There are not so many venture funds and investors in the world that are ready to invest in the implementation of other people’s business ideas. In general, launching your own business, for example, in the USA is a pretty risky thing: only 3% of startups survive and only 1% of them really make a profit. So-called unicorn startups, i.e. projects that are an immediate success on the market and earn millions of dollars are even more rare.
If the method of participation in the capital is chosen for financing a business (that is, the financing will be carried out at the investor’s expense), it is necessary to outline some features that are inherent to the investor-oriented business plans.
Financial calculations should be made considering the current tax system. At the same time, it makes sense to determine several taxation options, which would reduce costs and increase profits eventually. Strategic plans should be calculated taking into account the announced planned changes in the tax system.
The work of the company should be forecasted under the current legislation and the political situation aimed at developing the investment attractiveness of the country. It is very important to envisage not only the competitors’ behavior, but also the policy of the state as well as possible adjustments to legislation that could affect the results of business activity.
The question of recruiting and organizing the work of the employees is a very problematic one, since it’s difficult to find people who are capable of devoting themselves to the implementation of the idea. The business plan needs to be represented with the established management structure and the staff should be recruited to perform the ongoing work.
When forecasting financial indicators, the real rates of the investor’s interest should be considered. Actually, they should be higher than the risk-free investments in government bonds.
A modern investor is scared away by the obsolete corporate governance patterns, under which he does not make a profit since the funds are spent on development. The profit-generating policy of a modern company should be balanced, taking into account both the development of the enterprise and the satisfaction of the investor’s interests.
One must adhere to the standard structure, when composing a business plan. At the same time, it is worth focusing on the facts that will be of an interest to a foreign investor.
20 rules how to prepare a business plan for investors
Presentation of the Business Plan (Summary)
Imagine you are a multimillionaire or his assistant who is every day visited by the young businessmen searching for a financial support. You are spending several hours negotiating, listening to the presentations and looking through a pack of papers in the evening. Another business plan… Processing of the documentation is routine and exhausting, therefore only the business plans that stand out by means of their presentation part have a chance to attract a closer attention.
Rule 1. Pithiness
Presentation is a brief overview of the research and analysis results that were conducted in the main sections of the business plan. It is prepared at the very end but is briefly given at the beginning of the document on one or two pages. These two pages should be clear and concise. They should contain the purpose and key tasks, as well as the main financial indicators aimed at attracting the investor’s attention. The introductory part in this section is useless.
Rule 2. Advertising
If within the two minutes of processing the documents the investor fails to get interested, then all other thirty pages of the business plan no longer matter. The presentation is an advertisement that allows sell the business idea, therefore, it’s highly desirable to involve advertising specialists and professional copywriters who have the necessary skills of providing the information in a favorable light.
Rule 3. Serious intentions
Show your own determination and a serious approach to business. Before creating a business plan, you should determine the amount of money you are ready to risk to implement your idea. Emphasize the investor’s benefit as well as how many own funds is invested in the project and how many is borrowed. Remember the main thing: if a businessman is not ready to risk his property to realize his own dreams, if he is not trusted by his family and friends, then who else will believe in his idea?
This section shows whether the future business owner is a dreamer or a realist. One can dream of huge monthly incomes growing in a geometric progression, one can set a half-year payback period of the project, but only this section will show to which extent the planned profits are real. Before composing a business plan, you should explore the conditions in which the future activity will be carried out.
Rule 4. Understand your target audience
It is necessary to describe the target audience, namely, the average age of the buyer, which activity he is involved in, where he lives and how he will buy the product. Before composing a business plan, all the peculiarities and the interests of an average buyer should be defined and well understood. A clearly defined audience allows optimize spendings on advertising, which is undoubtedly very useful at the beginning of the company’s performance.
Rule 5. Understand your competitors
It is necessary to clearly identify competitors and analyze each one, revealing the strengths and weaknesses of their business. For example, before making a business plan of a shop, it’s a good idea to visit all the shops in the nearby area and make some purchases there. This helps determine the average prices, level of service and quality of the products.
Before making the business plan for a restaurant, it is advisable to pay a visit to all the restaurants in the city to get acquinted with their offers, prices and service level. This is the only way to find out the people’s needs and offer them a favourable solution. Before preparing a business plan for a coffee shop, you should regularly drink coffee in various locations and become a true connoisseur of it. Only fans and devoted people are able to create the products and services of the premium quality.
As a result, new services or products should be better than the best offers on the market considering the quality or price.
Rule 5. Hidden competitors
Never tell the investor there are no competitors on the market. Even if you create an unparalleled new product, several companies offering similar products already exist. It is these companies that will become your major competitors in a month or two after the product release. To do this, it is sometimes enough to modify the existing production processes which is much easier than launching a new business. Hidden competitors must be indicated in this section.
Rule 6. Market volume
This figure is quite difficult to calculate. It is determined by the total sales of all competitors. Sales volumes can be obtained in two ways:
- send a request to the local office of statistics that provides sales information for a particular industry in the region;
- surveillance and espionage methods that require establishing contacts with competitors and trying to get at least approximate figures.
The defined market volume allows predict the maximum revenue that a new company can get by pushing the competitors out or sharing the market with them. In the methods of fair competition are used, the market volume should be divided by the number of players. In case of the aggressive competition, the figure can be increased to 50-80% of the market.
This section should also contain the description of industry trends. The situation in the country or even in the world should be considered if the new product is export oriented.
Rule 7. State regulation
An overview of the political regulation of the market is one of the most important. It is necessary to investigate existing legislation, state measures to support the industry and identify the obstacles. Many plans can be created but the ignorance of a real situation (for example, the need of license or its high value) may be an obstacle of their implementation.
Rule 8. Market price
All competitors’ price proposals for similar products should be studied, since these facts will be a key when planning the production costs and pursuing an independent pricing policy. The price of the finished product can not be higher than the maximum price on the market, unless the product has more qualitative characteristics.
Getting Acquainted with the Product
If the new product or service is familiar and clear, then this section should be the first one after the presentation part. If the product is unfamiliar, this section should follow the market review, informing the investor with the preconditions for creating a product and describing the market situation.
Rule 9. Utility of the product
All new products or services should be useful to a particular audience. Studies of the products’ utility are mandatory. To begin with, you need to create a product that will be useful to the business owner and he should be ready to share it with the others. For example, before making a business plan for a travel agency, it’s worth arrange a vacation for the family or friends and only after their positive feedback make a decision regarding the launch of the agency. If the close environment confirms the need for a new product, there is a chance for business to grow.
Rule 10. Benefits of a new product
This part of the section describes benefits of the product over the products of competitors. It is advisable to make a comparative table, in which all the possible qualities of the goods or services that already exist on the market are clearly formed. Such table allows clearly understand whether the new product has a potential to crowd out the competitors.
Rule 11. Prototype
There are practically no investors who are ready to finance the creation of prototypes. People will not invest money in something that does not exist yet. You have to provide a description of the prototype or demonstrate the way the product works. For example, before making a business plan for a beauty salon, you should work in informal conditions and submit the photos of the finished work in the appendix. The same refers to the repair works, construction, cleaning. When it comes to legal, financial or other information services, you should show the research results and attach them as the appendix.
Rule 12. Pricing
Price is a key factor in generating profit and defining the payback period of any business project. The price can not be too high because such goods will not be sold. At the same time, it can not be low, because the company will not grow and receive the profit. No one will invest in such a business plan. The price of the product should cover all expenses, development aspirations of the enterprise, interests of the investor and at the same time remain within the limits of average market prices. If this is a feasible goal, then the business plan can be implemented.
Even the most valuable and useful products may not generate income unless they are bought. Modern marketing strategies make it possible to sell virtually everything, so the correct approach to sales is a basis for putting the ideas into practice.
Rule 13. A team of marketing managers
It is quite difficult to be involved both in production and sales at once. Marketing is a whole science and a set of certain technologies that the nonprofessionals can not effectively implement. To convince people to buy the product, a whole team of people should work taking care of expanding a customer base, constantly reminding about the company and doing everything possible to keep the new product in the center of attention.
If the business owner does not have such talented people or he is not endowed with the proper abilities, then it’s better to make use of the services of marketing professionals whose reward is a certain percentage from sales. Marketing companies promote the product in the well-established channels of sales allowing maximize the revenue and support the efforts to obtain a solid position on the market. At this stage, it may even be worthwhile to give up profits in favor of paying the marketing managers.
The production plan is developed in accordance with the planned sales volumes. The figures are provided by the sales department and when it comes to the business plan composition, they are brought in line with the forecasts of the marketing managers and the planned scope of market coverage.
Rule 14. The reality of calculations
Any experienced investor knows the bottlenecks of business planning. One of them is the discrepancy between the production plan and the volume of sales. The production plan includes the equipment power and the ability of the personnel to support demand. It is necessary to show the mode in which the equipment and hired personnel will work. All these plans are finally approved in the budget showing the product’s price and the list of direct and indirect costs. The ultimate price should be in line with market prices and competitive strategy.
Rule 15. Organizational structure
It is a rare situation when business starts with a complex organizational structure. At the initial stages, the owner performs 60% of all work and the staff is hired for help. However, a team of professionals who are competent in their area should be formed as the production volumes increase. It enables the company to develop.
Rule 16. Participation of the investor
Quite often, investors take on a certain role in the organization of the company. This includes but is not limited to the promotion of a product through the established sales channels or the organization of financial management. This section is formed by a prior agreement with the investor regarding the joint participation in a business activity.
Rule 17. Taxes
All calculations are made taking into account the current rates of taxes. Before starting a project, it is advisable to consult accountants in order to show the investor the financial situation as close to the real one as possible.
Rule 18. Profit
The policy of profit generation must be highly sustainable. An enterprise with high investments rarely shows profits during the first years of its activity. However, if after three years the activity brings no profit, there is no chance of finding an investor for such business. Profit should be allocated to development and consumption. You should not offer all the money earned to the investor as a reward, because the profit is equity and can also be a source of property formation.
Rule 19. Discounting
The average discount rate in international practice is 10%. It should be noted that the discount rate is the rate of return that an investor can be guaranteed if he makes risk-free investments, i.e. investments in government obligations. Discounting at a too high a rate is not justified.
Rule 20. Indicators
Cash flow is the main indicator for any investor. The investor should participate in a free cash flow that remains after the development costs of the enterprise are fully covered. The net free cash flow should be shown if the company also generates capital through a bank loan.
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