Another lesson in Business Planning

The most common reason for preparing a business plan is because the bank asked for one before evaluating a request for financing.

We've already discussed that a well prepared business plan document may still not be enough when it's finally delivered. Next comes the negotiating phase. The lesson that was recently confirmed was not to be deterred by questions and requests for more information, but do not be persuaded to go back and revise the Business Plan document. That will only cause the bankers to recycle through the process of internal review, look for the answers and revisions and probably come up with more questions. It may be a good stalling strategy to avoid the "no", but the entrepreneur wants to move forward to a clear "yes", or "no".

So we agreed to respond to the specific questions in a short follow-up note using the approach of "Thank you for reviewing our plan. Here are the answers to your questions and we now look forward to a favourable reply to our request for funds". It worked.

And I got that very pleasant consulting feedback of: "Hey Del, they really liked the Business Plan and our answers to their questions. We're getting the financing!"

A good lesson in effective use of the Business Plan as a negotiating tool. I hope it works for you.

Still a necessary step

I had a banker comment this week on my earlier posted opinion that it is important to know all the requirements before starting on a futile business planning exercise that still won't get the financing required.

He disagreed.

It's always a necessary and useful step he said. And he's right.

At some point the entrepreneur has to test his plan against the real world and its better to know now, rather than later, that the plan needs to be changed for it be a successful business. If more equity is required or a new cost and risk reduced plan is necessary, then at least we now know exactly what is required before we get a third party to invest. It also helps to look further ahead to make sure we don't just have enough financing to dig ourselves into a hole and not enough to work our way out of it.

It's a good start along the path of "no surprises" management.

A Business Plan is not enough

Asking for more information is often just another way of postponing the inevitable "no".

I've learned this is often the way potential investors or bankers manage to turn off the entrepreneur without ever being so direct as saying "No, I'm not interested." It would be even more helpful if they continued with "because ...". But they usually don't offer much explanation (or the real reason) and the entrepreneurs doesn't ask.

The first question investors and lenders do ask is, "Can I see your Business Plan?" And that often leads to work for me to help with the strategizing, documentation and financial analysis, but I always ask the entrepreneurs if the Business Plan is the only thing left to satisfy the lender or investor. Too often, after we have spent time and effort and cash to prepare a solid business plan that confirms the prospect of a viable business and the potential returns to investors and lenders, we then discover that the owners cannot put up the equity or the collateral that is required. We should have known that from the start.

It may come out during the planning process and the analysis of cash requirements, but it would be helpful to know the guidelines in advance. If you need $500,000 then the banker or investor probably wants your investment and guarantees to be a lot more than the $25,000 you've arranged.

All lenders and investors have a checklist. Be sure you are aware of the whole list and whether you can meet all the requirements, beyond a good Business Plan.