You can double your chances of securing capital if you have a complete business plan, but you can sink your business with a flawed one. That’s from Judd Hollas, CEO of EquityNet, an online platform that has raised $270 million in capital for small businesses.
He points to the Palo Alto Software survey of business owners, which revealed that 72% of entrepreneurs who completed a proper business plan secured a loan or investment capital. In addition, 64% of them expanded their business.
Contrast that with those who didn’t finish one: 36% secured a loan or investor funds, with 43% boosting their business.
Tips on creating a winning plan and avoiding pitfalls:
Lead off strong. Write a powerful executive summary, advises Brock Blake, CEO of Lendio, which helps small businesses secure loans outside banks. “Most lenders will read that and stop there if it’s not convincing,” he told IBD. “Make sure you show what your business is, where it’s going and how your business plan is going to get it there. If you can get them to read past the introduction, you’ve won 90% of the battle.”
Blake adds this pointer: It’s best to write that summary after you’ve written the rest of the plan. “That way you can highlight and summarize the strong points of it.”
Nail down essentials. Ensure that your business plan has all the information that investors expect to see: a mission statement, company description, market analysis, revenue projections, a marketing plan and an overview of your management team.
“There are hundreds of business plan templates on the Internet,” said Blake. “Find one that you like.”
Keep it relevant. Hollas notes that because investors already have a checklist of things they want to know before they make their investment decision, they don’t want to wade through extraneous information.
“Providing too much information simply dilutes your message and can cause you to go off topic,” he said. “Keep your plan concise. Not only will that help investors find the information they need, but it can provide an opportunity for further discussion.”
Identify your market. A common red flag for investors, Hollas says, is when a business plan claims that a product or service applies to a much larger consumer segment than it does. Investors want to back companies that have clearly identified and researched their customer base and have a realistic view.
Know your needs. You run the risk of running out of capital if you ask for too little, Hollas reminds. You also don’t want to have excessive amounts of cash sitting in your bank account.
“Investors don’t invest so their money can sit in someone else’s bank account earning less than 1% return,” he said. “Seek enough capital to adequately fund growth and operations for at least 12 to 18 months.”
Substantiate numbers. Savvy investors mostly ignore companies with unrealistic valuations or ones that do not line up with revenue. An entrepreneur must determine a realistic number for how much the company is worth prior to trying to secure an investor, Hollas said.
Even if your company is a startup with no revenue, a website like Worthworm can calculate a credible pre-money valuation. EquityNet also has a free business valuation calculator.
Be reader-friendly. Make sure your plan is organized, clear and concise, Blake says.
“View a business plan as more of a resume that brings your business to life on paper, (rather) than just a blueprint or cookie-cutter document, especially when you’re looking to secure capital,” he said.
This article was originally published in Investors Business Daily.