Business Strategy, Planning, and Feasibility Analysis

This article addresses the need to develop a business strategy—and eventually
a business plan—to enhance your chances of receiving financing. In
some cases, a comprehensive business strategy, properly articulated, will be
the difference between obtaining financing or not.

Business Strategy

A business strategy is a plan of action specifically designed to achieve a predetermined goal. Business strategy requires an executive approach to defining and solving the marketing, design, production, and financial problems that may prevent you from achieving your goal. However, creating your basic strategies may not require a time-consuming and arduous process, just as communicating your strategy does not require writing a very lengthy and complex book.

Recognizing Success: You know you have created and communicated effective strategies when your audience understands three things.
1. The current state of your business—your origin.
2. Your long-term (typically five-year) goals for the business—
your destination.
3. How you will travel from origin to destination and solve the problems you know you will encounter along the way.

Developing a Business Strategy

If you go to the Business and Economics Department at any large bookstore, you may find hundreds of books written on strategy. Many of them are well-written and effective. A few such titles are listed in the recommended reading list in this blog. The following ideas originate with Jay Winokur, a financial management consultant and chief financial officer for hire. His unique perspective comes from extensive work with large, multinational corporations and with emerging companies.

Business Vision

You can describe what the business is that you want to build, but you must also understand what makes it the right business for you. Determine the skills and experience it takes to make the business successful. Which of those critical factors are among your greatest talents? Which of those factors are also the tasks you love to do, twenty-four hours a day, seven days a week? The business that is right for you fits your individual expertise and your personal motivators.

Personal Values

Examine your personal values in order to set meaningful goals and objectives for your business. High-growth, high-reward, high-risk enterprises are not for people who value security, stability, and tranquility. The prospect of working eighty-hour weeks may not appeal to those who have lifestyle and family considerations. Issues concerning political, religious, philosophical, and economic beliefs will have a major impact on company policies, goals, and strategies. Acknowledge what is important to you so that you can build your values into your business.

Goals

When you understand what your business is and how you fit with it, you can set goals. Given the market opportunities and your personal values, how large could your company become? How profitable? What is the time frame for accomplishing all this? How will you and the company’s other stakeholders benefit from these accomplishments?

Market Definition

Market issues make the difference between success and disaster. Identify a problem and identify the specific groups of people who have the problem. How much pain do they feel? The greater the pain, the greater the value of an effective solution. How does the market currently solve this problem? Every possible solution—including ignoring the problem—represents your competition.

Business Model

This business model does not refer to the wheelbarrow-sized pile of financial projection spreadsheets that your favorite number cruncher produces. Instead, it refers to how your company operates. It includes the extent to which the people on your management team are full-time employees, part time employees, or consultants. It includes whether you manufacture your own products—domestically or elsewhere—or contract it out. It includes whether your salespeople are employees or outside representatives. It
includes your marketing approach—how you advertise, attend trade shows, and use direct mail and email, infomercials, telemarketers, and other aspects of your business. Not all of these decisions are made at start-up; however, the issues and possible alternative solutions should be identified.

FACTORS THAT INDICATE BUSINESS SUCCESS

Experience shows that there is a list of fifteen specific economic factors that lead toward strong business models. Few, if any, businesses incorporate all fifteen, but observation suggests that the more you incorporate, the better your chances for success.

1. An established, identifiable, segmental market.
2. The market perceives its need for your proprietary benefits, providing
you with a true strategic advantage.
3. Repeat buyers who generate continuous revenue.
4. Penetrable distribution channels, so you can easily build the bridge to
your end users.
5. Dependable supplies of inputs (material, labor, capital, etc.) and a reliable
production process.
6. High margins to absorb operating expenses and provide profit.
7. Good cash flow, such as customer deposits or supplier trade terms.
8. Limited product liability. (You do not want product mistakes to bankrupt
you.)
9. Slow product obsolescence. (You want to avoid high rates of technological
change, physical perishability, or fashion fad.)
10. Limited entrenched direct competition. (Would you really want to go
head-to-head against IBM, Microsoft, General Motors, or
Exxon/Mobil?)
11. Intellectual property protection to build a secure wall around your
market.
12. Exit potential or other wealth creation. (Very few companies have successful
IPOs. Select a wealth creation strategy that is prevalent in the
industry.)
13. Legal simplicity.
14. Minimal government interference. (Avoid highly regulated situations.)
15. Build a company that requires appropriate levels of investment. (Be
responsive to investors’ sweet spots.)

Resources

So far, you have articulated your vision, acknowledged your values, set your goals, defined your market, and determined your economic and business model. The next strategic focus is on the resources you require to put the enterprise in motion and grow it through each of your milestones. There are three types of resources—people, facilities and equipment, and capital.

You already know the skills and experience sets that are necessary to make your business successful. Your management team and board of advisors will guide you in determining the methods of staffing your startup. They will plan the growth of your organization so that you have the appropriate quantity of skilled and experienced managers and employees to support your growth.Your team will also determine the selection and timing of facilities, production equipment, office equipment, computer systems, and other assets necessary for everyone in your organization to do their part. Finally, your financial advisors will help you determine the amount and types of funding you need to finance your growth.

Organizational Structure

As part of the planning process, you will need to determine which type of
entity best supports the achievement of your goals. Input from your management team, as well as legal and other advisors, will help in the decision-making process.

Business Plan

A business plan is a blueprint of what your business is and what you want it to become. The business plan describes a serious problem suffered by individuals or organizations. It shows how your solution to that problem is much better—not just marginally better—than those that already exist. The plan
shows how you will implement your solution, grow your company, and create ownership value.
Generally, business plans take two forms—one is the plan you write to raise capital, and the other is the plan that represents ongoing evolution of your business.

You will find that both forms must be updated frequently to incorporate your latest progress and achievements. This section focuses on the plan you write to crystallize your business strategies and raise capital. Numerous resources exist in print and online to assist you in writing a business plan. These sources range from business plan
software like BizPlanBuilder (www.jian.com) to the Small Business Administration’s website at www.sba.gov, to classic works such as the Venture Capital Handbook by David Gladstone.

Later in this blog, the use of the private placement memorandum (PPM) to raise capital for your business is discussed. The PPM is a somewhat stylized disclosure document, prescribed by federal and state securities laws.
The PPM serves a different function than the business plan. The PPM is a legal retail document and the business plan is a strategic wholesale document. In other words, when you go to individual investors to raise capital, you use the PPM as your offering document. When you approach larger investors, sometime called angels and institutional investors, including banks or financing
institutions, they are more likely to ask for your business plan.

A business plan allows you to address the essential issues of your new business, such as the unique benefits and competitive advantages of your products or services, your market opportunity and marketing plan, and how you intend to capture a defensible share of the market. The financial
statements (income statement, balance sheet, and cash flow analysis) accompanying the plan will give you, your management team, and potential investors a roadmap of the next three to five years of your business.

Your financial projections should not exceed five years, as too much can change
in that amount of time. Three years is generally sufficient. What matters is that you select a reasonable time frame during which you can achieve your stated goals.

Feasibility Analysis

Many entrepreneurs have not thoroughly considered whether the business they are proposing is commercially feasible in the marketplace—some experts call this a feasibility analysis. Marvelous ideas are born each day, but many are simply not commercially viable. One of the benefits of initially
creating your strategies and writing your own plan is discovering exactly what business you are in and how it will deliver both emotional satisfaction and financial reward to you.

The feasibility analysis is a relatively brief version of the financial model that you will eventually develop to create economic scenarios. It indicates the broad operating parameters—product volume, prices, margins, operating expenses, and resources—under which you will achieve your financial goals. Your team will examine and interpret the analysis to determine the feasibility of operating within those guidelines.

Structuring Your Business Plan

Before discussing the contents of a business plan, it needs to be clear that a business plan is a management tool—it is not a legally required document. If you have an existing business and intend to continue that business without specific plans for expansion or other significant change, then you may not yet need a business plan.

 If you are going to register with eBay to sell your grandmother’s china online, you may never need a business plan (although you do need your grandmother’s permission or A business plan should be a living document that evolves with the business and is constantly a work in progress. Business planning is a constant process, not a brief project. Internally, the business plan is a useful management tool when it is continually updated to reflect the marketplace.

It should not be treated as a paperweight. Externally, the business plan often secures bank financing and attracts private or institutional investors. When your company is more mature, a business plan may serve as a basis for a strategic alliance, a merger, or an acquisition. Assuming the business has been determined to be generally feasible, turn to the specifics of the plan. A general outline for a business plan follows. that of her estate).

GETTING INVESTOR ATTENTION

Investors want to know some very fundamental information. Do not be intimidated by the questions that follow. Very few beginning businesses will have all of these questions fully answered from the start. However, sophisticated investors get hundreds of business plans to read. Your task is to write a business plan that is sticky—a plan that piques the interest of an investor to look further at your business.

What is your business?

• What is the market for the product or service?
• How big is the market for the product or service
• Have you segmented the market into digestible pieces?
• What is the revenue model (i.e., how does the business identify and sell to its customers)?
• What have you done to develop the business model?
• Have you identified all the resources you need to support the revenue model?
• How does the business make money?
• Why is this product or service unique?
• What qualities give it a competitive advantage over existing products or services?
• How is it better, faster, and cheaper than other choices available to your customers?
• What tangible assets does the company own?
• What intellectual property (trademarks, patents, trade secrets) does the company own?
• Who are the people in management and what are their backgrounds?
• What does the investor get for the investment?
• How much will the business be worth?
• How long will it take to be profitable?
• What is a reasonable risk assessment? 

Cover Sheet and Table of Contents

The cover sheet should contain the name of your business, CEO, and contact information (including the address, phone, fax, and email for both). If you have a spiffy logo, the cover page is a good place to introduce it. The next item should be a table of contents of the major topics contained in
the business plan.

QUICK Tip
Tab It: Some reviewers like to have the various sections of your business plan
tabbed for easy reference.

Executive Summary

The executive summary is the most important part of the business plan because it is the part read first and determines whether the reader goes any further. The executive summary gives a brief synopsis of:

• • the company’s strategy for success;
• • the company’s unique business proposition;
• • how your business proposition offers a competitive advantage;
• • the market you are addressing;
•  • a description of the product and services offered;
  • the management team’s qualifications;
  • key financial data and a statement of funds required; and,
  • a statement of how you will either pay the funds back or how the
  investors will receive a return on their investment.

All of these brief topic descriptions will be expanded in the business plan. The executive summary should be brief—usually no more than two pages. Typically, the executive summary is the section written last, after the whole business plan is completed.

Statement of Purpose or Mission

This is where you articulate the vision of the company and its management.
Some writers have called this the distinctive value proposition of the company—
the formula you have devised that delivers goods and services to
your customers better than the competition does.
Description of the Business
In this section, you give the history of the business entity. For start-ups, the
following information is recommended:
• name of the business;
• legal form of the business (corporation, LLC, partnership, etc.);
• state of organization;
• when it was organized;
• location of the business;
• brief description of the owners/founders; and,
• stage of development of the business—conceptual, start-up, emerging,
or mature.

Description of the Business

In this section, you give the history of the business entity. For start-ups, the
following information is recommended:
• name of the business;
• legal form of the business (corporation, LLC, partnership, etc.);
• state of organization;
• when it was organized;
• location of the business;
• brief description of the owners/founders; and,
• stage of development of the business—conceptual, start-up, emerging,
or mature.

Description of the Products or Services Offered

Describe your products and services and show how they are related to your mission. What is your business? Be clear. Many business plans do not begin to discuss the actual business of the company until the middle of the plan. Most investors will not be that patient. Tell it up front and tell it in plain
language. If the product is highly technical, save the details for inclusion in an appendix. Keep the discussion on a strategic level. The potential financers are probably not yet interested in tactical details.

Management Team

On equal footing with the products and services offered is the credibility of the management team of the company. Investors say that the three most important factors for success in business are management, management, and management. In this section, you will be providing a synopsis of the management team and its members’ qualifications.You can include full résumés in an appendix. Investors, especially sophisticated ones, would prefer an A management team and a B idea to a B management team and an A idea.

QUICK Tip : Differentiating the As from the Bs: What differentiates the A team from the B team is a history of solid success and accomplishment. It proves the existence of skills, and experience that can mean the difference between success and failure. Do not merely state that the marketing executive spent decades with a Fortune 500 company. Instead, specify the revenue growth and profitability results achieved in products and divisions for which the executive was responsible.

Many start-up ventures have difficulty attracting an experienced management team before their business has been tested in the marketplace. One way to offset any lack of depth on the management team is to establish a board of advisers and populate it with persons well-known in the business
and professional community. Often, advisers become more interested in the business and can be recruited to join the management team. Alternatively, they may introduce you to qualified management candidates.

Marketplace and the Competition

The marketplace and competition section helps you understand and define your market, the demographics and psychographics of your target customers, your competitor’s products or services, and your business risks.



Describe the target market for your product or service and the trends in your industry. For example, your market may be consumers between 25 and 40 years of age in the Rocky Mountain states or the upscale furniture industry in Chicago. Drill down to the specific market niche that fits your situation.

How large is your niche? Investors look for products that have scalable markets; that is, niches capable of expanding with the acceptance of the product in the marketplace. How large a share of the market can you capture, and over what time?

Who are the people who will buy from you? Why will these customers buy from you and not your established competitors? Describe your competition as specifically as possible and do not ever state that you have no competition no matter how unique your product or service. It is said that the only companies that have no competition are those
that have no customers.

Marketing and Sales Plan

The marketing and sales plan section of your business plan includes your advertising, promotion, pricing, profitability, selling tactics, distribution, public relations, and strategic business relationships. It answers the question, What marketing vehicles will you use in your business—advertising in
print and broadcast, direct mail, product brochures, trade shows, public relations? You should also discuss how your product would be sold, including your distribution channels and methods.

Financial Information

The financial information section addresses your ability to make money in your proposed business.Your company’s capital requirements and the profit and wealth potential are analyzed and demonstrated here. Include any financial history as well as your forecasts in the financial statements.
Normally, your projection should forecast at least three years out.

Remember that financial projections are only as good as the underlying assumptions, which must be uniformly applied to the cash flow statements, income statements, and balance sheets. Once you have completed the financial statements, review the business plan and make sure the language and examples in your plan are supported by and consistent with the financial statements.

Some of the assumptions you will wrestle with are revenues, marketing expenses, research and development costs, general and administrative expenses (G&A), inventory, accounts receivable, property and depreciation, debt and interest expense, and cash. Do not shirk from this task. It will cause you to seriously analyze, perhaps for the first time, the financial essence and feasibility of your business proposition.

Alert!
One venture capitalist, when asked about his internal review of business plans, said, “[we] take their projected revenue, cut it in half, double the expenses and then see if it still makes sense.”

Avoid the use of hockey stick financial projections—financial statements that skyrocket during the last year or two of the planning period. It is probably not reasonable to assume that the level of marketing, production, and other resources can grow fast enough to accommodate the hockey stick. It
is also unreasonable to assume large sales volume during the first year when your business is still in a conceptual or start-up stage.

Use a Number Cruncher: Some business

Some business plan software allows you to prepare financial projections. If you get easily lost in the numbers, this may be a good time to hire an experienced financial executive to help you engineer your business. 

Time Frame and Benchmarks

You may wish to provide a section that shows the benchmarks or significant developments in the life of the company, and the projected time frame in which these events will occur. For example, at the end of month three—develop a prototype; at the end of month six—solicit manufacturing bids and filefor patent protection; etc.

Funding Request

The funding request is a statement of how much money you need, why you need it, how you are going spend it, and how the investor is going to be rewarded. In the case of a loan request, the return to the lender is the amount borrowed plus interest. 

In the case of an equity investment, an exit
strategy (IPO, acquisition, merger, sale of the company, or stock redemption) is required. Determine what the typical wealth creation event is for your industry and how business values are determined.
your industry and how business values are determined.

Appendices

The advantage of having a shorter business plan is that you can include more lengthy materials in the appendices. At a minimum, include the full résumés of management. You can also insert articles on your product or the industry trends, test results, marketing studies, or any other information that
supports the main plan. 

You will need a cover letter when forwarding your plan to someone for
review. For a start-up company, a summary business plan of approximately ten to fifteen pages may work for you. Most beginning companies do not have an extensive history of operations, and therefore, do not initially need a twenty- to forty-page plan. 

QUESTIONS TO ASK

Burke Franklin, President of Jian Tools for Sale, Inc. and the creator of BizPlanBuilder software, suggests questions to ask in formulating your business plan.3

• What type of business do you have?
• What is the purpose of this business?
• What is the key message or phrase to describe your business in one sentence? 
•  What is your reason for starting your own business?
•  What is your product or service?
• Can you list three unique benefits of your product?
• Do you have datasheets, brochures, diagrams, sketches, photographs,
  related press releases, or other documentation about your product or
  service?
• What is the product application?
• What led you to develop your product?
• Is this product or service used in connection with other products?
• List the top three objections to buying your product or service immediately.
• When will your product be available?
• Who is your target audience?
• Who is your competition?
• How is your product differentiated from that of your competition?
• What is the pricing of your product versus your competition?
• Are you making any special offers?
• What plans do you have for advertising and promotions?
• How will you finance company growth?
• Do you have the management team needed to achieve your goals?

You can also include this template as an initial summary for bankers or investors. You should have the answers to these questions readily available when seeking a loan or investors for your new venture. Some of these answers may be appropriate to include in a cover letter for the company and may accompany the executive summary document.

Consultants vs. Do-It-Yourself

You are encouraged to write your own business plan—at least the initial draft. If you are not experienced in this process, use software to assist you.Entrepreneurs need to answer the fundamental questions. What business are you really in? How does it make money and build value? From those questions flow the ways and means of entering the marketplace and how much it is going to cost.
However, you can hire a consultant to help you polish your plan. 

Many entrepreneurs use an accountant to assist with the financial analysis and projections. Remember, the soundness of financial projections is largely dependent upon the underlying assumptions. Using estimates that are based on sound experience, relevant knowledge, and thorough research will give credible and realistic results. 

In expressing financial projections, you may wish to present a conservative version and one or more optimistic versions, or worst case, expected case, and best case scenarios. This can show the investor that your conservative version is viable and more favorable conditions generate better results. 

Make Realistic Projections: Projections

Projections have a funny way of coming back to haunt you if you do not meet investor expectations. Be as certain as you can that you can make the numbers. 

What the Experts Say

The most frequent complaint among venture capitalists and other business plan reviewers is that the plan does not clearly explain both the opportunity and risks. This comment is equally applicable to the executive summary, since that is the portion of the business plan that is read first and determines whether the reader will read further into the plan.
 
Close on the heels of lack of clarity is the use of unrealistic or hockey stick projections supported by weak assumptions. Unrealistic, in this instance, means unrealistically high. Weak assumptions are those not supported by the economic realities of the marketplace. Many times, the concern is that
the assumptions are too simplistic. There is a marked tendency on the part of entrepreneurs to treat their product or service as unique in the marketplace. 

Thus, one will read claims that no competition exists. Conduct thorough research to discover direct as well as indirect competitors. Oddly, some entrepreneurs believe it is advantageous to provide filtered information to reviewers and omit a thorough competitive analysis or other information that might detract from their business model. For the sophisticated reviewer, omissions and mistakes do not generate a high degree of confidence in the plan or in management.
 
Many investors want to be on the second wave of companies entering a field or market space; thus, the existence of competition, accurately described, can actually provide an element of risk reduction. They know that competition exists in every market and that the later market entrants often have
the best chance at success. A business plan must establish the existence of a sustainable competitive
advantage, yet many business plans are weak on market analysis. One reason for this weakness is that the cost of obtaining comprehensive market data can be very high. A low-cost, high-value alternative is to get your market research from the Internet.

The advantages of the Internet cannot be overemphasized. Compare it to doing market research at the public library just a few years ago. While the uniqueness of the product or service is helpful, the proven ability of the management team is even more important. It is common for business plans to overstate management’s strengths or to provide an inadequate discussion of the management team. 

Sophisticated investors will not invest in the best product or service if there is a lack of confidence
in management or an unwillingness to cede control to professional management if necessary.
There is also a tendency to overvalue companies. The days of sky-high valuations of the 1980s and 1990s are over. 

Valuation is an art, not a science— especially in early stage companies.Your best defense is to be able to identify valuable aspects of your business and attach a realistic valuation.
Learn how investors in your industry or geographic area determine company value. In a nonrevenue company, focus on intellectual property (IP), management, and benchmarks achieved to date.
 
Amazingly, a number of companies fail to include their contact information in the materials they send or present to investors. A good place to include that information is on the front cover of the business plan and in the executive summary.

HOW TO...Get Their Attention with Your Business Plan

• Have a snappy executive summary.
• Have your contact information clearly stated.
• Keep the initial plan short—ten to twelve pages.
• Talk about your business and revenue model first.
• Describe the market and show how your product is unique in that market.
• Present a management team with a history of successes.
• Present conservative financial projections.
• Do not argue about valuation—yet.  

None of the ideas in this article are all-encompassing, and not all of the items apply to every business. The information should spark your imagination while giving a context in which to analyze the business. Take your ideas, information, and research and develop a plan that makes investors take notice. Use the executive summary to give your potential investors what they want and to get them interested in learning more.

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