Last year, I was approached by a small group of people who had recently quit their jobs at a company that made commercial food processing equipment. They became disillusioned with their employer due to inefficiencies in production, marketing, and a general disorganized atmosphere. The leader of the group felt that they could “build a better mousetrap” if they went out alone. Each member of the group was an expert in the operational side of the business. They enjoyed good relationships with the company’s customers, who were also frustrated by missed deadlines, broken promises, and even incomplete orders. The leader of the group covertly talked to some of these customers (medium to large food manufacturers) about buying the new company from him. Several companies seemed enthusiastic about the prospect and made verbal commitments to buy equipment from them. Needless to say, the group of four wanted to go ahead with the formation of a new manufacturing company. Now they needed seed funding.
Although these people knew the business from an operational standpoint, they were all missing several key areas. None of the group understood accounting, cost structures, cash flow, or anything related to finance. This posed serious problems for me, who they were counting on to get the money they needed to get going. Long story short, I worked with them to the best of my ability, but quickly became frustrated when we tried to put together a business plan and attached timelines to deliver to the lender. I depended on them to give me relevant information related to their business because I knew nothing about the industry. Unfortunately, they just didn’t know as much about the back-office and finance segments of the business as they should, and it showed. They were turned down by two leasing companies and then turned down for an SBA loan. Despite the difficulties, they still would have gotten the SBA loan if the potential customers had signed purchase commitments, but they didn’t.
The moral of this story is to have the ducks in a row for all aspects of your business. What would have happened if they had gotten financing? Unless they had hired a top-tier internal financial officer, I think they would have ended up in serious trouble.
Some helpful tips for developing a business plan:
1. Be conservative with your sales projections. It’s easy to get caught up in the glamor of lofty sales forecasts, but you have to assume that it won’t be rosy in the first few years. Make sure you have a solid foundation for your projections.
2. Do not see it as a mere formality to obtain a bank loan. Look at it as a model for the life of your business. Writing an effective business plan means doing a lot of soul searching and research. What market entry challenges will we have? What is the most effective means to market our products? Which suppliers offer the best value for our raw materials? The answers to these questions (and many more) must be well thought out.
3. Carefully analyze the strengths and weaknesses of your management team. Part of the business plan involves giving biographies of the main players. Writing this section should reveal whether the main parts of your business are in good hands: sales, marketing, accounting and finance, administration, and operations. If you find that you are lacking in any of these areas, start looking for the people you need.
4. Don’t wait until the last minute to start writing. Schedule many actual working hours over the course of several weeks. The main reason is this: If you tell a loan officer or investor about your idea in person, he’ll say “Sounds interesting! Send me a business plan tomorrow.” In other words, they will already expect it to be done. Obviously, you won’t be able to generate a 40-page document overnight, complete with research and financial analysis.
5. Before you send your business plan to someone, carefully review the executive summary. You probably won’t get the funding if you have typographical errors in your executive summary. The fewer mistakes you have, the more professional you will look.
You’ve probably read statistics about the failure rate of new businesses. No one can say for sure how many failures occurred because key players didn’t do their homework early on, but I’d guess that’s the majority. Do not let that happen to you!