When I work with startups, I am invariably asked whether they "really need to bother with a business plan." Small businesses owners pose the same question. The answer to both is typically a resounding YES -- and that's why my venture capitalist and investor clients never ask whether spending the time drafting a business plan is a worthwhile allocation of resources. Whether you're looking for investment dollars or just looking to succeed, it makes sense to draft a business plan. There are a variety of reasons supporting my advice, including:
1. To flesh out the business model and develop a game plan.
The best time to analyze the business, scope out the competition, identify opportunities, understand the capital investment required, and devise a strategy for domination is upfront, and early. Performing this analysis well in advance can help organize the enterprise and focus the startup's efforts on ways it can refine its business niche and convert opportunities into profits. Additionally, it can help devise your strategy for a graduated rollout, or phased launch.
For that reason, a good business plan can also be used as a human resources tool. Developing a sound business plan clarifies the company's initial needs and changing needs as it evolves. That, in turn, helps the company identify candidates based on the skills and experience required for each phase of development. And a well-crafted business model can be used to attract other founders, management and top talent, as well. It's easier to pitch to others when you have your act together, and more difficult for prospective team members to turn you down when you have already performed your due diligence and can show what their role would be both initially and over time, and why you are likely to succeed where others have failed.
2. To make sure there really is a business there.
Nobody wants his or her business to fail. But after performing the competitive research and thinking about your specific offering, it may be that the business isn't as attractive as it initially was, or doesn't have the upside as initially anticipated. In such circumstances, the founders have an opportunity to go back to the drawing board, to rethink their plan, to shift gears, or to abandon the concept without having poured time and money into a venture that is less than promising. As many of my tech clients vouch, if a business is going to fail, it should fail quickly, before you invest too much time or money into it.
I have had clients abandon business ideas after spending a few weeks fleshing out a business plan -- and they still see that as a win. The reason is simple: understanding why the business will fail gives them a better idea of the marketplace, saves them time and money, and enables them to move on to the next business idea, which stands a better chance of being successful. A business plan helps smart entrepreneurs cut their losses.
3. To distinguish needs and wants.
In lean times, companies do a good job of cutting, doing more with less, and streamlining. There is no leaner a time than during the startup phase, when there is very little money and so much to do. For that reason, business plan development offers a good time to consider whether office space is truly required; to consider hiring options and entity structures; to consider the relative benefits of purchases and leases; to develop business alliances; to engage in guerilla, grass roots, or "bang-for-the-buck" marketing; and to be creative with business solutions.This information is important not only as a company is ramping up, but on an ongoing basis. Indeed, conducting this analysis can even help shelter a company during economic storms.
4. To foster alignment and to avoid emotional responses to business developments.
Startups with more than one founder typically struggle with direction, whether at inception or during growth. Business disagreements are costly to the business even when they do not result in litigation. A well-thought-out business plan forces founders and principals to think ideas and strategies through upfront, and helps keep everyone involved in the business focused, on task, and on the same page, even when things seem to stray from the initial plan. It can also set the stage for future discussions involving deviation from the company's original plan.
5. To secure capital.
Whether the money is from family members or outside investors, a startup needs to communicate its vision, describe the marketplace, and lay out its plans so an investor can make a reasoned decision. Few investors will even consider funding a company without a business plan, and many banks also require business plans before they approve business loans. But even when the funding comes from the founders themselves, they owe themselves the courtesy of performing the market analysis contained in a business plan to justify the investment of their time and money.
That said, even the best business plan is meaningless unless it is well thought out, actively used, revisited and updated on an ongoing basis. The most successful of entrepreneurs know that planning is a continuous process, and that the initial business plan is merely the starting point. So what's the bottom line? Develop a sound business plan, take your time with it, and revisit it on at least an annual basis.
The foregoing is provided for informational purposes only, is not an advertisement, does not constitute legal advice or legal opinion, and does not create an attorney-client relationship. The content may not apply to the specific facts or a particular matter. You should not act or rely on any information contained in this article without first seeking the advice of an attorney licensed to practice in your jurisdiction.