How to Structure Your Business Plan
The structure and content of the business plan will often vary depending upon such factors as the company's stage of development, the nature of the business, and the type of markets it will serve. However, the following topics should be addressed in any business plan, and provide a relatively easy format to follow:
- Executive Summary.
This section should provide the investor with a short overview of the key elements of the business plan. Since investors are turned away by exaggeration, the summary must provide an accurate appraisal of the company while distinguishing its product and organization from others who are competing for the same funding. It should also describe its management team emphasizing experience and skills, but not ignoring management weaknesses or how it expects to correct them. In addition, summarize key financial projections, and the funding requirements it will need to meet those projections. Above all, the summary must be designed to catch the attention of the prospective investor. Unless the summary inspires an investor to read on, it has not served its purpose.
- Company History.
Investors want to know about a company's past performance before they assess its future potential. Toward this end, the business plan should provide a brief history of the company, including: (1) when it was founded, (2) subsequent development and growth, (3) how it has been organized, (partnership, corporation, etc.), and (4) how well past performance reflects future potential. If you have good reason to believe that the company's past performance is not indicative of future potential, be sure to cite those reasons in this section.
- The Product.
This section describes in detail the company's products or services, including a summary explanation of the engineering and technology involved, and a statement about performance and present status. Patented or patentable components of the company's products should also be mentioned in this section. Keep in mind, however, that investors are generally not engineers. This section should be written in language easily understandable by business people with nontechnical backgrounds.
- The Market.
This section should contain a comprehensive description of the market the company plans to serve. If the product is generically new, independent market research may be needed to define both the initial and future markets. If the product is a refinement on presently available merchandise, the market may already be defined. In that case, you may rely on presently available data from industry, trade association, or government sources. For purposes of raising investment capital, the market section may be the most important part of your business plan. To the venture capitalist, a company without a strong understanding of the targeted market is a bad risk, even if its product is first rate. Consequently, the market description should be longer and more detailed than the product description indicating to potential investors that you understand the priority of market over products.
- The Competition.
Identify your competitors, discuss their relative strength and weaknesses, and indicate the market share held by each. Include a forecast of the market shares you expect to capture in the first three to five years, and which competitors you expect to draw customers from. Be sure to spell out your rationale for each projection improved product performance, reliability, styling, price, service or other factors. As with all projections in the business plan, do not understate the strengths of your competition while overestimating your own. Prospective investors will not back a company that does not have a realistic view of its competition.
Efficient production is the key to profit making. This section should describe your manufacturing facilities and discuss production capacity in relation to projected sales over the first five years. Emphasis should be placed not only on cost reduction, but on quality control as well. Minimizing production costs will not make your company more attractive to investors if the savings are offset by increased warranty costs.
As a general rule, venture capitalists prefer to invest in a mediocre product produced by first rate management than a top notch product produced by mediocre management. This priority should be reflected in your business plan. In this section, emphasize the experience of each key management executive. Include job descriptions and salaries, and provide resumes detailing your executives' past business experience, education, publications, and any other information that indicates to potential investors that you have a qualified management team. If your current management has weak spots, define them and explain how they will be corrected.
- Financial Data.
First class products and top flight management account for nothing if your financial projections do not allow for a substantial return on investment. Consequently, this section is the bottom line of your business plan. Begin by summarizing previous financial performance. If your company is new, be sure that all financial projections are realistic and justifiable. Remember that venture capitalists are sophisticated investors, and will check out other companies in the same field. If your projections deviate widely from the industry norm, you will lose both the credibility and the financing you seek. Furthermore, do not inundate investors with yards of computer generated spread sheets. Your financial data should be concise and easy to understand.
Finally, your financial section should discuss the investment itself. Indicate how much money the company needs, the form of the investment sought, and how the money is to be used. Most important, discuss the projected return on investment within the first five years of operation. As with all financial information, be realistic and support your projections with solid data and sound rationale.