ENDEAVORLEGAL attorneys work with our clients in a wide variety of industries preparing detailed business plans prior to the “Start-Up” of a business enterprise. Our attorneys pay particular attention to the special needs of each entrepreneur in determining the type of business plan that the client needs.
The depth and detail of a good business plan is often determined by the document’s anticipated use. Important considerations include the amount and type of financing the business venture requires, what type of investor will be a likely candidate for ownership, and what type of lender will be approached for the borrowing of capital.
Developing a Business Plan
One of the best ways to increase the likelihood of the success of a new business enterprise is through extensive research and proper planning. Whether one is setting out to start a software company, healthcare consulting company, restaurant, art gallery or any other business; the development of a business plan is a valuable asset to the business venture.
The drafting of a business plan can enlighten the entrepreneur as to issues and obstacles he had not previously considered when first deciding to start a business. In addition, a business plan serves as a marketing tool in locating and accessing capital to fund the venture.
The first step in developing a business plan is to research a few basic questions:
- What type of business does the entrepreneur wish to embark upon?
- Will the business sell a product or provide services?
- Will the business concept fill a need in the marketplace?
- Who are the business’ competitors?
- Is there room in the market for an additional business?
- What will it take for the business to be profitable?
Once these questions have been answered, it is time to determine whether the entrepreneur has a viable business concept. If the answer is “yes, the business concept is viable,” then the next step in developing a business plan is to determine the following:
- What is the entrepreneur’s resume? What does he bring to the table in terms of experience in the market he or she wishes to enter? Investors need to feel secure that the entrepreneur knows what he or she is doing before committing their moneys to funding to the business venture.
- Will the business be run as a sole proprietorship, corporation or limited liability company?
- What licenses will be needed to conduct the business? Restaurants and bars, for example, must obtain licenses from state and municipal authorities to serve and sell alcoholic beverages.
- What type of insurance will be required? For example, state law requires persons and companies providing certain services to carry malpractice insurance.
- If the business is to sell a product, where will it get inventory and how much will this inventory cost?
- Will the business be able to mark-up inventory to an amount that will generate desired revenue streams?
- If the business is to provide a service, will the entrepreneur be able to charge an amount for services sufficient to generate desired revenue streams?
- What will the start-up costs of the business venture be?
- How will the entrepreneur be compensated for his toils?
- Will the business have employees?
- Where will the business be located?
- Will the business need financing? Will the entrepreneur finance through debt or the issuance of equity interests in the business endeavor?
Once the entrepreneur has answered these questions in relevant detail, he is ready to prepare a detailed business plan to serve as the roadmap to business operation and success. The business plan will evolve as the business gets off the ground and begins to grow.
Drafting the Business Plan
The importance of a well researched and drafted business plan cannot be emphasized enough. A good business plan can aid the entrepreneur in accessing capital from investors and credit from suppliers; provide a roadmap and outline of the business’ management and finances; and serve as an excellent marketing tool in locating experienced personnel and strategic business partners.
A business plan is an excellent tool for defining business objectives and goals and serves as the endeavor’s blueprint for success. The four basic components of a good business plan include, description of the business of the enterprise; marketing strategy; financials (past, present, projected); and management.
The following shows the table of contents of a typical business plan.
Executive Summary: An overview of the business plan including a general description of both the business venture and the goals and financial objectives of the endeavor.
Investor Opportunity: A description of any additional perks investors can expect from purchasing an ownership interest in the business endeavor.
Investor Responsibilities: If applicable to the particular venture, a short list of activities investors are expected to participate in as part of their ownership of an interest in the business venture.
Summary of Terms of the Investment Opportunity: An overview of the particulars of the terms of purchasing an interest in the business venture.
Securities Offered: A description of the ownership interest being offered to potential investors. Corporations offer shares of their capital stock. Limited Liability Companies offer percentage interests (also known as Points) or units. Shares or Points/units are often broken down into various classes, each with its own particular ownership rights and privileges. Investors are often offered interests superior to those of the founders of the company as an additional incentive to invest.
Offering Price: A brief review of the purchase price per share or unit in the business.
Corporation stock sales are typically accomplished through the execution of a stock purchase agreement by the company and all of the prospective investors. In the alternative, a separate stock sale and subscription agreement can be executed by the offering company and each investor. Investors in corporations are commonly required to enter into a shareholders’ agreement which provides each of the stockholders of the corporation with specific rights, obligations and protections with respect to their stock ownership.
Sales of limited liability company interests are most often completed through the execution of a separate subscription agreement by the LLC and each prospective member. The investors will also be required to become party to the LLC operating agreement which details the conduct of the business of the LLC and the rights, obligations and protections of the members of the LLC.
Return on Investment: This section provides the potential investor with information regarding what percentage return the entrepreneur expects the company to be able to provide to its owners.
Additional Information: Additional information is sometimes included such as information regarding the anticipated expenses of the offering, the identity of any owners selling their interests in the company as part of the offering, and any liability the owners or investors will have with respect to the business of the company in excess of their investment.
Senior Management: A brief professional biography or resume of each member of the senior management of the business enterprise, including name, address, age and industry background.
Offering Statistics and Expected Timetable: A description of the percentage interest of the total ownership of the company anticipated to be sold in the offering and the expected timetable for completing the offering.
Certain Key Information
Selected Financial Data: Various financial statements are presented or a reference to these statements is provided which directs the reader to the appendix of the business plan where these financial statements appear. The statements typically included are as follows: (i) Statements of Profit and Loss, (ii) Balance Sheets, (iii) Income Statements and (iv) Statements of Cash Flow. It is recommended that a “break-even” analysis be included in this section. If the business is a new venture and has no or very little operating history, financial projections should be included in lieu of the financial statements described above.
Indebtedness: The debt presently carried or anticipated to be carried by the business endeavor is described in relevant detail including name of lender, interest rate, monthly payment and term of loans. Status of any loan applications should also be discussed in relevant detail.
Reasons for the Offering and Use of Proceeds: Information regarding the reasoning behind the sale of ownership interests and the uses to which management anticipates putting the proceeds of the sale of interests.
Risk Factors: All relevant and knowable risks associated with making an investment in the business enterprise.
Information about the Company
History and Development of the Company.
About the Company: A brief statement regarding any operating history the company has; or in the case of a new operation, the business history of the venture’s founders.
Information Concerning Choice of Entity: Information regarding the company’s entity status from a Federal and state perspective. For example:
Does the company operate as a corporation, a limited partnership or a limited liability company?
Under the laws of which state is the entity organized?
In what states is the entity authorized to conduct business?
If the company is a corporation, has it elected to be taxed under Subchapter S of the Internal Revenue Code?
If the company operates as a LLC, is it taxed as a partnership under Subchapter K of the Internal Revenue Code, or has it elected to be taxed as a corporation?
What type of licenses or permits does the company need to maintain in order to begin or continue operation?
Overview: A brief discussion of the intended business and its operation.
Industry Background: An overview of the history of the industry in which the venture is or will be transacting business.
Company Focus: A review of the company’s business and financial goals.
Company Strategy: Description of how the venture intends to reach its goals.
Products and/or Services: The products and/or services the company intends to offer to its customers and clients.
Customers/Clients: The demographic of the venture’s customer or client base.
Marketing: The marketing tools and strategies that the business intends to employ.
Competition: A brief description of the venture’s direct and indirect competitors. Depending on the nature of the business, it may be necessary to include international, national, regional and/or local competitors in this discussion.
Employees: The number of full-time and part-time employees that the venture will have on an ongoing basis. Anticipated increases or decreases in work force should also be discussed.
Legal Proceedings: If the venture is an ongoing concern and it is involved in any legal proceeds, either as a plaintiff or defendant, such proceedings should be discussed here in relevant detail.
Governmental Regulations: If the business of the company is governed by any Federal, state, municipal or professional regulatory agency, such regulations should be set forth in this paragraph.
Property, Plant and Equipment: A list of all property leased or owned by the business.
Operating and Financial Review and Prospects. The financial status of the business venture should be discussed in paragraph form in this section in detail, referencing the financial reports described above.
Senior Management. The management structure of the business organization should be described in detail. Board and/or management practices should be included; compensation arrangements discussed; and director and/or management ownership interests in the endeavor disclosed.
Related Party Transactions. Founders, management or other interested parties often enter into agreements with the business venture, such as loans, leases and the like. Any such related party transaction should be disclosed.
Financial Information. The financial statements of the business should be included here if they have not been included in an earlier section of the business plan. In addition, this section should include a disclosure of any company distribution or dividend policies and an in depth description of any significant changes in the health or operations of the venture since the preparation of the financial information included in the business plan.
Federal Income Tax Considerations. The business may be a corporation subject to taxation under either Sub-Chapter C or Sub-Chapter S of the Internal Revenue Code, or it may be a partnership or limited liability company subject to taxation under Sub- Chapter K of the Code – the consequences of the venture existing under a particular taxation regime should be described in this portion of the business plan. The description should include the considerations applicable to potential investors.
Additional Information. This section of the business plan should include or make reference to an appendix which includes the following: business organizational documents, copies of a franchise contract between the franchisor and the business (if applicable); copies of proposed leases or purchase and sale agreements for building space; copies of all licenses and other legal documents material and relevant to the business venture. This section of the business plan also should include estimates of professional fees associated with the development of the business plan and planned offer and sale of ownership interests, and if applicable describe any defaults or delinquencies under which the business is currently operating.
The business plan also must include information regarding the status of the offering as a private placement under Federal securities laws and describe the materials that will be required from investors wishing to participate in the offering.