Tuesday, October 23

How to write a good business case

This is a great article, basic common sense! Worth quoting in full.

 

Business plan howlers

By Luke Johnson

Published: October 23 2007 17:48 | Last updated: October 23 2007 17:48

I spend a lot of my time studying business plans from entrepreneurs looking for investment. Many are impressive but some are ghastly. Among the worst offences are:

Aggressive confidentiality clauses and an obsession with non-disclosure agreements. I find this sort of pushy legal stuff very off-putting, especially for start-ups. Often you are expected to sign up to very rigid terms without knowing anything about the proposition. In such circumstances, I just turn the deal down flat. If the entrepreneurs distrust me that much they ought to seek backing elsewhere. Would-be restaurateurs are often the worst offenders – would I really bother stealing their idea?

Overly technical documents. Business plans should be written in layman’s terms and avoid all jargon and endless acronyms. They should be readable and accessible, not obscure. Inventors can get too wrapped up in their subject – they forget that there are always thousands of projects seeking money. And promoters often use long-winded gobbledegook to disguise a fundamentally bad idea. If I can’t understand the deal, I don’t get involved.

Lack of focus. Plans that cover too much territory and companies that try to do too much at once don’t appeal to me. Successful concepts are usually simple, and successful entrepreneurs generally concentrate on a finite market and product range.

Preposterous valuations. Things that are far too expensive go straight into the bin. Such plans normally work back from a daft conclusion based on wild future projections or spurious comparisons. Instead, valuations should be based on sensible estimates of what investors would really pay. This means you miss the odd Facebook, but I can live with that.

Biographies. These should be honest and full. They are perhaps the single most important part of the entire proposal. I really want to know the owners and individuals who will make the thing happen. Vague or overly concise CVs make me suspicious. The résumés of the chief executive and finance director are the ones that matter: big name non-executives cannot compensate for weak executive managers who are actually running the business.

The numbers. This is the critical stuff. The funding requirement, the estimated returns, the cash flow projections: these must be attractive and sufficiently ambitious to be worthwhile. No one is going to put huge effort into a project that will never grow beyond one man and his dog. The figures should all be stated up front in an uncomplicated format. Do not bury them at the back of the pack.

The competition. All capable entrepreneurs know their competition well. If they say they have none, they are fooling themselves. A solid business plan has plenty of specifics about their rivals and why their particular proposition has a genuine competitive advantage.

Do not expect a perfect presentation. Every situation is flawed. If an investor is looking for an opportunity with no drawbacks, he will never invest in anything. I quite like deals with a known problem, because it can then be addressed and the price can be adjusted to compensate.

Huge appendices and too many spreadsheets. These might be necessary for loan applications but equity investors tend to decide based on a few important points. All the supportive evidence and background material can be supplied later if the proposal is of real interest. Don’t bury the hooks with padding.

Getting someone else to write it. It shows when advisers rather than principals write a plan. It lacks authenticity. By all means have experts assess your work – but do the first draft yourself.

Make sure it can be e-mailed. Do not rely on the post or present would-be backers with voluminous amounts of paper. Just get their e-mail addresses and send them the core presentation online. Catch their attention early and it may lead to something.

Unbelievable margins, profits and returns. Plans that suggest your company will quickly achieve operating margins of 35 per cent, returns on capital of 100 per cent and so on are not credible. Be realistic and conservative and you are more likely to be taken seriously.

Writing a business plan is an art. It should give a venture the best possible chance of securing finance, and it is worth taking great care over the task.

lukej@riskcapitalpartners.co.uk

The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity group

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