How to Prepare a Business Plan

There are no hard-and fast format requirements for a business plan, and the length and content often will vary depending on such factors as the companys stage of development, the nature and complexity of its business and the markets it will serve. In working with a large number of high-tech companies in both the startup and expansion phases, we have found the following planning format to be effective and, at the same time, comparatively easy to develop:

Description of your management team, emphasizing the relevant experience and special skills of each key executive. If there are management weaknesses, cite them and discuss how and when you expect to correct them. Summary of key financial projections for the next three to five years. Summary of funding requirements and, unless you are seeking lump-sum financing, when the company will need varying amounts of capital.

Executive Summary. Business History. The Product. The Market. The Competition. Marketing. Manufacturing and Operations. Management. Financial Projections.

Business History
If you are developing a business plan solely for internal use, you can omit this discussion of the history of the business. This section is intended primarily for prospective investors. Before a prospective investor can evaluate where a business is likely to go, he needs to know where it has been. Accordingly, this section of the plan should discuss:

While we often help clients develop their business plans, we stress the need for active management involvement in every aspect of the planning process. The fact is that a business plan prepared principally by outside consultants is unlikely to reflect an entrepreneurs total insight and broad concept of the business or, in the final analysis, to gain his full commitment. Your first planning job, then, is to establish and maintain supervision of the overall direction and scope of the plan. The following paragraphs discuss the basic elements of the business plan.

When the business was founded, its progress to date and a brief description of the founders, stressing their relevant experience and their roles in the company. Form of organization (partnership, S Corporation, research and development limited partnership, etc.) and distribution of equity. If a corporation, summarize the companys capitalization, classes of stock, shares outstanding and other relevant data. Summary of any past loans to, or investments in, the company by outside sources as well as managements investment in the company. Detail any outstanding stock options or warrants as well as royalty obligations, price concessions, leases or other financial commitments, including names of those involved and principal terms (price, expiration date and so on) of each commitment. Products or services the company has developed or marketed and the success of each.

The Executive Summary

This should be a two- to five-page summary of the key elements of the business plan an overview intended principally to catch the interest of prospective sources of financing. Often, the summary is all a venture capitalist will read, so it must capture his attention. An effective summary will position the company accurately and will serve to distinguish your concept from others who are competing for limited investment capital. If the summary fails to persuade a venture capitalist or other prospective source of capital to read further, it has not done its job. At a minimum, the summary should include:

If you have sound reasons for believing that the company past performance is not a reliable indicator of its potential it would be appropriate to cite those reasons in this section and discuss them more fully elsewhere in the plan.

Description of your business idea and the target markets for the new product or service. This description should distinguish your product or service from its competition and stress the market need it will fill. It also should state whether the business will compete in a large, existing market or create a new one. And it should address, concisely and persuasively, the issue of why your venture will succeed in a competitive situation.

The Product
The purpose of this section is to define precisely what you intend to develop and/or market. It should include a discussion of all of the companys existing or planned products or services.

Length of the section will vary, depending on the number and complexity of the products or services you plan to market. Presuming that some members of management will not be trained in the companys underlying technology and that the plan is likely to be used to court prospective sources of capital this section should be written in language easily understandable by a lay person. Although a subsequent section of the plan will deal specifically with the competitive environment, it is appropriate to state here any distinct benefits of individual products or services lower cost, for example, or greater versatility. This section also should include a discussion of any legal protection the company has obtained or applied for patents, copyrights, trademarks and so on. If, for example, a particular product or process is protected by a patent that will deter others from developing a competitive product, that can influence your marketing strategy and certainly will be of particular interest to prospective investors. You should attach as appendices any lengthy or detailed diagrams, technical documents or descriptions that are important to a comprehensive understanding of the companys products. Alternatively, you might opt to provide such detail at a later stage of the investigation, especially if the information is proprietary. If the company needs, or has obtained, any governmental approvals or clearances, you also should discuss those here. If, for example, the company intends to export military or defense-related products, it is important to indicate whether you have applied for or obtained the necessary federal authorization. If you need regulatory approval of certain products Food and Drug Administration clearance of high-tech surgical instruments, for instance you should state here whether you have received such approval.

What is the historic (last five years) and forecasted (next five years) rate of growth for each market segment? Where are your present and future markets? Regional. National. International. How will you sell to each market segment? Agents/distributors/representatives. Company sales force. Direct response. Multiple distribution. At what level does each market segment make the purchasing decision? Senior management. Operating management. Technical management. Administrative management. Purchasing agent. Individual consumer. How does each market segment purchase the product? Competitive bidding. Annual or long-term contract. Unit purchases. What are the critical product characteristics? Performance. Reliability. Durability. Availability. Price. Service. Other. Does the market have any special characteristics? Seasonal. Cyclical. Other.

The Market
A comprehensive description of your present market and future opportunities is important to both management and prospective investors. If your product is generically new, market research probably will be required to put meaningful dimensions on the initial and future market. This section should describe the results of such research if it has been completed or outline your plans for future research. If your product represents an improvement on what is presently available, there already may be well-defined dimensions to the market. In that case, summarize them here, using both historical data and reliable forecasts from industry, trade association or government sources. As part of your overall description of the market, you should cover such factors as these:

If the companys personnel resources are limited, it is possible to hire outside specialists marketing consultants or university professors, for example to develop a comprehensive market analysis for inclusion in your business plan. In some situations, the market may be generic enough that reliable market data will be available from industry, trade association or government sources.

The Competition
In most situations, the new high-tech company will face entrenched competition from mature organizations with far greater resources. It is important to identify competitors in the business plan, indicating the special strengths, weaknesses and market share of each. Your business plan also should indicate the share of market you expect to capture in the first three to five years and spell out your rationale for these forecasts. Which competitors do you expect to draw customers from and why? It is important to define the niche you expect

Who are the customers? Manufacturers. Institutions. Government. Consumers. Others.

to fill in the market and to summarize the strategy you intend to employ to gain your share of an existing market. Here, too, you should cite the principal competitive factors in the marketplace product performance, reliability, durability, styling, delivery, service, aggressive merchandising, price or other factors. In some situations, of course, markets are in flux with prices firming, for example, and performance and durability becoming critical factors. It is particularly important to identify such trends and to indicate how you plan to react to them. A prospective investor also will want to know your views on how competitors are likely to react to your entry into the market and how you plan to respond to any marketing ploys they use against you. Many planners focus clearly on existing competition but ignore prospective new competitors in developing their business plans. This can be a costly oversight, especially in dynamic or immature markets, so take care to analyze the possibility of strong, new competitors in making your competitive analysis. Perhaps the greatest temptation you will face in framing your startup business plan is to overstate your own competitive strengths and understate those of others. In the end, of course, this is self-defeating since you will base your actions on the directions charted in the business plan. Moreover, prospective investors are unlikely to choose to back an entrepreneur who lacks a realistic view of the competitive situation he will face in launching his new venture.

goals should be quantitative, realistic and consistent with your marketing analysis. Following are some additional points that will be of particular interest to prospective investors:

Channels of distribution. Will you use a company, sales force, contract with well-established manufacturers representatives or use some other channel to get your product to market? How does your plan compare with present industry practices? Sales compensation plan. In addition to indicating how you intend to compensate your sales force salary, commission or a combination of the two you should state your rationale for the plan you have selected. If bonuses or some other form of incentive compensation figure in your plan, explain that as well. Pricing strategy. How do you plan to price your products, and how will your prices compare with the existing price structure in the marketplace? Will you offer any special inducements to customers, such as extended warranties? How do you expect competitors to react to your pricing strategy? What impact is their action likely to have on your financial projections? Promotional concepts. Few products, however good they might be, can succeed in a competitive marketplace without effective, continuing promotion advertising, public relations and other forms of marketing-support communications. A prospective investor will be interested in how you plan to generate market awareness. If you have selected an advertising or public relations agency, the prospective investor will be interested in that as well. Distribution plan. In some cases, high-tech startup companies sell to such narrow, well-defined markets that they are able to sell nationally, or even internationally, from the very beginning. In other cases, entrepreneurs do a time-phased national rollout of their product, beginning with regional marketing and expanding to full distribution over a period of months or years. In still other cases especially those where the product is designed for the mass consumer market it is appropriate to use test markets to gauge consumer reaction to the product. However you plan your distribution, state it here.

Marketing
In some situations, of course, the entrepreneurs startup company will need to concentrate exclusively on research and development in the early stages and then on producing and testing product prototypes. In that case, the marketing section of the business plan might be very brief. In other cases, however, this is surely one of the most important sections of the business plan. It defines strategy and charts the marketing direction for your staff. Equally important, it should give prospective investors confidence that you can convert your idea and your assets into a strong marketing position and, eventually, into a continuing stream of profits. When the time is right either at startup or at some future stage your marketing executives will need to develop a comprehensive marketing plan to guide that critical function on both an annual and long-term basis. The marketing section of the business plan normally will set the stage for or summarize the more detailed marketing plan. In seeking financing, you might find it helpful to show prospective investors both your overall business plan and your detailed marketing plan . . . unless, as suggested earlier, some marketing data is ultrasensitive and you need to take every precaution to shield such information from competitors. Regardless of whether your company is in the R&D stage or ready to take its products to market, you should summarize your marketing goals in this section. Such

This section of your business plan also should outline how you intend to monitor the market on a continuing basis in order to assess the impact of changing competitive strategies as well as your own. It also should state whether you plan to conduct any necessary product evaluations, pricing comparisons or market-share analyses.

Manufacturing and Operations

Efficient production is a major factor in a companys success or lack of it. This section of the business plan should summarize the nature, quality and extent of your manufacturing and research facilities. It also should spell

out the companys production strengths and limitations and indicate how you plan to correct the latter. You should indicate the timing, cost, extent and importance of any planned expansion and discuss related financing issues and tax implications. It is helpful to management and prospective investors alike to include a table that shows manufacturing space, unit production capacity and projected unit sales on an annual basis for the coming five years. You also should indicate where you will handle production. If offshore manufacturing is feasible in the Far East, Puerto Rico or Ireland, for example you should give your views on that option as well. If you intend to subcontract all or any portion of your production, the plan should indicate that. It also should state how you will select subcontractors proximity, speed of delivery, competitive bids or some other basis. If any materials or components are critical to your production and their ready availability at a reasonable price is a potential problem for the business, the plan should discuss alternative sources of supply and projected costs.

purpose: to guide your management team and to inform prospective investors. You can include financial statements and other detailed information in an appendix or simply indicate that such data are available on request. At a minimum, your plan should include:

The companys past financial statements (balance sheets, profit and loss statements and statements of source and application of funds), if available, for up to three years. Current financial statements. Projected balance sheet information on an accrual basis for the next three to five years. Profit and loss projections and cash flow projections on a monthly or quarterly basis, if possible, for the first two years and annually for the three subsequent years.

Management
Many prospective investors believe the presence of a first-rate management team is the single most important criterion in the evaluation of any funding opportunity. So this section of your plan should emphasize the experience and competence of each key management executive. If one of your goals is to strengthen your management team, you should deal with that issue here, outlining your planned management structure in chart form and providing detailed job descriptions and minimum qualifications for each unfilled slot. You also should indicate the level of compensation for each open position and indicate when and how you expect to fill it. It also is helpful to include job descriptions, compensation data, equity interests and detailed resumes on all management executives who already are in place. While your internal business plan need not include such information, it will be of substantial interest to prospective investors who want assurance that you have a team that is well qualified to implement your business plan. Personal data on key executives, therefore, should include all relevant business experience, educational background, patents or copyrights, significant awards and any other information that would help a prospective investor conclude that you have the necessary management and technical resources.

Your financial projections will be of particular interest to a prospective investor since they will indicate how much money you will need and when you will need it. You should, of course, put at least a modest cushion in your funding request. Your financial projections also should reflect the tax planning ideas presented by your accountants to generate current cash by tax deferrals instead of giving up more equity. Your business plan also should include a detailed description of all major assumptions underlying your financial projections and a comprehensive discussion of the most important assumptions. At the very least, you should provide a description of your:

Accounting principles. Sales and market share assumptions. Assumptions regarding the anticipated number of days, sales in accounts receivable, bad debts, interest expense, R&D costs, facility costs, warranty costs, payroll expense, costs of materials and components and, of course, federal and state taxes.

Your financial projections must be realistic and must conform to established industry parameters. If, for example, gross margins in your industry range from 30% to 40% and you are projecting a 60% margin, you must present reasonable evidence to support such a rosy projection. Otherwise, your forecast will generate skepticism within your management group and among prospective investors. Obviously, the financial projections must tie to data included elsewhere in the business plan. For example, if you are planning to relocate technical personnel or expand production facilities in the third year, your projections should reflect the costs associated with these actions. Similarly, if you are obligated to pay royalties on a new product or process, these costs should be factored into your projections. Among those you should consult in developing financial projections are the top management team, key financial personnel and your independent public accountants.

Financial Projections
In this section, you must put to a numerical test all of the assumptions and quantitative data presented elsewhere in the business plan. You will, in other words, bring together here all of the companys sales, market and cost projections in a summary-type financial format. Again, the three- to five-year financial projections will serve a dual