NFIB

Common Business-Planning Myths
10/ 01/ 2002

Provided by Kiplinger

Myth #1: Business plans are only for start-up companies.

Reality: Companies at all stages of development need to prepare business plans.

Myth #2: Business plans should be as detailed and slick as possible. The more money you spend preparing the plan, the better your chance for getting financing.

Reality: Sophisticated investors don't have time to review hundreds of pages of text. Your plan must be concise and well-written, focusing on the lender's or investor's principal areas of concern. Although business plans ought to have a professional look, a very expensive binder or presentation often demonstrates inefficient resource management.

Myth #3: Business plans should emphasize ideas and concepts, not people.

Reality: Many entrepreneurs fear that if the success of a company depends too heavily on any specific person, an investor will shy away. Although this is partially true, an experienced venture capitalist ultimately prefers to invest in a company that has great people and only a good concept, rather than one that has a great concept and a weak management team.

Myth #4: Business plans should be prepared only by the founding entrepreneur.

Reality: Most entrepreneurs are highly skilled in a particular profession or area of management, but that doesn't necessarily mean they can prepare a business plan in a form to which prospective lenders or investors are accustomed. Ideally, the plan should be developed by a team of your managers and reviewed by qualified experts, such as accountants, attorneys and the board of directors. Conversely, the business plan should never be prepared solely by outside advisers without input from internal management. A venture capitalist will quickly recognize a "cooked" plan, or one that reflects the views and efforts of professional advisers rather than those who are responsible for running the company.

Myth #5: Business plans should be distributed as widely as possible.

Reality: The business plan will inevitably contain information that is proprietary and confidential, so you should control its distribution and keep careful records of who has copies. The cover sheet should have a conspicuously positioned notice of proprietary information and a management disclaimer reminding the reader that these are only the plans of the company (the success of which cannot be assured).

Myth #6: A Business plan should follow a specified format, regardless of the industry in which the company operates.

Reality: Companies at different stages of growth and operating in different industries will require very different topics in their business plans.

Myth #7: Optimism should prevail over realism.

Reality: The business plan should demonstrate your enthusiasm and generate excitement in the reader, but it still has to be credible and accurate. Investors want, and need, to know all the company's strengths and weaknesses. In fact, a realistic discussion of the company's problems, along with a reasonable plan for solving them, will have a positive impact on the prospective investor. Finally, any budgets, sales projections, company valuations or related forecasts should be well-annotated with accompanying footnotes, for both legal and business reasons.

Myth #8: A well-written business plan should contain an executive summary that is written before the full text of the document.

Reality: The executive summary (generally one to three pages long) will be the first (and possibly the last) impression you make. The mistake entrepreneurs often make is to write the executive summary first (before the main components have been drafted). It's more effective -- and ensures consistency -- to prepare the main body of the plan, then the executive summary. The executive summary is then a true preview of the plan's details.

Myth #9: Business plans are written only when a company needs to raise capital.

Reality: Although most business plans are written in connection with the search for money, a well-written business plan will serve a variety of purposes to the company and its management team. It can be a road map for growth; a realistic self-appraisal of the company's progress to date; and a foundation for a more detailed strategic -- and growth-management plan.

Myth #10: The business plan should showcase the company's proprietary products and services.

Reality: Most investors are not interested in a business plan that merely demonstrates that you have "built a better mousetrap." Many entrepreneurs fall in love with their proprietary product creations and fail to recognize that investors want to commit capital to successful companies, not just successful products. If the business plan overemphasizes the product without demonstrating that a long-term sustainable business can be built around the product, then it will fail to attract sophisticated investors.

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Andrew J. Sherman, a nationally recognized corporate and transactional attorney, has spent over two decades as a legal and strategic adviser to hundreds of entrepreneurs and growing companies. He is a senior partner of the Katten Muchin Zavis law firm in Washington, D.C. and chairs its local corporate and technology department. Sherman is also an adjunct professor at the University of Maryland and Georgetown University, where he teaches entrepreneurship and business planning.

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