Academics have done studies by the wagon load showing that managers who do business plans run companies which survive more often than companies without plans. Yet, most of us treat starting a business like young athletes relying more on twitch response than forethought and planning. The impulse to act rather than plan is very strong, especially among men. Unfortunately, the impulse is reinforced by enough companies which succeeded without a plan to convince most of us to fly by the seat of our pants. As a result, most start ups fail and take whatever money they got from friends and family with them. Friends are lost, and family members no longer invite you to reunions. One of the things a business plan is likely to do is to give the neophyte entrepreneur time to think through his idea and see the flaws before he has talked people into backing him. A business serves two purposes. Initially, it is a feasibility study. Writing a business plan is an exercise in self-explanation. That is, the writing the plan explains the business to the writer. Secondarily, it is a money-raising tool which explains how the business will work to others.

The plan can start out as a piece of paper with two columns headed pros and cons. Why is starting the particular business a good idea and why is it a bad one? Based purely on this table of advantages and disadvantages of starting a business, most people would not start one. There is always at least one Killer Con in the list. It might be loss of income until the business gets up and running. The second step in writing a business plan is figuring out how to overcome the Killer Cons. If you can't figure out how to get around a problem on paper, there is no point in starting the business for real.

Once the Killer Cons have been disposed of, it is time to look at the advantages. Each of the items in the pro column is based on one or more assumptions. For instance, a pro comment might be that you will be your own boss. The underlying assumption is that that is a good idea. Why? Are you really sure that you know all the answers or how to get the answers to things you don't know? Just what are your qualifications for being the boss? What are your strengths and weaknesses for the position of boss? What about the others involved? What are their strengths and weaknesses? This is the management section of the business plan, probably the most important section when it comes to looking for outside financing. Its purpose is to answer the simple question, "can the proposed management do what the rest of the plan calls for?"

The simple advantage that says the company will make money is based on an extremely unstable pile of assumptions which must be picked out and examined individually. The first assumption is that there are people who will buy the product or service you propose to sell. Support for that assumption is the market research portion of the plan. Howe many similar businesses are there in your service area? Are their sales increasing, decreasing, stable? Does the market really want your innovation? If you really do have a new idea, what is to prevent other people from using the trail you broke, "the barrier to entry?" For instance, if it cost you $50,000 to roll out your new idea and create a demand for it, that is $50,000 the companies that come after you don't have to spend. How are you going to avoid giving them that much advantage?

Is the market ready for another hamburger stand? To get an idea go to the local public library and look up hamburger stands in the Yellow Pages last year, five and 10 years ago. If the number hasn't changed, there probably isn't room for another hamburger stand in that town. If the number has increased with population, you can figure out how many more people have to come to town to support your stand. The local chamber of commerce will be able to tell you what businesses are coming to town and how many new people they are going to bring. The city planning department will be able to tell you how much additional housing is being built.

Demographic information from the Census and the IRS will also help in determining what the market for your proposed business will be.

By this time, many people begin to think about farming the business plan out to someone else. There are people who will write them for you. There are computer programs which will generate them for you. Since the whole idea of the business plan is to prove that the concept will or will not work, hiring someone else to do it is a bad idea. Writing a good business plan involves doing the one thing most of us would do anything to avoid--engaging in deep, analytical thought.

Planning for Money

The second reason for a business plan is to attract money, either bank loans or equity investors. When writing for others, the hardest thing to do is to provide all the information the prospective investor needs in as little space as possible. Most venture investors, business angels and investment bankers will throw most business plans in the trash after reading the first two pages because the plan hasn't told them what they want to know.

The first thing a business plan has to do is tell the reader why he should believe that the idea will work and why management can make it work. This is where the appearance of the plan comes in. Neatness counts and a professional-looking, bound plan makes a better first impression than a hastily put together sheaf of paper. Also, consider submitting the plan on media (CD-ROM or diskette) in addition to paper. The media submission can take advantage of hyperlinks to put supporting information at the reader's fingertips without bloating the executive summary.

Tell them what you do

The next step is to be clear about what you business is. For some reason, business people who are perfectly understandable when they speak, read like they had chosen their words by throwing darts at Mr. Roget=s thesaurus. There is no virtue is writing "Articulate@ when you mean Atell@ or "explain." All that happens is that the reader ends up unclear about just what it is that you do.

Knowing what business you are in is as important, and not always apparent. Clayton M. Christensen enjoyed quite a period on the New York Times Best Seller list with a little book called AThe Innovator=s Dilemma ,@ in which he described the disasters that befell companies that didn=t know what business they were in.

If you make widgets, say Awe make widgets.@ Since nobody admits to making bad widgets, it is understood that you make the best widgets around.

Never assume that your readers know as much about your business as you do. Guide them through your operation. Define and describe your product as if to someone who has never seen a widget and knows absolutely nothing about them. Not only is your product a left-handed thingamabobby, it is part of the $X billion thingamabobby industry.

If your=s is a technology company, don=t use the buzzwords or jargon of the technology without defining them first. You might want to include a glossary of technical terms used in your industry.

Careful explanation of your business also gives you an opportunity to demonstrate why you think you can compete against established widget makers and why the investor=s money will be well invested.

For instance, is your business really making widgets, or is it being able to make the right widget for the customer as soon as he wants it? How important is that? How much of a premium can you charge for that ability? How long will it be after you show that it can be done that your competitors will start doing it? Is there enough room in the market for more specialty widget makers?

Industry associations and the federal government are good sources for information on the size of the widget market. Industry associations and annual reports from the public companies in the industry can help with information on market share. Dunn & Bradstreet, the consulting arms of the major accounting firms may also have information you can incorporate in your plan. But, surely, you have all this information already, or you would have had no way of knowing whether you should go into this business.

Know your market

Nothing turns off an investment banker, venture capital analyst or angel investor quicker than sloppy market analysis. It is understood that you are prepared to sell to anyone would wants your product. But selling is an active, not a passive, operation. Define your customer in as much detail as possible including demographic traits as well as more subjective items such as lifestyle and personality traits. Finding this information may involve doing surveys or instituting focus groups of people you think might be customers to find out if they are, why they are, etc. Once you know who your customer is, the next step is to discover how many of them there are.

How big is the pool of potential customers? How is that pool now divided among your competitors? What are the points that move them to buy? How sure are you of that? Back in the early 1970s when the first oil crisis was getting started, gasoline marketers were shocked to learn that Acustomers don=t care about service. All they want is gas.@ For decades, the industry had been trying to out service each other. People actually ran to your car when you pulled up to the pump. While the gas was pouring into your tank, they checked the oil, water, washed your windshield, emptied your ash trays (front and rear), and, in some places, vacuumed the carpets.

Know your competitors

Competitors come in all sizes, shapes and some are not readily apparent. The first step in analyzing competitors is to know what business you are in. Many small business owners don=t really understand what business they are in. For instance, does McDonalds sell hamburgers or does it sell uniformity and convenience? Back when Sears was a force to be reckoned with, was it selling cheap, or was it selling reliable, clothes, appliances and tools? Did the superstores hurt it, or did the fact that Sears changed its policy on customer satisfaction? Did Sears lose customers when it began selling maintenance contracts, which other stores could do as well, instead of standing behind its products? If you don=t know why people are buying from you, they probably won=t be for long.

If you don=t know why they are buying from your competitors, your chances of getting them to change are slim.

In your business plan, you have to identify all your competitors, direct and indirect, the basis of competition (price, quality, convenience, etc.), their share of the market and their strengths and weaknesses.

Competitive analysis is such an important part of business that it would probably be well worth your while to study it, either through formal course work, or by reading.

Management

Modesty and diffidence are generally attractive traits, but not in a business plan. Be honest and complete about your and the rest of the management team=s accomplishments and short comings. Although most small business owners looking for startup or development stage money think their idea is the main selling point, the truth is that it is now and always will be management that brings home the bacon or blows the deal. The quickest way for an entrepreneur to lose his company is to convince his investors that he doesn=t have the management skills needed to run the company.

The management team has to have players in every position: marketing, sales, operations, finance, manufacturing, engineering, etc. In addition to the management team, the board of directors has to pass muster. Most venture capital or angel investors are going to require board representation in exchange for their money. Uncle Herby and your high school buddy probably aren=t going to impress them.

In addition to a management team and a board of directors, it might be useful to have an advisory board composed of people with special knowledge about the industry, the technology, or areas in which the management team is weak.

The business plan must include a complete curriculum vitae or each person. One touchy area is criminal records. If you plan to offer your shares on the Nasdaq or the New York Stock Exchange, you will find that having a convicted felon on your team or board will make that all but impossible. Youthful indiscretions may work for Congressmen, but they don=t necessarily cut much ice with the NASD or the NYSE listing authorities. You are better off finding out about that type of problem before the felon becomes a 5% shareholder or a controlling person.

The U.S. Securities and Exchange Commission has proposed changing its "bad boy" rules. Currently, certain exempt transactions are unavailable to companies who have people convicted of securities or postal offenses in the past five years. The SEC is considering changing that so that all the company has to do is to disclose the facts. As of July, 2001, no official action has been taken. See the Securities Lawyer's Deskbook for the bad boy provisions (Securities Act Rule 262).

The NASD, in its infinite wisdom, refuses to be bound by rules on what it will accept and what it won=t in terms of past criminal activity. It prefers to examine each situation on its own merits.

Where is the payoff?

Opinion is divided on whether a business plan should include an exit strategy by which investors will be rewarded. If your investors are venture capital companies or angel investors, several exits will be covered in the stock investment agreements. If you are selling to less high-powered investors, a discussion of possible exits would not be amiss. There are only three possible exits (purchase by another company, a listing on a trading market or exchange and a management buyout).