THE BASIC BUSINESS PLAN: WHAT IS IT AND HOW TO MAKE IT

Introduction:

When seeking to either find partners or investors in a business, or create some type of business enterprise requiring joint efforts, it is usually necessary to formulate a written detailed proposal for the anticipated business venture. This document is vaguely termed a "Business Plan" and can encompass variations that range from documents that merely summarize in very general terms a concept, to massive documents with detailed financial projections attached and certified by professionals.

The purpose of a business plan normally determines its complexity. If one seeks to raise money from investors in the United States and many other nations, one is subject to the Securities Laws which exist to protect investors and which specify, often in remarkable detail, precisely what disclosures and warnings must be made in any document (the "Prospectus") handed to an possible investor. Violation of these specific instructions can lead to civil liability to the investors and even criminal penalties being imposed by the State or Federal government.

Tremendous care (and expense) is necessary to create the Offering Documents that are shown to such potential investors and it is common for both the attorney and the certified public accountant to sign off on these documents after their own careful due diligence since they can be held liable for inaccuracies in such documentation. Such documents therefore are extremely time consuming and expensive to create and costs range between thirty thousand to hundreds of thousands of dollars to create such complete documentation, the latter usually being involved in a public offering. Smaller offerings are exempt from the copious documentation required but still can easily cost in excess of thirty thousand dollars.

This article shall NOT discuss the Business Plan normally attached to such offerings but, instead, shall concentrate on the typical Business Plan created to show to possible separate entities they may wish to engage in the proposed plan as vendors or buyers, as licensees or licensors, etc, NOT to passive investors. What is discussed herein is the Business Plan often thought of as a "proposal" or "sales pitch" delivered to a business contact for their consideration and future negotiation.

While securities laws usually do not apply to such proposals, there is still potential liability if done incorrectly. There is a definite balance that must be struck between advocating the proposed business venture and being forthright in revealing its risks and potential downsides. Put simply, if too much of the risks are left out, the recipients can later argue that fraud was involved in soliciting their involvement and seek damages. It is not uncommon, especially in the United States, for a failed business venture to result in acrimonious litigation as the parties seek to blame one another for the loss.

Further, depending on the structure of the business proposed, it is possible that the disgruntled business partner may later claim that it was a defacto passive investor under the broad definitions of "security" commonly used by Federal and California regulators and seek to impose the various severe penalties that such violations can impose. Thus, if the business plan has a proposed partner not actively involved in the business and merely acting as a funding source for the venture, receiving a percentage of the profits, then it could be classified as an investment by the courts requiring a full Prospectus.

It is therefore critical at the structural stage of any new business venture to involve experienced counsel to ensure that the proposed business does not end up being considered a securities offering and thereby exposing one or more of the partners to extreme liability. Such structures must be carefully examined in all their aspects and can not be the subject of this article: the reader is advised to consult with counsel in any transaction in which any of the parties in a proposed business is other than an actively involved and operating company.

Assuming for the moment that the Business Plan is a typical proposal for a business venture rather than an invitation for an investment, the following factors and methods of presentation should apply.

THE WRITTEN PLAN

So long as it is written carefully, there are definite advantages to a written business plan. Ideas are necessarily clarified by writing them down and confusion is avoided between possible partners since it becomes clear if their goals and concepts are the same. It also allows critical analysis even from those business people who reject the plan since by laying out the ideas in outline form, one necessarily subjects the plan to such careful scrutiny.

But by far the greatest advantage is that it eliminates for the most part later claims that one did not fully explain both the concepts and the dangers inherent in the plan. Speaking from experience, there is nothing like pulling out the original plan to show to the jury in litigation to prove that the now angry licensee was fully aware and advised of the risks.

Unlike securities laws, there is no set "formula" for how to draft a business plan, though there are common features which are discussed below. The business plan is invariably a compromise between the proponent, the entrepreneur who is excited about the prospects and hopes to put together the deal and thus "puffs" up the expectations of the readers, and the lawyers or accountants who warn against too much optimism and want cautions sprinkled all over the plan.

One client told the author that if he put in all the warnings desired by the attorneys that only an idiot would ever take the risk of investing a penny. The corollary, of course, is that making too optimistic predictions invariably results in disappointment and anger when those predictions fail to come true.

But a truly brilliant entrepreneur business woman known to this author possibly made a very good point when she commented that warning of all the dangers actually increases the credibility of the plan. Any potential business partner wants to know the downside but, even more importantly, wants to know that the plan has already been subjected to objective and critical scrutiny and that the author of the plan is not some neophyte who has let emotion cloud their judgment. She stated that her goal is to find more things wrong with the Plan than anyone it is shown to could, and answer the points before they are made. "If they do not believe I can analyze the dangers of my own plan, they will not think I am more than a saleswoman touting a scheme. I want them to know that I am a business woman and entrepreneur who has done my home work." She was usually quite successful.

Certain cautions are automatic, such as stating that these are only projections and predictions and, while representing the best thinking of the author, are not warranted as guaranteed. Other cautions, such as consult your own professionals, are also good protection.

But the core of the plan is the summary at the beginning since if one does not win the attention of the reader in that initial paragraph or two, the rest of the Plan will never be read.

The usual plan has the following outline:

1. SUMMARY OF THE CONCEPT AND ITS LIKELY RETURN
2. SUMMARY OF THE STRUCTURE REQUIRED INCLUDING FUNDING
3. GENERAL DESCRIPTION OF THE BUSINESS AND MARKET
4. STATEMENT OF RISKS AND COMPETITION
5. SUPPORTING DOCUMENTATION AND FINANCIALS
6. OCCASIONALLY, SUPPORTING LETTERS FROM INDUSTRY LEADERS OR PROFESSIONALS
7. ROUSING CONCLUSION AS TO HOW IT IS WORTH WHILE TO INVEST AND CONTACT INFORMATION.

It is usually a good idea to get the reader to execute a negotiation confidentiality agreement before he or she is shown the plan. A form for that document is on the web site, retainer articles page, the NEGOTIATIONS NONDISCLOSURE CONTRACT. Absent such a contract, your ideas are NOT protected unless there is a patent or copyright.

Very often, a very brief summary of the plan is presented to prospects before the longer plan is presented, or there is no longer plan at all, the parties merely meeting to negotiate if the shorter plan sparks interest. Typically, the shorter plan is only the first four categories above in quite brief form closing with an invitation for further discussion if interest is aroused.

It is important to note that the industry style, the nationality of the recipient, the corporate culture of the recipient, etc. all must be taken into account in creating the plan if one is creating a plan for consideration by Japanese, the document bears no relation to that presented in Argentina or Indonesia. However, multi nationals normally are uniform in what they want to see within an industry and plans for American businesses are also quite similar. Assume that the recipient will take the plan to attorneys and accountants for review and plan accordingly.

Lastly, keep the plan human. This is your idea, your dream quite often, and the spark of enthusiasm, while tempered with hard thinking, should be seen. Any good business person knows that without commitment no plan can succeed and your plan will get little attention if you do not make it clear that you are excited and enthused about its possibilities.

TYPICAL SHORT PLAN:

What follows is a fictional short business plan, without the documentation, but based on a Plan this writer witnessed about ten years ago. It worked and generated an excellent joint venture, but is only meant as a typical example of what was used to spark interest.

PROPOSAL FOR IMPORTATION OF SPARE AUTO PARTS

INTRODUCTION:

Spare parts for automobiles in California constitute a six billion dollar industry annually with the bulk of the parts sold through independent garages with a fifty to eighty percent markup. Recent studies have demonstrated that almost half of the profit generated by the independent garage stems from their markup on parts. In California, 45% of all garages are independently owned and operated and account for 65% of all repairs.

South America and most notably Brazil have recently developed excellent and reliable manufacturing facilities to create spare auto parts for both mechanical and body repairs in various cities close to transportation and has passed various laws encouraging this type of export. Credit terms, guaranteed by the Brazilian government, are available for exporters to both Europe and the United States and the industry is rapidly growing.

This writer has developed business contacts with two manufacturing facilities in two Brazilian port cities who are both engaged in this business and willing to give generous credit terms for exports to California. They are currently machined to generate parts for one European and three United States vehicles and pricing, including shipping costs, indicates that the parts can be delivered to both San Francisco and Los Angeles at cost roughly 40% below the nearest competitor.

This price differential should allow inroads to the existing market and both Brazilian facilities are willing to give exclusive contracts for three years, renewable for an additional five years if certain criteria are met.

The writer wishes to join forces with both a distributor with a sales force capable of serving all of California with net assets in excess of one million dollars. It is proposed to jointly expend approximately 45,000.00 US to set up the sales organization, local agent in Brazil, and initial marketing efforts with the basic budget for the initial five years attached. The writer is willing to divide evenly the return from the business if the distributor will commit to that investment and supply full time a minimum of three sales persons to accomplish this task.

These are predictions based on the experience and best estimate of the writer and are not guaranteed.

STRUCTURE

A joint venture company would be created, owned equally by the distributor and the writer. All sales matters will be decided by both owners. The writer shall be chairman of the board and CEO. The estimated budget, minus costs of inventory, is estimated to be 140,000 a year for officer salaries and office personnel. An employment agreement providing for 100,000 a year salary plus bonus will be made available to the CEO. Should sales not be generated at the level of six million dollars within one year of creation of the joint venture, either party may dissolve it. Should said sales or more be generated, the joint venture will last for a minimum of ten years at which point either party may buy the other out for one year's gross sales, averaged over the previous three years. If both wish to buy out, a means of chance will determine the buyer.

Each joint venturer will contribute full time to the venture. Additionally, the distributor will invest up to forty five thousand dollars to set up the distribution and all sums required above that will be equally contributed.

SUMMARY OF RETURNS

As described in the attached flow chart, it is anticipated that the first quarter of operations will lose approximately thirty thousand dollars and that break even occurs in the second quarter and returns averaging 24,000 each month thereafter can be expected, increasing quarterly by 25% on the average until full anticipated penetration of the market is achieved averaging a return of 230,000 each month. THESE ARE ONLY ESTIMATES AND SHOULD NOT BE RELIED UPON AS GUARANTEED RETURNS.

RISKS

1. Given the high returns, competition can be expected to ensue and the writer is aware of an already existing company begun one year ago importing from another factory in Brazil. That factory, however, is far from a port and of poor quality manufacturing. Nevertheless, additional competitors are likely and speed is essential if the company is to enter the market and establish reputation and loyalty among the various garages.
2. The Brazilian government is not stable and the customs and import duties may alter. Nevertheless, it is one of the most stable in Latin America and there are no present signs of alteration.
3. Resistance to Brazilian parts may be encountered due to the low reputation stemming in part from the importer described in paragraph 1 above. Samples will have to be provided and are part of the initial start up costs.

CONCLUSION

For a relatively low investment, the aggressive distributor can investigate and possibly exploit a source of high quality parts that can be sold for a significant discount from the competition. The writer's unique contacts with good manufacturers and the new Brazilian export laws should allow relatively safe exploitation of this opportunity.

For further contact information, contact XYZ at __________________________.

CONCLUSION

The above sample plan is clearly written for American business people and is meant to spark interest, not to spell out the details. It does not volunteer enough information so that the idea can be stolen, but does indicate the unique contacts the writer had developed which are of value to the distributor.

The tone is one of objective analysis but clear enthusiasm.

It worked.

But it also took over nine months of tough negotiations before the joint venture was actually created and the CEO received no salary for the first year of operations.

The reader is invited to review other articles on the retainer page which are relevant, most notably Partnerships; Their Pluses and Minuses and Corporate Struggles: Who Has What Power When Push Comes to Shove?