As small business attorneys for almost 25 years, we have seen many trends, heard many business ideas and have been pitched countless “business opportunities.” During the course of that time, we have consulted on literally thousands of new start-up companies, and we have found that the single most important characteristic as a barometer of future success is the business plan.
Notwithstanding the ability to get business plan outlines, templates and samples from a variety of sources, both pre- and post-web, entrepreneurs routinely dispense with the planning element of their start-ups, with excuses such as “this is a sure bet,” “can’t fail,” “it’s in my head,” “I know this business inside and out,” and our favorite, “I’ll figure it out as I go along.”
Recently, the St. Louis Post-Dispatch ran a series of articles detailing the impact small business has on the local and U.S. economy as a whole. The Post-Dispatch noted that since 1993, the St. Louis metropolitan area’s net job growth has come from firms with less than 100 employees. During the reporting period of 1993 to 2007, companies with 500 or more employees shed nearly 110,500 jobs. Small companies with less than 100 employees generated over 114,000 new jobs, while companies with between 100 and 499 employees generated just over 27,000 new jobs. Of the small business new jobs, 28,300 were self-employed, 40,200 were in companies of 2-9 employees, while 45,600 were in businesses employing between 10 and 99 employees.
Nationally, the U.S. Small Business Administration stated in its 2009 Report to the President that nearly one-half of the nation’s private sector workforce and half of the nation’s non-farm, private real gross domestic product were created in 2008 by small businesses. (Noteworthy fact: 18 of the 30 companies that make up the Dow Jones Industrial Average were launched in recessions or in bear stock markets.) Clearly, for those with the entrepreneurial spirit, there are plenty of success stories to share as guideposts for starting your own business.
The business plan is primarily a source for you to evaluate the likelihood of success for your business opportunity. It is also, however, an important, if not absolutely necessary, document to both borrow funds whether through traditional financing sources or family and friends, as well as potential investors, both perhaps initially and in the future, depending upon your type of business.
Starting a new business is not something lightly undertaken, regardless of size, as it is generally required that the owners, regardless of choice of entity, must guaranty current or future obligations, whether term or line of credit financing, and premises and equipment leases. Given the risks involved, why would an owner not undertake the preparation of a business plan? (A note of caution: We have seen businesses succeed without a business plan, and we have seen businesses fail notwithstanding a comprehensive and what appeared to be a well-thought-out business plan. When a recession of the type the U.S. and global economies have experienced since mid-2008 occurs, the best of planned businesses often cannot withstand the external pressures of loss of sales and tighter credit markets.)
Business plans are both projections and road maps. They project what is anticipated in getting a business up and running from a multiple of perspectives and provide that road map against which the owners can measure their progress and make adjustments as circumstances require on a going-forward basis. Although there is no set form for a business plan, most, if not nearly all, business plans address the following issues:
Elements of a Business Plan
A. Overview elements:
|i.||Narrative of what your business will be – describe “the opportunity.”|
|ii.||Where will your business be located, and where and how will it market and sell its goods or services?|
|iii.||A cold, hard look at the competition in your industry in your locale.|
|iv.||An analysis of what differentiates you from the competition, if you are different.|
|v.||Marketing plan and cost analysis.|
|vi.||Operational procedures overview and, to the extent necessary, summary.|
|ii.||Equipment, both purchased and leased;|
|iii.||Personnel, both direct and indirect (e.g., taxes, insurance and benefits);|
|iv.||Cost of goods;|
|v.||Marketing and advertising;|
|vii.||Licenses and permits;|
|a. Business liability;|
|b. Property insurance;|
|c. Contractual indemnification, if required under contracts or lease;|
|d. Health and medical insurance; and|
|e. Life insurance;|
|b. Accountants; and|
|c. Business and marketing consultants.|
C. Financial projections and documents:
|i.||Pro Forma balance sheet (24-36 months);|
|ii.||Monthly Pro Forma profit and loss statement (24-36 months);|
|iii.||Cash flow analysis (36 months);|
|a. Month-by-month (first 12 months); and|
|b. Quarterly summary (months 13-36);|
|iv.||Assumptions underlying financial projections; and|
|v.||Identification of source of funds.|
D. Additional documentation to support bank or investor financing:
|i.||Owner’s tax returns for last three (3) years;|
|ii.||Personal financial statement;|
|iii.||Résumés for all owners; and|
|iv.||Copies of any relevant supplier or vendor documents.|
By preparing a business plan, an owner should have a better understanding of the challenges confronting their business, programmatically, strategically and financially. By preparing a business plan, you are afforded the luxury of refining, and refining yet again, your ideas before incurring substantial costs while operating your business. As your business develops, you will likely see changes from your financial projections and operational underpinnings, both good and bad. A business plan will allow you to make adjustments on paper which will allow you to see what must be done in order to seize the business opportunity that you may be facing and address any challenges that may be confronting you.
And of course, having a business plan to start your successful operation will give you something to look at years from now and wonder how you did it! Maybe you will even be able to impress your children!