What makes a good business plan

From our extensive experience of selling businesses, what continues to surprise us is how few clients have a clear, thought-through business plan – although a plan is essential to be well positioned for sale and achieve the maximum price.

Often enough, clients assume that they have a decent business plan. The reality is that it’s in the wrong format, or not robust enough to support a sale. Roughly half of the entrepreneurs that we advise have to spend time drawing one up or re-structuring an old, badly drafted plan.

The structure of a good business plan will be set out over an initial three-year period. The first year of the plan can then be used as the budget. Ideally, owners should be looking to sell 60 per cent of the way along their plan so that further growth is still projected and it’s clear to potential buyers that continued expansion is achievable. This is crucial when selling a business and seeking the best value possible.

To be credible, a business plan requires market research and analysis. Many businesses looking to sell neglect market research, making them unaware of their own position in the market and the wider patterns of growth or decline within their industry.

A business plan needs to back growth strategies. Carrying out market research is more difficult if the information required is not publicly available, but the data is needed to draft an in-depth business plan, which will also support and underpin the company’s growth strategies – key to persuading buyers to pay top prices.

Growth strategies can be divided into two basic forms

Organic (based on new products, fresh markets and different pricing structures) and acquisition (requires an acquisition strategy and a supporting track record).

The business plan should clearly identify which strategy is being pursued, and areas of growth should be clearly presented. If it’s an organic growth strategy that is being pursued then the key components, such as those identified below, should be highlighted:

  • Revenues (clearly show sources, such as existing clients or products/new clients or products);
  • Operating costs (trends and any reductions/improvement in processes);
  • Gross margins (sustainable or not); and
  • Net margins (include key factors underpinning trends).
The business plan should also clearly demonstrate the links between the growth strategy and the projected increases in EBITDA, which is essential for the plan to be convincing.

Business plans also need to underpin capital values. They need to demonstrate how such factors as scalability, recurring revenue and protected unique IP, all key areas in terms of enhancing capital value, are addressed. For example, if a company is a software-as-a-service business, rather than old-style software licence business this should be highlighted as the recurring revenues of the former model are more highly valued and will help support and enhance capital value.

The plans also need to look at positioning and how that has been thought through as this too is vital for valuation. In the gaming sector, for instance, companies that merely develop games that others have created are valued at far lower multiples than the firms who have the IP and created the games. If a business is in the latter category, it should be emphasised.

Business plans are often the first thing that entrepreneurs think they need when they start a business, but sadly they are also often the first thing left on the board room table. They should remain a key priority, as every entrepreneur is thinking about his planned exit from the first minute he sets up his business. There is nothing more vital to securing maximum value than having a clear, professional business plan that a business owner can demonstrate he has followed and fulfilled.

Caroline Belcher is a partner at Cavendish Corporate Finance, which specialises purely in advising owners on how to get the best price when selling their businesses and then successfully leading on the deals.

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