How to Write a Business Plan for Raising Equity Capital – Understand Your Target Audience – Part 3

How to Write a Business Plan for Raising Equity Capital – Understand Your Target Audience – Part 3


This is Video 3 of the “MasterClass for
Corporate Advisers and Entrepreneurs” on “Persuasive and Effective Business Plans” in which
which I’m going to discuss raising equity capital … and in particular … focus
on how we should understand our target audience. I made the point in Video 1
that most potential investors won’t read your business plan with any enthusiasm
at all. It’s also important to appreciate that no potential investor will decide
to invest purely on the contents of your business plan. The objective of a
business plan should therefore be … merely to provide an ‘hors d’oeuvre’ … a ‘trailer’ … to
encourage further interest leading to later detailed discussions. To generate
sufficient initial interest to reach the next stage, therefore … your business plan
should clearly illustrate that the commercial opportunity is competently
researched … valid and believable … … that you have a well-structured strategy
to pursue the commercial opportunity … your management team has the experience … expertise … and the ability to deliver the strategy … that the target market is
clearly defined and growing … that the company has a sustainable competitive
advantage … that risks have been competently identified … analysed … and
monitored … the financial projections clearly underpin the viability of the
business plan … and that the potential investors will make a substantial profit …
commensurate with their perceived risk … and within a reasonable time. That’s a
very important list of objectives … and the advantage of watching a video is
that you can watch it again … as many times as you like … to ensure that these
particular points … and the other advice contained in this course … are logically
slotted into your business plan … for maximum effect. A business plan for a
small to medium-sized company should be no longer than 15 to 30 pages …
including appendices … and take about 30 minutes to read. The impression a reader
should receive … is that the company has a well-rounded management team … with a
credible strategy … for exploiting a sustainable competitive advantage … within
an attractive market . It should be descriptive rather than analytical …
providing data and opinion for investors to analyse for themselves. It should
describe the present position of the business which could be a start-up …
pre-revenue … pre-profit … already growing or mature … and then point to where the
business is likely to be … in three to five years … explaining the risks … problems …
and opportunities that you expect to encounter along the way … and how these will
be dealt with. Professional advisers will sometimes distribute a one-page ‘flyer’ to
numerous potential investors … which is just an advertisement rather than a business
plan. A ‘flyer’ will contain a very brief description of your business … and will
not normally mention the name of your company. The purpose of a ‘flyer’ is to
generate an initial interest … from a few serious potential investors … who will
then be given your business plan or Information Memorandum … in exchange for a Non-Disclosure Agreement. At the other extreme, business plans can run from 30
to 50 pages or more … with numerous additional appendices. There’s not much
point in producing a business plan of this length for a small to medium-sized
company … unless the company is going to be publicly auctioned … in which case
interested parties will be expected to formulate initial offers … primarily or
solely on the receipt of an Information Pack … which will include an Information
Memorandum with a draft Sale & Purchase Agreement … draft tax warranties … and a
formal auction procedure. That’s not the type of business plan I’m discussing
in this course. Because, unless it’s a public auction …very few potential investors will bother to read a long business plan.
After a few minutes, the reader will decide whether or not it’s worth meeting
the management team. In fact, a participant on one of my public
corporate finance courses … said that he was taught on his MBA course … that private
equity houses usually spent on average less than fifteen minutes reading a
business plan. I don’t know how this could possibly be known … unless
someone was standing behind the readers with a stopwatch. But it seems
believable. Because the central core of a private equity house … is usually relatively
small … and often receives hundreds of business plans a month … and won’t
usually have the time to read them in any detail. In fact, I don’t think I’ve
ever spent more than ten or twenty minutes reading a business plan … before I
decide to chuck it in the bin … or ask for an appointment to meet the management
team. Consequently, a large part of the content of an extensive business plan …
is largely redundant … and contains information that should be placed in a
data room … for serious potential investors to review … later on in the deal …
following at least one successful meeting with the management team. In
practice, the length of a business plan tends to be a function of how much a
professional adviser is being paid to write it. Professional advisers
working on a ‘success fee’ (which means that they’ll only get paid if, for
example, they succeed in raising the required funds or selling the company) …
will usually favour not much more than fifteen or twenty pages. Those being paid
on ‘time’, however, can comfortably exceed 50 pages … with all sorts of pie charts …
photos … and other bells and whistles … to justify a large fee. I’ve always worked
on a ‘success fee’ … so my business plans have rarely exceeded twenty pages.
However, all companies are different … so (regardless of the number of pages) your
business plan should include everything necessary … as
I’ll explain in these videos … but not one single sentence more. To achieve maximum
effect … your business plan should be tailored for the intended audience.
Because different aspects of the prospects of your business … and its risk
profile … will attract and deter different types of investors … who will read the
same information from a different perspective. To to target your business plan
in this manner … you should highlight the principal features of your company … which
are most likely to attract the serious and continuing interest of that
specific audience. For example, banks will focus on your
track record. Private investors will be looking for growth. Trade buyers will be
investigating synergies. Private equity houses will concentrate on the
predictability of your free cash flow. Premium buyers will want to have a clear
idea of operational risks … and public companies will primarily be concerned
with prospective earnings per share. If you have a clear idea of what your
intended audience will be focusing on … you can be confident that your business
plan will press the right buttons. In effect, however, all potential investors
and lenders will be searching for the same information from different
directions … which could be summarised into six questions: “Is the management team credible?” “How will the market grow?” “What are the likely future maintainable
profits of the business?” “How does the anticipated reward compare with the
perceived risk?” Is the company properly equipped to meet its objectives?” and “Will
there be a requirement for further investment or loans?” To answer these
questions … potential investors will normalise your results … so you should do
this for them. This means that your pro- forma income statement should remove all
non-recurring items … and adjust the figures abnormal expenditure. For example, if you’re a family-owned company … and you
pay your directors too little … or too much … for the type of job they do … your
pro-forma figures should adjust these costs to market rates … so that an
investor can estimate how much a replacement of these employees would
affect the profits of the company. Potential investors will then analyse
your reported profits resulting from your sales … cost of sales … and margins … and identify how much of your profits actually turn into cash … and when. They will
analyse your working capital required … in detail … consider your budgets … and budget
procedures … identify your assets … and liabilities … and investigate your capital
expenditure plans … and depreciation policy. Your business plan should provide
all the information and data … necessary to make this investigation analysis as
easy as possible for potential investors. You should be careful to eliminate all
‘padding’ and repetition … so that the finished article is concise … and easily
readable … without omitting important information. Your intended audience will
not be stupid. So it’s counterproductive to repeat important points … in an attempt
to emphasise them. Each point should therefore be described concisely … just once.
You should avoid the example of irritating public transport
announcements … which tend to be repeated three times … usually in quick succession …
with slightly different details. Just a lot of words … with a muddled meaning …
instead of using just one unequivocal sentence … which should precisely broadcast
the exact information required. Although not stupid, however, it’s
important to appreciate that potential investors may not initially understand …
the detailed features of a complex business. So, you should avoid
unnecessary jargon … and simplify your explanations. The description of a scientific
process, for example, should be understandable to a commercial audience … rather than to
a scientific convention. The objective of the document is not to impress… but to
explain. Colour and photos should be used only where they can usefully emphasise
the point being made … rather than in an attempt to impress. Expensive paper and
binding can often give potential investors the wrong impression. I
remember one potential investor asking me … when we were handed and expensively
bound Information Memorandum … by a professional adviser: He said: “Is this the
sort of thing these people intend to spend my money on.” Bad impression. Too
many appendices may indicate that the business plan will not be very easily
understood. ‘Keep it simple’ is a good rule to bear in mind … but the
content should nonetheless be complete … because … an unintended non-disclosure of an important matter … may later be construed as a deliberate
misrepresentation … which will undermine your credibility. A careless inaccuracy …
could encourage a potential investor to ‘over-discount’ the apparent prospects of
your proposal … in order to provide for the perceived likelihood of other
undisclosed facts … surfacing during a later due diligence investigation. To
maintain credibility throughout … your opinions and projections must be
entirely realistic … and fully supported by facts and figures … with a clear
distinction being made … between fact and opinion. It’s important to avoid
unsubstantiated projections … because they may later form the basis of an
unattainable target to be achieved … before future profits can be shared.
Furthermore … investors may require you to warrant the statements you make in your
business plan … which could later result in legal liability … if such statements
prove to be false or misleading. In summary, your business plan should
include all necessary information … and exclude everything else. Therefore,
knowing what to omit from a business plan is almost as important as
understanding what to include. The principle objective should be to
persuade a potential investor … purchaser … or lender … to arrange a meeting or agree
to a further meeting … at which your company’s potential can be discussed in
depth … and its management team assessed in person. A business plan should therefore avoid
discussing every conceivable aspect of your business. Its content should focus
on specific topics … grouped under self-explanatory headings … and described in
sufficient … but not excessive … detail. I’ll discuss the headings that are required
in the business plan in Video 10. You should therefore
concentrate on the critical factors required for success … supported by fact …
opinion … and market research … and an analysis of the company’s strengths …
weaknesses … opportunities … and threats … when confronted by likely future
developments. Having given your business plan a security cover … self explanatory
headings for each section … and a contents page … you should edit the final version
extremely carefully … and cross-check all the details … to verify that its contents
are completely accurate … and internally consistent. Check that you’ve used strong
and positive words … such as ‘will’ … and ‘shall’ … wherever reasonable … rather than weak
language such as ‘may’ … ‘might’ … and ‘should’ … because … if you don’t believe it’s going
to really happen … you can’t expect your reader to. Once you’ve
proof-read it several times … you should then ask others for feedback …
as you will … by now … be too familiar with the text … to recognise gaps in logic and
explanation. Finally, don’t rely on a spell checker. Although, they’ve improved
enormously … they’re still not perfect. A friend of mine once received an advertisement
from a psychotherapist … where a spell checker had re-described his
title “psycho the rapist”. Don’t rely on a spell checker. The first
paragraph of your business plan … should be the ‘executive summary’. This
is the first and most important section the potential investor will read.
If it’s vague … boring … or badly written … it may also be the last. This short section …
probably about half a page in length … should enable potential investors to
grasp the essence of your company …its history and current business … and
ambitions … and encourage them to read the rest of the document. The first paragraph
should therefore summarise the nature of the business … and the products or
services offered to your customers … giving brief details of actual and
expected turnover … and profits .. your plans for growth … and the funds required to
achieve such growth. You should also include a brief history of the company …
in which you should explain why your business is different to its competitors …
or unique … and outline the essential characteristics that will underpin the
company’s potential … or continuing success. It’s usually recommended that an
‘executive summary’ should be no longer than one page. However, that’s often not
practical or possible. So, provided the summary of your company is relevant and
compelling … two pages is perfectly acceptable … although you should probably
entitle a two page section as ‘Background and History’ or ‘Introduction’
rather than ‘Executive Summary’. That was Video 3 of the business plan …
focusing on raising equity capital and understanding your target audience. Video
4 will also focus on raising equity capital … but with particular reference to
the section on the market and competition for your products and
services.

Author: Kevin Mason

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