When starting a business from scratch, it is a foregone conclusion that a comprehensive business plan will be required. Unfortunately, a formal business plan is often overlooked when entrepreneurs purchase an established company.
The fact that the business is already in place with recurring revenue, a trained workforce, and an existing customer base does not mitigate the significance and value of a business plan when applied as an essential and critical planning tool. There are a number of factors, both strategic and tactical, that are involved in building a successful business, and many of these will revolve around methodical planning and the establishment of realistic expectations.
A business plan should be viewed as a written roadmap, typically over a moving 3 year period, that will assist the owner in planning the budgetary, marketing, and management tasks required to achieve forecasted sales and earnings. Being well positioned to anticipate and quickly react to new opportunities, in addition to being prepared with contingency plans when those unexpected challenges that most if not all businesses face, is difficult to achieve without putting the ‘big picture’ on paper.
A strategic business plan should be viewed as a ‘living document’. It is established and lays the foundation when a business is started or acquired and is updated on a periodic basis as circumstances and goals change. A business plan is a standard requirement by nearly every lending and financial institution when capital is required for either an acquisition or company expansion. The truism – ‘plan the work and work the plan’ – while sounding like a cliché, is nevertheless one of the more fundamental precepts of any successful business environment.
While there are a variety of formats and variations of business plans, a common set of essential elements will be required for the plan to be effective. Plans are often customized based upon the business goals, the audience, and requirements (e.g. securing financing). When acquiring an established business, it would be helpful if all owners/sellers had up-to-date plans in place that could be turned over to the prospective buyer but, unfortunately, this is rarely the case.
With proper market research, consulting with industry professionals, analyzing the competition, and receiving the necessary organizational, operational, and financial data from the targeted company, sufficient data should be in place to construct a comprehensive and effective business plan.
For some, an emotional attachment to an opportunity can be consuming, and many elements of the due diligence process are often neglected…something that is ill-advised. The business planning process, while taking considerable time, should be viewed as required investment spending that will afford good decision making, peace of mind, and a secure and more predictable future.
A business plan for an established company should have the following 10 elements and should be presented in a formal, concisely written, professional package that includes a table of contents:
- Executive Summary
- Business Description
- Market Analysis
- Sales & Marketing Plan
- Operations Plan
- Management and Organization Structure
- Financial History and Projections
- Transition Plan
- Exit Plan
- Appendices/Supporting Documents
I. Executive Summary:
The executive summary is a formal introduction to the business and a summary of the key points of the business plan including the range of products and services, specifics on the customer base and target markets, management overview, critical elements for success, and strategies for continued growth. If the purpose of the plan is to obtain financing, it should state the amount of funding required, how the funds will be deployed, and the structure for repayment.
This will be the first section that the audience will review and will need to grab their attention. Most experts would agree that this section should be two pages or less and should be concise, professional, and generate enthusiasm. While this section appears first it is often easier to develop the entire business plan and then write the Executive Summary last.
II. Business Description:
The business description section should provide a thorough review of the business, describing the uniqueness of the company, its mission statement, and the value proposition. At a minimum, the following elements should be explained:
- Corporate Structure: Sole proprietor, partnership, corporation, or limited liability corporation (LLC)
- Business Background/History: Who started the business, where is it located, and when was it founded? What are the major milestones that have transformed the business into the company that it is today?
- Products/Services: Describe the business model of the company. Does the business manufacture products, wholesale/retail products, or perform services. Describe in detail the major products and services offered by the business? What is the target market and what geographic areas are covered by the company? Who are the strategic suppliers and customers?
- Industry: Define the industry or sector that the business operates in. Historically, how has this industry performed? What changes are anticipated in the future?
- SWOT Analysis: Detail the major Strengths, Weaknesses, Opportunities, and Threats of the business. What activities (strategy & tactics) will be pursued to leverage the strengths and grow the business? How will the business be prepared to face future challenges?
III. Market Analysis:
The market analysis section is a comprehensive examination of the company’s target market (customers and geography), the competition (products and companies), and the industry economics (market size, demand, growth history, and barriers to entry). During the due diligence process it will be instrumental to obtain as much information as possible from the current business owner.
While they may be reluctant to provide the specific names of customers, it is a reasonable expectation to receive general information on the number and type of customers, the products and services they are receiving, and specifics as to their relative location and geographic densities. Armed with the data provided by the seller, independent research will need to be performed to systematically analyze the industry, company, products, and customers in the form of an in-depth market analysis covering the following areas:
What is the demographic profile of the targeted customer? Descriptions will vary based upon the type of business and whether it is B2B (business to business) or B2C (business to consumer). B2B channels will be further delineated if consumer products are sold through wholesalers and distributors, as the end user (consumer) will become an important consideration in addition to the business (reseller) customer.
The competition section should include a listing of the major competitors, where they are located, and what products/services they offer. A competitive matrix should be prepared that analyzes each major competitor, describes how they rate against the business being considered for purchase, and documents the competitive advantages and disadvantages of each competitor.
The economics section should provide the facts about the industry in which the company operates, including:
- What is the size of the market?
- What is the percentage market share owned by the company?
- What has the growth history been and what are the projections for the future?
- What factors will affect future growth negatively and positively?
- What are the barriers to entry?
IV. Sales & Marketing Plan:
The sales and marketing plan will provide a general description of the company’s products and services. A breakdown of sales for each product and service should be provided indicating whether there exists any obvious seasonality. New products and services that are planned to be offered to expand the business should be detailed.
What has been the company’s go-to-market strategy? Are products sold on a direct basis through the company’s sales force, the internet, or catalog sales –or- does the company perform retail sales, wholesale/distribution, or leverage independent representatives? Each of the current methods utilized should be detailed and analyzed for effectiveness, highlighting the recommendations to position the company more competitively in the future.
The pricing strategy should be thoroughly reviewed. Understanding the importance of price in capturing new business and retaining existing customers is imperative. Would a price increase be supported in the market place? What is the impact to the bottom line should prices increase or decrease in the near future? How competitive on price is the company relative to the competition? How are freight costs and payment terms being managed by the current company?
The advertising and promotion program should also be reviewed. What type of marketing activities has created the most revenue? Does the company have an internet presence? What marketing/advertising should be considered in the future? The respective costs for any proposed/anticipated changes to the marketing plan (e.g. attending more trade shows, additional advertising, rebuilding the website, etc.) should be incorporated in the pro-forma financial plan.
Using the historical sales as a base and modifying the data based upon the anticipated operational changes, a monthly or quarterly sales forecast should be incorporated in the business plan. Depending upon the length of time that the company has been in business, the quality of historical data, and the stability and predictability of sales, two forecasts could be warranted - one that is very conservative and represents a ‘worst case’ estimate and the other being a ‘best guess’. For businesses where financing or funding is required, it will be important to support any differences between projected and historical sales with market or industry research.
V. Operations Plan:
The operations section of the business plan should provide an overview of the company facilities including the physical location, equipment, processes, people, and surrounding environment. The following facets should be covered:
- Describe the facility in terms of square footage, production areas, offices, storage areas, accessibility (transportation, parking, shipping), and suitability for customer engagements (if applicable to business).
- Does the current facility allow for future growth in terms of supporting additional products/services and personnel? What percent is utilized?
- Approximately how much has the company spent each year on capital expenditures/improvements?
- Are the premises leased or owned?
- If Leased:
- How long is the Lease?
- What is the base rent?
- What are the CAM charges?
- Is it a triple net lease?
- When was it signed?
- Are there extension options?
- Is the lease assignable?
- Are there annual rate increases? Detail.
- If Owned:
- When was it purchased?
- What was the purchase price?
- If there is a note what is the balance?
- Is there a willingness to sell the building?
- Is there a current appraisal on the building?
- What is the likely selling price of the building?
- What will be the likely lease back of the building?
- If Leased:
- To reach the projected sales, approximately how much will the company have to spend on capital expenditures/improvements each year?
2. List the days and hours of operation.
3. Are any licenses or permits required to operate the business? If so, which?
4. Who are the key suppliers, what products/services do they furnish? Will new suppliers be required to support the business in the future?
- Explain the product/service distribution from initial call to collection.
- Describe how customer service is performed.
- What quality control processes are in place?
- Describe the inventory process – storage, turnover, etc. What kind of inventory is maintained, the average value, and rate of turnover?
- Explain orders/billing/collection process and terms (A/R & A/P)
- How many part-time and full-time employees are with the company? Explain the number of employees you intend to hire and the estimated personnel costs (detailed in the pro-forma P&L).
- Describe the quality and pay of the existing staff.
- Do you have written job descriptions for employees?
- Explain the use of contract, 1099, or temporary staff.
- Describe the importance of any key employees, will they stay, and how hard will they be to replace?
- Is the business seasonal, and if so, how does this affect staffing?
- Describe the technology used in daily operations.
- Is the technology up to date?
- Would newer technology increase efficiency? If so, what/how specifically?
- Does the company rely upon its own (proprietary) technology and if so, how often is it updated?
8. Are there any pending litigation matters or current lawsuits? If so, explain.
9. Is there an Employee Stock Ownership Plan (ESOP)? If so, when was it established?
VI. Management Plan:
The management section should provide background information on the existing management. This should detail whether it was operated as an ‘absentee owner’ company or whether the owner was actively involved in the daily management of the operations including the hours per week they were involved.
Additionally, this section should explain who will be responsible for managing the business moving forward. Bios of the prospective new owners and key management should be included detailing their work experience, specialties, and competencies.
In addition, any strategic employees who are anticipated to remain with the business should be included. An organizational chart depicting the management hierarchy indicating who is responsible for the key functions should be part of the management plan.
Should an advisory board be formed in conjunction with the business acquisition? A listing of the advisory members should be prepared as well as any professional support advisors: attorneys, CPA’s, business brokers, etc.
VII. Financial Plan:
When evaluating the acquisition of an established business it will be essential to perform a comprehensive analysis of the company’s past financial performance prior to any attempt to project the future numbers. Fortunately, the majority if not all of the documents required for this analysis should be available from the business seller.
During the review process it will be necessary to perform reality checks and to question the information sources. The buyer should assess the type of financial statements that are available, the individual that was responsible for preparing the numbers, and the type of accounting utilized.
Additionally, it will be important to determine if the financials received match what was reported by the company to the government (i.e. tax returns). Individuals without a strong financial background should seek out assistance from a CPA, financial consultant, or a competent business broker to properly interpret the data and perform the necessary due diligence.
While a separate topic from this article, it will be important for business buyers to understand the importance of adjusted (re-casted) financial statements as it relates to analyzing financial performance.
A brief explanation is as follows: The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on the non-cash (amortization & depreciation), discretionary, & non-recurring items expensed by the business owner. Earnings are intentionally kept low to achieve the goal of mitigating income taxes.
Therefore, to determine the true earning capacity of the business, the profit & loss statements need to be re-cast during the valuation process to derive either SDE (seller’s discretionary earnings) or EBITDA. This re-casting process standardizes (or normalizes) the business earnings through the exclusion of discretionary, non-recurring, and variable items, allowing an accurate and objective determination to be made of the owner’s financial benefit.
The following documents will be needed for the Financial Plan:
- 3-5 years of Profit and Loss Statements (aka Income Statements) and Balance Sheets
- 3-5 years of business tax returns.
- Complete list of all assets including FF&E and inventory with current market value and condition
- Copy of Real Property Lease Agreement including any Amendments -or- a copy of the real estate appraisal or tax assessment
- Copy of all other lease agreements including equipment lease(s)
- Copy of the (30/60/90+) Receivable Aging Report
- Copy of material contracts relating to the business
- Pro-forma income projections
- Pro-forma cash flow statement
One of the most critical components of the business plan will be the financial projections that are created based upon the analysis of the documents detailed above. Understanding the financial workings of the business including how income is generated, the cost to produce that income, and the related expenses in operating the company will be necessary to prepare a reliable forecast for the company’s financial future and the return on investment.
Explaining the cost to acquire the company, the type of financing that is being requested, and the amount of money available for a down payment should be covered in the financial plan. Future projections are delineated through the preparation of pro-forma financial statements and each section should include a narrative that explains the major assumptions used in estimating the revenue forecasts, income, and expenses.
1. Pro-forma Profit & Loss Statements
- 12-month pro-forma
- 3-5 year pro-forma
The 12-month pro-forma P&L will be the central focus of the financial plan. Extending the forecasts out in the future (3-5 years+) might be necessary depending upon the nature of the business and the extent and type of financing (Bank, SBA, Private Equity, etc) being sought. Using the historical financial statements as a base and making the necessary updates to the anticipated debt service, the required living wage, and other forecasted changes (income and/or expense) will enable the pro-forma statements to be both realistic and reliable.
2. 12-month pro-forma Balance Sheet
The 12-month pro-forma Balance Sheet is a forecast of how the balance sheet will look at the end of the 12-month period, based upon anticipated changes to the assets and liabilities of the company.
3. 12-month pro-forma Cash Flow Statement
Proper cash management is one of the cornerstones to ensure that the company can sustain itself, as poor cash management is often the reason for a business failure. Essentially, the cash flow statement is like a checking account register as it details the flow of cash in and cash out of the business. Fortunately, an established business will already have accounts receivables and payables in place and reasonable projections should be fairly easy to generate.
The structure of the transaction and whether the accounts receivable will be retained by the seller or purchased by the buyer will have an impact on the amount of working capital required to adequately operate the business.
The following components should be covered in the financial section:
- Does the company currently carry any debt? If so how much, what was it used for and what are the note terms?
- Describe financial trends over the last 5 years.
- What factors have affected revenue and/or profitability?
- What could management do to increase revenue?
- What could management do to increase profitability?
- Does the company have to rely on short-term debt for working capital purposes?
- Explain the nature of the accounts receivable. Amount, aging, bad debt, etc.
- Are there prepaid expenses? If so detail.
- Are there accrued expenses? If so detail.
- Is inventory to be included in the listing price?
- What is the approximate cost value of inventory? Is this high, low, or in line with industry averages?
- Has inventory been increasing? decreasing? remaining stable?
- Is there any slow moving or worthless inventory? Provide detail.
- What are the approximate Fair Market Value (Replacement) of Furniture, Fixtures, and Equipment?
- What is the approximate value of leasehold improvements?
- Is the business now, or has the business ever been in bankruptcy?
- List recurring expenses that the buyer will be responsible for after purchase.
- Identify any business resources that the new owner will be bringing to the company to enhance the operations.
VIII. Transition Plan:
The transition plan should explain how the intellectual property, owner experience, vendor relationships, and trusted advisor status with key customers will be transitioned to the buyer. Many business owners have operating procedures, manuals, and materials which can greatly assist in transitioning the business.
Detailing how long and under what conditions the former owner will stay with the business to assist in transferring the customer relationships and business know-how, will be important points to clarify. Depending upon the goals of the seller/buyer and the complexity of the business being sold, the seller could be retained as an independent consultant. The consulting agreement should specify the schedule of time (days or hours involved), type of training or services provided by the seller, the length of the agreement, and compensation.
IX. Exit Plan:
The final section of the business plan outlines the exit strategy. Formalizing the plans, projecting the time table, and detailing the terms and conditions under which a sale or business succession would be considered will be important points to clarify. A clear, concise, and documented exit strategy will be essential from an operational standpoint, as it will have an influence on how the company is managed. It will also have significance to potential investors or financiers should 3rd party funding be involved.
X. Appendices/Supporting Documents:
The appendix section should include all of the supporting documents that are referenced throughout the business plan. Some of the more common documents will include:
- Business tax returns
- Personal financial statements for the acquiring principals
- Copy of contracts, leases, and real property appraisals or tax assessments
- Licenses and other legal documents
- Existing and Proposed lease or purchase agreements for the building space
- Resumes of all principals
- Copies of letters of intent from suppliers, etc
A comprehensive business plan is an essential tool when buying an established business. By applying the necessary time, performing the required research, and actively managing the plan, it will become a powerful resource to assist the owner in making intelligent decisions, measuring company progress and achieving strategic goals. Too few business owners have comprehensive plans in place, but the ones who embrace the process often find the business plan to be the roadmap for success.
Michael Fekkes is a Certified Business Intermediary (CBI®) at ENLIGN Business Brokers
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