BUSINESS PLAN : 5 Business Plan Mistakes

If you are preparing to raise capital from either an investor or a bank, you’re probably going to write a business plan. Here are five of the most common mistakes:

Submitting the Business Plan to the Wrong People
Some entrepreneurs don't know who to send the business plan to. They have sent their business plan to hundreds of people but with no results.

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 send an unsolicited business plan. These will be put at the bottom of the pile, and they will not be given serious consideration. If you determine that your investor has an interest, send the executive summary over 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 a business plan, the executive summary should be prepared last. (After all, how can you summarize something that has not yet been written?)

The summary in the business plan should be broken down into five sections. 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 business solution to the problem, and why it is better plan than what is currently available.

Management: Describe why you and your busines team are qualified to deliver the solution that you have proposed.

Market Size and Share Expectations: Describe how large the market is for your business solution, and discuss how much of that market you intend to capture.

Financing Need and Exit Strategy: Describe how much money you need for your business and what it will be used for, but close with how you intend to provide the investor with an exit strategy.

Weak Business Management
One of the sections that all investors will read first is the discussion on business management. If you do not have direct, significant experience in the industry in which you're trying to start a 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 business management team is complete.

Unreasonable Financial Projections
All lenders and investors are accustomed to seeing business financial projections that are way to high!

While every business owner and entrepreneur has the best of intentions when preparing a forecast for the next five years, it is unrealistic to assume that sales will grow by 50-100% each and every year.

Also it is 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.

Don't be Greedy!
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 business 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.

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