Business Transition Consulting LLC

In my experience, the bank will not make the loan if it cannot be repaid outside the business experience of the venture. In other words, the transaction is a loan and the bank needs to see cash flow and collateral to assure payment if the business fails. Typically private investors will look more to the business, view the transaction as an investment not a loan, and will want a way to control the management of the business if things go off plan.

Your question indicates you are doing a business plan for the investor. It will be more effective if you do the plan for you (the owners) first. The beginning question should be: “How can we develop a business we can sell for top dollar in five years?” You do not have to sell, but you will develop a better business if you have that goal. Then do the business plan (based on the business plan you have done for you) that tells the potential investor that your business can meet the investor’s expectations.

The basis for the business must be proof of a market, especially ITE (“in this economy”). This is critical information, and it must be credible. The use of consultants should be considered where irrefutable market information is needed. For example, the marketing part of the plan is a place where a marketing consultant could be utilized in perceiving and verifying the market conditions for the business.

The term “business plan” often refers to an operational plan – how the business (in the short term) intends to meet the goals set forth in a strategic (long-term) plan. On the other hand, the term business plan could include both kinds of planning (strategic or long-term and operational or short-term).The owners of a business, reflecting upon their own values and goals, should communicate, decide, document those decisions, and thereby create a plan setting forth the strategies plan to be followed by the business. This plan should include issues relating to ownership transition and leadership or executive succession. The executives or managers of the business (who may also be all or in part owners) should create an operating plan to accomplish the goals of the strategic plan. Generally, the strategic plan is reviewed and revised annually, but I have seen it done successfully on a quarterly basis. The operating plan will be impacted by any change in the strategic plan and should be immediately revised accordingly.

The best place to start a business plan is at the end of the planning cycle. I recommend something five years or less. Envision the business you could sell to a third party (non-owner) for the highest reasonable amount. (Understand that at this point a selling owner cannot be an integral part of the business.) Then work backwards. What would it be doing the fourth year to get to the apex in the fifth year, the third year to the fourth, and so forth? If the market will not support the five year plan, something needs to be changed. Therefore, the market analysis becomes the reality check for the projected business status at the end of the planning cycle. If you then do a business plan for an investor, you will be able to program the investor’s exit as a part of this planning. Most sophisticated investors have a preferred endgame. Find out what this preference is and work it into your plan. Most investors see a sales event taking them out for cash within five years.