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10 Tips to Create an Effective Business Plan When Raising Capital

Your business plan is an important tool in your efforts to raise capital. It can be used by potential lenders and investors to evaluate your business and its prospects. Here are some tips to help you, through your business plan, make your case as effectively and compellingly as possible.

Tailor the business plan to your audience

    • What kind of capital is your business plan being used to raise? Ensure that you understand what your audience is looking for – and provide it.
    • Equity and mezzanine investors tend to look forward in time, whereas lenders primarily focus on past results as a predictor of future performance. A business plan that is being used to raise equity should therefore focus on competitive advantage, the size and nature of the market opportunity, the business’ valuation, the go-forward plan and financial projections.
    • Business plans being used to raise debt, such as sub-debt, should include a more detailed analysis of your company’s past financial performance, details of existing and proposed debt obligations, and a discussion of how the company plans to repay these debts.
    • For those raising bank debt, include a description of the company’s asset base, as senior lenders need to understand what collateral is available as a back-up source of repayment.

Own it

Business plans don’t need to be fancy but they do need to be yours. It is not necessary to hire expensive consultants. Capital providers rely on owners and management teams to execute on business plans; it is therefore critical that these parties support the plan’s underlying assumptions, strategies and goals. Simpler but ‘realer’ business plans, researched and written by management, are preferred.

Do the research

Without the benefit of good research, business plans can be based on outdated or inaccurate assumptions, which will undermine your plan’s credibility. Start the business planning process by talking to your key stakeholders: employees, customers, suppliers, capital providers, your accountant and your lawyer. What trends are emerging? Where are the opportunities? What keeps them up at night? And what does all this mean for your business?

A wealth of information is also available online, making it straight forward to ensure that key data – such as market size, demographics, economic growth rates, the nature of government regulation of specific sector, and more — are current and accurate.

Introduce you and your team

Ever heard the saying “culture eats strategy for breakfast”? Lenders and investors alike recognize that success hinges on having the right people on the bus. Describe the backgrounds, tenure, roles and responsibilities of key team members. Do you have a board of directors or other key advisors? Is a good succession plan in place for all key positions?

Be realistic about market opportunity and share

Your business plan may not be taken seriously if you based your revenue projections on, say, achieving a 1% share of a large market. Hockey stick projections, based on assumptions like this, look naïve and don’t inspire confidence.

Think beyond direct competitors

Everyone has competition and business plans that claim no competition lack credibility.  Consider a broader view of competition including the potential for substitute products, as well as how technological, or other innovation could impact the marketplace within the period of time in question.

Keep it real

Your SWOT should be balanced. It’s not just about your strengths and opportunities, but also about your company’s weaknesses and the threats that face it. Don’t gloss over the tough stuff. Capital providers want to know that their clients are committed to a long-term process of continuous improvement – to do that effectively, you must be self-aware.

Don’t forget the numbers

Include a summary of historic financial performance, with copies of accountant-prepared statements as an appendix. Capital providers will be suitably impressed if you include an Excel version of your company’s financial model that summarizes these historic results, as well as year-to-date actuals and projections for the next two to three years. They will be even more impressed if the model contains an assumption page where inputs can be varied to conduct a sensitivity analysis.

Cash is king

High growth, seasonal, and project-based businesses, in particular, need to explicitly consider cash flows in their business planning process. It is not enough to simply look at profitability. Make sure your model includes a cash flow forecast.

Presentation is key

Ensure that it is neither too long nor too vague (again, consider your audience), include an executive summary and use proper grammar, syntax, logic and flow. While the end user doesn’t expect Pulitzer Prize winning material, they do expect something professional with as much attention to detail as you would put into your product. The plan represents your business – it should do you proud.