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Patterns of Entrepreneurship Management

5th Edition Chapter 6

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Writing the Business Plan

Business Plan Fundamentals

• Attracts Investors

• Evaluates Feasibility of Business Concept

• Serves as an Operating Guide

• Attracts Potential Business Partners and Key

Employees

• Attracts Potential Customers and Suppliers

• Business Plans are becoming more concise and more

than 12 pages is considered too long

• All really detailed content goes in the Appendices

• Even the Business Model Canvas is being used to

communicate plans

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Business Plan Development Guide

Outline:

• The Executive Summary

• Business Description

• Market Analysis

• The Management Team

• Operations

• Critical Risks

• The Financial Projections

• Appendix

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

The Executive Summary - 1

Objective:

• Capture interest of investors and other

stakeholders

• General overview of business idea

• How will it work

• Bullet form

• Emphasize key issues

• No more than 2 pages

• Should be written LAST

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Include the following: • Company profile

• Nature of the product or service offering emphasizing any competitive advantages

• Identify foreign/domestic markets to be targeted

• Size and growth trend of market

• Make-up and background of the management team - include individual skills

• Financing requirements

• Key projections (i.e., sales, gross profits, net income.)

The Executive Summary - 2

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Business Description - 1

Objective:

• Provide a detailed overview of the company

and the nature of the product/service offering.

• Show long-term commitment to developing the

venture.

• Show defensible competitive advantage.

• No more than one page for this section.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Business Description - 2

Include:

• Mission statement

• History behind the idea or current business

• Company’s current or proposed legal form

• Proposed entry strategy

• Description of the initial product/service

(including any anticipated competitive

advantages)

• Product/service research and development.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Market Analysis - 1

Objective:

• Prepare an opportunity marketing analysis.

• Demonstrate how to capture a large share to

support the venture.

• Show how to support claims and customer

interest.

• No more than 2 pages for this section.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Market Analysis - 2

Address:

• Description of industry including size, trends

• Description of region and/or countries (international

business)

• Targeted market segments

• Primary and secondary market research

• Competition

• Barriers to entry

• Marketing entry strategy to deliver products/services to

the targeted markets.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Management Team - 1

Objective:

• Show that the team can effectively manage the

product/service into foreign or domestic markets.

• Does management have the background and skills to

make the venture a success?

• Highlight synergistic skills.

• Show how deficiencies will be covered.

• Do not give up more control than absolutely

necessary.

• No more than two pages for the whole section.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Address:

• Background and primary responsibilities of the

management team

• Organizational structure

• Board of directors/advisors/international trade

specialists

• Ownership structure

• Future potential hires

Management Team - 2

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Exit Strategy if Investment is Sought

Objective

• To be determined and stated clearly up-front

• No more than one page for this section.

• Some options include:

– going public

– selling the business

– a stock buy-back at the going rate

– leveraged buy-out

– second round of investment allowing some

liquidity

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Operations - 1

Objective:

• Focus on relevant cost.

• Demonstrate ability to carry out

implementation.

• Integrate operation costs with the financial

section.

• Spell-out make/buy options.

• Explain use of external partners if planned.

• No more than 2 pages for this whole section.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Address:

• International Considerations

– market development activities

– transportation

– export documentation

– foreign contacts and personal relationships

• Future Research and Development Plans

– cannot be built around a single service or product

– present the planned directions of R&D

– extensions and new products/services

– new markets to be considered

– improve on existing production processes

Operations - 2

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Address:

• Production Plan

– procuring and transforming critical resources

– internally

– externally

– time line of events

• Customer Support

– focus on getting and keeping customers

– customer service

– what role it plays in achieving sales goals

Operations - 3

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Address:

• Personnel

– creating management and infrastructure charts

– hiring

– training

– compensation plans

– stock option plans

Operations - 4

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Critical Risks - 1

Objective:

• Identify potential problems that could

significantly affect the new company.

• Let potential investors know up-front that

there are risks associated with the venture.

• No more than one page for this section.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Critical Risks - 2

Internal

– loss of key employees

– inadequate working capital

– unproductive R&D

– breakdowns in plant and equipment

– bottlenecks in the distribution channels

– factors not covered by insurance policies

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Critical Risks - 3

External

– inability to protect IP and patent violations

– changes in technology, government

regulation or protectionist legislation

– adverse economic conditions, market

changes

– failure to procure sufficient funding

– unstable banking/financial and

transportation/distribution systems

– potential effects on financial plans

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Address:

• Contingency Plans

– probabilities

• Insurance Provisions

– fire

– liability

– automobile

– worker’s compensation

– key person

Critical Risks - 4

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Financial Projections - 1

Objective:

• Convince investors or bankers that the venture

makes sense from a financial standpoint.

Address:

• Projections must address:

– allocation of expenses

– return on investment

– cash flow management

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Examples:

• Historical financial data, if any

• First year financial projections by month

• Balance Sheet

• Income Statement

• Cash Flow Statement

• Second year financial projections by quarter

• Five year annual forecasts

• Break-Even Analysis

• Ratio Analysis

Financial Projections - 2

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Valuation - 1

• “Residual Value” commonly used by investors.

• Should be done before meeting with investors.

• Will help you to assess what ownership you may

have to give up based on the expected ROI for

your type of venture.

• Use the “time value of money” equation: n

Future Value = Present Value (1+i)

i = estimated rate of return investors will require based on

the

perceived risk associated with your type of venture

n = number of years

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

• Calculate the future value of the up-front

investment needed.

Example: Funds needed = $500,000

Average annual return on investment (ROI) = 45%

4 FV = $500,000 (1+.45)

FV = $500,000 (4.4205)

FV = $2,210,253

Valuation - 2

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Example:

• Determine the point in time that will be used

in the valuation calculations.

Example: 4 years

• What are the projected after-tax profits?

Example: $1,855,050 (year 4)

• Determine the valuation factor by looking at

similar companies in your industry.

Example: 10 times after tax earnings

$1,855,050 x 10 = $18,550,500

Valuation - 3

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

• Determine the amount of equity you may have

to give up, based on the value of the venture,

and the future value of the potential investors’

initial investment.

Example:

$2,210,253 -------------- = 12% $18,550,500

Valuation

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Balance Sheet

• Working Capital Position

• Capital Asset Position

• Capital Structure

Pro Forma Balance Sheet:

Current Assets Current Liabilities Fixed Assets Long-term Debt Intangible Assets Equity

Total Assets = Total Liabilities + Equity

Chapter 5

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Cash Flow Statement - 1

Objective:

• Demonstrate that you have sufficient cash to

run the operation.

• Assess the timing of future cash flows.

• Develop a plan for subsequent rounds of

financing.

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Cash Provided (used) from Operations Net income (loss) Depreciation Adjusted net income (loss)

Cash Provided by Working Capital Accounts receivable (increases) decreases Inventories (increases) decreases Accrued liabilities (decreases) increases Prepaid expenses (decreases) increases

Cash Provided (used) by Continuing Operations

Cash Flow Statement - 2

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Continued:

Cash Provided (used) from Financing Activities Long-term debt (decreases) increases

Interest on notes Cash dividends paid Issuance of stock

Total Cash Provided (used) from Financing Activities

Cash Flow Statement - 3

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Continued:

Cash Provided (used) from Investment Activities Purchase of property, plant and equipment Proceeds from sale of assets Other acquisitions

Cash Provided (used) from Investment Activities Increase (decrease) in cash Cash at beginning of period Cash at end of period

Cash Flow Statement - 4

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Income Statement - 1

• Revenue Projections

• Cost Relationships

• Tie into the Operating Strategy

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

Income Statement - 2

Pro Forma Income Statement

Revenue

- Cost of Goods Sold

Gross Profit Margin

- Operating Expenses

Net Income Before Interest and Taxes

- Interest

- Taxes

Net Income (Loss)

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix

What goes here?

– Detailed financials, the sections covering all

financial issues should be no longer than 2

pages of SUMMARY in the main text.

– Detailed research

– Mock-Ups

– More Technical/Complex information

Chapter 6

Executive Summary

Business Description

Market Analysis

Management Team

Critical Risks

Operations

Financial Projections

Appendix