“By failing to prepare, you are preparing to fail.” Benjamin Franklin
Startup founders are special. Driven, focused and single minded in their determination to succeed, they often have a singular vision of what success of their company looks like and how they are going to get there. This determined view can meet resistance from buyers/investors when a founder decides to sell early in the life of the new company. The reason is simple; potential buyers will look at the enterprise differently than a founder does. Early discussions of a sale often fail because the founder cannot reconcile his/her view of the businesses’ future with that of a potential buyer/investor. Suddenly, the determined view of the founder is challenged by a buyer and if the founder cannot respond effectively to the new perspective the sale may be in jeopardy. Success in selling the business now requires the founder to pivot to the view of the potential buyer and respond with information that resonates. The founder now has to think in more complex ways about the startup and communicate effectively with the buyer to achieve a common view of the future of the business. A Five Year Business Plan can help with that process.
Many entrepreneurs start a business without ever writing a business plan. Proof of concepts, customer analytics and one-year expense forecasts are by far more valued by both investors and business owners at the early stages of a company than at any other time. Typically no one cares to talk about five-year business plans early in a startup’s life because statistically speaking; most startups that fail do so in the first year of operations. For that reason worrying about longer terms plans is typically left to the future.
The focus on survival can shift quickly though if an entrepreneur moves to sell a company early in its development. When preparing the company for sale, many business owners are suddenly confronted with the need to account for their growth assumptions and forward looking results and oftentimes find out that demonstrated company history or traction cannot provide a sufficient base to support future growth assumptions and expected results.
Why do buyers care so much about future projections in the form of a three or five-year business plan? And is that more credible than demonstrated track record? New opportunities, markets, products etc. – all the variables that show purpose, market knowledge, accountability and commitment to long-term goals often fail to be encapsulated or tangibly recorded in the company’s historical financial records. However, along with the company’s track record, these are some of the very same things buyers care about when looking to make an acquisition.
As with any investor, buyers care about the future, not the past. They are all looking to score the next big golden egg in their basket and the investment will need to demonstrate forward-looking traction and growth prospects in order to be deemed worthy of acquisition.
A business plan can help the founder shape the conversation between buyer and seller by demonstrating the founder’s sound knowledge of the business, product, market, competition/benchmarks, new opportunities and last but not least, ownership of the business’ vision and plans for the future. Furthermore, the business plan is a valuable asset that can act as an internal road-map for management decision making and serve as the basis for supporting your pitch to investors about future growth prospects. Using the tool still requires a founder to think in complex ways about the future of the business and exhibit intellectual nimbleness in the process as well as the ability to pivot to investor thinking as the transaction proceeds. Complex thinking capabilities and the ability to pivot to investor/buyer’s perspective is just another in the long line of skills that successful entrepreneurs need to possess.