External use of a business plan
A business plan is a tool with which your essential qualitative and quantitative company information can be documented for investors in a compact form, information regarding existing growth or risk potentials, beyond annual financial statement and report. As an entrepreneur, you should know more about the goals, concepts, and instruments of an effective business plan to gain investors trust and convince them back your startup.
But what kind of business plan can obtain the investors’ confidence? What does a successful business plan look like?
Basically, a successful business plan has three important features:
- The short- and long-term objectives are clearly depicted,
- a careful description is given of how the objectives can be achieved in realistic general conditions and
- a description is given of how the realization of the plan will meet the expectations of the investors.
From an external point of view, the business plan represents the main financing tool for your company. In addition, it serves to secure existing or planned business relations between your company and your stakeholders.
Necessity of planning
Depending on the type of financing and stakeholder relations, various aspects are weighed up and dealt with in different ways in a business plan.
Venture-capital financing
As a rule, venture capital and private equity investors nowadays only consider business cases which are well represented by a business plan. When reading a business plan, the investors are primarily interested in good and relevant arguments that promise business growth. Furthermore, investors attach great importance to how and in which period of time a return on investment will be realized, for instance:
- through operating profit or
- by going public or
- by merger and acquisition or
- through a repurchase by the management.
- In order to guarantee a high return on investment, investors pay great attention
to:
- the company’s success on the market,
- the feasibility of the plan in order to achieve its business objectives,
- the unique selling proposition of the products and services and
- the quality and experience of the management team.
Financing by bank credits
When granting credits, investment banks focus on one main question: when and how the repayment of the credits and interests will be made. In order to minimize risks, banks usually ask for securities. That is why credit applications addressed to banks should provide more than a list of current and past annual accounts.
Moreover, banks will also ask to what extent the companies are prepared for possible setbacks, and how they will be able to overcome such critical situations. For these reasons banks more and more often demand professional business plans when considering applications for credits. Banks expect business plans to give qualified insight into the enterprise strategy, the management, the organization, the market, the competitors, the products and the current and future financial and profit situation of the enterprise.
Strategic alliances
The formation of strategic alliances by young and growing companies within the framework of research projects, product design, marketing, etc. is gaining increasingly in importance. A strategic alliance is usually the consequence of:
the financial backing or access to well-established distribution channels. Such an alliance may well succeed over several years for the benefit of all parties. The majority of companies, however, request a business plan before consenting to any long-term business relations or obligations within the framework of a strategic alliance.
Mergers and acquisitions
Acquisitions present an alternative for company expansion while selling a company may be seen as the way out of a solvency crisis. Companies that are looking for acquisition candidates usually request a detailed business plan that will support their evaluation and selection of the candidates. Similarly, the acquisition candidate himself will also be interested in the long-term plans of any acquiring company, in order to ensure and protect his own interests for the future. This information is also the subject-matter of a business plan.
Customer and marketing relations
Winning a major customer or an agreement with a wholesaler is a particularly crucial step towards success for many growth companies. Most big companies, however, are very reserved and precautions before starting negotiations with rather small and unknown companies. In such cases, a convincing business plan may clear doubts and prove decisive for inspiring confidence, opening negotiations and making further decisions.
Hence, business plans effectively help to open doors to potential customers, markets and suppliers.
Source: The Business Plan “How toWin Your Investors’ Confidence”
