Rx for Business Start Ups: An Effective Business Plan That Includes Due Diligence
It is said that a business without a plan is like a ship without a rudder…it runs in circles, going nowhere, until it exhausts its fuel supply. In the case of a business the fuel is cash.
One of the most often overlooked steps in buying or expanding a business is taking the time to write an effective business plan and performing adequate due diligence. Often when purchasing a small business, the reason given often includes “I know in my heart that this business can’t fail” and “I don’t see the need to hire a consultant to investigate this business or write a plan, besides I need the money to start the business”.
The truth is that investing in an independent team of seasoned executives or professionals is money well spent and should be part of every business venture as it establishes a sound direction of where you want to go and how you intend to get there, as well as identifying potential obstacles or factors associated with overall business climate, competition, your prospective consumers, financing, marketing, etc. Adequate due diligence will identify pitfalls to avoid, shortfalls in the business, whether the business is overpriced or a bargain, as well as potential legal issues or entanglements.
These are just some of the reasons for a business acquisition or venture to develop a sound business plan that includes adequate due diligence and the help of a professional:
- The cost of hiring a professional should be considered as an integral part of the investment cost, as at the onset it can probably be determined if the venture is worth pursuing and if it is not, you just saved yourself a lot of money.
- If the business is viable, you need to determine the likelihood of success and return on investment based on market factors, competition, consumer spending (needs and wants), your management team’s ability to run the business, available start up capital to cover not only the initial investment but also the cost of sustaining the business during the start up phase, break even analysis, time, etc.
- If the lights are still green then, and only then, you should execute a letter of intent to purchase the business contingent upon performing due diligence. This would also apply even if you are not purchasing an existing business but rather starting it from scratch as there are many factors that will be uncovered during the due diligence process including matters relating to legal, tax, customer base, competition, etc.
During my career I have witnessed business failures ranging from $60,000 to $35 Million. In each case there was either no business plan, or the plan was faulty, and often due diligence was absent or defective. The period of time it took for these business to totally fail ranged from 6 months to less than 2 years.
A SUCCESSFUL ACQUISITION
One extremely successful business acquisition was when a small group of experienced executives decided that market conditions were right for them to purchase waterfront property that included a marina for pleasure boats. The first thing they did was retain an experienced and independent business management advisor to assist them with their preliminary business plan. Once they determined the feasibility to be sound, they secured a soft commitment from their financing sources and sought a likely target, executed letters of intent subject to performance of due diligence, and once complete integrated this into their business plan, secured a hard financing commitment, and completed the acquisition. The venture was a success from the start and they eventually sold the business for several times their cost.
COMPONENTS OF A SUCCESSFUL BUSINESS PLAN
- Business opportunity and needs analysis- How solid is your concept? Have you performed a vision-rationale and reality check? Have you considered consumer needs and spending in relation to opportunities as it fits with your prioritized goals? Have you studied your market and is your executive team solid and experienced in this market? Have you identified a specific business industry niche? Have you considered not only profit potential but real risk factors as well? How solid is your management team and mission?
- Developing a business strategy and tactical plan-Have you identified and established specific goals, objectives, targets and budgets for each category; including product development or procurement, marketing, operations and finance?
- Critical Path Method (CPM). Have you considered the potential benefits of designing and implementing a model based on CPM? Have you developed and included in your business plan a Gantt Chart establishing tasks, timeliness and milestones?
- EXECUTE-EVALUATE-RE-PLAN- Of paramount importance in any business plan is the ongoing evaluation process whereby their management team reviews business performance relative to the original business plan, thereby enabling them to determine what has worked and what did not work. Based on this vital information the business plan is updated. The entire process can be summed up in a strategy developed by Col. John Boyd (USAF-Ret), an ACE fighter pilot during the war in Vietnam, which he referred to as OODA-Loop-Observe, Orient, Decide and Act. The most compelling element of the equation is the “loop” whereby each maneuver is evaluated immediately to determine how next to get inside the “bandit’s” OODA-Loop. This strategy not only identified flaws in existing military air combat strategy at the time and led to Col. Boyd becoming an ACE fighter pilot, it is often today utilized within the context of a business plan, with the evaluation process, or “loop” being the decisive factor in the plan’s success or failure.
SUMMARY AND CONCLUSION
In any business climate, especially that in which we are now entrenched, a sound business plan combined with a comprehensive due diligence review is not only vital, it is absolutely necessary if a new business venture is to have a chance of success. Is this to say that every business that has bypassed this step has failed, certainly not; however if you look around, whether it be Wall Street or Main Street, most businesses that fail never planned to fail, they just did not plan. Given the state of the economy at this time, overlooking the investment of time, resources and effort of developing a sound and effective business plan combined with strategic due diligence is simply not an option. Whatever the cost, this needs to be factored into your initial capital outlay.