Faculty Scholarship

Jon GaronFollow

Document Type

Book Chapter

Publication Date

January 2018

Abstract

This article is part of a series of book excerpts from The Entrepreneur’s Intellectual Property & Business Handbook, which provides the business, strategy, and legal reference guide for start-ups and small businesses. A useful business plan provides a blueprint for the operations, direction, and growth of a business. It explains the needs for funding, anticipates the cash flow operations of the business, highlights strategic partnerships, and serves as a proof-of-concept for key partners. The credibility of the business plan will help investors, founders, suppliers, lenders, and other key partners be able to assess the thoughtfulness and planfulness that has gone into the business. The business plan is a fifteen page calling card.The business plan is not a “disclosure document” in the sense that it is not expected to provide the necessary warnings and disclosures regarding the risks associated with the start-up enterprise. The business plan does not have sufficient information to counsel a potential investor regarding the many risks associated with the investment or offering. That task is left to financing documents described in the next chapter. The business plan should provide a comprehensive overview of the business and the business’s potential for success.In modern business transactions, however, all the information provided by the business owner must be accurate and truthful. Although it is not a disclosure document, neither should it be an investor’s sales pitch. It should be accurate and as reasonably objective as the entrepreneur can draft it. Any material mistakes in the facts must be corrected, including statements which might have been true at the time the business plan was drafted but are no longer true because circumstances have changed. One common mistake in business plans is to highlight the success of one or two similar companies without acknowledging the risks associated in the field as a whole. Further, since the sophisticated investor understands these risks, the refusal to acknowledge the risks undermines the credibility of the business plan.The business plan can, however, contain projections based on speculation. Acknowledging that projections are based on reasonable estimates and not on historical data is acceptable. Often business plans guarantee rates of returns. Again, these are wildly speculative statements and should be more thoughtfully described. The optimistic speculations can be included, so long as the reasoning for these enthusiastic statements is carefully described and balanced with more reasonable assumptions and projections. For example, a restaurant cannot base its revenue on the potential size of the population in the city it serves. Instead, it must base its potential revenue on the number of seats available in the facility and the number of seatings the restaurant hopes to achieve. Once the business plan provides this realistic calculation, it can list the revenue based on full capacity. It should, however, also calculate revenue based on a more conservative estimate of weekly customers and include the number of patrons necessary to break even. The tone and voice of the document should be directed toward the outside investor. While the business plan has many uses and many audiences, the focus should stay on the investor, because the investor’s goals of creating a return on investment, managing risks, planning realistically and providing good value will also serve to inform all the other readers. The investor is a financially successful, sophisticated outsider. The language selected must reflect the business owner’s ability to grasp complex ideas while recognizing that, to the investor, acronyms and industry jargon may have little or no meaning. So long as the document remains true to the investor, it can be used for its other essential purposes efficiently.

Publication Title

The Entrepreneur’s Intellectual Property & Business Handbook

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