Cover the bases

After reviewing more than 60 entrepreneurial business plans for DeVry University and the Governor’s Business Plan contest, I found that the plans shared similar strengths and weaknesses.

Successful business plans need to clearly communicate exactly what service or product they are offering, who is their target customer, how they intend to get it to market and how they intend to finance it. Otherwise, the plan has little or no chance of being accepted by a venture capitalist or angel investor.

Clearly conceptualizing the product or service

When it came to this issue, the entrepreneur had spent a great deal of time developing and perfecting the product or service offering. But it some cases, they could not successfully communicate that vision to the potential investor in the executive summary.

More than once while reviewing a plan, I asked myself the same question, “What is the product or service they are offering and what segment of the public would use this?” As I read on, sometimes that question was answered but in other cases it was not. If you can’t articulate what you are offering, then how would the potential customer understand how the product or service meets their needs?

Research the market thoroughly

A majority of the business plans had a similar flaw in their marketing strategies. They suffered from a lack of market research that would have identified if there was a clear need for their product or service.

Here, all that energy was expended on developing a plan without verifying that a need existed. In addition, they never addressed the question if they were targeting the correct market segment.

In each case, they had a product or service that they felt strongly about and had spent a great deal of time perfecting. What was missing was a strategy on how to take that product to market. In more than one case, the entrepreneur recognized that they would need an intermediary to successfully bring the product to market. In other cases, they did not demonstrate they understood the existing channel or channels of distribution and its complexities.

In a high percentage of the business plans, the entrepreneur did not recognize that once their business became successful others would attempt to copy their strategy and compete for market share. They did not have pricing nor distribution strategies in place to overcome these challenges.

Build a strong financial profile

Here is where there were major voids in information for a venture capitalist, angel investor or bank to make an informed decision regarding potential funding. The entrepreneur would show that they were investing a certain amount of their own capital in the venture, and ask for funds exceeding the dollars they were willing to put forth. In addition, they would only grant up to a 50 percent share on twice the money invested by outsiders, thereby retaining control over the business and its direction. This demonstrated that they lacked an understanding of how the capital markets function.

When reviewing their cash flows, income statements and balance sheets, it was evident that they made assumptions that could not be supported by the facts presented in the executive summary or the market research. Depreciation schedules, projected sales, and market shares were overstated and unsubstantiated. Contestants and students both elected incorrect depreciation schedules for their industry. They took straight line instead of accelerated when dealing with technology.

In another example, they overstated the value of assets as collateral. In more than one case units sold did not support the projected sales and in the case of food service, theft and waste were not taken into account.

What this demonstrated was that the assumptions that were made were based on neither experience nor a clear understanding on how these business and markets operated.

Develop a human

resource strategy

In this area, staffing levels were underestimated or inflated. They either had insufficient staffing or too many people for the projected level of sales. The entrepreneur would elect to draw salaries in excess of what an investor would permit in the early stages of a business. These salaries would deplete cash flows and reduce the level of reinvestment need to perpetuate the entity. In a number of cases, the entrepreneur did not recognize the need for a higher level of expertise in management, sales or marketing and would assume those responsibilities without having the necessary experience. Middle management is critical to ensure that the span of control is not exceeded, which leads to poor levels of supervision and productivity.

Address legal and insurance issues

As stated earlier, in order to protect your market share and capital invested in the business, you need one or more strategies that would prevent competition from entering your markets and taking away your customers. Many of the individuals who developed these business plans did recognize that they could protect their product and services with patents, copyrights and trademarks.

But more than one business plan omitted proper levels of insurance from their financials. Liability insurance, key manager insurance and property casualty are essential for protecting the investment of the owners and their investors. Many of the entrepreneurs failed to recognize this need.

Unless the business is sufficiently capitalized from the beginning, it will be necessary to get additional funding during the rapid growth period. These additional funding needs would either come from the initial investors or from new sources. Many of the business plans don’t recognize this and attempted to self fund the business, thus putting pressure on the cash flow, which eventually will starve the business and slow growth.

Provide exit strategies

A number of business plans recognized that they would need to sell the business concept or find a suitable partner in an existing business in order to be successful. In one business plan the entrepreneurs were developing a new psychoactive drug that did not have the side effects of the existing drugs. They knew that, in order to be successful, they would need to patent the formula and find a partner in the field who could produce and market it.

Many times the exit strategy would include the option of one partner buying the other one out after the investors were paid. This would entail either a bank loan or other capital raising strategies. More than one entrepreneur elected to position the entity for sale to a competitor in order to pay back all the investors.

Realistic business plans should consider the sale or merger of the business as it approaches profitability. This is the point where the serial entrepreneur takes his profit and starts a new business. Other entrepreneurs elect to continue to ride the waves in today’s turbulent business environment.

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