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Business Plans for Business Angels – Part Two

August 18, 2014

The second instalment of our two-part guide to writing a business plan for business angels, examines each of the main chapters in detail, highlighting the areas that need particular attention if you are to successfully attract funding from a business angel or private investor.

Executive Summary

This is the most important section of the plan and comes at the beginning. It will be read before anything else and must enable the reader to determine whether or not he should read further. It should be no longer than two pages, and cover:

  • background/history of the business – how long it has been established, ownership, etc.
  • the nature of the business, including its market
  • profit forecasts
  • brief backgrounds of management team
  • how much finance is needed and why
  • what is in it for the investor, in terms of shareholding, role and exit route.

Take great care over this section. It is probably best to draft it before writing the main body of the plan, revising it after this has been done. Check to make sure that statements in the executive summary do not contradict the main body of the plan (I have seen it happen).

History and Background

Even a start up business has a history. What brought you to this particular niche? What is your own background? What have you done so far to bring the business into being?

For established businesses:

  • when was it started?
  • where is it based?
  • what have been the major changes in ownership?
  • current ownership of the business – how much do they own, how much did they invest, what executive role do they have in the business?
  • what, if any, have been the past problems and how have they been dealt with?
  • where do you see the business going?

Product/Services

This section describes what the business does. What makes the business different (if only slightly) from others? What patents etc are held, by whom, and what licensing arrangements are in place? How will the product mix change over the next few years and why? What technological advances are on the horizon? How skilled are the work force, and how skilled do they need to be? How much is sub-contracted out, why, to whom?

Describe briefly the operations relevant to your product/service. Indicate ability to cope with turnover increases. Who are the main suppliers? Is supplier dependency an issue?

Are there any legal issues to be addressed?

The Market

This is an important section and needs a degree of thought. What market are you in and what brought you to this? Who generally are your customers, what sector are they in, what is their geographic/demographic spread? Who are your major customers, how long have they been with you and how dependent are you on them? How will this market mix change and why?

Who are your competitors? Everyone has a competitor! Why are you different, how will you stay different, what are the likely competitive pressures over the next few years? Macroeconomic information is also useful, and your local IoD or Chamber of Commerce may well be able to provide statistics on the total market and future trends.

What is your advertising and marketing strategy? How do prospects tend to find out about you? Where are you going to advertise and what is the budget for this? What other processes are being used to attract and retain customers? If a start-up or early stage business, what customers are already in place, and what is the estimated sales value?

How is the sales and marketing function organised? Who are the people involved and what are their roles? Is there any after sales service or warranty liability?

People

This is an area of great interest to private investors, since they tend to invest in people before products. Give brief backgrounds of all Directors (including non-executives), showing their ages and function. Describe major achievements, since the investor is looking for a proven track record. Full CVs should be included in an appendix.

Similar details of key management should also be set out in this section; include also their length of service. Show also current remuneration and benefits, service contract details and any other relevant information.

If anyone in the business has had problems in the past, perhaps a personal bankruptcy or where they have been a Director of an insolvent company, this should be mentioned. Investors need however to be given comfort that this will not be repeated (exceptional circumstances, lessons learned etc). Any blots will be uncovered during the due diligence in any event.

Financial analysis

Highlight the key facts and figures – i.e. profit forecasts for the next three years. The detail will be shown in an appendix. Why are future profits differing from historical performance? Investors tend to adopt a rather sceptical attitude where future profits are forecast to be substantially better than in the past, and you need to deal with this firmly.

A break-even analysis is useful, to help investors assess the risks; the key is to understand by how much turnover has to fall before the company makes a loss.

Explain the assumptions upon which the profit and cash flow forecasts are based, and justify them. After all the forecasts are merely a translation of the assumptions.

Show how much is required, when and why. When is the peak cash flow requirement? Can funding be received in tranches? An investor will usually want to invest as little as possible initially, until performance demonstrates that he will feel comfortable with further investment.

What are the current actual borrowings and borrowing facilities? Is there room for some of the future funding requirement to come from a bank, factoring company etc. If so what security will be offered? Remember that an investor may well want to lend the money himself.

Are any grants available and what steps have been taken to exploit these. Again your Business Link may be able to help here.

Investor deal

Few plans that we see deal with this adequately. Although the ultimate “deal” with the investor is subject to negotiation, and indeed to our advice, there are some areas which need to be covered.

Is the finance to be in the form of equity, loans, or mezzanine? What proportion of the equity is offered, and what is the justification for this?

In our experience, investees tend to overvalue their business by almost as much as investors will undervalue them! If a loan or, say, redeemable preference shares are proposed, how are these to be repaid? An investor will always want some equity.

What is the exit route? This is most likely through a trade sale. What plans do you have to build to a size where a trade buyer will become interested? Who are the potential buyers? Have any offers in fact been made for the business and why were they turned down?

Most importantly, what is the role for an investor? There is no such thing as an entirely passive investor – indeed an investor can usually be of great value to the company in terms of his skills, contacts, experience etc. What is the ideal skill profile of your investor? What role is envisaged and how many days a month are expected? Are you willing to accept a syndicate, or is a single investor preferred?

What is the company’s tax status – i.e. will the investor be able to obtain Enterprise Investment Scheme and/or Capital Gains Tax re-investment relief? Your accountant can advise you.

Appendices

All bulky material should be relegated to an appendix, and these are likely to include most of the following:

  • Profit projections – show profits monthly for the first year, quarterly for the next two. There is no need for profit forecasts further out than the next three years – no one will believe them anyway. Show actual historic profit and loss for the previous two years, tied to audited accounts if possible for comparison.
  • Cash flow projections– again monthly in the first year, quarterly thereafter. Immediate cash flow is of particular importance, and care should be taken over this. Be prepared to demonstrate the absolute minimum of new cash that the business will need over the next six months in order to survive – that will be the start point of investor negotiations.
  • Balance sheet projections – less of an issue, but gives an indication of possible funding structures. Include a recent historic balance sheet if appropriate; adjust for any Directors’ loans to be capitalised.
  • Latest audited accounts – in full if available.
  • CV s of key personnel, particularly Directors, focusing on achievements.
  • Marketing material – there is nothing to beat pictures to give an understanding of what the company does.
  • Advisors – i.e. accountants, solicitors, bankers, insurance brokers etc, with contact names and telephone numbers.
  • For start ups, copies of favourable reviews, indications of future orders, or indeed anything else which will give the investor comfort that forecast sales will be forthcoming.

You do not need to include certificates of incorporation (the investor may want to form a “newco” any way), patents etc. These and other details are best left for the due diligence that a seriously interested investor will wish to undertake.

Finally

If you do get stuck, and writing a business plan can be daunting if you have never written one before, you can contact Beer & Partners. We want to ensure that our investors receive well prepared plans, since this improves our chances of finding the right investor for you.

Back to Part 1 – Writing a Business Plan for Business Angels

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