I was asked to review four sample business plans and address the following three questions for two of them.
- What are the strengths and what are the weaknesses of each plan?
- Select one area that you think the business plan in deficient in. How and why would you change it?
- Assume that you have the financial resources. Would you invest in the business? Why?
I chose the business plans for Acme and Generico.
The Acme business plan is fairly well written. The writers clearly have a good understanding of the market they want to reach, the competition they will face, and how they want to differentiate themselves from their competition. In fact, I would say that one of the greatest strengths of the Acme business plan is their understanding of how their competition operates. It is clear that the founding partners have experience doing business with or working for the name brand consulting firms they acknowledge. Unfortunately, these are counterbalanced by the plan’s lack of a marketing plan and unbelievable performance figures. Although the founders have clearly done market research and they have a pricing plan, there is no detail in how they intend to conduct sales. One can only surmise that they plan to use the founders’ personal contacts within the industry to garner future prospects. Regarding the performance figures, the ratios table is particularly telling. By every metric, the firm intends to outperform the industry. Unfortunately, the rest of the plan gives no details regarding how they intend to do this.
I would keep the figures as they are and work to improve confidence that the founders can bring that much business to the firm. For example, the plan indicates that a brochure will be developed and that the initial literature and mailing will be “very important.” The plan goes on to say they will target a few thousand well-chosen potential customers. Assuming the founders have the inside track on a few of the more important customers, I would provide more detail regarding those customers. Obviously, the plan can not go into too much detail regarding specific customers, but investors have got to see more than a plan to send brochures to a few thousand customers.
I would not invest in this company at this stage. They are planning to go up against big name consulting firms and have shown no real plan for how they will get their foot in the door. They readily admit that competing with the brand name firms is going to be difficult, and they do have a way to differentiate themselves from those firms. Unfortunately, until they can land some well-known clients, it is unlikely that they will gain ground. If I knew, for example, that they had tentative agreements with Microsoft and HP to do some market research, I would at least feel confident that they had access to the right people in the right firms. As it stands now, they have a good idea targeted at a good niche, but no real idea of how they are going to turn potential customers into paying clients.
The Generico business plan is very well written. I can honestly say I liked everything about the plan. The are in a growth market and are expecting a very reasonable level of market share (3%). Additionally, they a strong list of customers and have already made inroads with them. I have no doubt they will sell their first product as soon as its ready. They know exactly who their competitors are and how they will compete with each one. I only see two weaknesses with their plan. First, it concerns me that they do not have a CFO. They do have a controller in place and the financials look good, but I’m surprised they do not already have a CFO. The second concern is that there is no room for outside investment without diluting the equity of existing employees. Currently 100% of equity is tied up with existing employees. Not only does this mean outside investment is not an option (in the current structure), but the future CFO and Director of Sales will not have an equity stake.
Unfortunately, Generico is past the point where they can bring on a CFO before the business plan is out. Although the existing controller is good, they are clearly looking for a more senior person with existing industry experience. I would not try to address this weakness in a hurry. Instead, I would focus on how the equity is currently structured. As mentioned previously, the document seems to indicate that 100% of the company is owned by various employees. If this is the case, there is nothing available to offer outside investors or future employees without diluting the existing employees shares. If this is the case, Generico needs to consider changing the equity structure now rather than later. They should consider adding a pool of shares (perhaps even doubling the number of current shares) and keeping those available for the future. There’s also the possibility that they have already done this and the percentages listed on page 25 represent a percentage of that pool rather than the entire pool. If that’s the case, I would recommend rewriting the ownership section to make it more clear.
I would definitely invest in this company. At the moment, it looks like they are merely looking for a $2.5 Million loan and it appears they are looking to pay 13% interest per year on that loan. Those numbers are based on the assumptions listed on page 26. Although I would much rather have an equity position, I would be very tempted to take them up on the 13% for the loan.