Reject business plans! Well, no, not exactly. The practice tends to be to write wide ranging, comprehensive books. These cover every possible aspect of the business, are neatly bound, have lovely graphics, moving pictures of the charismatic leader, and snazzy graphics. Cool. Ignored. Useless. Expensive. Time-burners. Let’s step back and see what actually happens, by dropping in on big brother.
In this case big brother is a publicly traded company. They have access to capital markets. They can add capital in at least four primary ways – lease facilities, lender facilities, exchange traded debt, and exchange traded equity. The first two rarely are interested in reviewing a business plan – hand them the financials, and start negotiating. The second two will require a prospectus. Lets look at the prospectus process for a company just going public with its first share issue, or for that matter dealing with a VC with the intention of going public in the near future.
An Equity Deal
A VC deal or an IPO is not sold the way it seems on television, that is just entertainment. (Do you really believe in CSI, too?) An IPO is first negotiated with an underwriter – and this is where the work really gets done. The first thing that happens is that you hand over your financials, operating data, strategic and tactical and operating plans to the lead underwriter’s analyst. That analyst goes away and builds their own model of your business projection - they use many of their own assumptions, and industry standard productivity factors, costs of marketing, and costs of production. Then they compare it to yours, and attempt to reconcile them. You must then argue for and support your construction of the assumptions and factors.
The analyst reports to the lead underwriter’s due diligence team – legal, financial, marketing, and analyst. That analyst will tell the due diligence participants
- what the assumptions are
- how credible the research supporting your assumptions is
- what are the probabilities on key issues like growth and competitive advantage
- whether the proposal is reasonable in the current environment
- what weaknesses there are in the plan
- how credible you are
Due diligence will hone right in on those points, with you on the hot seat. If you cannot answer the questions, the answer is no. How do you answer the questions? By asking them of yourself first, and for that, you need a model.
Where is the Business Plan?
The business plan concept trumpeted by M.B.A.s and accountants comes out of schools and professional practices – as explained in a previous post. What is being confused here, is the prospectus document prepared after an underwriting deal is locked up . The purpose of such “business plans” is not to negotiate a deal, but to protect the securities commission, the exchanges, and the underwriters from irate investors. Let’s be blunt – it is also not how fresh equity shares are actually sold. That is done by salespeople - stock brokers - to their clients, based mostly on materials developed by those sales people. Most such offerings are in fact pre-sold, and not to retail investors. Where do the stock brokers get their sales material - from their analysts (remember the analysts?)
What do the materials tabled so far look like? Numbers, in black and white. There might be a picture of the product, or a prototype sitting on the table. There might be a coloured map – geology if a mine, aerial views if it is real estate, perhaps an architects rendering if a building.
Somehow small business has the idea that a business plan is a glossy brochure – it isn’t. A plan is a model that contains the relationships, investment cycles, production cycles, strategic and tactical positions of your operation. There is research underpinning assumptions on markets size, competitors, product competitive specifications, operating technologies and facilities, execution and accountability – but this is not presentation material. There may be execution plans in the form of project management schedules and teams, but these are not presentation materials either.
The Written Text
What many people consider to be a business plan is the written text. Three things.
One :
Write it for the specific audience. Don’t have a general audience business plan. Instead write a briefing memo for the person you are targeting. If desired, include a page of financials that answers the questions that audience will ask.
Two:
If it is more than three pages, no one will read it. Oh they will thumb through it, and murmur appreciatively, but it will not have an impact. Write it as if you were doing it for yourself – keep it short, sweet and focused. You know what the key factors are – state them, and leave it alone. Three pages.
Three:
Do not use jargon. Do not try to impress the audience with your vocabulary, unless no other word is specific, and then define the word carefully.
These are not business plans, but financing briefs drawn from the real business plan. The real business plan is prepared by the operator, for the operator and its purpose is to help make operator’s decisions.
In the more than 85 businesses with hands-on involvement, only twice were popular business plans prepared, In both cases, it was to solicit government funds, and both were unsuccessful – the criteria had little to do with the business, and everything to do with political goals.
Small and medium independent, private businesses make their presentations to cynical, sceptical, audiences. Glossy public relations and marketing style promotion are not effective, and can be counter productive. Short, sweet, honest, and credible – that is persuasive.
Post a Comment