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How to write a Business Plan for a small business?

A compelling business plan is an essential part of raising Capital to start or acquire a small business (<$10 million in Sales). The best business plans are short, concise, and speak directly to an audience of investors and lenders. To that end, this article lays out the structure of a successful business plan for raising Capital for your small business.

Audience

Knowing that you’re raising Capital for a small business opportunity helps better define your audience so that your plan can address their goals. Now is a good time to mention that you should avoid raising Capital from anyone that hasn’t made direct investments into small businesses, especially friends and family. Chasing new investors is simply a waste of time because it requires twice as much work for marginal gains. First, you have to convince them of the benefits of direct investing and then the value of your opportunity. Unfortunately, their lack of experience in both areas makes it harder to make a decision, so they’ll keep putting you off with a “maybe.” On the other hand, professional investors and SBA Lenders are very formulaic in their approach, and if your opportunity meets their criteria, they will invest. In addition, professional investors tend to provide immediate feedback and criticism, but you can’t get emotional. That said, their Capital is expensive. And since your opportunity isn’t AT&T, you will have to give up some of your Equity or deliver higher returns (>14% ROE) to earn their investment dollars. Alternatively, SBA loans offer a lower Capital cost (~6%-7%), but it takes longer to get funded. For example, it can take 30-45 days for a Term Sheet (“Pre-Approval”) and another 30-60 days to close and fund due to the required paperwork.

Presentation

Traditional business plans appear on 8×11 paper in report format. Today, however, many entrepreneurs and professional investors prefer to see plans on PowerPoint or Google Slides (“Pitch Decks”) to focus discussions on the critical points. This article will work for either format, but you should work in whichever medium you’re most comfortable.

1. Executive Summary
2. Company History
3. Market Analysis
4. SWOT Analysis
5. Go to Market Strategy
6. Financial Projections
7. Management Resumes

Executive Summary

The Executive Summary should begin or include a transaction overview that quickly conveys what you’re looking to accomplish. For example, the first page of your business plan should address the following items:

  • Ask: How much you’re looking to raise
  • Sources and Uses: The proposed Capital Structure and use of the funds
  • Financial Projections (summarized): A five-year P&L projection of Sales, Net Income, and EBITDA
  • Expected Return (for Investors): ROE, ROI, and IRR
  • Debt Metrics (Lenders): Senior Leverage Ratio (Debt/EBITDA) and Fixed Charge Coverage Ratio (FCCR)
  • Problem and Solution Statements: Description of the challenge your business solves, and the size of the serviceable market

Table of Contents

While this seems obvious, you’d be surprised how many plans we’ve seen that don’t have one, especially pitch decks. So, naturally, the absence of a table of contents will annoy some decision-makers, and that’s the last thing an entrepreneur wants to do.

Company History

Here you’ll want to quickly walk the audience through critical milestones in the company’s history.

  • Startups: You should describe how the founders identified the business problem (and solution) along with its current staffing level (roles and total headcount).
  • Acquisitions: For acquisitions, you’re quickly moving the audience from the company’s founding to the present period. This section should also include information about the current staff and clearly indicate any planned personnel changes. Finally, with acquisitions, investors will pay close attention to the rationale behind the sale. Some red flags include “selling to pursue other interests,” retiring before the age of fifty or selling a business within five years of its founding. Neither conveys confidence in the business’s future viability (are you investing in the best pay-phone manufacturer in 1997?).
  • Financial Analysis: (all Acquisitions, some Startups): You should depict the firm’s financials for the last three (3) fiscal years and discuss the most recent Last/Trailing Twelve Months (LTM/TTM) results on the P&L (impact on EBITDA) and Balance Sheet (implications for Cash). If you haven’t completed this kind of analysis before, you should read the Management Discussion & Analysis section (Annual Report) of a leading publicly-traded company in the same industry (going back three years).
  • SWOT Analysis for Acquisitions: SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. So, you’ll assess each of these items as of the Financial Analysis completed above. The interweb contains numerous examples of SWOT Analysis, so we won’t go into great detail here other than to state that the Strengths and Weaknesses represent an internal assessment. In contrast to Opportunities and Threats, which stem from external forces.

Market Analysis

You can’t start a business without understanding who your customers are, what they want, and how they’re currently meeting these needs. This section will make or break your business plan because investors will judge the opportunity on how well you understand the market.

  • Industry: Here, you want to start broad and then narrow. So, it should begin with an overview of the industry and the outlook (size, growth rate, and trends). You can usually obtain this data from the internet or analyst reports on publicly traded companies in your industry.
  • Target Market: In the previous section, we discussed the industry, but now we want to focus on the specific customer or the business segment. You might begin this section by restating the business problem your product(s) solves. You should also include demographic data about the customer (B2C) or business (B2B) your company serves.
  • Market Size: Based on the data above, you’ll quantify the business opportunity based on the spending characteristics of the customers you’re targeting. The spending characteristics should include how frequently your clients purchase your products, the foundation of your financial projections.
  • Competitor Analysis: Here, you should describe your top three or four competitors along with their strengths and weaknesses. You probably won’t be able to get financial information (Sales, Net Income) for small businesses. However, you may validate them based on staffing levels or purchasing volume if you have vendors in common.
  • SWOT Analysis for Startups: Now that you’ve assessed the market and your competitors, it’s time to present prospective investors your assessment of the challenges and opportunities facing your startup.

Go to Market Strategy

This section should restate the business’s solution and management’s plan to attract and retain customers while addressing the weaknesses and threats from the SWOT analysis.

Financial Projections (P&L, Balance Sheet & Cash Flow Statement)

Now, based on your market strategy, your business plan should include financial projections for the next five years (P&Ls, Balance Sheet, and Cash Flow Statements). If you’re seeking an SBA Loan, you’ll need month-by-month P&Ls for the first twenty-four (24) months. Your projections should also include any important assumptions used.

Management Resumes

Finally, no Business Plan is complete with a summary of your Management Team’s experience. The summaries should resemble what you’ve all seen in a business website’s “About Us” section.

Conclusion

Writing a good business plan can seem challenging if you’re unfamiliar with the process. However, time spent developing competence in this skill set will benefit you with any investment decision that crosses your path.

Restaurant Capital, A How-To Guide

Restaurant capital is a key component of starting a restaurant and creating personal financial freedom. However, the challenge comes from finding the right capital partners for your new business. Therefore, it’s essential to “begin with the end in mind” and start sourcing restaurant capital in the early stages of the process since there are many options to consider. The alternatives include Bank debt (SBA and Conventional), Private Equity (“PE”), and family and friends. But, each offers unique benefits to meet your needs and can ultimately determine your success as an entrepreneur. Here are some of the primary options for raising capital for your restaurant business.

Friends and Family
When seeking restaurant capital, friends and family will often appear as the path of least resistance. However, this option has its fair share of challenges. Friends and family are a good option for experienced restaurant owners and chefs with a proven track record. Unfortunately, it is not an ideal solution for new Restauranteurs. Your friends and family may love you, but they are unlikely to put their capital into your new venture because of a common mistake many new entrepreneurs make. That is, seeking direct investment from people that don’t make direct investments. This approach puts you in the untenable position of selling the idea of direct investment as well as your new restaurant concept. The second mistake involves accepting an unconditional “maybe” as a valid response to a request for capital. If you’re familiar with the Shark Tank™, you’ve probably noticed the Sharks will either say “yes” or “no” and explain their rationale (valuation, lack of current revenues, among others). The Sharks seldom use the word “maybe” unless it involves a counteroffer. “Yes” is a great answer, and “no” is actually a good answer because you can move to the next prospective investor. However, “maybe” (without a counteroffer) is a terrible answer and only delays the inevitable “no.”

Private Equity
PE Investors are another source for restaurant capital, but it also has shortcomings. Private Equity and other professional investors are pretty good at spotting bad ideas quickly. So, you need to have thick skin and be prepared to be turned down more often than not. On the other hand, if you have a viable concept and a lot of experience or data to back up your claims, you have a better chance of success. The key, however, is to present to Private Equity investors that focus on providing restaurant capital. Like most professional investors, they tend to invest in areas where they have competency. That said, experienced investors will tell you exactly why they are not interested, and you can use the feedback to correct any shortcomings in your opportunity.

Conventional Bank Loan (non-SBA)
Conventional Bank loans are also better suited for very experienced restaurant owners. Banks are also professional investors, and as the saying goes, a “Banker will offer you an umbrella when it isn’t raining only to ask for it back when the rain starts.” To say it another way, Bankers prefer to lend to situations where the borrower takes on most of the risk. For example, if you own a piece of real estate, free and clear, with an appraised value of $100k, your Banker might lend you $50k-$75k with the property as collateral. The Banker will discount the collateral in order to sell it quickly, should you default. To that end, restaurants are harder to finance because most locations are leaseholds. And, new restaurant equipment, like new cars, is worth significantly less after the initial purchase.

SBA Loans
What is an SBA loan? The US Small Business Administration is not a direct lender. Instead, they actually guarantee 50-85% of the Bank’s loan, making it easier for Banks to make loans when there is a “collateral gap” (assets are worth less than the loan amount). The SBA offers multiple guarantee programs for business loans, including 504 (real estate loans), 7a (non-real estate), and Express (fast 7a), and Micro (up to $50k) loans. However, we will focus on the 7a program because it is the most popular SBA program. Under the 7a program, Banks can lend between $50k to $5MM towards a new or existing business. Unfortunately, most Banks have a $300k minimum loan amount for the program due to fixed loan origination and servicing costs.

Preferred SBA Lenders
Not all SBA lenders are the same. “Preferred” SBA Lenders do not have to wait for the SBA to sign off for final approval. This distinction makes it faster and easier to work with Preferred SBA lenders. The designation is difficult to attain and often indicates a successful record for making and servicing SBA loans.

Borrower Guidelines
Although a 7a loan is more accessible than a traditional Bank loan, prospective borrowers must meet specific guidelines and requirements.

  • A minimum credit score of 680
  • You should have the ability to invest 10% of your own money
  • You must have sufficient post-transaction liquidity (the capacity to make the first six (6) loan payments without the benefit of Revenues)
  • The SBA prefers direct industry experience, but it is not mandatory for Franchised businesses.
  • No Bankruptcies in last ten (10) years
  • No active Judgements or Tax Liens

Good for Experienced Owners
If you are an experienced Restaurant chef or owner, the 7a program is an excellent resource for restaurant capital for experienced owners. Your resume and a sound Restaurant Business Plan are all you need. So, it is much easier than trying to convince PE investors or Conventional lenders that the market is ready for a restaurant specializing in artisanal grilled cheese sandwiches.

Good for New Entrepreneurs and New Concepts
As we discussed, it is harder to raise capital for new restaurant concepts, and that’s why SBA restaurant loans are a good alternative. They’re suitable for both new entrepreneurs and new concepts. That said, new entrepreneurs should hire experienced staff (chef, general manager, among others) to make up for any shortcomings.

Ideal for Restaurant Franchises
SBA loans work very well for Restaurant Franchises because the Franchise model offers a proven and formulaic approach to managing the restaurant. The Franchisor has done most of the “heavy lifting” by identifying the product, the serviceable market, and the ideal campaign to reach their customers. The Franchisor also provides ongoing training and support to reinforce its investment in the Franchisee’s success. As a result, lenders are less worried about the viability of the business versus Start-ups and other non-Franchised businesses. The SBA Franchise Directory contains an updated listing of all of the SBA-approved Franchises.

Conclusion
As you can see, there are a variety of options when it comes to acquiring restaurant capital. So, it is imperative to narrow down the pros and cons of each option before committing. We also recommend speaking to proven Restaurant investors for honest feedback about raising capital for your idea, whether you are considering an independent restaurant, a Franchise, or becoming a Franchisor. That said, the SBA stands above the rest as a source for restaurant capital. Please contact us for more information about SBA loans and Franchising.