for a business can be frustrating because the most obvious names are often already taken • A complicating factor is getting an Internet domain name that is the same as the company’s name • A brief mention should be made in the business plan that a company’s name has been registered and trademarked, and that the Internet domain name has been secured • If these activities have not been completed, mention this step as pending so that you maintain credibility with the reader Instructor Manual for Preparing Effective Business Plans: An Entrepreneurial Approach Bruce R. Barringer 9780133506976, 9781292039916, 9780132318327