The Harbour Pilot

A long time ago, in a place far away, was a coffee house. And that coffee house was located in a harbour town, nestled close below some arching hills, and soothed by the lapping waters of the protected berths of ships that were safe home from the sea. And life was good.

Until, one day, a ship arrived from foreign climes, and a pestilence, in the form of starving rodents scuttled down a hawser and first set foot in that harbour, to forevermore disturb the peace and tranquillity of the genteel sailors and ship masters that rested in the safety of the harbour’ s shelter. And that rodent was a rat, and that rat had an M.B.A degree, and a need to sell services to the ship masters. Forasmuch as the ship masters needed to raise investment capital to secure new cargoes for lucrative trade, and the investors were loath to subscribe to peril and risk.

Business Plan as Investment Selling Tool

Verily quoth the rats, you need to persuade yon investors to part with their savings, and that means you need a business plan. And your tongue and your hands are not meet to perform such arcane tasks as crafting a business plan, and must acknowledge that you must lean on us to provide those services – for a price. And lo, since that fateful day, have entrepreneurs been bedevilled by the persecution of the unholy business plan and its mysteries.

So it came to pass that investors became accustomed to the blandishments of the business plan, and came to know sorrow, since the business plan held no truth. And the princes of the land, and its knights also, rode to the defence of the investor, and passed laws to require truth in the business plan, and the M.B.A was sore afraid. They prevailed upon their brothers-in-arms, the ferrets, to structure the laws to require of the ship masters, the business plan – and life was once more good. And in due course, the language became confused, as the meaning of cargo and adventure in trade were disputed mightily. And new words were brought into existence by the weasels - alchemists who sought to turn water into wine, and reckoning day into subsidiary consolidation. And the trinity ruled, and life was good. The ship masters sat and the ships rode at anchor, awaiting the determination of the trinity at their convenience.

A silly fable, is it not. Well, it has some of the aspects of myth, but it is more or less what happened. So let’s play archaeologist, and look for the remnants of those long gone days, shall we?

The Laws Governing Public Investment - Formal Business Plan

Here are the laws governing businesses offering investors equity in a venture. In the United States, there is The Securities Act of 1933, and can be found at the Securities Exchange Commission page. A great deal of the law is given effect through regulations, and those can be found here as well, although a faster less exhaustive index is here. Here are the regulations covering a prospectus, and its details.

Information Required

The information to be included ranges from

• the general character of the business,
• the purposes and approximate amounts of the new equity proceeds,
• a balance sheet, and
• three years worth of income statement results

to name only the central four of the 32 items.

This is the “business plan”. All of the rest is conventionally included material, covered under Rule 418 Dealing with Supplemental Information. This covers things like fairness opinions, and internal studies of feasibility studies of new products and new markets.

Here is an example of a prospectus offered under this act. Note the sections

• The Company
• Industry Background
• Market Opportunity
• Product
• Strategy
• Competition
• Intellectual Property
• Facilities
• Management Team

This material is covered in pages 36 through 54 – 16 pages in all out of 92. There are no future oriented statements, or pro-formas, in part because the offering proceeds are not designated for new lines of business, but for working capital. In contrast, the risks section runs from page 6 through 20 (15 pages).

So this is the business plan. These things are included because they are required by law to protect investors. The concept of a business plan emerged from this setting, by people who were trained to provide information to these standards, for these purposes. Those people are our original trinity – lawyers, accountants, and M.B.A.s. This is their understanding of a business plan. When these people bring the concept of business plan to small and medium businesses, they borrow this approach. In giving advice to clients, they rely on this concept, because it reflects their training.

Here’s the thing. No one will take time to read such a plan – even if you prepare one – simply because it does not pay to invest that much time. Nor in fact is this a plan for doing business – it is a plan for spending equity proceeds.

So, don’t do it – it will be ignored.

(Disclosure: Yes, I hold an M.B.A., and yes, I count lawyers, and accountants as friends and colleagues. Don’t be so serious - do you believe in Hansel and Gretel? Did you know the witch of the forest was actually trained in H.R.? That’s me, an equal opportunity offender.)