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What Is a Business Plan and Why Should I Write One?

You've been asked to write a business plan. Perhaps your bank has "suggested" that you include a business plan with your loan application. Or potential investors you approached for financing requested one. Or that financial whiz you're trying to recruit as your company's chief financial officer wants to see one to help decide whether to become a part of your team.

However the request was made, you probably said something like, "Oh, sure. I want to do a little fine-tuning first. Then I'll get it off to you. No problem."

And now you're trying to figure out what to do next. Because you don't have a plan and you don't know how to begin to write one.

I've met hundreds of entrepreneurs in the course of writing about and working with smaller businesses over the past dozen years and, next to the individual facing business failure, none is more poignant than the man or woman who must write a business plan. When he or she tells me about the task ahead, it's usually in a tone of voice not much different from what you would expect if the person were looking ahead to ten years' hard labor in Leavenworth. "Well, I guess I'll just start writing," they usually sigh.

What happens next varies with the individuals. Sometimes they do start writing and invariably come out with something more akin to stream of consciousness than a business plan. More often than not, they get writer's block and find ways to weasel out of the task. They try a different bank or different investors, looking for the growing number who are less insistent. They recruit the financial whiz, marketing genius, or other hot prospect with promises of a business plan later.

You've probably heard all the academic and formal definitions of a business plan - something to the effect that it's a document describing your company's goals and means of achieving them over the next five years. However it's phrased, though, the definition is usually abstract and uninformative. It makes a business plan sound dry and theoretical - and mysterious - which it is not.

Here's how I define a business plan: It's a document that convincingly demonstrates that your business can sell enough of its product or service to make a satisfactory profit and be attractive to potential backers. In other words, a business plan is a selling document. It sells your business and its executives to potential backers of your business, from bankers to investors to partners to employees.

When viewed as a selling document, the business plan takes on a new meaning. This view provides three compelling reasons for writing a business plan:

1. A business plan, first and foremost, should sell you on the business.

Fred Gibbons recalls that when he decided to become a founder of Software Publishing Corp., in 1980, he was about to quit a fast-track job at Hewlett-Packard and take out a second mortgage on his house to help raise $50,000 of start-up funding. He concluded that he needed to write a business plan to confirm the wisdom of those steps. In his words, the plan was his "sanity check."

If you do all the things you're supposed to do in writing a business plan, you may decide at some point in the writing process that the business doesn't make as much sense as you'd anticipated. The market isn't growing as fast as you'd thought or the gross margins aren't as high as you'd expected. And you may decide not to pursue the business. In that event, the business plan has done you a favor - it has saved you the expense and grief of pursuing a business that wasn't really viable.

Conversely, you may discover in the course of researching and writing the plan that the business opportunity isn't exactly what you'd expected, but that if you alter your focus slightly, the opportunity is even greater than you'd realized. You may change your approach to take the new realities into account, making the business more exciting than before.

A manager of a small wholesaler of cut flowers wrote a business plan in response to a demand for one from its chief investor, who was concerned about the company's eroding profits. In doing the research to write a plan, the manager discovered that competitors were devising ways to sell the freshest and prettiest flowers as special premium brands - fetching higher prices than usual. The manager decided to propose to the investor a plan for creating a special inspection and grading system so that interested customers could ensure they were getting the best of the bunch. The investor liked the idea well enough to authorize funding for the project. The new premium-brand project enabled the company to raise its prices to some customers and to attract new ones. Over the next few years, profitability improved significantly, thanks to the effort made in putting together a business plan.

2. A business plan sells others on the business. When someone asks you for a business plan, they are really saying, "Sell me on this business. Turn me on."

In that sense, a business plan is not unlike the marketing materials your company produces. The advertising, direct mail, public relations, and other promotional copy your company puts together is meant to sell your company to potential customers.

A business plan is meant to sell your company as well, but to those we might call "stakeholders." These are individuals and companies considering providing support of some kind, be it funding, time, expertise, or whatever. Usually, they are bankers, investors, executives, suppliers, significant customers, and so on.

3. A business plan gives you confidence. Having gone through the planning process for my own business, I know what a great feeling it is to complete a written business plan. Suddenly, I felt more in control of my business. That feeling of control was really one of confidence. I knew where my business stood and where it was going. I had also established criteria against which to compare my performance a year out. It was a good feeling.

4. A business plan may improve your chances of success. It certainly makes sense, though research in this area is contradictory. In a 1993 study of 500 business owners by AT&T, the entrepreneurs were asked to rate their overall success. Those 42% who had written business plans rated themselves more successful than the 58% who hadn't written business plans. In other words, planning paid off for them.

All this sounds fine, you say, but surely many successful businesses got started and grew quickly without the benefit of a plan. And indeed, if you talk to highly successful entrepreneurs and ask them how they started their businesses, you discover that a surprising number never wrote a business plan. (See the box on page 16.) The next question is obvious. If Frank Carney can start and grow Pizza Hut and Gordon Segal can start and grow Crate & Barrel and Debbie Fields can start and grow Mrs. Fields Cookies without business plans, why can't I start and/or grow ABC Widgets without one? I offer two reasons:

1. Times have changed. When Frank Carney started his company in the 1950s and Gordon Segal and Debbie Fields started theirs in the 1970s, the competitive climate was much less intense than it is now. Only about 100,000 businesses were being incorporated annually during the 1950s and just over 200,000 yearly during the mid-1970s. By the 1990s, that number had climbed to more than 600,000 annually. Add to that the increasingly intense competition from foreign and U.S. corporations and it's clear that making it today with your own business is tougher than it has ever been. You need every advantage you can get.

2. Most of us probably aren't as talented as the famous entrepreneurs. I don't mean this as a put-down. It's just that people like Segal and Fields are highly skilled entrepreneurs whose talent compensates for the lack of a business plan. Most of us aren't as fortunate. We need to identify potential problems and opportunities before it's too late to do anything about them.

How does a business plan sell the business? By allowing the business to exploit the opportunities that arise in the life of a business from start-up to maturity - and are essential to achieve success. A written business plan becomes your company's representative, much as a salesperson or executive serves as its representative during sales and conference presentations and meetings. Here are some of the main ways in which a business plan can serve your company:

1. Obtaining bank financing. For most banks, it's usually enough that an applicant provide past and current financial statements to get a formal hearing for a loan. But in today's world, just getting a hearing isn't enough. Because more small companies are seeking bank financing than banks have money available, only those businesses that make the best case will receive funds.

A business plan helps set you apart from the crowd. I've had any number of bankers tell me that while their banks don't require business plans, companies that submit plans immeasurably improve their chances of getting the funds they seek.

Keep in mind that bankers are nervous, averse to risk. A written business plan carries an important message even before it's read: it says the company's executives are serious enough to do formal planning. That's an important message because bankers believe that those individuals who plan are better risks than those who don't, and more deserving of bank funds.

2. Seeking investment funds. Venture capitalists and other investors usually request a business plan from any company that wants to be considered for funding. It's the first thing most ask for, much as a personnel manager asks job applicants for a résumé. Investors use business plans as a screening device, looking to be turned on to a business with significant growth potential. Whether you want to agree to such a request is another matter; for example, you may want to send them to your web site first and provide a plan later.

3. Arranging strategic alliances. Strategic alliances are arrangements between large and small companies to carry out joint research, marketing, and other activities. They have become more common in the last few years. For small companies, arranging a strategic alliance with a large company can mean gaining access to important financial, distribution, and other resources. But before a large company will even consider a strategic alliance, its executives will want to examine a smaller company's business plan.

4. Obtaining large contracts. Smaller companies seeking to obtain a large chunk of business from a major corporation can encounter a common obstacle. It comes when the corporate representative says something like: "Everyone knows who we are, but very few people know who you are. More important, we don't know whether you'll be around long enough to fill all the obligations we expect for the big bucks we'll be paying you." At this point, producing a business plan can go a long way toward reassuring a corporation.

5. Attracting key employees. For a smaller company going after a top-notch executive, there's usually a two-way due diligence process going on. The company wants to be sure the executive is as good as presented and the executive wants to be sure the company is right for his or her talents. A business plan can save a lot of conversation, besides instilling the necessary confidence to snare that hotshot.

6. Completing mergers and acquisitions. Whether you want to sell your company or acquire another one, a business plan can go a long way toward helping you stand out from the crowd. Even in today's slowed-down merger/acquisition world, that can be very important. When you go to sell your company, you'll be scrutinized by potential buyers who are looking at many companies. One large chemical firm looked at more than 200 companies in its search for a small specialty chemical business to acquire. When it found a company that looked solid, its business plan helped seal the deal.

Frank Carney credits his business plan with helping make Pizza Hut attractive enough that Pepsico eventually acquired it. And Mo Siegel says that Celestial Seasonings' sale to Kraft Foods was due in large measure to the herbal tea company's annually prepared business plan.

Similarly, if you are doing the acquiring, you'll be looking at many companies before you decide to plunge ahead. Should you be in competition to acquire a business, your business plan can once again inspire the confidence essential to completing the deal.

7. Motivating your management team. One of the major problems confronting growing companies is communicating the company's strategy and business approach within the company so everyone is working toward the same goals. When individuals in a small company have different visions about the company's strategy, customers may become confused about what the company is trying to accomplish. A written business plan that is based on input from all members of the company's management team and distributed to all managers ensures that everyone understands where the company is headed. In the process, the plan serves as a motivational tool by laying out the company's financial, marketing, and production goals.

A note of caution: Obviously, you won't show your business plan to every Tom, Dick, and Harry who happens along with a deal of some sort. And even when you do want to show a plan to an outsider, you may want to omit some sensitive information or alter your approach to meet differing reader interests. Moreover, you want to protect proprietary information in the plan from being misused. In Chapters 10 and 11, I look at ways of tailoring your business plan to fit your audience and to reduce the risk of your plan being misused.

Nontraditional applications. Business plans have even begun to be used outside of the business world. Many nonprofit and government organizations now routinely develop written plans to guide their organizations.

The executives of these organizations are coming to the realization that even though their organizations aren't profit-making entities, they must be on sound financial footing and have compelling reasons to continue attracting funds. Nonprofit hospitals, for example, face a tumultuous world of mergers, downsizings, and reorganizations, reflecting a major shake-up in the world of health care.

Even seemingly "safe" organizations, like public schools, are discovering they must plan ahead if they are to survive the rapidly changing world order. Over a two-year period I was involved in an effort by my town's school system to develop a strategic plan. The school's superintendent and school board members are farsighted enough to anticipate the changes being wrought by school choice and new private school competitors.

The planning process is much the same for nonprofit and government organizations as for businesses. These organizations need to develop a strategy, target their markets, focus on product and/or service quality, and attend to all the other matters that a business must consider.

But in addition to business considerations, nonbusiness organizations must pay attention to an additional factor: their governing constituencies. For most small businesses, the governing constituency is the board of directors, which is controlled by the owners. But hospitals, museums, and charities have boards of trustees that control policy-making decisions. A school district has a school board and a town has aldermen, selectmen, or some such variation. The members of these governing bodies may have different agendas and interests than the executives running the organizations on a day-to-day basis. In addition, local agencies often have community-based constituencies - parents for schools, for example. They need to feel they had input into the planning process, via mailed questionnaires, open planning meetings, and other such tools.

Thus, the executives often confront a political challenge in getting the governing constituencies to "buy in" to the planning process. One way or another, the executives must make the governing constituencies feel a part of the planning process or risk having them feel they are being left out of the process. If they feel left out, they may sabotage the planning process or simply ignore any plans that come out of it.

All right, you say. Enough of the arguments. You're convinced you should have a business plan. Now what do you do?

The obvious answer is that you begin planning, but that doesn't really give you much practical guidance. Before you can begin planning a business's goals and objectives, you have to first clarify your own goals and objectives.

Before this begins sounding theoretical, let me point out that what I'm really talking about is determining what you want out of your business life. To make the process worthwhile, I suggest you begin by examining your personal aspirations and objectives.

We tend to equate success with making lots of money. But when you really come down to it, success means being happy doing whatever it is you are spending your time doing. To put it another way, it's hard to be successful financially if you aren't personally satisfied with your work. You just aren't as motivated doing something you don't enjoy doing. To succeed in today's competitive business climate, you have to be highly motivated.

Here are four basic questions to ask yourself to begin determining your personal objectives:

1. What kind of businessperson are you?

2. Do you want your money now or later?

This may sound like a crazy question, but there are significant differences in how the two types of situations just described tend to pay off for their founders. The small, slow-growing business is likelier to make large amounts of money for its owner sooner than a fast-growing Inc. 500 type of business. This too may sound strange, but the latter business requires that most or all of its profits be reinvested to fuel the growth - to pay for new employees, equipment, and office space. In the fast-growth business, you'll probably make your money some years down the road, when the business can afford to pay large salaries and may be ripe for going public or being sold to a major corporation.

3. What kind of business do you want?

I like to separate businesses broadly into two types:

4. What are your personal goals for the future?

This is one of those difficult questions that most of us would rather avoid. The answer has to do with personal values and preferences. What do you really enjoy doing? Producing your business's product? Selling it? Developing new products or services? And how important are nonbusiness matters? Would you like to spend more time with your family? Travel more? Pursue certain hobbies?

Perhaps most pertinent is the issue of whether you can make your personal goals fit into your business goals, and vice versa. If you want to spend more time with your family, is it possible to involve family members in the business? Or could you run the business from your home so you'll be more available to family members? Or does that desire mean you must reduce the amount of time you spend in the business? If you want to travel more, is it possible to accomplish that goal via selling more of your products and/or services internationally? If you really prefer to develop new products, could you recruit a chief executive to grow the business?

It is helpful to write your goals down. Try to express them both in general terms and specific targets of where you'd like to be in five years. For example, perhaps you'd like to be spending 50% of your time developing new products, or taking one international trip a year, or moving your business from an office to your home.

Clearly, the more closely your personal and business goals match, the happier you'll be. And in my experience, the happier you are, the more enthusiastic you'll be about your business. And the more enthusiastic you are about your business, the more likely you are to succeed.

A note of caution: Keep in mind that the business you want isn't necessarily the business you can have. I recall two entrepreneurs who asked for my help in writing a business plan to raise venture capital for an office supply wholesaling business. While it's certainly possible for such a business to become a high flyer, it's more likely to thrive as a lifestyle business. Alternatively, a high-technology business in certain industries almost has to be a high flyer in order to keep up with the fast growth of its industry.

If you write a business plan to show to bankers or potential acquirers, you probably won't include a section on your personal objectives. But answering the questions just posed will make the writing process easier than it might otherwise have been and will lead to a clearer, more focused business plan. That's because you will be pursuing the kind of business you feel most comfortable with. That comfort will translate into enthusiasm and creativity.

You can begin using the questions in your own planning effort by constructing what I call The Personal Evaluation Equation. Here's how it looks:

A few points need to be raised about this little exercise:

1. What if there's a mismatch? Maybe you have the leadership and managerial abilities that would enable you to handle a large group operation, but you want your riches as quickly as possible. You should be asking yourself some tough questions, then, about just what your priorities are. If you conclude that the money can wait, then a growth business may make sense. If not, then perhaps you want to alter your focus to a lifestyle business.

2. Isn't it possible for a lifestyle business to suddenly turn into a growth business, and vice versa? Most certainly. One point to be emphasized about planning in general is that plans don't always work out as expected, either in personal life or business life. Any number of entrepreneurs who thought they were starting a simple lifestyle business have been swept into a growth business by the demands of the marketplace. At the same time, it's important to emphasize that the chances of achieving your goals are much greater if you plan your approach. So don't go starting a lifestyle business and expect that fate will turn it into a growth business.

3. Either path is acceptable. One reason for going through this exercise is to debunk the notion that every entrepreneur has to set his or her sights on being the next Fred Smith or Steve Jobs. Not everyone is equipped to make that happen, nor would everyone who starts a business necessarily enjoy the process involved in making it happen. It's possible to be very successful financially running a one-person business or a small organization of fewer than 25 people.

To get you started in the planning process, here are two exercises. The first is a quiz and the second is a writing assignment.

I. Quiz

1. Which do you prefer?
a. Personally making your business's product or fulfilling its service.
b. Getting others to do the work.
2. What kind of organization interests you more?
a. A small, stable organization.
b. A fast-growing organization with lots of new people and new assignments.
3. Which approach to work gives you the most satisfaction?
a. Doing detailed tasks such as personally keeping the books.
b. Making strategic decisions but getting others to execute them.
4. Which leadership style best describes you?
a. Like to be in charge of the business.
b. Am willing to share authority with others.
5. Which of these business goals are most important to you?
a. Achieving the freedom and independence of being the owner.
b. Gaining the satisfaction of seeing the organization grow and expand.
6. Which of the following financial goals is most important to you?
a. Making a good living from the business within three years.
b. Making a marginal living from the business for several years, with the prospect of becoming a millionaire in seven to ten years.
7. How do you feel about hiring and motivating people?
a. It's one of the business tasks an owner has to endure.
b. It's one of the great challenges and sources of excitement in running a business.

If you picked five or more "a" answers, you're a good candidate for a lifestyle business. If you picked five or more "b" answers, you're a good candidate for a high-flyer business.

II. Writing Assignment

Describe in 50 words or less your principal personal goals in starting, operating, or expanding your business.