While it may sound like stating the obvious to suggest that any potential business angel is a human being, it’s easy to forget the extent to which this is true; namely that most will have run businesses of their own and, at some stage, been in the same starting block position that many entrepreneurs now find themselves in.
Given that many private investors are therefore attracted to the one-to-one dynamic of angel investment, as well as hopefully making a profit out of any involvement, writing a plan that gets a genuine sense of the entrepreneur across, as much as his idea, is therefore crucial.
So while the creation of spreadsheets and other supporting material can be delegated to accountants, advisors or promoters, the penning of the plan itself should be the entrepreneur’s duty. Considering that most investors will have read a large number of other plans before yours, it’s safe to assume that they’ll make a very sound judgement of its entrepreneur author just by the reading alone.
In order to take advantage of this level of immediacy, one of the most important functions of the plan is to impart to the investor a clear sense of who they are dealing with, the financial benefits of investing in this particular product, any associated risks and how the business could fulfil their own criteria.
As a general rule of thumb, if you cannot get the full swathe of your idea across in less than 20 pages (excluding appendices and supporting material), you probably need to spend more time distilling the essence of what makes your idea so special.
Reading and digesting a plan and then assessing its merits takes time, so anything over and above this length is more likely to lose the reader’s attention, when what you’re really trying to do is convince them to set up a face-to-face meeting with you. Assuming that the investor’s desk is piled high with other such documents, getting yours right in terms of length goes some way to ensuring it’s read from cover to cover.
How you physically present the plan will also help determine its fate. It may detail the best product in the world, but if it’s poorly presented and riddled with typos, you may put the investor off.
Technical jargon can be as off-putting as typos and tempting as it may be to detail your product in every conceivable light, it’s worth remembering that most readers will lack your level of expertise. Treating them as intelligent amateurs is a good rule of thumb when deciding which content is important to their understanding of a product and which is not.
How you organise your content is just as important as the content itself. Even in a plan that’s just 20 pages long, chapters and page numbers make it so much easier to navigate the document and find key facts and figures, names, addresses, website details and telephone numbers.
What (and what not) to include in the plan can also be determined by issues of confidentiality. In the absence of any costly patents and confidentiality agreements, it’s probably best leaving out any sensitive material that could assist the endeavours of your competitors.
Having proofed and spell checked your plan, get it read by a trusted colleague and listen to (and implement) their feedback (good or bad). Finally choose a font size and style that is easily legible (especially in figures across spreadsheets) and easily printable. Most investors these days prefer digital copies of the business plan, though often print and read it at their own leisure.
The Financial Services and Markets Act 2000 is a piece of legislation whose general purpose is to protect the unwary entrepreneur from any potential private investor who isn’t either ‘Sophisticated’ or ‘High Net Worth’. Prudence should always be shown when passing a plan to anyone who is not covered under the act.
The same act also requires by law the plan to be a fair and reasonable summary of the investment proposal and to contain no misleading statements. Its author must be able to substantiate any of the statements it makes and a ‘wealth warning’ along the following lines should be included in a prominent position:
Financial Services and Markets Act 2000
This business plan is not a prospectus and does not, and is not intended to, constitute an offer or invitation to invest in securities, nor shall it, or any part of it, be relied upon in any way in connection with an offer to subscribe for shares. Private Investor recipients are assumed to possess a certificate of ‘High Net Worth’ or ‘Sophistication’ as set out in articles 48 & 50 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001. You should seek your own independent advice in relation to the information contained therein. Investment in a new business carries high risks as well as the possibility of high rewards; it is highly speculative and investors should be aware that no established market exists for the trading of shares in private companies.
Before investing in a project about which information is given, potential investors are strongly advised to take advice from an authorised person who specialises in advising on investments of this kind.
Even the newest, smallest business began somewhere, so your opening section should really be to sketch out the origin of yours in order to give the larger plan some kind of context. Try and define what drew you to the idea in the first place and outline what you’ve achieved so far in terms of bringing it to life.
As well as detailing its origins, those entrepreneurs at the helm of more established businesses might want to elaborate upon notions of ownership: its history, the current state of play, how it’s divided up, their individual stake and role. Think about any problems that have arisen in the past, how they were dealt with and how the lessons that have been learned inform where the business is going in the future.
Defining exactly what your business does is obviously an important element of this chapter, but going on to define how you have the edge over competitors will really set your plan apart from others. Practicalities are also important, so this is an ideal opportunity to detail who holds which patents (if any) and whatever licensing arrangements are already in place. Other patent-related issues might include how technological advances could affect your business in the future.
Depending on your type of business, an overview of production might also include any operations that are relevant to the service or product you’re offering, including details of suppliers, supplier dependency and any legal issues that have affected (or might go on to affect) your business.
The marketplace within which you hope to operate is one of the most important considerations of the whole plan, so your attempt to pinpoint exactly who it consists of should be very persuasive. Ask yourself who your customers are and try to pinpoint their geographic and demographic profile.
An understanding of the marketplace is, of course, as much about your competitors, so getting a real handle on who they are is also really important and pre-empts some further consideration of how your product is both different and better and what you can do to remain ahead of the game.
Any additional information you can put forward to support your understanding of the marketplace – macroeconomics, marketing strategy, advertising budgets and so on – does much to support the credibility of your plan.
Although it may well feel that your marketplace is still taking shape, any potential angel who is considering whether to run with you financially will be looking for some solid foundations for market growth. Detail which customers you already have in place and what value they represent in sales terms, what your marketing strategy is and how you plan to develop it.
It’s easy to forget that business is first and foremost people oriented and that many private investors will consider the who before they consider the what – understandably so, given that poor human relations can cast a bad light upon the very best entrepreneurial idea. As such, it’s crucial to dedicate some of your plan to the people at the heart of your business.
Besides their role within the company, potential investors will be looking for experience with positive results, so biographies for all the directors (including non-executives) should therefore outline all their key achievements. As part of the plan’s appendix you can expand upon this by including full CVs, with details of length of service, current remuneration and benefits, as well as any relevant contract details.
While it’s tempting to overlook any previous financial problems, such as insolvency or bankruptcy, these should also be detailed. Since an investor’s due diligence will inevitably reveal such issues, transparency gives an opportunity to expand upon the circumstances and the lessons learned from the outset.
Offering up a detailed financial analysis of projected profits is a crucial way of illustrating that you’ve understood key facts and figures, although it’s worth noting that overly ambitious projections won’t necessarily win over potential investors. On the contrary, many take rather a dim view of future profits that aren’t in line with past performance. Much more useful and realistic is a break-even analysis, since it allows investors scope to gauge risk and assess the levels at which a depleted turnover equates to the company making a loss.
Since most investors will typically want to see how a business performs before they are comfortable with making an investment, the ability to justify your profit and cash flow projections should therefore underpin the whole financial analysis. Realistic projections will also substantiate your argument for how much funding is required, whether it can be received in instalments and when the peak cash flow requirement is.
Other questions that your financial analysis should seek to answer include who the current borrowers are and what their facilities cover, whether (and under what conditions) any future funding will come from a bank, factoring company or grant, and what steps have been taken to explore these avenues
Although the whole business plan is geared towards striking up some kind of financial deal, in practice few actually cover the issue properly. Ultimately, any deal is subject to negotiation, but there are a number of factors which will pre-empt it, such as whether the finance will take the form of equity, loans or mezzanine, how much equity is offered and how this proportion can be suitably justified.
It’s often the case that investees will overestimate the value of their business by much the same amount that investors will undervalue it. In order to win greater financial confidence from potential investors, it’s important to detail how an exit route could be achieved and demonstrate your understanding of what your business needs to look like in order to achieve it.
Any plans you have to build the business up to such a size that a trade buyer would be interested should also be discussed, as well as who these buyers could be.
Beyond any financial requirements, the very notion of ‘a deal’ implies some kind of investor involvement. As such it’s often worthwhile creating some kind of profile for the ideal investor.
Outlining the company’s tax status will help determine whether any potential investor could take part in the enterprise investment scheme (EIS) or the seed enterprise investment scheme (SEIS). In the final equation it’s also worth bearing in mind that an investor can potentially receive a substantial amount of tax relief on his original equity investment.
Any supporting material should be contained in the appendix and would most likely include:
- Profit projections detailing projected profits for the first year on a monthly basis and for the next two on a quarterly basis. For the sake of comparison you should also include actual historic profit and loss for the previous two years, supported, wherever possible, by audited accounts.
- Cash flow projections detailing projected profits for the first year on a monthly basis and for the next two on a quarterly basis. Extra care should be taken with the important issue of immediate cash flow. Given that such matters will inevitably provide the starting point for any investor negotiations, your projections should also detail the absolute minimum of new cash that will be required over the next twelve months in order for the business to survive.
- Balance sheet projections are less important, but can be a useful tool for outlining possible funding structures. Wherever it is relevant to do so you should also include a recent historic balance sheet and adjust for any directors’ loans to be capitalised.
- Latest audited accounts should be included in full when available.
- CVs that highlight all the relevant achievements and experience of key personnel, especially directors, should be included.
- Marketing material and other visual material is a very useful way of illustrating exactly what the company does.
- Contact details of all advisors (accountants, solicitors, bankers, insurance brokers, etc.) should be included.
- Startup businesses must work especially hard to earn the support and financial favour of investors, so the appendix might also include any reviews, details of future orders or, indeed, anything to suggest that the forecast sales are credible.