Elements of a Great Business Plan

You must view the ten sections of a business plan not just as due diligence, but as an opportunity to capture the heart and mind of the investor. Each section has a special purpose.

Executive Summary: The "hook" of your business plan. This section concisely explains your product, the market size and need, and the company's unique qualifications to fill those needs. The best executive summaries quickly make busy investors want to read the rest of the plan.

Company Analysis: Your opportunity to put your accomplishments front-and-center. A timeline of milestones proves that your company or management team have executed on a previous game plan and describes your company's "unfair competitive advantage" (such as proprietary technology).

Industry Analysis: Proof that you know your industry inside and out - including the many overlapping industries in which your business competes. Include full industry figures from reputable data sources, but also include niche trends. Be specific.

Customer Analysis: A map of your customer relationships. Here you must demonstrate that you know your customer better than any other company does. Include niche market trend statistics, demographics, psychographics, and all pertinent customer information.

Competitive Analysis: Proof that you know your opponent. Your competition is not only public companies that operate in your industry. Your real competition is any service or product that a customer can use to fulfill the same needs as your company does - including actions by the customers themselves. Soberly lay out the strengths and weaknesses of your competition.

Marketing Plan: The Four P's: product, promotions, price and place. Fully explain your product; how you will promote the product; your pricing; and your distribution channels. Be as specific as possible to show investors you know how to move product into customers' hands.

Operations Plan: A description of how you service customers. Include your company's everyday activities (short-term processes) and long-term processes. Include projected dates of product releases, revenue milestones, partnership formations, customer contracts secured, future funding rounds and IPO, and hiring. Here, investors are looking for context for "exits" or payout for their capital.

Management Team: The engine of your company's success. Include biographies of your team members and the Board of Directors. Include past accomplishments that demonstrate an ability to execute on a plan and grow a company. If there are management gaps that are crucial to the early operations of the company, fill them before completing your business plan.

Financial Plan: Investors spend the most time on the financial plan, as it details how your business will reap great rewards for them. Your pro forma statements (future projections) must include dates for market penetration rates, operating margins, and employee head counts, acquisitions, mergers and IPOs. Exercise absolute realism.

Business Plan Appendix: Overflow documentation. This section backs up the claims made in the executive summary, financial plan, and the rest of the sections. Include technical drawings, patent information, letters from partners and/or customers, a thorough list of competitors, and/or a list of key customers.

Funding Terms and Their Definitions

Consolidation
When a company undergoes consolidation, it can have a variety of different meanings. A classic definition of consolidation is a company that is looking to be merged with another company. Some investment firms, however, define consolidation as an amalgamation.

Recapitalization
Recapitalization is the restructuring of a company’s debt and equity to make it more stable.

Restructuring
Restructuring is a step a company takes when it encounters problems. The primary reason for restructuring is when a company is in debt and needs to reorganize its finances, management and other key operations.

Seed Funding
Seed funding is the funding a company receives when it is just starting out. The seed funding round is the funding a company seeks to develop its product or service and purchase the necessary equipment and real estate to begin operations.

Later Stage
Later stage, also referred by some investment firms as either expansion or growth stage is the stage when a company seeks capital to expand its operations into new markets. During this stage, a company primarily requires bridge funding. The company is already in a mature stage.

Series A Funding
Series A funding is the first round of early stage funding. Companies seek series A funding to provide them with enough capital to operate from six months to two years.

Series B Funding
Series B funding is the second stage of early stage funding and is usually given to companies who are preparing for mezzanine funding.

Leveraged Buyout or LBO
A leveraged buyout, also known as an LBO, occurs when a company is looking for funding to acquire a smaller company and the licensing of the acquired company’s products or services.

Management Buyout or MBO
A management buyout, also known as an MBO, is the acquisition of a smaller company by a larger company. In an MBO, the company works together with the management of the company it is looking to acquire. In an MBO, the management of the acquiring company acts as the management of the acquired company.

Start-up
A start-up company is a company which is in its early stages of formation

Mezzanine Funding
Mezzanine funding is funding given to a company that is in mezzanine stage. Mezzanine stage can best be defined as the middle stage of a company’s life.

Mezzanine funding is primarily intended for companies who are preparing an initial IPO or initial public offering. An initial public offering occurs when a company prepares for public trading on the stock exchange.

How to Protect Your Company from Anti-Dilutions

What is anti-dilution?

Well, this has to do with the shares of your company’s equity or your company’s net worth. As mentioned before, when an investor invests money in your company, he is buying some of your company’s equity.

This means that you will have to dilute some of the shares of your company stock. For example, you begin a company together with a couple of other partners, you and your partners own shares in the company stock.

If you and three other partners cofound a company divide your company’s stock into one hundred shares each share then represents 1% of the company stock. This means that if you divided your company stock equally amongst yourselves, all four of you should hold 25% of the company’s stock each.

Now, however, the investor steps in, and he also wants some company stock, so you need to dilute your shares.

This means that 100 shares equaling 100% of the company stock can no longer be applicable. You and your cofounders currently own 25% of the company stock each, but your investor will also want 25% of the company stock, so how can you correct this problem?

Simple, you need to dilute your shares and instead of the company stock being divided into 100 shares you will need to divide the company stock into 150 shares.

You and your cofounders may still have 25 shares each, but you no longer own 25% of the company stock.

The shares have been diluted in order to accommodate the investor’s condition, and the investor gets his share in the company shares.

This basically means instead of each owning a quarter of the company stock, you and your cofounders would own one-sixth of the company stock each and the investor would own two sixths of the company stock.

 This is because now, instead of 100 shares in the company, you have 150 and each stock has been diluted, and one share is no longer one percent of the company stock. Now, you do not want to dilute the stocks too much, since the more investors you have come on board, the more the stocks will have to be diluted.

Should a strategic corporate investor want to come on board, you should be able to protect yourself from anti-dilution.

Anti-dilution basically means that the investor dictates the shares in the company not be diluted, hence preventing new investors from having their share in the company stock.

Business Ideas and Intellectual Property

Like with trade secrets, business ideas and intellectual property are just as important to protect, but especially in the case of intellectual property, you have more legal avenues to protect it than trade secrets.
First, before learning how to protect intellectual properties you need to know exactly what intellectual properties are. Intellectual property basically refers to either scientific or mathematical formulas, hypotheses and sketches that can lead to the development of a particular product, drug, computer program or chemical solutions. Intellectual property can also be an invention.

There are many new kinds of gadgets out there that require some kind of intellect to create. For example, if you have invented a particular gadget that can simplify a particular task or chore in life, that is an intellectual property. Good examples include the Apple iPod and Bluetooth accessories. Now, because these inventions were thought out and developed by various different individuals, the recipes for these gadgets and the formulas for chemicals used in a variety of industries are not of the public domain. If they were of the public domain, then the inventors of these products and the entrepreneurs who produce them would not be making their millions off them.

The way that intellectual properties are protected is by applying for a patent. A patent is available in almost all of the countries in the world, but in the United States patents need to be applied for with the United States Patent Office. Having a patent in your name is the best way to protect your intellectual property.

The only way a corporation can get your intellectual property once it is patented is for you to legally sell the patent to that particular corporate entity. Having a patent for your intellectual property is very similar to having a copyright for your written material.

Trade Secrets

Every company who prepares to start a business has its trade secrets.

There will always be competition, but you need to have something unique that your competition does not need to know about. These are trade secrets.

It is very important for you to keep these trade secrets in tact when you are presenting your venture to venture capitalists. The main thing you need to keep in mind is that your competitors have their investors also.

This can make searching for your investor a mine field. How do you keep your trade secrets secret? Simple, you need to request the prospective investor to sign a nondisclosure agreement. Trade secrets are very important for any entrepreneur.

Think about it. You have a secret idea of a product that you know will be very popular, and your competitor’s investor gets a hold of it and starts putting millions of dollars into it and gives it to your competitor. You will not be able to compete.

This is why nondisclosure agreements are important and essential to protecting your trade secrets.

Due Diligence

Due diligence is very important in the investment process because your investor scrutinizes everything in your business plan to allocate what funds that they can invest in your venture.

When dealing with a venture capital firm, you need to take into account that these firms manage funds that can sometimes be over several billion dollars.

Risk Evaluation and Management

As part of the business plan, slide presentation and the complete business plan, you need to evaluate your risks and what risks require risk management.

Investors also evaluate risks because they want to make sure that the risks are as minimal as possible and the profits are as large as possible.

Never hype up the potential profits and never underestimate your risks. Be realistic because investors have their experts who know how to evaluate risks and if they see that you have greatly underestimated your risks and overestimated your potential profits, they will not be very likely to fund your venture.

How can you evaluate and manage risks? Risks depend on your market sector and industry. Risks are basically events that can affect your company and disrupt your company’s cash flow, potentially doing serious and permanent damage to your company. All business has its share of risks, some of which are greater than others.

These risks can range from economic risks, such as financial crises, which can hurt business, to physical risks, which can directly impact employees, clients and infrastructure. In doing your business plan and getting it ready to present to investors, you should identify each risk and have a plan about how to address and manage them.

This is crucial because investors look at risks and the strategies to manage these risks.