Y L F M A E T ® Team-Fly Michael Miller Alpha Teach Yourself Business Plans 24 in hours A Pearson Education Company Alpha Teach Yourself Business Plans SENIORACQUISITIONSEDITOR Renee Wilmeth in 24 Hours DEVELOPMENTEDITOR Copyright © 2002 by Michael Miller Nancy D. Warner All rights reserved. No part of this book shall be reproduced, stored in a retrieval system, or transmitted by any means, elec- PRODUCTIONEDITOR tronic, mechanical, photocopying, recording, or otherwise, with- Katherin Bidwell out written permission from the publisher. No patent liability is assumed with respect to the use of the information contained COPYEDITOR herein. Although every precaution has been taken in the prepara- Amy Lepore tion of this book, the publisher and author assume no responsibil- INDEXER ity for errors or omissions. Neither is any liability assumed for Tonya Heard damages resulting from the use of information contained herein. For information, address Alpha Books, 201 West 103rd Street, PRODUCTION Indianapolis, IN 46290. Mary Hunt International Standard Book Number: Bookz 0-02-864216-3 COVERDESIGNER Library of Congress Catalog Card Number: 2001092335 Alan Clements Printed in the United States of America BOOKDESIGNER First printing: 2001 Gary Adair 03 02 01 4 3 2 1 MANAGINGEDITOR Jennifer Chisholm Note:This publication contains the opinions and ideas of its author. It is intended to provide helpful and informative material PRODUCTMANAGER on the subject matter covered. It is sold with the understanding Phil Kitchel that the author and publisher are not engaged in rendering profes- sional services in the book. If the reader requires personal assis- PUBLISHER tance or advice, a competent professional should be consulted. 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Use of a term in this book should not be regarded as affecting the validity of any trademark or service mark Overview Introduction xvii PARTI: Plan for Research 1 HOUR1 Analyze Your Objectives 3 HOUR2 Analyze Your Audience 15 HOUR3 Analyze Your Market 31 HOUR4 Analyze Your Strengths 45 HOUR5 Analyze Your Strategy 61 HOUR6 Analyze Your Options 75 PARTII: Plan the Plan 99 HOUR7 Create Your Outline 101 HOUR8 Marshal Your Resources 113 HOUR9 Build Your Numbers 125 PARTIII: Plan to Write 143 HOUR10 Executive Summary 145 HOUR11 Vision and Mission 165 HOUR12 Opportunity 173 HOUR13 Market Strategy 193 HOUR14 Business Strategy 205 HOUR15 Organization and Operations 219 HOUR16 Management 231 HOUR17 Core Competencies and Challenges 239 HOUR18 Financials 251 PARTIV: Plan the Package 267 HOUR19 Appendixes and Attachments 269 HOUR20 Table of Contents and Index 281 HOUR21 Format and Print 291 PARTV: Plan for Success 311 HOUR22 Present the Plan 313 HOUR23 Use the Plan 329 HOUR24 Create a Private Placement Memorandum (PPM) 345 Appendixes APPENDIXA 20-Minute Recap 359 APPENDIXB Glossary 365 APPENDIXC Outline 371 APPENDIXD Financial Formulas 375 Index 377 Contents PARTI Plan for Research 1 HOUR1 Analyze Your Objectives 3 Business Plans: Facts and Fiction ......................................................4 Articulating the Strategic Direction ............................................4 Communicating with Potential Investors ....................................5 Who the Target Audience ReallyIs for Your Business Plan ..............6 Business Plans and Customers ......................................................6 Business Plans and Employees ......................................................7 Business Plans and Investors ........................................................7 WhyYourBusiness Needs a Business Plan ........................................8 The Components of a Successful Business Plan ................................9 Who Writes Your Business Plan? ....................................................11 How to Move from Idea to Reality ..................................................11 How to Define Success ....................................................................12 Homework ........................................................................................13 HOUR2 Analyze Your Audience 15 Determining the Audience for Your Business Plan ........................16 Writing for Your Audience ..............................................................17 You Are Not the Audience ........................................................18 Your Employees Aren’t the Audience ........................................19 Your Customers Aren’t the Audience ........................................20 Your Audience Is the Audience ..................................................21 Understanding Specific Audiences ..................................................23 Bankers and Loan Officers..........................................................23 Small Investors............................................................................24 Strategic Investors........................................................................25 Venture Capitalists......................................................................26 Researching What Others Have Done ............................................27 Picking a Plan ..............................................................................27 Finding a Plan ............................................................................28 Studying a Plan ..........................................................................29 Homework ........................................................................................29 vi Teach Yourself Business Plans in 24 Hours HOUR3 Analyze Your Market 31 Why Market Analysis Is Important ................................................32 The Market Drives Everything ..................................................32 How to Keep in Touch ................................................................33 Defining Your Market ......................................................................34 Your Competitors’ Market Is Your Market..................................34 Broad or Narrow? ........................................................................35 Your Market—As Others See It ................................................35 Quantifying Your Market ................................................................36 Finding the Data ........................................................................36 Creating Your Own Data ............................................................37 Detailing the Market ........................................................................39 Projecting the Future ........................................................................40 Considering the Pundits..............................................................41 Extrapolating Current Trends......................................................42 Anticipating Future Developments ............................................43 Putting It All Together................................................................43 Key Market Information ..................................................................44 Homework ........................................................................................44 HOUR4 Analyze Your Strengths 45 Identifying What You Do Well ........................................................46 Different Kinds of Strengths ............................................................46 Product Strengths ........................................................................46 Brand Strengths ..........................................................................47 Marketing and Advertising Strengths ........................................48 Sales and Distribution Strengths ................................................48 Operational Strengths ................................................................49 Other Strengths ..........................................................................50 Determining Your Strengths ............................................................50 Learning from Your Strengths ..........................................................51 Broadcasting Your Strengths ............................................................52 Figuring Out Where You’re Weak ....................................................53 Understanding Different Kinds of Weaknesses ..........................53 Determining Your Weaknesses ....................................................55 Fixing What’s Wrong—Or Minimizing Its Impact ....................55 Acknowledging Your Weaknesses ..............................................56 Completing the Strengths and Weaknesses Checklist ....................57 Homework ........................................................................................59 Contents vii HOUR5 Analyze Your Strategy 61 What You Are—And What You Want to Be..................................62 Vision............................................................................................63 Mission..........................................................................................64 Goals............................................................................................64 Strategy........................................................................................65 Tactics..........................................................................................66 Figuring Out Where You Want to Be in the Future ........................66 Forging a Path to Your Future Business ..........................................68 Growth Strategy ..........................................................................69 Product Strategy ..........................................................................69 Pricing Strategy ..........................................................................70 Marketing Strategy ......................................................................70 Sales Strategy ..............................................................................71 Distribution Strategy ..................................................................71 Internal Operations Strategy ......................................................72 Management Strategy ................................................................72 Funding Strategy ........................................................................73 Elements of a Sound Business Strategy ............................................73 Homework ........................................................................................74 HOUR6 Analyze Your Options 75 Determining How Much Money You Need—And Why ................75 Why Do You Need This Money? ................................................76 How Much Money Do You Need? ..............................................77 Now What? ..................................................................................79 Nonequity Funding ..........................................................................80 Banks and Lenders: Borrowing the Money You Need................80 Self-Financing: Going It Alone ..................................................83 Equity Funding ..................................................................................83 Small Investors: Friends and Family Funding ............................85 Strategic Investors: Big Money from Big Business ....................87 Venture Capital: Betting on Growth ..........................................90 Which Is the Right Option for Your Business? ................................93 Comparing the Options ..............................................................93 The Best Options for Small Businesses ......................................94 The Best Options for Fast-Track Startups ..................................95 The Best Options for Growing Existing Businesses ..................96 The Best Options for Cash-Strapped Businesses ........................97 Homework ........................................................................................97 viii Teach Yourself Business Plans in 24 Hours PARTII Plan the Plan 99 HOUR7 Create Your Outline 101 Telling the Story ............................................................................101 The Elements of a Typical Business Plan ......................................103 The Basic Outline ....................................................................103 Mapping the Story to the Plan ................................................105 Determining the Length ..........................................................106 Variations ................................................................................106 Making Your Business and Your Plan Fit Together ........................109 Matching Your Organization to the Outline ............................109 Fine-Tuning Your Outline ........................................................110 Adding Other Elements ............................................................111 Homework ......................................................................................111 HOUR8 Marshal Your Resources 113 Getting Organized ..........................................................................114 Splitting the Project into Parts ................................................114 Assigning a Project Manager ....................................................115 Determining What You Need—Before You Start ....................115 Setting the Schedule ................................................................116 What Kind of Help Do You Need? ................................................117 Someone Who Knows Your Business ......................................118 Someone to Manage the Pieces and Parts ................................118 Someone Who Can Write—And Sell ......................................118 Someone Who Can Make It Look Professional ......................119 Who Can You Use? ........................................................................120 You ............................................................................................120 Your Staff ..................................................................................121 Outside Resources ....................................................................121 Who Does What? ..........................................................................122 Homework ......................................................................................123 HOUR9 Build Your Numbers 125 A Quick Financial Refresher Course ............................................125 Revenues, Expenses, and Profits ..............................................126 Assets and Liabilities ................................................................127 The Difference Between Profits and Cash ..............................128 Essential Financial Statements ......................................................128 Contents ix The Income Statement ............................................................131 The Balance Sheet ....................................................................134 The Cash Flow Projection ........................................................136 Other Financial Statements ......................................................137 Assumptions ..............................................................................138 Margins and Ratios ........................................................................139 Gross Margin ............................................................................139 EBITDA Margin........................................................................140 Net Margin ................................................................................140 Return on Investment (ROI) ....................................................140 Current Ratio ............................................................................141 Quick Assets Ratio ....................................................................142 Debt-to-Equity Ratio ................................................................142 Homework ......................................................................................142 PARTIII Plan to Write 143 HOUR10 Executive Summary 145 Why You Need an Executive Summary ........................................146 How to Summarize Your Plan ........................................................146 Different Styles of Summaries ........................................................147 Straight Narrative......................................................................148 Narrative with Subheadings......................................................149 Narrative with a Financial Table..............................................149 Bulleted Outline ........................................................................152 Narrative/Bulleted Blend ..........................................................152 What to Include in the Executive Summary ................................152 Vision..........................................................................................152 Mission........................................................................................152 Opportunity................................................................................155 Market Strategy..........................................................................155 Business Strategy........................................................................156 Financial Goals..........................................................................156 WhatNotto Include in the Executive Summary..........................158 Organization and Operations....................................................158 Management..............................................................................158 Core Competencies and Challenges..........................................159 Detailed Financials....................................................................159 Charts and Graphs ....................................................................160