How to Write a Winning Business Plan

An entrepreneur’s business plan gets them into the investment process. Most investor groups won’t even grant an interview without a plan. It has to be an outstanding plan to get investors.

The world will beat a path to their door if they just build a better mousetrap, but too many entrepreneurs don’t believe that. It’s important to have a good mousetrap, but that’s just part of the challenge. Satisfying investors and marketers is also important. A marketer wants to see evidence that customers are interested and that the market is viable. They want to know how good the financial projections are and when they can cash out. Based on their own experiences and those of the Massachusetts Institute of Technology Enterprise Forum, the authors show entrepreneurs how to write a winning business plan.

Entrepreneurs and bosses need a comprehensive, well-thought-out business plan. Business plans are the most challenging writing assignments you’ll ever face, whether you’re starting a new business, trying to get more capital for existing products, or proposing a new activity in a company.

Investment and support for your idea can only be won with a well-conceived and well-packaged plan. The company or proposed project needs to be described accurately and attractively. Although its subject is changing, the plan must detail the company’s or project’s present status, current needs, and expected future. It’s important to present and justify ongoing and changing resource requirements, marketing decisions, financial projections, production demands, and staffing needs logically and persuasively.

Since managers have to assemble, organize, describe, and document so much, it’s not surprising they sometimes forget the basics. We’ve found that accurate representation of three constituencies is the most important.

  1. The market, including existing and potential clients, customers, and users.
  2. Investors, whether financial or otherwise.
  3. The producer, whether it’s the entrepreneur or the inventor.

Business plans are too often written from the perspective of the third constituency. In glowing terms and at length, they describe the technology or creativity behind the product or service. The market and investors are what give the venture its financial viability.

Take the case of five executives who want to start their own engineering consulting firm. A dozen types of specialized engineering services are listed in their business plan, and they estimate 20% growth each year. They didn’t decide which of the dozen services their potential clients really needed and which would be most profitable. Lack of close examination of these issues left them open to the possibility that the market might want some services not listed.

Furthermore, they didn’t say the price of new shares or how many were available to investors. It’s important to consider the investor’s perspective because -at least for new ventures – backers want a 40%-60% return on their capital. I’m the Growth rates of 20% couldn’t provide the return the founders needed unless they gave up a lot of stock.

The executives only looked at the new company’s services, organization, and projected results from their perspective. Due to lack of convincing reasons why customers would buy the services and how investors would make an adequate return (or how and when they could cash out), their business plan lacked credibility to raise investment funds.

In addition to evaluating business plans, we have organized and observed presentations and investor responses at MIT Enterprise Forum sessions. A business plan needs to address marketing and investor considerations convincingly. There are several considerations to keep in mind when writing a business plan, and this reading explains how they can be addressed.

Forum for MIT Enterprise

Massachusetts Institute of Technology Alumni Association started the MIT Alumni Association in 1978…

Focus on the market

A company with a market-driven strategy is better for investors than one with a technology-driven strategy or one with a service-driven strategy. It’s more important to look at the market, sales, and profit potential of a product than its attractiveness.

Demonstrating user benefit, identifying market interest, and documenting market claims can help you prove there’s a market.

Demonstrate the benefits to the user

This basic concept is easy to overlook, even for experts. At an MIT Enterprise Forum, an entrepreneur spent most of his 20-minute presentation extolling the virtues of his company’s product-an instrument to control some aspects of textile production. As a final thought, he gave some five-year financial projections.

Panelist #1, a partner in a venture capital firm, was completely negative about the company’s chances of getting funding because, he said, its market was depressed.

In terms of decreased production costs, how long does it take for your product to pay for itself? The presenter immediately said “Six months.” The second panelist said, “That’s the most important thing you said.”

It didn’t take long for the venture capitalist to change his mind. If a company could prove such a valuable user benefit in its sales pitch, he’d back it no matter what industry it’s in. After all, it’d essentially “print money” if it paid back the customer’s cost in six months.

Most potential customers want instruments, machinery, and services that pay for themselves in less than a year. It’s a probable purchase if the payback period is less than two years. If it’s longer than three years, they don’t cover it.

The MIT panel advised the entrepreneur to rewrite his business plan so it emphasized the short payback period and downplayed the self-serving discussions about product innovation. Taking the advice, the executive rewrote the plan to make it easier to understand. In the last couple of years, his company has gone from being a technology-driven company to a market-driven company.

Find out what’s hot in the market

You don’t have to stop at calculating the user’s benefit. Customers must also be intrigued by the product’s benefits and like it, so an entrepreneur has to prove it. The business plan needs to reflect clear positive responses from customer prospects to the question “Will you buy? ” Without them, an investment usually won’t be made.

Start-ups – some of which have only prototypes or ideas – need to gauge market reaction, right? One executive at a smaller company created a prototype for a device that lets computers handle phone calls. But the company had exhausted its cash resources and couldn’t make and sell the product in quantity, so he needed to show customers would buy it.

They wondered how to fix it. Two possible answers were offered by the MIT panel. They might let a few customers use the prototype and get written feedback on the product when it’s ready.

Additionally, the founders could offer the product at a big discount if customers paid a third of the cost up front so that the company could build it. Not only could the company find potential buyers, but they could also show potential investors the product in action.

Entrepreneurs may offer a prototype of a new service at a discount if the customers agree to serve as references to market it.

Nothing succeeds like letters of support and appreciation from significant potential customers, along with “reference installations” for a new product. You can use third-party statements-from would-be customers to whom you’ve demonstrated the product, initial users, sales reps, or distributors-to show you’ve discovered a solid market that needs your product.

Even a prototype can get letters from users. Install it with a potential customer, who you’ll sell at or below cost in exchange for information on its benefits and a promise to talk to investors or sales prospects. You can include letters from experimental customers attesting to the value of the product in an appendix to the business plan.

Keep a record of your claims

Once you’ve identified a market, use carefully analyzed data to support your claims about sales and profit growth. Often, executives think, “If we’re smart, we’ll get about 10% of the market” or “Even if we only get 1% of such a big market, we’ll be fine.”

Investors know that no matter how big the market is, there’s no guarantee a new company will succeed. When a company doesn’t carefully gather and analyze supporting data, even if such claims are based on fact — like evidence of customer interest, for example — they can crumble quickly.

There was one example of this danger in a business plan that came before MIT Enterprise Forum. There was an entrepreneur who wanted to sell a service to small businesses. If he penetrated even 1% of the 17 million small businesses in the United States, he could have 170,000 customers. According to the panel, 11 million to 14 million of these so-called small businesses are really sole proprietorships or part-time businesses. There were between 3 million and 6 million full-time small businesses with employees, which represented a real market way below the company’s original projections.

In a business plan for selling certain equipment to apple growers, you’d need data from the Department of Agriculture on how many growers could use the equipment. When your equipment is only useful for growers with 50 acres or more, you need to know how many growers have farms that size, that is, how many have just an acre or two of apple trees.

Realistic business plans specify the number of potential customers, their size, and which size is best for the offered products or services. Bigger isn’t always better. An annual chemical savings of $10,000 may make a big difference to a small company, but not to a Du Pont or Monsanto.

The nature of the industry should also be shown in marketing research. There are few industries more conservative than banking and utilities. The number of potential customers is small, and industry acceptance of new products or services is slow, no matter how good they are. Although most of the customers are well known, they have enough buying power to make the wait worth it.

On the other end of the industrial spectrum are companies like franchised weight-loss clinics and computer software companies that are growing and changing fast. Here, it’s the other way around. Although some companies have achieved multi-million-dollar sales in a few years, they’re susceptible to declines of similar proportions from their competition. So potential competitors won’t enter the market, these companies have to innovate constantly.

Project how popular the product or service will be – and how quickly it will sell. Using marketing research data, you can create a credible sales plan and project your plant and staff needs.

Address Investors’ Needs

The marketing issues are tied to the satisfaction of investors. Once executives make a convincing case for their market penetration, they can make the financial projections that help determine whether investors will be interested in evaluating the venture and how much they will commit and at what price.

Before considering investors’ concerns in evaluating business plans, you will find it worth your while to gauge who your potential investors might be. Most of us know that for new and growing private companies, investors may be professional venture capitalists and wealthy individuals. For corporate ventures, they are the corporation itself. When a company offers shares to the public, individuals of all means become investors along with various institutions.

But one part of the investor constituency is often overlooked in the planning process—the founders of new and growing enterprises. By deciding to start and manage a business, they are committed to years of hard work and personal sacrifice. They must try to stand back and evaluate their own businesses in order to decide whether the opportunity for reward some years down the road truly justifies the risk early on.

When an entrepreneur looks at an idea objectively rather than through rose-colored glasses, the decision whether to invest may change. One entrepreneur who believed in the promise of his scientific-instruments company faced difficult marketing problems because the product was highly specialized and had, at best, few customers. Because of the entrepreneur’s heavy debt, the venture’s chance of eventual success and financial return was quite slim.

The panelists concluded that the entrepreneur would earn only as much financial return as he would have had holding a job during the next three to seven years. On the downside, he might wind up with much less in exchange for larger headaches. When he viewed the project in such dispassionate terms, the entrepreneur finally agreed and gave it up.

Investors’ primary considerations are:

Cashing out

Entrepreneurs frequently do not understand why investors have a short attention span. Many who see their ventures in terms of a lifetime commitment expect that anyone else who gets involved will feel the same. When investors evaluate a business plan, they consider not only whether to get in but also how and when to get out.

Because small, fast-growing companies have little cash available for dividends, the main way investors can profit is from the sale of their holdings, either when the company goes public or is sold to another business. (Large corporations that invest in new enterprises may not sell their holdings if they’re committed to integrating the venture into their organizations and realizing long-term gains from income.)

Venture capital firms usually wish to liquidate their investments in small companies in three to seven years so as to pay gains while they generate funds for investment in new ventures. The professional investor wants to cash out with a large capital appreciation.

Investors want to know that entrepreneurs have thought about how to comply with this desire. Do they expect to go public, sell the company, or buy the investors out in three to seven years? Will the proceeds provide investors with a return on invested capital commensurate with the investment risk—in the range of 35% to 60%, compounded and adjusted for inflation?

Business plans often do not show when and how investors may liquidate their holdings. For example, one entrepreneur’s software company sought $1.5 million to expand. But a panelist calculated that, to satisfy their goals, the investors “would need to own the entire company and then some.”

Making Sound Projections

Five-year forecasts of profitability help lay the groundwork for negotiating the amount investors will receive in return for their money. Investors see such financial forecasts as yardsticks against which to judge future performance.

Too often, entrepreneurs go to extremes with their numbers. In some cases, they don’t do enough work on their financials and rely on figures that are so skimpy or overoptimistic that anyone who has read more than a dozen business plans quickly sees through them.

In one MIT Enterprise Forum presentation, a management team proposing to manufacture and market scientific instruments forecast a net income after taxes of 25% of sales during the fourth and fifth years following investment. While a few industries such as computer software average such high profits, the scientific instruments business is so competitive, panelists noted, that expecting such margins is unrealistic.

In fact, the managers had grossly—and carelessly—understated some important costs. The panelists advised them to take their financial estimates back to the drawing board and before approaching investors to consult financial professionals.

Some entrepreneurs think that the financials are the business plan. They may cover the plan with a smog of numbers. Such “spreadsheet merchants,” with their pages of computer printouts covering every business variation possible and analyzing product sensitivity, completely turn off many investors.

Investors are wary even when financial projections are solidly based on realistic marketing data because fledgling companies nearly always fail to achieve their rosy profit forecasts. Officials of five major venture capital firms we surveyed said they are satisfied when new ventures reach 50% of their financial goals. They agreed that the negotiations that determine the percentage of the company purchased by the investment dollars are affected by this “projection discount factor.”

The Development Stage

All investors wish to reduce their risk. In evaluating the risk of a new and growing venture, they assess the status of the product and the management team. The farther along an enterprise is in each area, the lower the risk.

At one extreme is a single entrepreneur with an unproven idea. Unless the founder has a magnificent track record, such a venture has little chance of obtaining investment funds.

At the more desirable extreme is a venture that has an accepted product in a proven market and a competent and fully staffed management team. This business is most likely to win investment funds at the lowest costs.

Entrepreneurs who become aware of their status with investors and think it inadequate can improve it. Take the case of a young MIT engineering graduate who appeared at an MIT Enterprise Forum session with written schematics for the improvement of semiconductor-equipment production. He had documented interest by several producers and was looking for money to complete development and begin production.

The panelists advised him to concentrate first on making a prototype and assembling a management team with marketing and financial know-how to complement his product-development expertise. They explained that because he had never before started a company, he needed to show a great deal of visible progress in building his venture to allay investors’ concern about his inexperience.

The Price

Once investors understand a company qualitatively, they can begin to do some quantitative analysis. One customary way is to calculate the company’s value on the basis of the results expected in the fifth year following investment. Because risk and reward are closely related, investors believe companies with fully developed products and proven management teams should yield between 35% and 40% on their investment, while those with incomplete products and management teams are expected to bring in 60% annual compounded returns.

Investors calculate the potential worth of a company after five years to determine what percentage they must own to realize their return. Take the hypothetical case of a well-developed company expected to yield 35% annually. Investors would want to earn 4.5 times their original investment, before inflation, over a five-year period.

After allowing for the projection discount factor, investors may postulate that a company will have $20 million annual revenues after five years and a net profit of $1.5 million. Based on a conventional multiple for acquisitions of ten times earnings, the company would be worth $15 million in five years.

If the company wants $1 million of financing, it should grow to $4.5 million after five years to satisfy investors. To realize that return from a company worth $15 million, the investors would need to own a bit less than one-third. If inflation is expected to average 7.5% a year during the five-year period, however, investors would look for a value of $6.46 million as a reasonable return over five years, or 43% of the company.

For a less mature venture—from which investors would be seeking 60% annually, net of inflation—a $1 million investment would have to bring in close to $15 million in five years, with inflation figured at 7.5% annually. But few businesses can make a convincing case for such a rich return if they do not already have a product in the hands of some representative customers.

The final percentage of the company acquired by the investors is, of course, subject to some negotiation, depending on projected earnings and expected inflation.

Make It Happen

The only way to tend to your needs is to satisfy those of the market and the investors—unless you are wealthy enough to furnish your own capital to finance the venture and test out the pet product or service.

Of course, you must confront other issues before you can convince investors that the enterprise will succeed. For example, what proprietary aspects are there to the product or service? How will you provide quality control? Have you focused the venture toward a particular market segment, or are you trying to do too much? If this is answered in the context of the market and investors, the result will be more effective than if you deal with them in terms of your own wishes.

An example helps illustrate the potential conflicts. An entrepreneur at an MIT Enterprise Forum session projected R&D spending of about half of gross sales revenues for his specialty chemical venture. A panelist who had analyzed comparable organic chemical suppliers asked why the company’s R&D spending was so much higher than the industry average of 5% of gross revenues.

The entrepreneur explained that he wanted to continually develop new products in his field. While admitting his purpose was admirable, the panel unanimously advised him to bring his spending into line with the industry’s. The presenter ignored the advice; he failed to obtain the needed financing and eventually went out of business.

Once you accept the idea that you should satisfy the market and the investors, you face the challenge of organizing your data into a convincing document so that you can sell your venture to investors and customers. We have provided some presentation guidelines in the insert called “Packaging Is Important.”

Packaging Is Important

A business plan gives financiers their first impressions of a company and its principals. Potential …

Even though we might wish it were not so, writing effective business plans is as much an art as it is a science. The idea of a master document whose blanks executives can merely fill in—much in the way lawyers use sample wills or real estate agreements—is appealing but unrealistic.

Businesses differ in key marketing, production, and financial issues. Their plans must reflect such differences and must emphasize appropriate areas and deemphasize minor issues. Remember that investors view a plan as a distillation of the objectives and character of the business and its executives. A cookie-cutter, fill-in-the-blanks plan or, worse yet, a computer-generated package, will turn them off.

Write your business plans by looking outward to your key constituencies rather than by looking inward at what suits you best. You will save valuable time and energy this way and improve your chances of winning investors and customers.

You can design your own website. The easiest way to make sure your website can accomplish all of these goals is to hire a pro. You’ll have more time to run and grow your business.

Please download your brochure for your business plan below – Myinvestorchoice is ranked the number 1 Agency on Upwork for preparing business plans

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