Lately we’ve been asked for information on business plans. Lenders often request business plans. Rather than view their request as a necessary chore and nuisance, consider the creation of a business plan an opportunity. The process of creating a business plan will force you to think clearly and express succinctly in writing the key issues surrounding your company’s present and future viability.
Because most business owners embark upon business plan creation at the request of a potential lender, let’s deal with a typical business plan and how a lender might critique that plan.
1) Company Background – Lenders want to know how long you’ve been in business. A long, successful history shows strength and resiliency during changing markets. Successful ownership transitions in the past (for instance from one generation to the next) is also viewed favorably.
2) Business Philosophy – Companies with written mission and value statements have this section of the business plan already licked. If your company hasn’t developed a mission statement, do your best to articulate why you are in business, who you serve, and how you approach this market.
3) Customers – Lenders want to know the number of customers you serve, their industries, and the names of your largest individual customers. The lender’s perception is that the more diverse your customer base, the less risk.
Astute lenders will critically assess the viability of industries you serve. This is an important management function for you as well. Your company is vulnerable if you have business concentrated in an industry that may decline in the near future.
4) Vendors – Lenders are concerned with product supply availability. Generally, the more vendors you purchase from with longevity and strength in their industry, the more secure your lender will feel.
5) Competition and Market Position – Your business plan should include an evaluation of your current and future competitors. How is your company’s strength and market share compared with your direct competitors? How easy or difficult would it be for a new competitor to enter your market place and take away your existing business?
6) Management Depth, Expertise and Years of Experience – Lenders prefer companies where there are multiple individuals capable of running the company. The worst credit risk to a lender is a one-owner company with no other managers. For this reason, lenders will often require key-man life insurance in single-manager companies. In multiple-manager companies, lenders prefer to see longevity and are suspect of high turnover, particularly in key financial management roles.
7) Employee Profile and Summary – Ideally, report your employees by department and segregate hourly from salary. You should also report the average length of time on the job and highlight any very long-term employees. Lenders realize that employee loyalty is a key component to customer loyalty and watch for high turnover.
8) Internal Strengths – You should be able to identify the unique strengths of your company. Examples of strengths include physical assets, location, operational efficiencies, personnel, technology, etc.
9) Internal Weaknesses – What a lender looks for first is that you actually see and acknowledge your company’s weaknesses. More importantly, however, they want to know your action plan to cure those deficiencies.
10) Predictions and Projections – The last section of your business plan is your prediction for the future, including financial projections. Lenders realize that the best-managed companies are those that are able to predict and capitalize on marketplace changes. Since lenders are concerned with prediction accuracy, they will monitor your predictions, comparing actual results in the future to your predictions.
If you must err, err on the side of conservatism. It is much easier to explain next year why your company did better than its prediction than why it underperformed.
If you need (or just want) a business plan, there are reasonably priced software programs to help you. These software programs will walk you step by step through the business plan process, forcing you to think about every component of your business, your marketplace and your competitors. By putting your thoughts in writing, you will have clarity and focus on your company’s critical issues. What began as a tedious exercise for your lender may become a critical tool for your company’s management and future viability.
Meridian Associates has been partnering with family-owned businesses for over 30 years to remove barriers, accelerate business growth, build their legacy, and reduce stress levels. With three, high-impact business events each year, The CEO Exchange, Women in Family Business, and The Family Business Intensive, we continually provide best practices & proven strategies that keep multigenerational businesses thriving. Discover how Meridian can help your business thrive through our combination of high impact business coaching, advisory, M&A, and precision company valuations by visiting www.askmeridian.com or calling us at 817-594-0546.
