12/08/2020
Eight Reasons for Writing a Business Plan
Excerpt from 'MBA in Entrepreneurship' by William D Bygrave
Why write a business plan? This is a legitimate, indeed essential, question to ask yourself before you plunge in.
If you write a business plan in a vacuum - because you feel it is something you are "supposed" to do - you run the risk of engaging in a painful process of conceptualizing and in the end conveying a sense of aimlessness. But if you write a business plan with one or more specific purposes and audiences in mind, you will likely feel a greater sense of commitment and produce a more focused and practical document.
Your audience most fundamentally consists of those individuals or organizations with a stake in your company's success - those I refer to as stakeholders. Here are eight of the most important reasons for writing a business plan, with a description of stakeholders associated with each:
1) To Sell Yourself on the Business
This is a "sanity check". The most important stakeholders in any business are its founders. First and foremost, you need to convince yourself that starting the business is right for you - both from a personal standpoint and an investment viewpoint.
The case of Frank Gibbons helps illustrate this point. Back in the early 1980's when he was considering leaving Hewlett-Packard to start Software Publishing, he was a rising star at the computer giant. Moreover, he would need to take a second mortgage on his house and borrow money from his family to make it work. Gibbons decided he needed to write a business plan to serve as a "sanity check", to convince himself he was doing the right things. In other words, he needed to sell himself on committing so deeply to the idea.
2) To Obtain Bank Financing
Up until the late 1980's writing a business plan to obtain bank financing was an option left up to the entrepreneur. Bankers usually took the approach that a business plan helped you make a better case, but wasn't an essential component in the banks' decision making process.
The bank failures of the late 1980's and early 1990's changed all that. Banks are under great scrutiny by federal regulators and, as a consequence, are requiring entrepreneurs to include a written business plan with any request for loan funds. Getting bank money is tougher than it has ever been, and a business plan is an essential component of any campaign.
3) To Obtain Investment Funds
For many years now, the business plan has been a "ticket of admission" to the venture capital evaluation process. Now, though, whether your seeking venture capital or so-called informal capital from private investors, you will need a written business plan. Rare is the private investor - typically a successful entrepreneur or other well-heeled individual - who will make a financial commitment based entirely on your oral presentation. Even if you get in the door to sell your idea, you will be asked to send along something in writing, namely a business plan. If you attempt a private offering under Securities and Exchange Commission rules and exemptions, you will need a business plan to enable your lawyer to write a private placement or offering memorandum.
4) To Arrange Strategic Alliances
Joint research, marketing, and other efforts between small and large companies seek out alliances, have resulted from the need of small and large companies for each other. Small companies need financial support and large companies need innovation.
Despite the mutual needs, though, many more small early-stage companies seek out alliances with corporations than the corporations can ally with. To help them in their selection process, the corporations usually want to see the business plans of prospective small company alliance partners. Indeed, the large companies are more likely to be attracted to a company that volunteers a plan in the early negotiating process, without being asked for one.
5) To Obtain Large Contracts
When small companies are seeking substantial orders or ongoing service contracts from major corporations, the corporations often respond (somewhat arrogantly): "Everyone knows who we are. But no one knows who you are. How do we know you'll be around in three or five years to provide the parts or service we might require for your product?"
If at this point in the conversation, entrepreneurs can pull out their business plans, the corporate representatives will be immediately impressed that the entrepreneurs have though about the future. More important, the corporate representatives will see that the small company fully expects to be around in three or five years, bigger and stronger than it is now. This can be a powerful argument in the selling process. And in today's selling environment in which corporations are increasingly looking toward their suppliers as partners, the business plan helps convey that feeling or partnership.
6) To Attract Key Employees
One of the biggest obstacles that small, growing companies face in attracting key employees is convincing the best people to take necessary risk - that the company will thrive and grow during the coming years. Even in today's uncertain job environment, the best executives are still attracted to large corporations. A small company must be as convincing as the corporate officials can be. A written business plan can assure prospective employees that the entrepreneurs have thought through the key issues facing the company and have a plan for dealing with them.
A business plan does something more though. It helps the prospective employee understand the company's culture and rationale for doing business. Conveying such fundamentals helps ensure that the most compatible people will take the job.
7) To Complete Mergers and Acquisitions
No matter which side of the merger process you are on, a business plan can be very handy. If you want to sell your company to a large corporation, a business plan helps your stand apart from the crowd. Corporations searching for acquisition candidates typically examine hundreds of companies. The business plan says to the potential acquirer that you have thought about the future and know where the business is headed.
Similarly, if you are seeking to acquire a company, your business plan can help convince a reluctant seller that your company would be a suitable partner. The business plan in these situations serves almost as an extended company resume.
8) To Motivate and Focus Your Management Team
As smaller companies grow and become more complex, a business plan becomes an important component in keeping everyone on the same goals. Frank Carney, a founder of Pizza Hut, points out that in the late 1970s, when his company was showing signs of foundering, a business plan helped everyone thinking about the company's long-range goals. And the final document served as a roadmap over the next year, until the plan was updated.
