1. How to Prepare a Winning Business Plan
Preparing a Business Plan
How to Prepare a Winning Business Plan
Patterns of Entrepreneurship
Chapter 4
copyright 2003 Jack M. Kaplan

2. Purpose of a Business Plan
Attracts Investors
Evaluates Feasibility of Business Concept
Serves as an Operating Guide
Attracts Potential Business Partners and Key Employees
Attracts Potential Customers and Suppliers
copyright 2003 Jack M. Kaplan

3. Business Plan Development Guide
Outline:
The Executive Summary
Business Description
Market Analysis
The Management Team
Operations
Critical Risks
The Financial Projections
Appendix
copyright 2003 Jack M. Kaplan

4. copyright 2003 Jack M. Kaplan
The Executive Summary
Objective:
Capture interest of investors
General overview of business idea
How will it work
Bullet form
Emphasize key issues
No more than 2-3 pages
Should be written last
copyright 2003 Jack M. Kaplan

5. copyright 2003 Jack M. Kaplan
The Executive Summary
Include the following:
Company profile
Nature of the product or service offering emphasizing any competitive advantages
Identify foreign/domestic markets to be targeted
Size and growth trend of market
Make-up and background of the management team - include individual skills
Financing requirements
Key projections (i.e., sales, gross profits, N.I.)
copyright 2003 Jack M. Kaplan

6. copyright 2003 Jack M. Kaplan
Business Description
Objective:
Provide a detailed overview of the company and the nature of the product/service offering.
Show long-term commitment to developing the venture.
Show defensible competitive advantage.
copyright 2003 Jack M. Kaplan

7. copyright 2003 Jack M. Kaplan
Business Description
Include:
Mission statement
History behind the idea or current business
Company’s current or proposed legal form
Proposed entry strategy
Description of the initial product/service (including any anticipated competitive advantages)
Product research and development
copyright 2003 Jack M. Kaplan

8. copyright 2003 Jack M. Kaplan
Market Analysis
Objective:
Prepare an opportunity marketing analysis.
Demonstrate how to capture a large share to support the venture.
Show how to support claims and customer interest.
copyright 2003 Jack M. Kaplan

9. copyright 2003 Jack M. Kaplan
Market Analysis
Address:
Description of industry
Description of region and/or countries (international business)
Targeted markets
Marketing research
Competition
Barriers to entry
Marketing strategy
deliver products/services to the targeted markets
copyright 2003 Jack M. Kaplan

10. copyright 2003 Jack M. Kaplan
Management Team
Objective:
Show that the team can effectively manage the product/service into foreign or domestic markets.
Does management have the background and skills to make the venture a success?
Highlight synergistic skills.
Show how deficiencies will be covered.
Do not give up more control than absolutely necessary.
copyright 2003 Jack M. Kaplan

11. copyright 2003 Jack M. Kaplan
Management Team
Address:
Background and primary responsibilities of the management team
Organizational structure
Board of directors/advisors/international trade specialists
Ownership
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12. copyright 2003 Jack M. Kaplan
Exit Strategy
To be determined up-front
Some options include:
going public
selling the business
a stock buy-back at the going rate
leveraged buy-out
second round of investment
copyright 2003 Jack M. Kaplan

13. copyright 2003 Jack M. Kaplan
Critical Risks
Objective:
Identify potential problems that could significantly affect the new company.
Let potential investors know up-front that there are risks associated with the venture.
copyright 2003 Jack M. Kaplan

14. copyright 2003 Jack M. Kaplan
Critical Risks
Internal
loss of key employees
inadequate working capital
unproductive R&D
breakdowns in plant and equipment
bottlenecks in the distribution channels
factors not covered by insurance policies
External
patent violations
changes in technology
changes in government regulation or protectionist legislation
adverse economic conditions, market changes
unstable banking/financial and transportation/distribution systems
potential effects on financial plans
copyright 2003 Jack M. Kaplan

15. copyright 2003 Jack M. Kaplan
Critical Risks
Continued:
Contingency Plans
probabilities
Insurance Provisions
fire
liability
automobile
worker’s compensation
key person
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16. copyright 2003 Jack M. Kaplan
Operations
Objective:
Focus on relevant cost.
Demonstrate ability to carry out implementation.
Integrate operation costs with the financial section.
copyright 2003 Jack M. Kaplan

17. copyright 2003 Jack M. Kaplan
Operations
Address:
International Considerations
market development activities
transportation
export documentation
foreign contacts and personal relationships
Future Research and Development Plans
cannot be built around a single service or product
present the planned directions of R&D
new products
new markets
improve on existing production processes
copyright 2003 Jack M. Kaplan

18. copyright 2003 Jack M. Kaplan
Operations
Continued:
Production Plan
procuring and transforming critical resources
internally
externally
time line of events
Customer Support
focus on getting and keeping customers
customer service
what role it plays in achieving sales goals
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19. copyright 2003 Jack M. Kaplan
Operations
Continued:
Personnel
creating management and infrastructure charts
hiring
training
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20. The Financial Projections
Objective:
Convince the investor that the venture makes sense from a financial standpoint.
Projections must address:
allocation of expenses
return on investment
cash flow management
copyright 2003 Jack M. Kaplan

21. The Financial Projections
Historical financial data
First year financial projections by month
Balance Sheet
Income Statement
Cash Flow Statement
Second year financial projections by quarter
Five year annual forecasts
Break-Even Analysis
Ratio Analysis
copyright 2003 Jack M. Kaplan

22. copyright 2003 Jack M. Kaplan
Valuation
“Residual Value” commonly used by investors.
Should be done before meeting with investors.
Will help you to assess what ownership you may have to give up based on the expected ROI for your type of venture.
Use the “time value of money” equation: n
Future Value = Present Value (1+i)
i= estimated rate of return investors will require based on the
perceived risk associated with your type of venture
n= number of years
copyright 2003 Jack M. Kaplan

23. copyright 2003 Jack M. Kaplan
Valuation
Calculate the future value of the up-front investment needed.
Example: Funds needed = $500,000
Average annual return on investment (ROI) = 45% 4
FV = $500,000 (1+.45)
FV = $500,000 (4.4205)
FV = $2,210,253
copyright 2003 Jack M. Kaplan

24. copyright 2003 Jack M. Kaplan
Valuation
Example:
Determine the point in time that will be used in the valuation calculations.
Example: 4 years
What are the projected after-tax profits?
Example: $1,855,050 (year 4)
Determine the valuation factor by looking at similar companies in your industry.
Example: 10 times after tax earnings
$1,855,050 x 10 = $18,550,500
copyright 2003 Jack M. Kaplan

25. copyright 2003 Jack M. Kaplan
Valuation
Determine the amount of equity you may have to give up, based on the value of the venture, and the future value of the potential investors’ initial investment.
Example:
$2,210,253
= 12%
$18,550,500
copyright 2003 Jack M. Kaplan

26. copyright 2003 Jack M. Kaplan
Balance Sheet
WC Position
Capital Asset Position
Capital Structure
Pro Forma Balance Sheet:
Current Assets Current Liabilities
Fixed Assets Long-term Debt
Intangible Assets Equity
Total Assets = Total Liabilities + Equity
copyright 2003 Jack M. Kaplan

27. copyright 2003 Jack M. Kaplan
Cash Flow Statement
Objective:
Demonstrate that you have sufficient cash to run the operation.
Assess the timing of future cash flows.
Develop a plan for subsequent rounds of financing.
copyright 2003 Jack M. Kaplan

28. copyright 2003 Jack M. Kaplan
Cash Flow Statement
Cash Provided (used) from Operations
Net income (loss)
Depreciation
Adjusted net income (loss)
Cash Provided by Working Capital
Accounts receivable (increases) decreases
Inventories (increases) decreases
Accrued liabilities (decreases) increases
Prepaid expenses (decreases) increases
Cash Provided (used) by Continuing Operations
copyright 2003 Jack M. Kaplan

29. copyright 2003 Jack M. Kaplan
Cash Flow Statement
Continued:
Cash Provided (used) from Financing Activities
Long-term debt (decreases) increases
Interest on notes
Cash dividends paid
Issuance of stock
Total Cash Provided (used) from Financing Activities
copyright 2003 Jack M. Kaplan

30. copyright 2003 Jack M. Kaplan
Cash Flow Statement
Continued:
Cash Provided (used) from Investment Activities
Purchase of property, plant and equipment
Proceeds from sale of assets
Other acquisitions
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period
copyright 2003 Jack M. Kaplan

31. copyright 2003 Jack M. Kaplan
Income Statement
Revenue Projections
Cost Relationships
Tie into the Operating Strategy
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32. copyright 2003 Jack M. Kaplan
Income Statement
Pro Forma Income Statement
Revenue
- Cost of Goods Sold
Gross Profit Margin
- Operating Expenses
Net Income Before Interest and Taxes
- Interest
- Taxes
Net Income (Loss)
copyright 2003 Jack M. Kaplan