In the first installment, we discussed the importance of: 1) Not having too many pages and being brief and to the point; 2) Clearly stating the product or service the opening sentence; 3) Not using a canned business plan package or someone else’s business plan as a template. Here, we continue to discuss common business plan mistakes. You should also take heed to avoid the following:
Over-Defining Your Market
Using Too Many Industry Specific Terms, Catch Phrases, Acronyms And Abbreviations
Not Quoting Sources
Forecasting Revenues Beyond A Reasonable Growth Rate
Basing The Revenue Forecast On Capturing Just 1% Of The Market
Including Irrelevant Or Unimportant Information
Dancing Around The Competition
Predicting a Baseless Exit Strategy
Overlooking Expenses and Overstating Profit Margins
Providing Too Much Financial Detail
Over-Defining the Market
As you know, you will have to define your market, its size and its growth, but be careful. One of the most common business plan mistakes is fueled by a belief that the market figures have to be as big as possible in order to impress investors, and herein lies the pitfall. Bigger is not always better. Whatever you do, fight the urge to over define the boundaries and size of your market. Talk only about your “addressable” market
.When discussing your market, make it relevant to your business by distilling it down to your specific market niche. Remember, credibility is one of the most important ingredients in a business plan. If you try too hard to hype and build the size of your market opportunity, you will be tossing your credibility out the window, and you will appear foolish.
I have a client who has a great business concept, one that actually uses the Internet to improve the way attorneys conduct business by providing on-line interactive court forms that speed up court filings and reduce cost and errors. The original draft of the business plan stated that the company was in the twenty billion dollar market for legal services, and in a sense, it was true…true, but not relevant. The company does not directly compete with every service provided to law firms. The company does not have a $20 billion opportunity.
We helped the client realize that its addressable market was “Court Forms”, and not all “Legal Services,” and while the former is considerably smaller than the latter, it is an honest representation of the company’s market opportunity.
If you are selling tires, you market is not the US automotive industry. If you’re selling cereal, your market isn’t the whole grocery industry. If you are selling restaurant supplies, your market isn’t the entire restaurant industry. You must define your market according to the product and/or service that you are actually selling. The size of that market won’t be as large as the more broadly defined market, but you’ll be showing your investors that you understand the business you’re in, and that you’re not one to build your case on hype.
The acid test is, “If I could possibly capture 100% of the sales of the products and services I am specifically addressing, what would be the dollar total?” The answer to this question is your market size.
Using Too Many Industry Specific Terms, Catch Phrases, Acronyms and Abbreviations
Minimize industry or company specific terms and abbreviations. To the investor perusing your business plan, these terms can be confusing and frustrating. To the one being introduced to your business, these terms mean nothing until you define them, and even when you do, you are forcing the reader to repeatedly refer back to the definition. You’re creating additional work for your reader. Put yourself in the investor’s place and ask yourself how you would react if you continued to come across unfamiliar terms or abbreviations. Don’t give the investor an excuse to set your business plan aside.
Abbreviations have different meanings to different people in different industries. Does ERA stand for Earned Run Average or Equal Rights Amendment or Electronic Realty Associates? Is WWF the World Wrestling Federation or the World Wildlife Fund? Of course, you know that MRS stands for Magnetic Resonance Spectroscopy, or is it Material Reject Stock, or maybe Material Requirements Schedule, Materials Research Society or Media Recognition System. Your target investor comes across many new and different abbreviations, acronyms and special terms. Don’t ever assume that he or she will remember the meaning of your acronyms.
Spell it out every time, and you will avoid confusion and frustration.
Not Quoting Sources
Any time you provide statistics, quote your sources. Without independent, identifiable verification of your assumptions, whether about market size, market growth, or just about anything…without a reliable recognizable independent source, do not use a statistic in your business plan. Investors won’t appreciate figures that appear to have been made up.
Anyone can have a gut feeling about the size of a market, but investors want to know that you’ve done your homework. They want to know that you’re not going to spend their money based on some piece of management guess work. They want to know that they can trust and believe what you tell them. If you make up numbers in the business plan, then you will be caught. Investors will perform due diligence on every number you give them, and if you can’t back them up with independent verification, then your credibility will be shot, and you will be perceived as a management team that is careless and unwilling to take the steps necessary to succeed.
Always provide the sources of all of the data you present.
Next up:
7. Forecasting Revenues Beyond A Reasonable Growth Rate
8. Basing The Revenue Forecast On Capturing Just 1% Of The Market
9. Including Irrelevant Or Unimportant Information
10. Dancing Around The Competition
© Copyright 2001 by Eli Eisenberg and Straight Line Management
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