Attract New Investors With Your Business Plan

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This blog post is presented courtesy of Everingham & Kerr, a merger and acquisition advisory firm that specializes in providing intermediary services for lower middle market companies and entrepreneurs. The article is reprinted from their 2015 year end newsletter.

If you think business plans are only for young companies seeking initial financing, think again. A business plan can also help established companies make strategic decisions and communicate with lenders and investors when they seek new capital infusions. A good plan that clearly and succinctly outlines the company’s purpose, profitability, industry, competition, management and personnel generally takes between four and eight weeks to prepare. Pulling together accurate financial projections often is the most difficult business plan–related task for management, but such financials are critical to attracting new investors — including business buyers.

Your plan should provide its readers with a realistic perspective of all aspects of your business operations. This includes details about:

• Product and service offerings,
• Market factors and strategies,
• Industry trends,
• Competitors,
• Management and staffing,
• Pricing and marketing strategies,
• Business risks and what might mitigate them,
• Strategic and financial goals, and
• Historical financial statements and a financial forecast.

While the purpose of your plan may dictate its length and level of detail, the best business plans generally are concise and targeted to their specific audience. For example, lenders are concerned about your ability to repay loans. Therefore, a business plan targeting lenders should focus on financials showing adequate collateral, a history of steady cash flows and an ability to reach future financial objectives. The plan should also specify loan requirements, how your business intends to use the funds and how it plans to repay them. Private investors will be concerned with all facets of your business.

When addressing potential investors, your business plan should specify three important things:

1. How much equity are you offering in exchange for what amount of money?

2. How will your business use the money?

3. What return on equity can investors expect?

Major investors typically put a high premium on the experience and quality of a company’s management team, looking for individuals with a history of successfully implementing a business plan in the specific market and achieving financial goals. Investors will also be interested in your market research and analysis of business opportunities. So be sure to discuss potential barriers to bringing your products to market, such as government regulations, competing products, disruptive technologies, raw material costs and high product development costs.

The information conveyed in your plan is crucial for an investor’s valuation of your company and the terms and conditions necessary to attract additional funding. If, for example, your business’s most valuable asset is its intellectual property, you need to convincingly convey the value of patents, licenses, trademarks and trade secrets.

Financial statement projections can show that you understand how your ideas and objectives translate into tangible results. While a certain amount of detail is important in substantiating the projections, don’t add too much detail in your business plan. The finer details often are best discussed during face-to-face meetings. These personal interactions between management and investors will showcase your understanding of the business. Even if you draft your basic business plan internally, consider engaging outside advisers to prepare financial statements. (Note, however, that it’s never a good idea for a business to allow outside advisers to write the entire business plan without significant input from management.)

Not only will your business plan help you communicate with lenders and investors, but it will also come in handy as a comprehensive overview when you decide to exit your business. In fact, consider including your exit strategy — whether it involves selling to another company, selling to your management team or passing your business to family members — in your business plan. Even if your plans change over time, including an exit strategy in this important document helps to promote stability and value.