Dissecting a Business Plan

Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.

The ability to decipher a business plan and thoroughly understand a business model are two of the essential skills that help angel investors to separate worthwhile investments from mere pretenders. At its a core, a business plan should adequately and compellingly explain a company’s business model and provide supporting documentation for its assumptions. Too often, a compelling idea can overshadow the fact that there’s no monetization plan or that a market doesn’t currently exist. To have any realistic hope of success, an investor must be able to understand a business plan and accurately assess its potential value.

Angel investors are well-versed in the importance of due diligence. Part of the process entails ensuring that the business plan being studied is both viable and accurate. Despite there being such a great deal of information packed into a business plan’s 40+ pages, angel investors must dissect the document and determine whether the stated business model meets their investment criteria.

What The Sections Should Tell You

The traditional business plan is comprised of nine sections. While a given plan’s internals may vary slightly between industries, they generally conform to the same outline. This makes it easier for potential investors to review the information and make a decision.

Executive Summary

The executive summary should function as an elevator pitch – it should hook you on the overall idea while also making clear exactly what the entrepreneur is seeking from investors. When well-executed, it will offer a précis of what’ll be found in the following pages and inspire sufficient intrigue to keep one reading more.

Company Description

Here, the entrepreneur will list his assumptions regarding the company’s value proposition, its target audience, and the resources he’s bringing to the table. The company description should clearly state the specific need or problem which the company intends to solve, how they plan on doing so, their anticipated market, and any prospective partners. A business plan that’s lacking a clear value proposition or one that misunderstands its own target audience should raise a red flag. Keep any discovered issues or discrepancies in mind as you continue to review the remaining sections.

Market Analysis

The market analysis details the overall industry, as well as the company’s possible market share. It should cover the target market in detail, introduce competitors, and illustrate how their value proposition will result in being able to capture a section of the market.

The goal of this area is to prove that the company knows its target audience and its competitors – and to highlight the ways in which their product will better satisfy the need(s) of that target audience. Information about pricing and any testing that the company has conducted should also be included in this section, as well as information about any relevant regulations and the operational costs of adhering to those regulations.

If the market analysis fails to illustrate why the target audience will purchase the company’s product or service, it will be necessary to further question the entrepreneur to ascertain their market knowledge. If no competitors are listed, be wary. An entrepreneur who hasn’t identified his competition has done an incomplete job, is attempting to dissemble for some reason, or may simply have insufficient knowledge of his industry to create a viable product or service within it. In any case, such an omission is cause for concern.

Organization & Management

How a company opts to organize itself provides valuable insight into how well they’re likely to work together. It also serves as an indication of where the principals place their priorities. For example, some business teams may omit a marketing manager, while others may employ a full-fledged sales and marketing department. As an investor, you need to check for thoroughness (have they thought of everything?), redundancy (why are two people performing the same function?), and appropriateness (is a particular individual truly necessary?).

In addition to an organizational chart, a business plan’s Organization & Management section should also contain documentation on the company’s legal structure, biographies of the ownership and management team, and the board members’ qualifications.

A good team is essential for a successful venture. Many investments are made solely on the strength of the team. It’s absolutely vital to have a team in place that’s compelled to succeed and is willing to do whatever it takes to make their business a success – invest their own money, work long hours, perform exhaustive research, etc. To determine whether the owner and team are up to the task, thoroughly read their biographies and prepare to vet them. If you have common associates, you should solicit their opinions on the company’s various team members. As part of the due diligence process, it’ll be necessary to run both background and reference checks on the entire team. The first step, however, is ensuring that the team members have the necessary experience and drive to succeed in their industry. If the team seems lackluster or inexperienced, exercise caution.

Product or Service Line

This section details the product or service that the company plans to sell. The goal is to demonstrate the value proposition by illustrating the specific needs they intend to fulfill and how, exactly, they propose to do so. Ambiguity has no place in this section. The importance of the product to the target audience must be clearly shown, as well as the anticipated reactions of customers. Any research that supports these conclusions should also be included here.

This section should incorporate details on the product’s current development stage (is there a prototype or is the product already being sold?) and its overall lifecycle. How long does the product last? Is it expected to be replaced with a newer model?

Any relevant intellectual property (IP) such as patents or copyrights should be listed in this section. The IP serves as a resource that helps to differentiate the product or service from those of any competitors. Likewise, information on the research and development (R&D) process should be provided here whether that R&D has already occurred or is planned for the future.

While reading this section, the investor will need to weigh the degree to which they believe that the product or service described can be successful. Does it fulfill an existing need or is it creating an entirely new market? Do the assumptions that are being made, especially with respect to the target audience and intended use, make sense? Is there research to support the value proposition?

Sales & Marketing

While word-of-mouth can help to launch a product, it is not sufficient, in and of itself. A quality marketing plan is essential to ensure success. A serious entrepreneur will also illustrate how they intend to enter the market, how they plan to grow that market, who will be purchasing their product or service, and how they intend to communicate with their target audience. These are the basics of getting a product into a customer’s hands. A great product requires an equally great sales and marketing plan.

When assessing the sales and marketing plan, it’s often useful to compare it to others within the industry. Check that the numbers are based on the best available predictors and that the expectations are reasonable. Every entrepreneur wants to believe (and wants you, the investor, to believe) that his product will be a success and inevitably skyrocket in popularity, but we all know that this isn’t realistic.

The planned growth strategy is of particular importance for investors concerned with an idea’s potential scalability. Once the initial product hits the market, what’s the next step? Will the company create another model or expand into peripherals? Will it sell franchising rights? All of these options should be clearly discussed. If a company doesn’t know how it intends to make money going forward, there’s a serious problem at this stage.

Funding Request

Investors should pay special attention to the funding request included in a business plan. The entrepreneur should clearly state how much money they need and how they anticipate using those funds. Supporting information should confirm that the projected need is accurate and that the investment would be sufficient to enable growth. Additionally, this section should detail an entrepreneur’s exit strategy, if they have one, as well as the specific terms of investment. Smart investors will independently verify that the funding request is reasonable and that any investment will be allocated appropriately.

Financial Projections

Depending on the stage of the business, financial projections can take two forms: historical data and future projections. The former should detail the company’s financial history and can provide information for constructing more accurate projections. Profit and loss information can yield valuable insights into both current spending patterns and an endeavor’s likely future profitability.

Financial projections are a trickier matter. While historical data should include the documentation necessary to support the figures, financial projections – while based on industry and market knowledge or historical data – are mostly informed conjecture. A well-written plan will buttress projections with research. If easy growth is projected, there should be documentation to prove it.

Appendix

The Appendix can function as the repository of a wide range of information. Depending on the company, it might include everything from resumés and product images to contracts and legal documentation. If a patent was previously mentioned in the Product section, it will likely be found in the Appendix. The Appendix is not a required part of the business plan and should serve only to provide necessary additional resources to support stated assumptions. That said, if included, it can certainly provide more information on which to base an investment decision.

Companies employ a variety of techniques in an attempt to stand out from the many other business plans an investor reads on a regular basis, but the ones that stand out best are the most thorough, accurate, and compelling. A good business plan should answer an investor’s principal questions and clearly illustrate how the company intends to make money.

A business plan is simply a story. A company describes how it’s going to be successful within an industry by describing its actions and products and predicting how consumers will react. A good business plan should detail the assumptions a company makes and the needs it intends to fulfill for its target market.  It will:

Have a specific value proposition
Clearly identify its target market
Detail the relevant business processes
Highlight business resources and connections
Identify the possibilities for future growth

After thoroughly examining the sections of a business plan, it’s necessary to remember one thing: business plans are iterative documents. The plan you see prior to investing may not be the plan in place one year (or even one month) down the road. This fluidity is not necessarily a bad thing; it’s a natural part of doing business. A business plan must respond to changes in the market. Additionally, as a business tests its hypotheses against real-world prevailing conditions, it will need to make adjustments to its model. Failing to do so might very well result in catastrophe for a new venture. As an investor, be aware that changing business plans are part and parcel of the always-evolving investing landscape.

About the Author

Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).

Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.

Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.

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