Venture Capital Criteria

Most venture capital firms concentrate primarily on the competence and character of the proposing firm’s management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group. They know that even excellent products can be ruined by poor management.

Next in importance to the excellence of the proposing firm’s management group, most venture capital firms seek a distinctive element in the strategy or product/market/process combination of the firm. This distinctive element may be a new feature of the product or process or a particular skill or technical competence of the management. But it must exist. It must provide a competitive advantage.

After the exhaustive investigation and analysis, if the venture capital firm decides to invest in a company, they will prepare an equity financing proposal. This details the amount of money to be provided, the percentage of common stock to be surrendered in exchange for these funds, the interim financing method to be used, and the protective covenants to be included.

The final financing agreement will be negotiated and generally represents a compromise between the management of the company and the partners or senior executives of the venture capital firm. The important elements of this compromise are ownership and control.

Ownership

Venture capital financing is not inexpensive for the owners of a small business. The venture firm receives a portion of the business’s equity in exchange for their investment.

This percentage of equity varies, of course, and depends upon the amount of money provided, the success and worth of the business, and the anticipated investment return. It can range from perhaps 10% in the case of an established, profitable company to as much as 80% or 90% for beginning or financially troubled firms. Most venture firms, at least initially, don’t want a position of more than 30% to 40% because they want the owner to have the incentive to keep building the business.

Most venture firms determine the ratio of funds provided to equity requested by a comparison of the present financial worth of the contributions made by each of the parties to the agreement. The present value of the contribution by the owner of a starting or financially troubled company is obviously rated low. Often it is estimated as just the existing value of his or her idea and the competitive costs of the owner’s time. The contribution by the owners of a thriving business is valued much higher. Generally, it is capitalized at a multiple of the current earnings and/or net worth.

Financial valuation is not an exact science. The compromise on owner contribution’s worth in the equity financing agreement is likely to be lower than the owner thinks it should be and higher than the partners of the capital firm think it might be. Ideally, the two parties to the agreement are able to do together what neither could do separately:

1. grow the company faster with the additional funds to more than overcome the owner’s loss of equity, and

2. grow the investment at a sufficient rate to compensate the venture capitalists for assuming the risk.

An equity financing agreement with an outcome in five to seven years which pleases both parties is ideal. Since the parties can’t see this outcome in the present, neither will be perfectly satisfied with the compromise reached. The business owner should carefully consider the impact of the ratio of funds invested to the ownership given up, not only for the present, but for the years to come.

Control

The partners of a venture firm generally have little interest in assuming control of the business. They have neither the technical expertise nor the managerial personnel to run a number of small companies in diverse industries. They much prefer to leave operating control to the existing management.

The venture capital firm does, however, want to participate in any strategic decisions that might change the basic product/market character of the company and in any major investment decisions that might divert or deplete the financial resources of the company.

Venture capital firms also want to be able to assume control and attempt to rescue their investments, if severe financial, operating, or marketing problems develop. Thus, they will usually include protective covenants in their equity financing agreements to permit them to take control and appoint new officers if financial performance is very poor.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Approaching the Venture Capital Market

Many of today’s new ventures, particularly Internet startups with their enormous cash requirements, high risk, and high potential return, require approaching the venture capital marketplace.

What Venture Capital Firms Look For

One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds, is expressed by LaRue Hosmer as: “Banks look at its immediate future, but are most heavily influenced by its past. Venture capitalists look to its longer run future.”

Venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections.

Banks are creditors. They look for assurance that the business service or product can provide steady sales and generate sufficient cash flow to repay a loan. Venture capital firms are owners. They hold stock in the company, investing only in firms they believe can rapidly increase sales and generate substantial profits.

Venture capital is a risky business, because it’s difficult to judge the worth of early stage companies. So most venture capital firms set rigorous policies for venture proposal size, maturity of the seeking company, requirements and evaluation procedures to reduce risks, since their investments are unprotected in the event of failure.

Size of the Venture Proposal

Few venture capital firms are interested in investment projects of less than $1,000,000, and this threshold is even higher for the major firms. Projects requiring less are of limited interest because of the high cost of investigation and administration.

The typical VC firm will quickly reject on the order of 90% of the proposals received, because they don’t fit the established geographical, technical, or market area policies of the firm, or because they have been poorly prepared. The remaining plans are investigated with care. These investigations are costly, and generally reduce the candidate pool even further.

Maturity of the Firm Making the Proposal.

Most venture capital firms’ investment interest is limited to projects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting.

Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm already has a large risk concentration, they may be reluctant to invest in these areas.

A small number of venture firms specialize in “start-up” financing. The small firm that has a well thought-out plan and can demonstrate that its management group has an outstanding record (even if it is with other companies) has a decided edge in acquiring this kind of seed capital.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Applying for a Loan

In making loan requests, entrepreneurs tend to be confident that they will meet or exceed what they consider conservative financial projections. They then have trouble understanding when they receive a less than enthusiastic response. To complete the picture, however, we need to look at the process from the banker’s perspective.

“What bankers view as a good loan application is at times different from what applicants think,” says Ray Fincken, vice president of HSBC Bank USA in New York. “Applicants know the bank needs information about their company to process the loan. So in the first interview they often describe all the good things happening within their company — focusing mainly on marketing and sales.

“However, bankers are usually more interested in assessing risk and consequently learning that the company has a good core foundation. Does the company have experienced management? Do these managers have various talents and experiences to guide the company through good times and bad?”

Given confidence in the management team, the bank must look at the elements of the business plan from a more objective standpoint than the entrepreneur ever can. The critical consideration is whether the company’s major products or services provide sufficient profitability and cash flow to meet all its financial obligations, particularly payments to service the debt under consideration.

If the company is a startup, the best indicators are often the norms for the business in which the company will be competing. Are projected margins and ratios in line with others in their industry? The bank will also look at credit reports and tax returns on the key individuals involved in the startup.

If the company has some financial and credit history, the bank will check corporate tax returns and financial statements, individual financial statements, liens, litigation, agency reports such as Dun and Bradstreet, etc. To ensure finances are in order, Ray recommends receiving your personal and business credit reports prior to seeking a loan to make sure the information is correct before going through this process. Misinformation or old loans and liens may erroneously still be on the report. Taking care of these errors prior to applying for a loan can streamline the process.

Fincken says: “We look for consistent, sound cash flow from operations and good, quality assets. We look at these because they are the primary sources of repayment. We then analyze this information and compare it to other similar businesses as a guide.”

Once the records are in order, the next step is the bank’s formal application process. “Planning ahead will help you increase your chances of receiving a loan as well as streamline the loan timeline,” Fincken advises. “Put together a business plan and description of why you need financing; include three years of financial statements or projections.”

Expect to be asked, and prepare your answers to the following questions:

• How much money is needed?

• What is the purpose of the loan?

• How long do you anticipate using the money?

• How will the company be able to pay back the loan?

• How will the bank get paid if something goes wrong?

Here is a list of the most common reasons for loan denials:

• The company is deemed unable to repay the loan

• There is inadequate financial information

• The financial statements are unprofessionally prepared

• There are perceived critical weaknesses in management

• Applicants fail to demonstrate their ability to implement sound accounting and management information systems.

You would certainly be reluctant to extend credit to a prospective customer where you had significant doubt of their ability to pay. Remember that the bank’s business is to lend money, and that they must apply the same discretion to your request.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Business Structure and Financing

The most common business structures are proprietorships, partnerships, and corporations. A proprietorship is simply a one-owner business. It is the most prevalent form (on the order of 70% of all businesses) because it is the simplest and least expensive to start.

A partnership is basically a proprietorship for multiple owners. Most are general partnerships, where each partner is held liable for the acts of the other partners. A limited partnership allows for general and limited partners; limited partners’ liability is limited to their contributed capital.

If you choose to go into business with a partner, be sure to prepare a formal, written partnership agreement. This should address the contribution each will make to the partnership, financial and personal; how business profits and losses will be apportioned; the salaries, and financial rights of each partner, and; provisions for changes in ownership, such as a sale, succession, or desire to bring in a new partner.

The corporation is a legal entity, separate from its owners. It is a more secure and better-defined form for prospective lenders/investors. Incorporation is perceived as limiting the owner’s liability, but personal guarantees are generally required whenever there is liability exposure.

The traditional form is called the C-Corporation. An S-Corporation is frequently preferable as a start-up form, since the losses expected in the early stages of the business may be applied to the owner’s personal tax return. Other forms include the LLC, or Limited Liability Corporation; Trusts, often for a specific time frame or purpose, and; combinations of legal entities such as “CoOps” and joint ventures.

Enlist the legal and tax advice of the professionals as to which form suits your venture best.

Ownership Structure and Capitalization

Once the legal structure is decided upon, issues of distribution of ownership, and distribution of risks and benefits may be addressed. The primary decision to be made is whether the entrepreneur will finance the venture or whether there is a need for other stakeholders, and whether these stakeholders will be investors or lenders or some combination thereof.

Financing our venture by borrowing adds to our fixed costs, but makes no claim beyond the amount of the debt no matter how great our success. Standards for debt financing are generally very difficult for startups to meet; lenders are not generally willing to share the risk with you. If a lender turns you down, ask them for specific reasons. If the reasons cannot be countered with this lender, the insight gained can be used to strengthen the presentation to the next.

The advantage of selling shares of ownership to raise capital, referred to as equity financing, is that the investor is sharing the risks of the venture; this lowers expenses since there is no debt service to be paid. The investor also shares the rewards, however, and the entrepreneur must be careful not to sell the equity too cheaply.

What do we have to offer prospective investors? For most, their primary interest is in a high return on their investment, through dividends and appreciation. There is little appeal to most investors in being a long-term minority owner in a closely-held business, so some way of “cashing out,” must be offered, such as a provision for company buy-back or a public offering.

Venture capitalists look for generally larger deals and impressive returns. Many fund projects only in specific industries; some work only from referrals from within their “network.” Carol Steinberg, in “Success Selling,” puts the odds of receiving venture capital funding in perspective: “Each year a venture capitalist fields 400 to 500 deals, seriously reviews 40 or 50, and funds only 4 or 5.”

Less visible as a source of startup capital are individual investors, known as “angels,” who typically invest $50,000 to $250,000 in private companies. While we must generally “recruit” such investors ourselves, angels are thought to represent a significant pool of risk capital.

While stakeholders are hard to find at startup, sources of assistance are available. A good starting point is the U.S. Small Business Administration (SBA). Their Small Business Investment Company (SBIC) program allows private investment partnerships, or SBICs, to leverage their own capital using SBA guarantees.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

The Strategic Plan

Small businesses are not scale models of big businesses; they are characterized by resource poverty and dependence on a fairly localized market. Their greater vulnerability to the consequences of a lack of focus stresses the importance of their strategic plan.

The strategic plan defines the company’s “competitive edge,” that collection of factors that sets the business apart from its competitors and promotes its chances for success. It requires a clear evaluation of the competitive business climate and an intimate knowledge of the market for the entrepreneur’s product.

The foundation for the strategic plan is a clear mission statement for the venture. Addressing the following questions can assist in developing this statement:

What business am I in? The answer to this question is not as simple as it seems. A good example of an industry group that failed to take a broader view is the railroads. If they had viewed their business as transportation rather than trains-and-tracks, then the airlines would be named Union Pacific and Illinois Central.

Who is our product intended to satisfy? What customer needs are being satisfied? How are these needs being satisfied, that is, by which of our methods or products?

An important strategic option is in how we price our product (as a price leader, value leader, or prestige product). Other options include the way in which we differentiate ourselves from the competition and the particular “niche,” or subset of the market, we seek to serve.

Once we have set internal objectives, we must examine the external and competitive environments in which we will be trying to achieve them.

The external environment consists of those factors that are largely outside our control, but affect the market for our product. Examples of these factors include general economic conditions, regulations, technological developments, and consumer demographics and attitudes. This environment is very dynamic, but some attempt must be made at projecting its changes.

Analysis of the competitive environment must begin with consideration of whether there are any barriers to the entry of a new competitor into the market. How strong is consumer loyalty to existing brands? How important are economies of scale; can a small independent firm compete? Are capital requirements prohibitive? Is there some proprietary technology that puts prospective entrants in a serious competitive disadvantage? Is access to raw materials or to distribution channels limited in some way? Are new entrants limited by permit restrictions or regulations?

The competitive structure of the industry is another important consideration. Are there a few dominant firms, or is the industry fairly fragmented? Will current competitors attempt to “punish” new entrants, such as through a price war, heavy advertising, or exercising their clout with key suppliers? Is there some geographic niche we can serve? What factors create cost advantages or disadvantages? How important is a firm’s position on the learning and experience curves? How are prices set? Is demand rising, even, or falling? Are there exit barriers that raise the risk of entry?

Relative strengths of our strategic partners must also be considered. What is the bargaining power of suppliers? How wide is our choice of suppliers? Is it costly for us to switch? Can our suppliers compete with us for the same customers? How important is our industry to our suppliers?

Do buyers have a wide choice of vendors? Can they make our product themselves? Are there less expensive or superior substitutes to our product in some segments of the market?

These are certainly not easy questions to answer, but performing the research to make better informed decisions, and addressing these questions “head-on” can improve our chances of success.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Buying an Existing Business

One alternative to starting a business “from scratch” is to buy an existing business. To some extent, buying a business is less risky because its operating history provides meaningful data on its chances of success under our concept. We must, however, balance the acquisition cost against what the cost of a startup might have been.

Small-business sales are generally (on the order of 94%) sales of assets, with no assumption of liabilities; only about 6% are sales of company stock. Often the seller finances part of the purchase; typically the buyer makes a down payment on the order of one-third of the sales price, with repayment terms of five years at market rates. Do you see any danger for the seller in financing the sale?

If the decision is made that purchase of an existing business could improve our chances for success, we must then evaluate existing businesses to determine whether any are available at a price that is economically more favorable than a new venture. The most difficult issue in small business sales is establishing a selling price. It is an inexact science, characterized by a seller’s too-high expectations, and an overly skeptical prospective buyer.

Due diligence must be performed before a binding offer is made. Is the company’s history and network of business relationships clear? Are their financial statements representative? What do they say about the business? Are there any unstated dangers or risks? Are there any hidden liabilities? Often, a review of the financials by our banker and accountant can be valuable.

Intangible factors must also be considered, such as the seller’s reasons for offering the business for sale. Often these are for personal and career reasons, such as a readiness to retire with the absence of a successor, or another opportunity perceived as a better fit. Business reasons might include personnel problems, or a weak competitive position. Where business reasons predominate, we must decide whether all that is missing is a quality of management that we can provide, or whether there are some changes that we can make in the way the business is operated that will make the difference.

How “good” an organization is it? How do its customers and suppliers perceive it? If we do not buy it, how tough a competitor will it be? What will be the effect of an ownership change on the customer base, supplier relations, etc.? How much customer loyalty is to the business, and how much to the current owner?

Does the company have a “niche?” Is it the one in which you want to operate? Is there a competitive advantage to the operation that is sustainable? Are its assets useful to you? Will key personnel remain with the business?

Once we have gathered the necessary information, we may decide to extend a purchase offer. We should decide on a bargaining range before we go into any negotiating session. If we cannot meet on price, perhaps concessions on payment terms could make up the difference. We should know the tax and legal consequences of our options. If the discussion takes us outside our range, we should schedule another session, and reanalyze the data. We must allow for the possibility that the deal cannot be made.

Ultimately we must decide whether the purchase, at a price that the seller will accept, gives us a better chance of success than starting from scratch in competition with the business. Perhaps the seller’s errors would start us in a deficit position; we might prefer creating our own corporate culture and customer relationships; maybe we can find a better location, facility, newer equipment, etc. On the other hand, the cost of taking sufficient business away from existing firms could be ruinous.

It must be emphasized that there is no one correct value for a business. Any valuation is based on assumptions, and projections of future performance. Discomfort about basing financial decisions on assumptions and projections is natural. Entrepreneurship requires exploring uncharted territory, and operating in an environment of uncertainty. Success depends on applying our best judgment to reducing that uncertainty.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Taking Stock

Back when I owned an inventory-based business, one of my better customers had a clever barb in his repertoire. If we were out of anything he needed in his order, he would say “You know, this would be a great place to open a supply house.”

But supply, we did for 20 years on my watch. We were in a smaller market, handling about 10,000 separate items, so we enjoyed few economies of scale. We competed with some large distributors and did very well largely due to our focus on inventory control.

At the time we used integrated management software that included an inventory control (IC) module. What made our system work so well was our commitment to keeping accurate inventory on a real-time basis, which necessitated “cycle counting.”

Wikipedia.org defines a cycle count as “an inventory management procedure where a small subset of inventory is counted on any given day.” In our case, this meant that, instead of taking a physical inventory once a year, we counted 2% (one-fiftieth) of our inventory each week up to the fiftieth week of the year. Using this method errors are caught more quickly, and extra counts can be performed on error-prone items.

With that introduction, let’s talk about the steps you can take to get your inventory under control:
Evaluate your IC “infrastructure.” Are you ready to automate IC? If you are using a management software package, is the IC module adequate for your needs?

Is your inventory layout conducive to administering a “real-time” IC? Can your staff take on the extra duties involved? While getting such a system going can require a lot of initial attention, IC systems save time, by allowing you to know what’s in stock without having to go to the warehouse, by quickly detecting any possible theft, and by lowering rates of stockout (lost sales) and overstock.

Set a target for customer service level. Measures can include percent of orders filled completely, or percent of items delivered to items ordered. The primary constraint on reducing inventory is, of course, customer service level. What’s an acceptable service level for you? 95%? 99.5%? IC software generally uses such a figure to determine how much “safety stock” you need to meet this objective.

Learn industry norms to aid perspective. While it should seldom affect your behavior, it is “nice to know” what the industry norms are for businesses of your size. You can probably get these from your trade association, or go to the “Annual Statement Studies” by the Risk Management Association, or “Industry Norms and Key Business Ratios” by Dun & Bradstreet.
What if the industry norms are 90 days of inventory on-hand, and you only keep 45 days’ worth? What if you keep 120 days’ worth? No action may be necessary, but this gives you a greater context and perspective as you fine-tune your system.

Use “best practices.” Minimum overall inventory is not the end of the story. Ascertain whether a reduction is advisable. Even at a good overall level of stock you may still have many items out of balance, over or under. So our efforts should be about “best practices” that minimize quantities required, while raising the quality of your inventory.
Clean house! In my most recent turnaround consulting appointment, a plumbing wholesaler, we started by identifying all the items that our IC system identified as overstock. We went from thinking we needed more warehouse space to having about a third of existing space available.

Of course, much of it went straight to the trash heap, but some was recent enough to send back to the manufacturer. In between, we sold some at two garage sales we held, and donated the rest to a local housing agency.

Implement “Just-in-Time. “ JIT includes a set of actions that work together to squeeze slack out of your processes. Do you enter received material as soon as it arrives? Can your key suppliers commit to shorter lead times?

Zero-base SKUs. Take a hard look at the realistic contribution of every item in inventory. You may need to keep some losers as “service items,” but you will be amazed at how many of your items are break-even or worse.

Partner strategically. Can you narrow your number of suppliers by getting more items from the “majors?” You may currently split up orders to save a penny here and there, but the vendor left standing would probably meet or beat the other’s prices for a greater share of your business. More from each vendor means more frequent replenishment, and more opportunities for JIT.
These are a few actions that should apply to continuous improvement programs at most inventory-based businesses. As they say, “your mileage may vary.”

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Let the market speak!

A market analysis is a study of the market area and of probable future patterns. It should include the current state of the market, and the nature and extent of competition. The purpose of the analysis is to make it possible to develop more accurate, that is, more fact-based sales forecasts.

The first and most logical step in whether or where to start a business is to conduct a market analysis. For a retail business, a few general locations should be chosen for detailed analysis to identify where the opportunity is greatest.

A market analysis is a study of the market area and of probable future patterns. It should include the current state of the market, and the nature and extent of competition. The purpose of the analysis is to make it possible to develop more accurate, that is, more fact-based sales forecasts. The method is to identify the pattern or trend of sales over the past and to use this information to project or estimate sales for the period ahead.

Another important issue is how much it costs in selling effort to produce a given volume of sales. It involves two types of costs: advertising costs, and salaries and wages paid for selling. If the business requires sales-people in the field, as a manufacturer might, information on reimbursable travel expenses should be included.

A study of the competition should be included in any market analysis. The competition may be local and well defined, or quite generalized, depending on the nature of the business and of the market. Trade associations and other data-gathering agencies, both governmental and non-governmental, are sometimes helpful in this area. A good deal of the information about competition, such as estimated sales, pricing policies, advertising and promotional costs , services offered, performance of sales personnel, must come from direct investigation, business by business.

Of interest also are whether there are businesses entering and leaving the competition recently, and changes in the competitive structure through product mix or services offered. If there is a lot of flux in the market, we need to look into the causes, and whether they are favorable to our entry.

When evaluating a location, be sure to investigate whether there any plans for proposed changes that may have an adverse effect on the future of the business. Urban revitalization programs, changes in highways and streets, flood-control programs, changes in zoning ordinances, could all severely impact what looks today like a favorable location.

The number of people within the market area and the amount of disposable income they have are important market factors. For many kinds of businesses, the total population is less important than certain segments of the population. A business selling hearing aids, for example, will be interested only in persons who have hearing difficulties, which would generally imply an older demographic.

General population figures are obtained from Federal, State, and local government sources. The Federal census gives not only total population figures but also breakdowns that are useful in many business situations. For most of the larger cities, census figures are further classified by sections within the city, called census tracts, on the basis of certain population and economic characteristics.

Business population figures may be available from numerous sources. The Yellow Pages of the telephone directory and the city directory are local sources that are immediately available. Chambers of commerce, trade associations, and State and Federal government agencies can often be helpful.

Many trade associations report the results of research on consumer expenditures. Other sources of data on income include planning commission offices, employment offices, and utility companies. Many newspapers research and report on building permits and demographic trends, especially in newly developed areas.

A much broader yet vital part of the market analysis has to do with what might be called the general state of the market, that is, overall economic conditions of the market area and of the country. These may be widespread movements such as national cycles of prosperity and less favorable times, or they may be purely local conditions.

Perhaps the prospective entrepreneur favors a particular area, near home for example, and is merely looking for a specific location. It can still be very useful to investigate a couple of other areas, in case the opportunity in the favored area is particularly less than in other neighborhoods. The possibility must always be recognized that the nature and /or direction of the industry, or the competitive situation may prove unfavorable in all the areas investigated.

Options then are to wait for conditions to become more favorable, or to “cast a wider net” geographically or in terms of business niche chosen. In any case, finding out at the analysis stage makes it much easier to optimize the opportunity chosen.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Evaluating Business Planning Software

Abstract: Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan.

Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. The result of this step is a comprehensive business plan, with its major components being the marketing “mix,” the strategic plan, operational and logistical structures, and the financial proposal. The purpose of the business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.

While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan. These packages are particularly helpful to those who are intimidated by starting from a blank piece of paper.

So is there a downside to purchasing software that has most of the text “in place?” The text is not always well-written, “fill-in the blanks” tends not to produce very fluid copy, and the parts you write may be in a different style than the words surrounding it. Some experts suggest that the real usefulness of such packages lies in the examples, when they are in a business similar to yours.

The sales leader in “plan-ware” is Palo Alto Software’s Business Plan Pro (BPP, paloalto.com). We have tried several packages that are comparable to BPP; you should evaluate a few to find which might fit your unique style best. Figure a price point of about $120 for standard versions of all. Others to consider would be:

 Planware’s PlanWrite (planware.org)

 PlanMagic’s Business (planmagic.com)

In addition to BP software, you may want to consider online services.

 Fundable Plans (fundableplans.com); $40 per use

Some of the factors that you would want to consider in your evaluation are:

User-friendliness – easy to get productive quickly; self-guiding, not having to go back-and-forth with instruction manual or help screens; “wizards available for some functions.

Interface – the package works with the other software that you will need in the process, such as Word, Excel, and PowerPoint.

Support – free technical support by telephone or email; useful help screens; program updates; and, resources such as articles and links that assist in the business planning process.

Features – functions beyond the basic “fill-in-the-blanks” templates, such as PowerPoint templates; market research data; industry codes; lots of rich examples; and, assistance with the more technical aspects of the plan, such as finance and strategy.

One of the dangers of using such packages is that your focus may shift from producing a complete and convincing plan to simply filling out the templates. Their real value lies in their support of getting it in writing.

Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan. The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities,” according to business consultant Eric Siegel.

A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success,” establish goals and check-points, and consider long-term prospects. The plan must realistically assess the skills required for success of the venture, initially and over the long run, and match the skills and interests of the team to these requirements. Test the plan, and an accompanying oral presentation, on friends whose business judgment you value. Let them assume the role of a prospective investor or lender.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Used-Book Case Study

This is a case study to sharpen your skills at forecasting and break-even analysis.

Dwight Payne and Gary Heap reside in Santa Barbara, CA, where they attend college and pursue their mutual hobby of science-fiction book collecting. They pooled their book collection of over 4,000 volumes, and sci-fi magazines going back over twenty-five years. All neatly cataloged and indexed, they estimate it would cost $20,000 to assemble the collection today.

Payne and Heap decided that, at the end of this school year, they will dedicate the summer to getting a used-book store started in Santa Barbara as a means of supplementing their income year-round. Heap’s uncle owns a storefront near the University, and agreed to rebuild it as a used-book store. He also co-signed an inventory loan for $4,000 for some start-up working capital. In exchange he gets 25 percent of store sales for two years.

In addition, they bought a collection of over 10,000 paperbacks, magazines, and comics for $3,500, and some used shelving for $1,500. These purchases required borrowing the money from some fraternity brothers.

Provide business strategy planning advice to Dwight and Gary (There is no one right answer).

Decide on days of the week and hours the store will be open. Estimate staffing required and hourly salary costs. Do Dwight and Gary really work for free? What is a reasonable expectation of customers per day? Average purchase per customer? What are pessimistic and optimistic values of these estimates? How much will they have to spend on advertising and promotion to meet these estimates?

What will they pay, on average, for each book? How much can they get, on average, for each book?

Put together a projected (often referred to as pro forma) income statement. Relate the estimates developed above to monthly sales (pessimistic, expected, and optimistic), cost of goods, and expense amounts for wages and promotion. We should add 25% to wages paid for the payroll estimate, to account for taxes, sick days, etc. Debt service payments may be assumed to total $400 per month. Estimate rent and utilities and any other expenses that you feel might be incurred.

Conclusions: Find a break-even sales estimate, that is, the value for sales that produces a Gross Margin just equal to Total Expense. When gross margin generated equals expenses, profit/loss is equal to zero; this sales level is called the break-even point.

Would you do it if you were they? Why or why not? What kind of a test is this where you can’t look up the answer? It’s an entrepreneurship test; learn to be comfortable with your best estimate. If you are not comfortable with this seek consulting services for small businesses.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Categories