Business Plans that Work: A Guide For Small Business 2/E (BUSINESS SKILLS AND DEVELOPMENT) - Softcover

Zacharakis, Andrew

Softcover

ISBN 10: 0071748830 ISBN 13: 9780071748834

Publisher: McGraw-Hill, 2011

Synopsis

Turn your great idea into BIG PROFITS with a powerful, persuasive business plan!

With any endeavor, good planning is the key to good results―especially in the launch of a new business or product. Business Plans That Work gives you an easy-to-follow template for conceptualizing, writing, focusing, and revising a business plan that converts your business idea into financial profit.

A virtual blueprint for entrepreneurial success, this new edition of the popular entrepreneur’s guide provides all the tools you need to communicate the value of your idea to investors and attract key talent, and create a plan you can turn to throughout the entire process of starting and running a business. You’ll learn how to:

• Determine what to include in each plan, why, and for whom
• Secure the capital you need to get the project off the ground
• Assess opportunities and risks involved in your project
• Avoid common pitfalls that cost money, time, and effort

With Business Plans That Work, you have everything you need to create winning strategies for development, sales, marketing, operations, distribution, and everything else successful ventures are founded on.

About this title

About the Author

McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

Excerpt. © Reprinted by permission. All rights reserved.

BUSINESS PLANS THAT WORK

A GUIDE FOR SMALL BUSINESS

By ANDREW ZACHARAKIS, STEPHEN SPINELLI, JEFFRY A. TIMMONS

The McGraw-Hill Companies, Inc.

Copyright © 2011 Andrew Zacharakis, Stephen Spinelli, and Jeffry A. Timmons
All rights reserved.

ISBN: 978-0-07-174883-4

Contents

Preface
1 Entrepreneurs Create the Future
2 Before You Start Planning, Ask the Right Questions
3 Getting Started
4 Industry: Zoom Lens on Opportunity
5 Company and Product Description: Selling Your Vision
6 Marketing Plan: Reaching the Customer
7 Operations and Development: Execution
8 Team: The Key to Success
9 The Critical Risks and Offering Plan Sections
10 Financial Plan: Telling Your Story in Numbers
11 Conclusion
Appendix 1: Quick Screen Exercise
Appendix 2: Business Planning Guide Exercise
Appendix 3: Sample Presentation
Index
About the Author

Excerpt

CHAPTER 1

ENTREPRENEURS CREATE THE FUTURE

The weight of this crisis will not determine the destiny of this nation. Theanswers to our problems don't lie beyond our reach. They exist in ourlaboratories and universities; in our fields and our factories; in theimaginations of our entrepreneurs and the pride of the hardest-working people onEarth.

—President Barack Obama Address to Joint Session of Congress,Tuesday, February 24, 2009

Entrepreneurship runs deep in the American psyche. Many of today's heroes arecelebrated for their entrepreneurial achievements. Sergey Brin and Larry Page,Jack Dorsey, Mark Zuckerberg, Bill Gates, Steven Jobs, Sam Walton, and ArthurBlank among others have created businesses that are household names (Google,Twitter, Facebook, Microsoft, Apple, Wal-Mart, and Home Depot). Moreover, manyof today's leading companies were founded at the depths of recession, such asIBM, Microsoft, GE, FedEx, Hewlett-Packard, Revlon Cosmetics among many others.In fact, a study out of the Kauffman Foundation finds that more than half of the2009 Fortune 500 companies and nearly half of the 2008 Inc. 500 companies werelaunched during a recession or a bear market. In 5–10 years, we will seemany new companies on the Inc. 500 and the Fortune 500 that were founded duringthe "Great Recession." If America has learned anything during the GreatRecession of 2008–10, it is that job security is a myth. To succeed,people need to be creative in their career design, which means focusing theircareer on positions that intersect with market trends, taking jobs withinteresting young companies, and developing skill sets that help them understandhow to synthesize inputs. For those of you reading this book, the time might benow. You are not alone in your entrepreneurial dreams. Over 26 million fellowAmericans are in the process of launching a business or own a new business lessthan four years old. Ultimately, the most rewarding and satisfying careers arethose that are created for oneself; create a company rather than take a job.With the current pace of innovation this probably means preparing for jobs thatmight not exist today. Entrepreneurs' unique experiences imbue them with anability to combine human, physical, and financial resources to create advantage.

Babson College, along with the London Business School, spearheaded the GlobalEntrepreneurship Monitor (GEM) project in 1999. Today, GEM tracks the rate ofentrepreneurship across 54 countries. In the GEM study, entrepreneurship isdefined as any attempt to create a new business. Best estimates of theentrepreneurial activity rate for adults aged 18 to 74 in 1993 was around 4percent. After peaking at around 16.7 percent during the Internet boom in 2000,the rate dropped to 8.7 percent in 2008, still over twice the level of activitysince 1993. However, not every entrepreneur succeeds in launching a business,and only 40 percent of launched businesses survive longer than five years. Thisbook is designed to help you get beyond the prelaunch stage, successfullynavigate the new business stage, and ultimately grow your business into asustainable enterprise that is both personally and financially rewarding.

This first chapter provides a background of the state of entrepreneurship in theUnited States, which firms beat the failure rule and why. The chapter continueswith an overview of attributes of successful people. Next the chapterillustrates when ideas are opportunities. Our simple but robust framework foropportunity assessment is the Timmons Model.

Entrepreneurship in America

To understand what works and what doesn't work, it is useful to briefly examineentrepreneurs. We can think of entrepreneurs as falling into differentcategories based upon the stage of development of their business. Nascententrepreneurs are those individuals in prelaunch mode. They have yet to paythemselves or any employees a salary. New business owners are entrepreneurs whohave paid salaries and their business is less than four years old—acritical phase in entrepreneurship. Once the business has survived and reachedpositive cash flow, usually by the fourth year at the latest, the business isclosing in on becoming a durable enterprise, and the entrepreneur's task movestoward building upon the foundation already laid.

Nascent Entrepreneurs

Nascent entrepreneurs are those individuals who report that they are takingsteps toward launching a business but have yet to pay themselves or anybody elsewithin the organization a salary or wages. In 2008, 5.9 percent of the adultpopulation (or 1 in 17 adults) were in the process of launching a business. Menare more likely to be nascent entrepreneurs then women (1.3 men for every woman)but the rate of women becoming entrepreneurs has been accelerating in the last20 years. Entrepreneurs are all ages, but most commonly fall between 18 and 44.They tend to be college educated, but there are many who don't even finish highschool. As we can see from the demographics, entrepreneurship isn't confined tohighly educated men; it is an encompassing phenomenon within the United States.Granted, there are periods in life when it is more likely that a person willpursue entrepreneurship (mid-thirties), but exceptions to the rule abound(Colonel Sanders was in his sixties when he launched Kentucky Fried Chicken andMark Zuckerberg was a teenager when he launched Facebook). We often describeentrepreneurship as the art and craft of the creative, the unexpected and theexceptional. The inspiration, if you will, may strike at any time in your lifeas long as you are open to seeing new opportunities.

Not all nascent entrepreneurs successfully launch their businesses. Many willdiscover in this prelaunch stage that the business isn't viable for any numberof reasons. For instance, the opportunity may not be compelling enough for youto leave an existing job. You need to be confident that the business can grow toa level where you will be able to pay yourself a salary that is comparable towhat you currently make, or more. Moreover, you must recognize that it willtypically take two or more years before you approach revenue figures that makesuch earning potential possible. There are opportunity costs to pursuing a newventure. Other flaws may become apparent in the prelaunch phase. You may learnthat you lack the skills necessary to be successful, so you may postpone yourdream while you seek experiences that build that skill set. Entrepreneurs oftenfind it difficult to raise the necessary capital, and less determinedindividuals will abandon their plans.

Learning is a way of life for entrepreneurs. New and old businesses makemistakes and some of those mistakes may lead to failure, but successfulentrepreneurs manage mistakes better. Successful entrepreneurs recognize thatlearning events help them reshape the opportunity so that it better meetscustomer needs. The business planning process can help you compress and createthose learning curves and move from nascent entrepreneur to business owner.Business planning will save you considerable time and money by helping youunderstand and anticipate the obstacles that all entrepreneurs face when theylaunch a business. Articulating in your business plan the nature of youropportunity and the way you will exploit it requires you to answer many of thereal-life questions you will ultimately face in practice. Indeed, your immersionin creating a great business plan will carry into your execution of that plan.You will build a textured awareness of the market and how to attack it by doingresearch, talking to potential customers and vendors, and generally building anetwork or "brain trust." In essence, writing a great plan provides the momentumfor you to become a great entrepreneur, but it is not the business.

Even if you successfully launch your business, not all new businesses willsurvive. Traditionally, the failure rate for new businesses has progressed asfollows: 19 percent fail within one year, 35 percent fail with two years, and 60percent fail within five years. Although these numbers hold over time, they varyby industry and company type. We believe that you can move those percentages inyour favor by gaining a deep understanding of your capabilities as a founder,what it will take for the business to succeed, and how to create ways to makethis happen. Business planning is part of that process. It is a useful tool forunderstanding the potential, the risks, and the payoff for a particularopportunity.

Durable Organizations

Who are the survivors? What new businesses ultimately transition into thesustainable business mode? The odds for survival and a higher level of successchange dramatically if the venture reaches a critical mass of at least 10 to 20people with $2 million to $3 million in revenues and is currently pursuingopportunities with growth potential. One-year survival rates for new firms jumpfrom approximately 78 percent for firms having up to 9 employees toapproximately 95 percent for firms with between 20 and 99 employees. After fouryears, the survival rate jumps from approximately 35 to 40 percent for firmswith fewer than 19 employees to about 55 percent for firms with 20 to 49employees.

Growth is implicit in entrepreneurship. The entrepreneur's goal often includesexpansion and the building of long-term value and durable cash flow streams.McDonald's founder Ray Kroc said, "Green and growing or ripe and rotting."However, it takes a long time for new companies to become established and grow.Historically, two of every five small firms founded survived five or more years,but few achieved growth during the first four years. The study also found thatsurvival rates more than double for firms that grow, and the earlier in the lifeof the business that growth occurs, the higher the chance of survival. The 2009Inc. 500 exemplifies this, with a five-year growth rate of 881 percent. Thelesson from these studies is that entrepreneurs need to think big enough. Don'tcreate a job, build a business.

This compelling data has led some to conclude that there is a threshold core of10 to 15 percent of new companies that will become the winners in terms of size,job creation, profitability, innovation, and potential for harvesting (andthereby realize a capital gain). As you plan your business, think of ways toattain these threshold milestones. By understanding due diligence, intimateinvolvement in planning, and the intricacies of your deal, you will increaseyour odds of launching and sustaining a new venture.

Timeless Lessons from the Dot-Com Meltdown

Although failure rates seem to be relatively stable, there are instances wherethey becomes more severe. Furthermore, ignoring the fundamental lessons ofentrepreneurship can lead to failure even if your venture achieves many of thethreshold rules already discussed. Take the Internet boom and subsequent bust,for example. The creation rate during the late nineties was phenomenal, but by2000, the failure rate exploded. Through the third quarter of 2002, nearly ninehundred Internet companies had shut down or declared bankruptcy. Several lessonscan be learned from the Internet debacle.

1. Entrepreneurship Is Hard Work and Requires Both Creativity andRigor

During the boom heyday, entrepreneurs had visions of easy money and quicksuccess. Television, newspapers, and magazines highlighted stories of instantbillionaires. All that was necessary, it seemed, was to be young, create aconcept with the term Internet in it, and go out and seek start-upcapital. The idea didn't have to be original (how many Internet toy companies,pet supply companies, electronic gadget companies were there?), the goal was tospend as much money as possible and hope that it led to impenetrable marketshare. Fast growth in Internet traffic led to public offerings that createdinstant paper billionaires and funneled more capital for the company to spendfoolishly. Venture capitalist and entrepreneurship professor Ernie Parizeausaid, "When entrepreneurs become movie stars it's time to stop investing."

What we learned (or relearned) is that entrepreneurship isn't about marketshare; it is all about a strong business model. That means profits. Youcan't buy your customers forever, nor expect undying customer loyalty justbecause you gave them a good deal. You need to have a product or service thatcustomers truly value; something that they will pay a premium for. In otherwords, your product and supporting service need to be some combination ofbetter, cheaper, or faster. We should pause for a moment and explain what wemean by cheaper. Some readers might misconstrue this to mean your product shouldbe priced lower than the competition's. While this might be a sound strategy insome cases, most new companies don't have the economies to deliver a lower-pricedproduct effectively. Instead, "cheaper" usually means that you have acost advantage that adds value to your customer. In the spring of 2010, Applelaunched its iPad starting at $499. The iPad was cheaper than most laptops, butApple optimized certain features and excluded others. For instance, the iPad isan all-in-one supergadget that consolidates your e-reader, gaming device, photoframe, and iPod all in one. On the other hand, it doesn't have the fullfunctionality of a laptop. The iPad doesn't have any SD card slots or USB ports,it has limited multitasking capability, and it doesn't support Flash software.In essence, the iPad creates a new class of computing combining features fromexisting devices such as the smartphone and netbooks, while eliminating somefeatures from the laptop. While the iPad may be a cheaper device, it generatesmore traffic to iTunes, where users download songs, apps, and e-books. ThusApple is creating value for its users throughout the Apple ecosystem. The"better, faster, cheaper" mindset focuses an entrepreneur's attention ondelivering the customer value proposition.

The business planning process is one of exploration and learning. It is adisciplined approach where you ask questions, seek answers, and plan forincreasingly demanding market tests. Deep understanding and the ability to adaptwill improve your chances of success. The business planning process helps youmove beyond the nascent entrepreneurial stage and survive the new businessownership phase.

2. Too Much Money Is as Dangerous as Too Little Money

Failed entrepreneurs often cite a lack of capital as the primary reason fortheir firm's demise. The opposite was true in the Internet boom. Venturecapitalists eager to invest large sums of money with the prospects of quickliquidity via initial public offerings (IPOs), poured more money into Internetcompanies than they could digest. At the peak in early 2000, venture capitalistswere pumping $8 million to $15 million per round of investment into early-stagedeals and a whopping $22 million per round into later-stage deals. Expected tospend this money, many of the Internet entrepreneurs spent foolishly in vainefforts to capture market share. Boo.com spent $130 million in 7 months tolaunch a fashion Web site, and failed. Webvan, a grocery delivery service, blewover $800 million and then failed. The excess money insulated these companiesfrom the market validation of their value proposition. That is, these companiesused investor money, rather than profits, to sustain operations (at least in theshort term). With huge war chests of cash, these companies could sell theirproduct or provide their service at a loss, and never really understand if theycould ever command a price high enough to generate a profit. Market share wasall that mattered, because there was going to be some investor (usually thepublic market) who would pay more than the company was worth. Then, conceivably,the entrepreneur and early investors could get their money out plus hugereturns. Ultimately, these companies destroyed wealth, and few entrepreneursenjoyed the highly publicized short-term gains. Toby Lenk, founder of eToys, wasworth $850 million dollars (on paper) the day after his company went public. Inpart, to set an example, and in part because selling a large chunk of his shareswould have hurt the overall value of his company, Toby Lenk held almost all ofhis shares until the company went bankrupt.

The key is to get enough money to get started, but not so much that yourbusiness is insulated from market tests. It is critical to learn early whetheryour product or service has the potential to earn profits. Your venture needs toanswer several questions in the early iterations of growth. Will the customerpay enough for the product so that the firm can be profitable? Will the customerstay loyal to your company or shop for the best price? How much will it cost tocapture the customer in the first place? If your entrepreneurial venture is on atight budget, you learn the answers to these questions quickly. You then havetime to adapt your business so that it does answer the questions in theaffirmative. Business planning helps you define milestones that you need toachieve on your journey toward a sustainable business. Once you identify thesemilestones, business planning helps you assess how much capital you need toachieve them and when you should raise that capital. Devise your fundingstrategy around those key milestones. For example, in developing a prototype,you may be able to use your own resources, such as your time and small infusionsof your personal cash. After you have a prototype, the next milestone might beto produce and sell your product or service. This might require investment fromfriends and family. Tying your capital needs to milestones helps you test theconcept, see if it passes, thereby ameliorating some of the risk, and then movetoward the next milestone.

3. The First Mover's Advantage Is an Urban Legend

Having worked with numerous entrepreneurs and student entrepreneurs, one thingthat we hear over and over is that "our company will have a first mover'sadvantage." Often, this is the sole critical assumption on which entrepreneursbase their competitive advantage. In truth, first mover's advantage rarely worksin isolation from other competitive advantages. Numerous examples illustratethat the first to market is rarely the industry leader in the long run. Acompany called Audio Highway had the first MP3 player, but it was supplanted byApple's iPod. When Facebook was founded, MySpace held the preeminent position insocial networking. Just four years later, in 2008, Facebook surpassed MySpace inthe number of unique visitors and is now the dominant social networking site.Visicalc had the first spreadsheet, but it was supplanted by Lotus 123, whichwas supplanted by Microsoft Excel. Being first to market doesn't mean you willown the market.

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Excerpted from BUSINESS PLANS THAT WORK by ANDREW ZACHARAKIS. Copyright © 2011 by Andrew Zacharakis, Stephen Spinelli, and Jeffry A. Timmons. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Edition details

• Publisher: McGraw-Hill
• Publication date: 2011
• Language: English
• ISBN 10: 0071748830
• ISBN 13: 9780071748834
• Binding: Paperback
• Edition number: 2
• Number of pages: 208