Invest In My Idea

■ Real Life Example

In the late 1970s, board games were old news. Monopoly was 50 years old, and Scrabble was even older. So, when Chris Haney and Scott Abbot got together to play a board game one night, they chose one of the very few available—Scrabble. As they pulled out Chris’s Scrabble game, the two friends discovered that some of the tiles were missing. As they went out to buy another Scrabble game, Chris thought: This was the sixth game of Scrabble he’d bought in his life. The two friends decided then and there to start a business and invent a board game.

To say they were novices would be generous; they knew next to nothing about business or toys. They were journalists. Yet in their case, ig-norance was not such a bad thing because they were aware of what they didn’t know. They did what you are being coached to do—they began to research and analyze their industry. In January 1980, armed with an ex-pired press pass and a camera without any film, the two buddies visited the Canadian Toy and Decoration Fair in Montreal posing as reporter and pho-tographer. There, they pumped toy manufacturers for information about the strategies of marketing a game and, according to Scott, collected about $10,000 worth of information in one afternoon.

Their research convinced them that they were on to something— even though there had been few new board games invented over the pre-vious half century, there was nevertheless a market for their new product and business. And they were right. After almost going broke in the process, the two friends sold more than 20 million copies of Trivial Pursuit within three years.

need to know your potential market before investing your time and money in any business venture. You don’t want to waste time or money on a bad idea.

In essence, you must ask yourself whether anyone wants or needs your proposed business. In addition, it is equally important to research your po-tential competition, and the industry in general, so you can have a good idea about what you are getting into. By figuring out your potential market, your likely competition, and how you will stand out from the crowd, you greatly increase your chances of success.

Here are some tips to follow when using this technique:

• Tell the interviewee up front how important his or her response is and that the interview will be short (between five and ten minutes).

• Avoid pauses as respondent interest drops.

• Keep the questions short and interesting.

• Make the survey answer options consistent.

Good interviewers can survey up to seven people an hour (however, speed for speed’s sake is not the goal of any of these surveys), but five to six per hour is more typical. You would like to get over 250 interviews to have a good sample.

The costs associated with this method include the fee for the telemar-keter, phone charges, preparation of the questionnaire, and the analysis of the results. Costs can be lowered by calling during certain hours.

Direct mail. Direct mail questionnaires can be inexpensive if you send out enough to take advantage of bulk mail prices, but the response rates are usu-ally less than 5 percent. To increase your response rate, try these ideas:

• Include a nice letter that explains what you are looking for and why.

• Keep your questions short.

• Limit the length of the questionnaire to two pages.

• Address the letter to a person, not “occupant.”

• Address the letters by hand (tiring yes, but also effective).

• Include a self-addressed, stamped return envelope.

The main costs of this method relate to printing the cover letter and questionnaire, envelopes, postage, and the ensuing analysis.

Personal interviews. There are two main types of personal interviews, in-dividual and group. Group interviews are good because you get many re-sponses at once. They give insight into buying preferences and purchasing decisions. But they also are expensive because participants usually want to be paid for their time. One-on-one interviews either use a script to get responses to specific inquiries or are more open-ended, allowing for any response.

Costs for personal interviews include the fees paid to participants and interviewers, renting the facility, the printing of any questionnaires, and analysis.

If primary research is too expensive for you, then you need to turn to the secondary research methods discussed below. But before you do, it doesn’t hurt to simply go out and speak with some business owners on your own. Go to a town other than your own (so that you aren’t viewed as the competition), find a business similar to the one you want to start, and ask the owner about the business. Find out who his customers are, what they like and dislike, and what the competition is doing. By doing this several times, you will learn much about your potential business.

Secondary Research

There are many organizations and sources out there from which you can gather plenty of information that will help you make some informed decisions about your potential business. Government departments, public libraries, your local chamber of commerce, business departments at universities, and the Small Business Administration all have information that could help you.

Particularly helpful tools are trade organizations and associations. Al-most every industry has a trade association and a trade publication associated with it. If anyone will know your potential industry, it is them. Most trade as-sociations have regional chapters that usually are very helpful.

You can’t overlook the greatest research tool invented in the past 100 years—the Internet. The Net is loaded with almost more information than you need regarding every business imaginable.

The following details how you can conduct market research over the Internet.

Pick your industry. Let’s say you wanted to open a florist shop. Begin by typing “florist” into the best search engine there is, Google <www.google.com>. Doing this will yield many hyperlinks from which to choose. You can begin by exploring various links that look good. For example, the Ohio Florists As-sociation link might look interesting. At this Web site, you will find an area of industry links that will open up the world of flowers to you—associations, government, colleges and universities, floriculture magazines. Everything you need to know about the florist business is but a few clicks away.

Make it more specific. You will likely need information more specific and germane to your geographic area. You can find this on the Net too. Here are several sites that can give you industry-specific market research:

• <www.inside.com> The home of American Demographics, a monthly magazine that offers accurate information on emerging consumer trends, analysis of those trends, and issues and events that relate to consumer markets. The site and the magazine contain detailed insights into spending, growth, and demographics. You have to pay a minimal fee for the content.

• <www.hoovers.com> Hoover’s offers company, industry, and market intelligence, as well as sales, marketing, business development, and other intelligence on public and private companies worldwide. It is a great business information resource. This is also a fee-for-content site.

• <www.marketresearch.com> This great site offers a search of the larg-est database of market research publications. Over 50,000 titles from more than 350 leading publishers. The site is organized into 21 different industry categories, and offers a slew of market research information.

• <www.marketresearch.org.uk> The Market Research Society is one of the largest international organizations for those interested in mar-ket, social, and opinion research. This site can help you head in the right direction.

• <www.marketingpower.com> This is the site of the American Mar-keting Association. A great site for an overview of marketing in gen-eral, and for specific market research.

Combined, all of these sources should enable you to decide if there is re-ally a market for the business you want to create. When you have firmly con-cluded that you have a good idea and are convinced that there is a market for your business, the next step is to draft a business plan that will explain ex-actly how you plan to tap this market and make money.

The Business Plan

I bet you don’t want to draft a business plan. Maybe you are thinking that you know what you are going to do and consider it as a waste of time. Possibly you have your funding in place so you figure that no one is ever going to read it, so why bother. I don’t blame you. Business plans are a lot of work and you may, in fact, be the only person who ever reads it. But it is still an important exercise nonetheless.

Think of it this way: An experienced pilot would not fly anywhere with-out a detailed, well-researched flight plan. The plan helps him understand

where he is going and how he will get there. Just as you wouldn’t trust a new pilot to fly you and your family to an unknown destination without some as-surances that he planned the trip, knew where he was going, and knew how to get there, you shouldn’t trust that you can start a business without a plan.

A business plan is your flight plan, your game plan. It is your blueprint. Creating one forces you to carefully think through the entire enterprise— from products, prices, and income projections to advertising, marketing, and sales forecasts. By analyzing some things that you are probably unfamiliar and uncomfortable with, you are forced to really understand what you are getting into and how much money you can realistically expect to make. If you don’t create a plan, your entire enterprise will be a shot in the dark and you are going to be investing too much of your time, money, reputation, and ego to wander around in the dark, hoping your Y business will work. That is why you need a plan. L

A business plan is a written summary of what you hope to accomplish by being in business and how you intend to organize your resources to meet your goals. In it, you define your basic product, your income objectives, your management team, your competition, and your specific operating procedures. It details the what, when, where, why, and how of your business. It explains what your objectives are, why your business will be unique, and the steps you will take to achieve those objectives. In essence, it is the road map for oper-ating your business and measuring progress along the way.

There are many practical advantages of a business plan:

• It identifies the amount of financing or outside investment required, when it is needed, and how it will be used.

• It enables a lender or investor to assess your financing proposal and assess you as a business manager.

• By committing your plans to paper, your overall ability to manage the business will improve. You will know your business better. You will be able to look ahead and hopefully avoid problems before they arise.

• A business plan forces you to be realistic and avoid pie-in-the-sky projections.

• It helps you to identify your customers, your market, your pricing

strategy, and your competition.

You don’t want your business plan to be so short that it doesn’t include the necessary information or so long that you have to spend a lot of time rewriting it. A normal business plan should be between 30 and 50 pages. Not more, not less.

Elements of a Business Plan

While every business plan is different because every business is different, they are all generally alike. Your business plan should include the following elements.

Executive Summary

The document starts with an executive summary describing the high-lights of the business plan. Even though your entire business is well described later on, a crisp, three- or four-page introduction helps to capture the imme-diate attention of the potential investor or lender. The executive summary is just that—a compact summary of the whole plan. In it, you should explain

• what sort of company it is,

• what your product or service will be,

• why your business will be unique,

• whom the management team is comprised of, and

• how much money you need, in what stages, and how you will use it.

It is important that this summary be your best. Remember, this may be the only chance you have to attract attention. Some people say that busy lenders read only the executive summary; if it doesn’t grab them by the lapels, they move on to the next plan. Make sure your executive summary sells your idea so the reader will retain interest and continue reading. Because the ex-ecutive summary is so important, you might want to write it last, after you have thought through the entire plan.

Table of Contents

Right after the executive summary will be a table of contents that lists the section titles and page numbers for easy reference.

Description of Business Venture

This is the heart of your plan. In it, you will describe exactly what your business is going to be and how you envision it proceeding. This section will contain:

•   A description of your product or service. What is it? How is it differ-ent? Why will people want it? Why isn’t someone else doing it? What kind of equipment will you need? Do you have or can you get a patent? The thing you must do is put yourself in a potential investor’s place and ask yourself what he or she would need to know before in-vesting in your business.
•   A description of your business. Is this a wholesale business, retail, professional, or what?

Market Analysis

This is where all of that research comes in handy. Here you will identify your target market—your typical customers. You will also explain present buying patterns and offer trends, projected growth, customer behavior, com-plementary products or services, barriers to entry into the marketplace, and so on. Tell the reader what the total market is for your industry. For example: The computer repair market in the United States grew to more than $1 bil-lion last year.

Next define your target market. If your business is going to be confined to your specific locale, then you need to explain what the market is like in your area. After this, you must narrow your market down even more and an-alyze what your total feasible market is. Finally, you must determine what your share of that feasible market will be. This is called your market share.

How will you capture that market share? That is what you need to know and what you need to convey. How will you position your goods or services in the market? What will your pricing strategy be? How will you promote yourself and your business? You should include in this section your sales strat-egy (sales objectives, target customers, sales tools, and sales support), distri-

bution plan (direct to public, wholesale, or retail), pricing structure (mark-ups, margins, and break-even), and promotion plan (media, advertising, pro-motions, and publicity).

Description of the Industry

This section will include statistics and information about your chosen in-dustry. You want to include the following in this section:

•   Industry outlook and growth potential, such as industry trends, new products and developments, etc.
•   Markets and customers, including the size of the total market and market trends
•   National and economic trends, such as population shifts, consumer trends, and relevant economic indicators

Researching and writing this section will enable you to understand the industry you are getting involved in much better.

Business Goals

Explain in this section where you see your company in one year, in two years, and so on up until the fifth year. Explain specifically how you will reach these goals and what will happen in different economic environments.

Do you want your business to get funded? Then write your business plan in plain English. Nothing turns off a reader more than lots of technical jargon that he or she cannot understand.

Competition

This section of your business plan should include all pertinent informa-tion about your competition, including the length of time they have been in business, where they are located, and what their average annual sales are. You will want to analyze the following:

•   The reasons behind their success
•   What they do right and wrong
•   What customers are looking for
•   How those needs are being met by your competitors
•   How those needs are not being met

The Internet sites listed in the Secondary Research section can help you fill in this information. Getting some good, solid data about your competitors will impress investors and teach you plenty in the process.

In addition, you should explain how you perceive your business will compete in terms of strengths and weaknesses compared to the strengths and weaknesses of these competitors. Explain how you intend to overcome your competition and your expectations of the impact your company will have on their business. Consider how well your competition satisfies the needs of po-tential customers. Determine how you fit into this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, or better service?

Management Team

What are your qualifications and those of your team? Do not underesti-mate the importance an investor puts in the management team. Banks, angels, and venture capital firms will want to see that you have a board of directors or officers with a record of entrepreneurial success—proven business lead-ers, people with legal and finance skills, marketing experts, and the like. Those types of people will help prove the viability of your business and can make all the difference between funding and no funding. The resumes of all key personnel should be included in this section as well.

Sales Forecast

The next part of the business plan covers sales, operations, and finances. This section deals with hard numbers and forecasts of sales, operating ex-penses, profits, and the like. This section should include:

•   A monthly forecast for coming year (sales volume in units and dollars)
•   An annual forecast for the following two to four years (sales volume in dollars)
•   Assumptions on which you base these forecasts

By this point, your research on the competition is vital. Analyze their lo-cation, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product lines carried, promotional techniques, positioning, and product catalogues and other handouts. If feasi-ble, talk to customers and sales staff.

Use this research to estimate your sales on a monthly basis for your first year. The basis for your sales forecast can be the average monthly sales of a similar-sized competitor’s business that is operating in a similar market.

Financial Analysis

A business plan is not just words; it is words and numbers. You need to understand and explain how much it will cost to get your business up and running, and how much it will cost to keep it going on a monthly basis. The financial needs of the plan depend greatly on your marketing and sales strate-gies. They all must fit together. Remember, though, that while projections are projections, they must show an understanding of how all of the variables of the business plan fit together. In the end, you must really understand the numbers because investors will grill you on them.

In this section, you are also going to explain how much money you are asking for and how you will be spending it. This section will include a spread-sheet that analyzes income and expenses for the next few years, including:

•   Profit and loss statement (P&L). This is a summary of your projected business transactions over a period of time. It explains the difference between your income and expenses. An income statement is the same as the profit and loss statement. Your P&L will include analyses of sales by month, gross profit and profit margin, overhead, depreci-ation, interest payable on any loans, and net profit.
•   Cash flow statement. This statement shows how much cash your business will need, when it will be needed, and where it will come from. Do you need to buy inventory? How much will that cost every month? What are your receipts, bills, wages paid, etc.? That is what you will be discussing here. The cash flow statement is important be-cause it forces you to realistically look at the bottom line and see if you are making (or are going to make) enough money to service your debts. A cash flow statement is a great tool that you should use throughout your business career as it is a mirror of where things are.
•   Balance sheet. The balance sheet forecasts your assets and liabilities. It shows your financial position at a fixed point in time, usually at the end of the year. It helps you understand where all the money coming into the business has come from and where it has gone. Balance sheet information is extracted mostly from the P&L and cash flow statement.

This section is often the most difficult part of a business plan for many entrepreneurs. It’s easy to wax poetic about your fantastic business idea and how it will make everyone rich. Actually putting hard numbers to those projec-tions is not always easy, but you have to do it. You have to crunch some real-istic numbers to go along with your realistic (and hopefully enthusiastic) plan.

Where do you get this information? There are many sources of informa-tion to assist you. Some key sources are competitors, trade suppliers, busi-ness associations, trade associations, trade publications, and trade directories. Once you have this information, you will need to provide it in your financial statement.

The financial section of your business plan will also analyze the use of any loan proceeds you are seeking, including the amount of the loan, the term, and when it is required. Finally, you need to disclose your financial sit-uation and how much you will personally be contributing to the venture. The appendix of your plan should include the past three years’ income tax re-turns. Also include a current credit report.

Critical Risks

This section will analyze what you consider to be the biggest risks and obstacles to the success of the business and how you plan to overcome them.

Action Plan

This section will contain specific steps you will take to accomplish this year’s goals and checkpoints for measuring results. Identify significant dates, sales levels, and production levels as decision points.

Appendix

This section will contain:

•   Substantiation documentation, articles of interest, etc.
•   References
•   Name of present lending institution
•   Names of your lawyer and accountant
•   Personal net worth statement
•   Tax returns
•   Resumes
•   Letters of intent (potential orders, customer commitments, letters of support)

Mistakes to Avoid

Preparing a business plan will generate a lot of thought and a lot of paper. You will need to write it and rewrite it. But the process should do you a lot of good. In the end, you will have a much better idea about how your business will run, what it will take to succeed, and what risks will be involved in the process.