By Paul A. Broni
If you are preparing to raise capital from either an investor or a bank, you’re probably writing a business plan. Here are five of the most common mistakes that I have seen as a result of my experience as a commercial banker and corporate-finance consultant:
Submitting the Plan to the Wrong People
I have actually heard entrepreneurs say, “I don’t know why I can’t raise any money. I’ve sent my business plan to hundreds of people!” Don’t make this same mistake.
You should first determine that your prospective investor or lender has an interest in your industry and your business. Do this by making a call or sending an introductory letter or e-mail. If you can receive a referral from an accountant, attorney, or banker, that is all the better
Never, under any circumstances, should you send an unsolicited business plan. These are put at the bottom of the pile, and they are seldom read or given serious consideration. If you determine that your prospect has an interest, send over only the executive summary for review, unless otherwise requested.
Incomplete Executive Summary
The first thing that all prospective investors and lenders will want to read is your executive summary. This section should be no more than two pages, but three is the absolute maximum. When you write your business plan, the executive summary should be prepared last. (After all, how can you summarize something that has not yet been written?)
The summary should be broken down into five sections, each of which should be no more than one or two paragraphs long. These five sections are:
The Opportunity: Describe the need that is currently unfilled in the marketplace; if the need is being filled, discuss how it is not being adequately met.
The Solution: Describe your solution to the problem, and why it is better than what is currently available.
Management: Describe why you and your team are qualified to deliver the solution that you have proposed.
Market Size and Share Expectations: Describe how large the market is for your solution, and discuss how much of that market you intend to capture.
Financing Need and Exit Strategy: Describe how much money you need and what it will be used for, but close with how you intend to provide the investor with an exit strategy.
One of the sections that all investors will read first is the discussion on management. If you do not have direct, significant experience in the industry in which you’re trying to start your business, add someone to the management team who makes up for your weakness.
Either agree to hire full-time executives or bring skilled directors onto the board. If you are searching for funding from angel investors, you might offer executive management positions to those investors who have significant experience in the industry. Venture capitalists, on the other hand, are not likely to invest until the management team is complete.
Unreasonable Financial Projections
All lenders and investors are accustomed to seeing financial projections that go in only one direction — up!
While every business owner and entrepreneur has the best of intentions when preparing a forecast for the next five years, it is seldom realistic to assume that sales will grow by 50-100% each and every year.
It is also not likely that gross and operating profit margins will improve forever.
Your assumptions with respect to working capital turnover, earnings retention, debt/equity mix, and return on invested capital must all be reasonable. If you forecast that your business will return 100% or more on its invested capital during each of the next five years, you are going to have some explaining to do. That does not mean that it is not possible, just that it’s not probable.
Nothing will ruin a deal faster than greed. If your business is little more than an idea at this point, it is not feasible to value the company at more than a few million dollars. If your plan is to raise $2 million in exchange for 10% of the business (i.e., a $20 million valuation), you are going to have a tough time attracting the interest of venture capitalists and angel investors.
Spend less time worrying about the valuation today, and instead focus on structuring the transaction so that you can re-acquire a majority ownership interest in the future.
Moreover, don’t be too quick to equate majority ownership with control. You might be able to sell non-voting stock that does not give away control of the business.
About the Author
Paul A. Broni is a principal of Rockville, Md.-based Mercury Partners Inc., a firm that provides high-quality bookkeeping, payroll, and advisory services to small businesses.
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