Download - Entrepreneurship Chap 4
copyright 2003 Jack M. Kaplan
How to Prepare a Winning Business Plan
Preparing a Business Plan
Patterns of Entrepreneurship Chapter 4
copyright 2003 Jack M. Kaplan
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
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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
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
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.)
The Executive Summary
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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.
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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
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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.
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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
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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.
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Address: Background and primary responsibilities of the
management team Organizational structure Board of directors/advisors/international trade
specialists Ownership
Management Team
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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
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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.
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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
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Continued: Contingency Plans
– probabilities
Insurance Provisions– fire– liability– automobile– worker’s compensation– key person
Critical Risks
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Operations
Objective: Focus on relevant cost. Demonstrate ability to carry out implementation. Integrate operation costs with the financial
section.
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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
Operations
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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
Operations
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Continued: Personnel
– creating management and infrastructure charts– hiring– training
Operations
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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
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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
The Financial Projections
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 venturen= number of years
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Calculate the future value of the up-front investment needed.
Example: Funds needed = $500,000Average annual return on investment (ROI) = 45% 4FV = $500,000 (1+.45)FV = $500,000 (4.4205)FV = $2,210,253
Valuation
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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
Valuation
copyright 2003 Jack M. Kaplan
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
Valuation
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Balance Sheet
WC Position Capital Asset Position Capital Structure
Pro Forma Balance Sheet:Current Assets Current LiabilitiesFixed Assets Long-term DebtIntangible Assets Equity
Total Assets = Total Liabilities + Equity
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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.
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Cash Provided (used) from OperationsNet income (loss)DepreciationAdjusted net income (loss)
Cash Provided by Working CapitalAccounts receivable (increases) decreasesInventories (increases) decreasesAccrued liabilities (decreases) increasesPrepaid expenses (decreases) increases
Cash Provided (used) by Continuing Operations
Cash Flow Statement
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Continued:
Cash Provided (used) from Financing ActivitiesLong-term debt (decreases) increasesInterest on notesCash dividends paidIssuance of stock
Total Cash Provided (used) from Financing Activities
Cash Flow Statement
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Continued:
Cash Provided (used) from Investment ActivitiesPurchase of property, plant and equipment Proceeds from sale of assetsOther acquisitions
Cash Provided (used) from Investment ActivitiesIncrease (decrease) in cashCash at beginning of periodCash at end of period
Cash Flow Statement
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Income Statement
Revenue Projections Cost Relationships Tie into the Operating Strategy
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Income Statement
Pro Forma Income StatementRevenue- Cost of Goods SoldGross Profit Margin- Operating ExpensesNet Income Before Interest and Taxes- Interest- Taxes Net Income (Loss)