Business Plans That Win Profits
Entrepreneurs and investors have a common objective:
both are interested in making a profit. A profit is earned
if the capital project that the entrepreneur wants to
launch has long-term viability. This common objective
can be achieved if the entrepreneur is able to sell his
project, and equally important, if the investor is able
to understand what the project is all about. The instrument
that helps to bridge this gap is the business plan. A
business plan is the ticket of admission to the process
of raising capital funds. Knowing what information to
present in a business plan, how, to whom and why it should
be presented enhances the chance for both to understand
each other's interests.
Sell the Steak, not the Sizzle
Sales people learn early in their careers that if they
are to succeed, they must learn to "sell the sizzle,
not the steak'. Most sales persons are taught that those
who do not succeed in sales are selling the wrong thing:
they should sell themselves, not the product.
However, in raising capital funds this basic rule does
not apply; investors or lenders are not attracted by the
sizzle - it is the steak that captures their attention.
In the context of fund raising, a project is the steak,
and investors want to know how much it will cost, how
much funds are needed, its viability and many other things
such as the sales and cost estimates, the profile of the
owners, the technical and managerial competence of the
management team, the competition, the financial plan,
etc. The personality of an entrepreneur plays second fiddle
as far as investors are concerned; it is what can be harvested
from the project that really counts.
This article illustrates how an entrepreneur can seize
the interest of investors by preparing, presenting and
selling a business plan. Often, viable projects fail to
proceed beyond loan negotiation. If entrepreneurs take
the time to make a careful and serious examination of
their business plans, many wil receive approval from their
To attract the attention of investors, the entrepreneurs
- What turns them "on" and "off".
- What investors or lenders they should deal with.
- What investors look for.
- The type of information to present.
- Why a business plan is important.
What Turns Investors "On" and "Off"
Investors receive hundreds of business plans regularly.
Business plans are the instruments that should attract
the interest of investors speedily. Here are the most
common reasons that turn investors "on" and
The major turn-on factors are:
- Lenders like to see evidence that a product or service
will sell. They want to see the product, feel it, see
it in stores, look at customer reactions and even talk
to them for feedback.
- They like to be approached early enough. This gives
them sufficient time to appraise the proposal and to
review and discuss all components of the project with
- They like collateral which is a pledge offered by
a business in exchange for a loan, or evidence of viability
in exchange for equity. A business plan is no more than
a "plan"; anything can happen. Collateral
is like insurance; if something goes wrong, lenders
like to be reassured that they can squeeze enough from
the remains of a business if it ever folds. Viability,
on the other hand, can be demonstrated by a strong management
team, a good marketing program, and so on.
- They appreciate an equitable capital structure, i.e.
the relationship between the promoters' equity and the
funds provided by investors or lenders. The more money
the promoters invest in a business, the more confident
the lenders or outside investors will be when injecting
their own funds in a business.
- They also like to see evidence of capacity, i.e. the
ability of the business to generate enough cash to meet
its financial obligations and the managerial competence
and technical ability of the managers in areas such
as production, finance, marketing, and distribution.
The major turn-off factors are:
- Promoters buy equipment or machinery before approaching
- Sales projections are not realistic. Sometimes, entrepreneurs
think that they are alone in the business and will submit
unrealistic sales estimates. The project should reflect,
as accurately as possible, the capital expenditures
required, the viability of the project, and the ability
of management to undertake the project.
- Entrepreneurs are too product-oriented rather than
focusing on the customer or the market.
- Cost estimates deviate from industry norms. When an
entrepreneur shows, for example, cost of sales to sales
revenues at 50 per cent, while the industry norm is
in the 65 per cent range, if such information is not
substantiated the lenders or investors can readily discredit
the entire business plan.
- When the management team is nothing more than a one-man
band; no one is identified.
What Lenders Look For
In general, lenders look for projects which are viable
in the long run. However, some lenders are not willing
to take risks (chartered banks, mortgage companies and
finance companies) and require collateral as guarantees.
Other financiers are willing to take greater risks, but
they will demand a greater return on their investment
(e.g. venture capitalists). Despite their interests in
investing in a capital project, before forming a financial
partnership with a promoter, both usually ask questions
such as: 'What kind of entrepreneur am I dealing with?
Will this project be able to pay its own way? What will
happen if the venture goes bankrupt? Is the project part
of an industry that is expanding, stable, or contracting?
Are the promoters prepared to take a financial risk in
the venture? If yes, to what extent?" Irrespective
of the type of financier or stakeholder, an entrepreneur
who wants to negotiate funds should be able to answer
these questions in their business plan.
The dozens of questions asked by potential investors
or lenders can be condensed into six words, commonly referred
to as the C's of credit. They are: (1) character (reputation,
honesty, dependability and integrity of the owners and
managers); (2) collateral (assets pledged by a borrower
as security on a loan); (3) capacity (ability of the business
to meet its obligations and the managerial and technical
abilities of the management team); (4) capital (the relationship
between the promoters' equity and the external funds provided
by other shareholders and lenders); (5) circumstances
(the general and immediate environment such as trends
in product demand, competition, government regulations);
and (6) coverage (insurance coverage on the death of the
principal owners, damage to the business resulting from
fire, explosion, embezzlement, etc.)
Although traditional lenders such as chartered banks,
finance companies or investment dealers analyze umpteen
different items in capital projects prior to approving
a loan, there are two factors that take priority when
venture capitalists examine a business plan. They are:
product/service and management.
The first step that venture capitalists use to evaluate
plans is the qualitative assessment which is based on
the product and the management team. The next step is
the quantitative analysis. Here, the venture capitalist
assesses the risk level in each case and determines the
level of return he or she hopes to obtain from the deal.
Venture capitalists are usually looking for an annual
return on their investment in the range of 35 per cent
to more than 60 per cent.
Presenting a Business Plan that Sells
Since a business plan is the ticket of admission to
the process of raising funds, and since hundreds of business
plans are received by lenders, the document must have
the right appearance, a sound structure, and contain the
right type of information.
The nature of the business project should dictate to
a large degree the structure and relative importance of
the type of information presented in a business plan.
Project submissions should therefore be 'tailor-made'
to clarify important issues. For instance, a well-established
firm may submit a project involving new products and markets.
Since the firm is well established, its management capability
and financial position will not likely be an issue. Consequently,
the business plan should cover these points briefly and
concentrate its analysis on factors related to the industry
environments, supported by details of project costs, the
marketing program, R & D program, etc. On the other
hand, a promoter, inexperienced and financially weak,
might wish to invest in a sawmill complex - an industry
promising favourable long-term performance. In this case,
the business plan should emphasize management capability,
the availability of raw material, manufacturing process,
and financing, with less attention on the industry environment.
By Pierre Bergeron