I’m about to sit down and start writing a business plan to raise $50,000 for my bar. It’s right next to a new golf course so it should be a winner. What is the biggest error I can make in writing this plan?
I like this question. Actually, no other startup entrepreneur has ever asked me to name just one oversight in business plan production so you have asked a challenging question indeed!
Of course I have a long list of potential business plan gotchas that can slow down financing. I don’t think there is one biggest mistake, but I can speak to one oversight that I believe is the most common and potentially perilous.
Why do investors fund entrepreneurial companies? The obvious answer is to make money.
Investors know that there is a subtle but meaningful distinction between a successful company and a successful investment. A successful company can pay its bills and employees, earn a profit, and serve customers with a high degree of professionalism.
A successful investment, however, is ultimately based on the ease in which investors can cash out at a price that is well above their investment purchase price–even if it is years down the road.
Most entrepreneurs overlook the most obvious question investors think about as they read executive summaries. It is, “How will I get my money back with a profit?”
In order for investors to buy-in-low in order to sell high, they study industry acquisition activity and learn what types of customer relationships, intellectual property and operating margins will lead to a lucrative sale.
Investors also need comfort that when it’s time to sell, other well-funded corporations or private equity investors will step forward to buy.
Here is where business plans fall short: Most entrepreneurs simply write that investors will get their money back (known as the “exit”) from an IPO or sale to another corporation. However, without any specific information about how companies are bought and sold within your industry, the promise of a lucrative exit loses credibility with prospective investors.
Why not give investors a better understanding of what that super successful exit might look like? Why not explain why larger companies will want to buy your company’s? Maybe the exit is selling your bar concept to a private equity fund that specializes in expanding successful bars or restaurant concepts. Spend some time answering this question, and you won’t make this common error.