THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY
“Do that which you fear to do, and the fear will die.”- Emerson
The business plan consists of using numbers to determine how you are going to get where you want to get, what measures you will take, how much they will cost, and what economic results they will have. It is a natural extension of the strategic plan. In the long run, it will also help you see if you are advancing in the right path.
Why could the business be considered the pathway to the purchase of a company?
The business plan is the layout and budget; it details how you are going to assign the resources, how much each project will cost, and what objectives you will establish. Therefore, it should include a financial model. It must build a bridge between the past and the future of the company.
It has to do with a fundamental element because you may not only require money to purchase a company but also to make the necessary changes so that the purchase is successful.
This plan incorporates the tactics that you will implement to reach your strategic vision and the investments to carry out to achieve it. You might not need investment but rather an improved focus and assignment of costs. If you do it well, you will know the amount of money you really need and when you need it.
If you want to purchase the affiliate of a multinational, maybe the cost structure of the corporate services pressure profitability too much or there is too much bureaucracy and it dampens decision-making and commercial effectiveness. It could also be that the corporate strategy is not a good fit for the country. If you are aware of this, you will be able to show a financial investor that the profitability could grow much more if the company breaks from the corporate mold.
If the seller is a businessman and you see that it does not function with the same force as it did a few years ago, that it has slowed down, that the costs are too high, that corporate energy is lacking, that there is bad circulation of money, and that the money is lost in the details, you might see that there is the possibility to create a lot of value with a more aggressive and professional management. However, you will have to show it.
These are the messages that you will transfer to a financial partner so that he or she invests in the project alongside you, buying a company for the value that it creates and later managing it to create even more value.
How you transmit the messages of the business plan will be decisive. Since you will not be investing much money yourself, your value will be in the credibility of the documentation that you prepare (the proposed operation and the strategy to increase profitability). If your credibility is of high quality, you will find investors and they will put a price to your idea. If not, you will not have an operation to begin with.
If you want to have a financial investor, you should incorporate an exit strategy in the business plan. Venture capitalists will dedicate 50% of their time to study if it is worth investing in the company and the other 50% to analyze how they could leave in four or five years. If you want to attract investors, give them something to think about.
Be careful with your projections. If they are too low, they will not be attractive since financial investors look for profitability above 20%. If they are too high, they should be well-supported because, if not, you will lose credibility.
It is true that the projections you make will benchmark you. Investors will ask that you comply with them, and if you do no reach them, they will penalize you. Therefore, I recommend that you be conservative and leave room for error.
Venture capitalists invest in only one or two companies for every 100 offers that they receive. Thus, it is very important that your business plan be of high quality if you want to get past the test. You could ruin your chances with a bad business plan.
If your business plan is presented by an investment bank, they will be much more interested in it, and it will have the structure that they are looking for. It is worth it getting help from professional, specialized advisors.
The layout of a basic business plan
Below, I explain the basic layout of a business plan:
–Executive summary: two or three pages that summarize the opportunity, numbers, price, company, sector, management team, growth strategy, expected profitability, and exit strategy. The investor might only devote five minutes to it, and if, in this time period, you have not gotten his or her attention, your document will go straight to the trash. Therefore, the quality of the executive summary is fundamental; potential investors might not read more than that.
–Company: show its products, organizational chart, facilities, production and sale methods, clients and suppliers, competitive advantages, and its position in the industry.
–Sector: clarify your sector and subsector in which you operate, its size, actual and projected growth, margins, competitive landscape, and tendencies.
–SWOT: show the strengths, weaknesses, opportunities, and threats of both the sector and the company.
–Competitors: how many players exist, who are the most important five actors, who competes directly with your company, what are your competitive strategies, your margins, and your balance structure. Also mention your potential competitors.
–Strategic opportunity: describe the strategy that you will develop to take advantage of the competitive opportunity, what advantages the company has and the actions that they will take, and what the expected results are.
–Management team: the background of the executives and why they are the ideal people to lead the company according to a new strategy that will provide more margins and profitability.
–Numbers: show the numerical results of the previous three years and the projections for the results that you will have under your management in the following three scenarios: optimistic, realistic, and pessimistic. Explain how you will invest the additional capital.
–Profitability: explain the expected profitability under each of the scenarios and the risks of not achieving them.
–Exit strategy: some options for the investor consist of growing the company through acquisitions or selling it later to a foreign company, going public, or selling to a larger venture capital firm.
This article was written by Enrique Quemada – President of ONEtoONE Corporate Finance
Your might also be interested in “THE STRATEGIC PLAN: THE KEY TO CREATING VALUE IN THE PURCHASE OF A COMPANY”.