Have you watched shows like Shark Tank or Dragon’s Den? If you have, then when was the last time you saw one of the entrepreneurs on the show present a 40 page business plan to their potential investors?
You haven’t. Most investors today are more interested in things like the personality of an entrepreneur, their commitment and passion to an idea, what makes an idea stand out, and what the potential value of that idea happens to be.
Banks take a different approach. The average financial institution will want a complete business plan presentation in order to extend funding that has interest associated with it. A bank looks at an entrepreneur and says that they will fail if they fail to plan. An investor looks at an entrepreneur and says that they will succeed if they have a good enough idea and are willing to put in a ton of sweat equity.
You don’t need to experience the negativity a financial institution is going to send your way. That negativity can be toxic. You no longer need an extensive business plan to experience success and here’s why.
A Formal Business Plan Doesn’t Match Up With Today’s Expectations
Traditional business plans were required in a world without the internet. You had to prove you knew your market, had tested your idea, and could market it successfully. Your strategies and summaries would provide you with the specificity needed to find success. Unfortunately many banks haven’t evolved as the world has evolved, so they still see value in this traditional business plan.
Instead of taking several months to create this document in the hopes of receiving funding from a bank, the fact is that today’s expectations are much more brief for a business. The average investor must move quickly and they don’t have time to dissect a 40 page business plan. In the real world of entrepreneurship today, an idea you don’t act on today is an idea that someone will act on tomorrow. This is why the character, work ethic, and value is evaluated more than the quality of a traditional business plan.
It is more important to make your brand distinct than it is to create a traditional business plan today. That doesn’t mean you can completely ignore the business plan. It just means that in a world that is becoming more global from a business perspective every day, it is more important to stand out than it is to create a document that will just gather dust.
The Modern Business Needs To Be Adaptable
The 40 page business plan is designed for a world that was routine-orientated and predictable. You would create this document as a way to show yourself and others how the market would likely respond to your entry. This would allow you to then understand what you had to do as a business to find success to prove to financial institutions that you deserved to be funded.
The modern business faces a different set of challenges. Global influences can change your market on a daily or even hourly basis. It makes no sense to spend weeks or months preparing details because you’ll have to think on your feet and move quickly. How the market responds to you today can be very different than how it will respond to you tomorrow.
Modern businesses must pay attention to these rapidly evolving changes and adjust to them. That’s not something the traditional business plan can do for you. It is up to your skills, your observations, and your willingness to adapt to survive – which is why the modern investor looks at these specific traits in an entrepreneur over what they might create within the context of a business plan.
— business.com (@businessdotcom) January 8, 2016
Financial Forecasts Beyond 6 Months Are Essentially Useless
Entrepreneurs need to have some idea of what their financial outlook is going to be. It’s important to forecast a financial outlook out to 6 months so you can see the potential profit or loss that will be experienced. This allows you to make necessary changes so the best possible outcome can be achieved.
Yet the 40 page business plan requires more than this. A financial institution might want a forecast that goes out as far as 5 years if they’re unsure about an idea or have no knowledge about a particular industry. Going that far out with a forecast requires far too many assumptions for it to be accurate, especially if you are in the initial start-up phases of your business.
It’s nice to have a 5 year outlook that shows you having massive profitability. It’s also a complete fantasy. Until you start seeing real consumer attraction to your idea, these forecasts are just a dream. They’re a projection based on the projection of how much work you anticipate being able to provide as an entrepreneur.
What happens if you have an extended illness and can’t work as hard? Or what happens if your competition comes out with a product with an equal or better value 12 months down the road? Banks like to look at your total market share to create valuation. If a market is worth $10 million and you can take 10% of that market, your perceived value is $1 million.
Investors will laugh at you and refuse to invest if that’s how you approach your financials. They want real dollars and cents, not projections. This is why the traditional business plan can be extremely limiting to the modern entrepreneur. Investors don’t want to know what you can do. They want to know what you will do today, tomorrow, and the days to come.
The 40 Page Business Plan Still Requires a Personal Guarantee
When you form a business as an entrepreneur, the goal is to protect your personal assets. Even sole proprietors take out insurance to protect their personal assets should something go wrong. When you create the traditional business plan and this is your first business, there’s a good chance a financial institution is going to turn you down for a line of credit or a small business loan. This even happens when you have an exceptional credit score.
What do banks want to see when you’re looking for financing? Collateral. They want you to make a personal guarantee on the credit you’re receiving and that is something you should never do. If you personally guarantee a business loan, then if your idea doesn’t work out for some reason, you’re still on the hook to pay back the bank. They make money no matter what and that’s good for them – but it’s not good for you.
This is why the 40 page business plan is essentially useless. The only people who are going to want to look at it are the people who will want you to personally guarantee the debt in the first place. There’s literally no point to the business plan presentation when a financial institution wants your collateral and your personal credit to guarantee the business loan. You might as well take out a signature loan and call it good.
This means the time it takes to create the traditional business plan could be better served doing other things, such as accomplishing some of your early goals. Don’t get locked into the thinking that you must have a bank support you in order to be successful. It doesn’t have to be that way any more.
That’s why a “success plan” structure is gaining traction in today’s business world. It offers some structure, but gives you flexibility. It gives you daily information so you can monitor cash flow, yet allows you to adapt to daily changes in your market if necessary. It’s a shorter document that is based on real-world applications instead of the traditional red tape financial institutions like to see.
Yet the Traditional Business Plan Has Some Advantages
Although there are many disadvantages to creating a 40 page business plan, this traditional approach does have a few distinct advantages that must also be considered. For starters, when you approach a bank for a line of credit, you won’t be required to turn over a portion of the equity you have in your business to get that cash. Investors want to have equity as a certain percentage in exchange for an investment.
Think about it like this: you need $50,000. The traditional business plan allows you to approach banks to obtain this cash. Let’s say you get the line of credit you need. When interest is applied to the amount, you’ll pay $65,000 back to the bank for $50,000 now. You’ll also have 100% equity in your business. Every dollar of profit you earn is yours to keep.
Investors don’t want the traditional business plan, but they still want a way to get their cash back. An investor might give you the $50,000 as well, but they’ll also want 30% equity in your business in exchange. The advantage is that you don’t pay back the $50,000 at all – it is yours to keep. For every dollar of profit you earn, however, you get to keep $0.70 and the investor gets $0.30.
What happens if you make $1 million? You make $700k and the investor receives $300k. Suddenly that $50,000 investment looks pretty good for them and not so good for you, right? If you’re fairly confident that your idea can be massively profitable as an entrepreneur, the traditional path might hold a better long-term future.
The traditional business plan also puts structure into your business. It gives you a place of reference for those times when you’re not sure what to do. It can be fun to “fly by the seat of your pants,” but that also has a greater level of risk to it. A traditional business plan helps to lower risks because it has a forecast in place to follow.
The 40 page business plan is also a reference document that stakeholders can use to understand who you are and what you do. If you ever plan to take a business public, having that understanding between you and those who wish to invest into your company is essential to success.
How can you tell if you need more of a success plan or more of a traditional business plan? It depends on where your business is right now, how long you’ve been in business, and what your future potential happens to be.
— Blake Delle Fave (@BlakeDelleFave) July 27, 2015
Why Cashing Out Now Could Be a Great Idea
When you watch shows like Shark Tank or Dragon’s Den, there are the occasional ideas which solicit a buy out offer from an investor. Sometimes these offers exceed $1 million. The investor does this because they see the opportunity to make even more money from the idea. They take the entrepreneur out of the equation by compensating them right now for the work they’ve done and for the initial development of the idea.
Even with the right business structure in place, neither an investor nor a traditional business plan can protect you from the forces of the free market. There are numerous businesses which have entered bankruptcy after having successful years because the tides of consumer preferences changed. If you cash out now and let someone else run with an idea, you’ll get at least something instead of risking the potential of receiving nothing.
The 40 page business plan isn’t going to put you into a position where you’ll be able to cash out today. That plan is designed to provide you with debt and a structure to bring you to profitability so you can pay off that debt one day. It’s forcing you to stay involved with this idea no matter what. A success plan gives you the option to cash out or the option to stay involved with potentially less equity, but with cash in-hand that you can use.
You’re locked into a specific structure with the business plan that may not let you adapt to changing circumstances. Blockbuster and their struggles with Redbox and other value movie rental providers is evidence of what can happen when you’re too involved with a specific structure. Today’s start-ups need to move fast. They need some structure and precision, but they also need flexibility. 40 pages of business plan structure make that flexibility difficult to achieve.
What Should You Do?
A traditional business plan has certain advantages, but it reduces flexibility. The modern entrepreneur needs to think on their feet and be ready to adapt to global changes on a regular basis if they’re going to find financial success. Being locked into 40 pages of summaries, forecasts, and structure doesn’t always allow that to happen.
Take the lessons learned from investors who want entrepreneurs on their teams today. They want people who are willing to work hard. They want good ideas that have potential. They want a way to stand out from the rest of the pack. The traditional business plan ultimately creates a business which looks like almost every other business in operation today and that makes it difficult to dominate a niche in today’s world.
Times have changed. Businesses and entrepreneurs must also change to keep experiencing success. If you’re trying to approach a bank with a 40 page business plan to get funding, then your ideas may have already lost the relevance they need. Stay fast, stay mobile, and accomplish your early goals through sweat equity and less structure and you may find an investor willing to look at what you’ve got so you can stay debt-free.