Business Plan – The Mission Statement

The Mission Statement seems to be another one of those declarations that everyone has in their business plan and no one knows what is in it and no one really cares. Often it contains statements such as, “We will be point of reference for the market.” Others play to the opinion that an aggressive statement such as, “We will dominate the internet space,” shows desire and high self-esteem. If you have statements like this, eliminate them. They do nothing toward helping the people around you understand what you want to do and make you lose credibility with those who might invest in your company.

The Mission Statement is an outline. Think of it as a general description of your plan of attack. It should help your employees understand what type of operations are in line with the overall objectives of the company and allow investors determine if your current strategy is in line with where you want to be.

The Mission Statement should also be synchronized with your Statement of Values and your Vision of the business environment. In other words if your differentiating factor is customer service and your Values Statement indicates that return on investment is the most important thing to the company you have a problem. It is important to think about the relationship among the various factors influencing your company. Is it possible to accomplish your mission considering your Vision of the market and the way you intend to interact with employees?

The following is an actual Mission Statement from a plan that was financed for $46 million US:

Our mission is to develop national networks for voice telephony and data transmission in European countries experiencing de-regulation and in the emerging Eastern European and Latin American markets. The company’s infrastructure exploits the technological advances in voice telephony and data transmission to offer quality services at a reasonable cost allowing our customers to become leaders in their own fields.

Think about these statements. They can help you stay on track and communicate your message to those around you.

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Business Plan – The Values Statement

The values statement is one of the first pieces I prepare in any business plan. For most entrepreneurs it is a waste of time, a useless piece of fluff, but for me it is one of the basic building blocks. I only do business with people I like and respect. Over the next years we will be sharing most of our waking hours, our dreams are tied together, and our capability to achieve our goals is highly dependent on each other. It is, therefore, natural that I want us to share similar values. I want our vision of success to be similar. It will help us work together as we understand what the primary rules of engagement are. In difficult situations we will inherently understand what is important and what is not.

It is imperative that the founding partners share the same values. It is important that the employees understand fully the values of the company. They should be shared and explained. It will help the company stay on track as it grows. Understanding the basic values will allow each individual to operate inside the values of the company. I also use this in evaluating the decisions of my managers. If someone is acting outside of the values of the company it allows me the opportunity to explain the values and discuss why they are important. If a manager is unable to embrace corporate values I usually encourage them to find employment elsewhere because they will, sooner or later, create a serious problem for the company.
The Values Statement is self-explanatory. It describes how you feel the company should act. It tells the world what you think of investors, employees and the community you are part of. If you do not believe any of these are stake-holders you should explain this because someone in your company will think that these parties have a vested interest and will act outside of what you think is correct.

You will find boilerplates for values statements. These templates are things that good thinking people have written, but do not believe in. These templates are useless. Write what you think. Describe your thoughts as completely as possible. This statement will be the guiding light for your partners and employees. It will indicate how they should take on problems when something unusual arrives or the company takes on new sets of problems when the business environment is changing.

Take your time writing this statement and review it often. It is the essence of who you are. It says what is important to you and explains why you act the way you do. If the statement is fluff, those around you, including private equity, will see this immediately and you will lose credibility.

The following is a values statement from one of my companies. We were dedicated to customer service, more than anything else, and successfully created an all cash retail business with 17 million Euro in Revenues by the fourth year.

We are dedicated to those who use our products and services. In meeting their needs, we must produce quality services. Our objective is to serve our customers as they want to be served, providing quality services at reasonable prices. We must anticipate the technological advances in the market, continuously improving and developing our product and service line. Quality control must be an integral part of our process creating long-term relationships with our client base.

Our employees are respected as individuals and are compensated in a fair and adequate manner. We recognize their merit and respect their dignity. Development and advancement for those qualified will create an atmosphere where suggestions and complaints are possibilities for growth and unity. We must provide competent management, and their actions must be just and ethical.

Our final responsibility is to our shareholders. Business must make a sound profit. Research and Development is our future. We must purchase new equipment, new facilities and launch new products guaranteeing the investment of those who believe in our company. Reserves must be created to provide for adverse times. Our shareholders should realize a reasonable return when we operate according to these principles.

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Have a Plan

I know that just about every entrepreneur or small company thinks it has a plan. Sometimes it is a few pages written or somewhere in the partner’s mind. It may seem very clear to them but rarely is sufficient to allow an equity investment. Most people have created an executive summary, many think that this is their plan. An executive summary should be the last document that quickly summarizes and identifies the salient points of a business plan.

There have been situations over the years where a company has been created without a written plan. Most likely these businesses could have been much more successful should they have taken the time to describe what they intended to do. A plan described objectives and milestones. It describes what you think is your market and what you think your product is. It gives you a measuring stick to continually verify how you are doing. It lets others working with you know what is really important. Finally it keeps you on track and when updated makes you think about what you want to do, create new goals and objectives, and discuss with others in your group your desires so everyone is on the same page. Remember an organized group pulling together pulls harder and reaches their objectives faster. Even when the objectives are off course it is easier to straighten the path than to reign in numerous factions that will surely be created inside your organization.

From an equity point of view, having a business plan is imperative. The people making investment decisions are very smart and very good at what they do. They are not experts in every field. They may not even know anything about your field but they do need to know what you do well enough to help you obtain their objectives. Some of my clients will actually make a 30 minute presentation about the company they want to invest in. If they are unable to explain the primary concepts of the business and why the business is unique, they will not make the investment.

The plan needs to take a completely uninformed reader through the process of the business, the addressable market, the competitive environment, and the differentiating features. At the end of the business plan it should reassume the financial objectives and define some of the primary economic milestones. Finally the executive summary should cover each section of the business plan with a quick summary. This is where you can make statements that will be later supported in the actual plan. The executive summary also has a section defined as Use of Funds. This should identify how and when the requested funds will be used.

Be precise, it is better to say too much than to say too little in the business plan.

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Is it a Business or a Job

It is highly unusual for me to be introduced into a situation where I have to make this type of valuation. Generally the initial vetting process identifies structures that are not true businesses. Sometimes it is a bit of a surprise for the company to hear the equity group tell them that that, although the structure may be highly profitable, they do not consider it to be a business. Most of the time it is very simple and there are some basic types of companies that can be easily identified as jobs.

Consulting companies are usually jobs, no matter how big they are. There can be consulting companies that are businesses when they offer a wide range of services or technologies. Some examples of consulting companies that are businesses are Deloitte and IBM. Generally companies that offer products or a wide variety of services are businesses but again, there are cases where they are jobs. An example could be a cleaning company that has 1 primary client or a technology company that develops software for one company or a small group of companies.

The identifying factor is often the number of clients, the range of products and that the efficiency of the structure can be improved through economies of scale. This is the 2+2 = 7 relationship. Some sectors create publicly listed companies that are in fact jobs. One drug development firms are an example. These structures are often financed, in the initial phase, by a Pharmaceutical company; their structure is determined by the drug company’s desire to “spread the risk around.” The risk reward relationship on this type of company can make a job like this an appropriate investment.

There are cases where a company seems to be a company but digging down it becomes apparent that the company is actually a job for the people employed there. Last year I looked at a company involved in developing paints that neutralized various pathogens such as anthrax. The initial documentation indicated that there were numerous addressable markets with significant growth capabilities. As I worked into the plan, contacting prospective clients and talking with experts from the scholastic and governmental environments proved that this product could only be used in military applications without making significant changes to the types of pathogens targeted. The end result is that this is a great company for the scientists developing this technology and may bring long term returns for them but it is not an entity in which private equity could invest. In other words, it is the best of jobs, long term return on today’s work but, still a job.

It may be a simple process to transform your company from a job to a business but the first step is to recognize what it is.

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Know Your Addressable Market

Once we get through the basic definitions of company, product and client, it is important to understand how big the company can become in its current structure and whether or not its markets can be expanded.

Too often when speaking with company principals I hear that they are targeting SMEs (Small and Medium Enterprises). There are nnn SMEs in our area. If we get 5% of the SMEs that will translate to 10m $ in sales. The translation is, “We have no clue about our specific market but we know that some businesses will need our product.”

Structuring any product or service to meet the needs of a broad market is practically impossible. Usually, successful companies will build a product or service for a very small and specific need and the market will then find that the same product can be used in different segments. Their product and business model are structured in a way that allows them to make money with a reasonably pessimistic view of sales. They are then pleasantly surprised when the product has greater penetration than anticipated.

Another way to think of it is from a salesman’s point of view. If the salesman can get the client to touch, handle or use the product he most likely will make the sale. If the client cannot see himself using the product he will not buy it no matter how good “a deal” is offered. The same is true with investments. If the investor can see a way to expand your market, one that you have not told him about, he is using the product and sees upside potential. If he does not see how you are going to make your projections he calculates downside risks.

The days of “I have an idea that is viral, give me money to develop it,” are gone. Investors are looking for realistic expectations and cautious demeanor by management.

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Know Your Client

I know, you are thinking, “goodness this is business 101, why am I wasting my time reading this stuff?”

Most of the time, by the end of the third day I already know whether a company will or will not meet the basic characteristics necessary for an investment by the private equity group. As simplistic as the concepts are, many companies have not given thought to these basic principles. Perhaps they start out with one idea and then get distracted along the way, or the product develops differently than their original vision and they have not had time to think about who they are selling to.

Many private equity groups will see this as a possibility to pick up a company on the cheap, in some way neutralize current partners, and have the possibility to create a big winner. I do not believe in this type of activity and will not participate in a takeover of this type but, there are those who will. This means that your interests and those of the investment firm may be significantly different and you need to be on the lookout for telling signs that you are not on the same page.

What does it mean to know your client? In today’s world of specialization it can be easy to mistake who your client is or even have a changing target segment as your product or service takes market share. Sometimes it can be very difficult to identify who is really buying your product since the person paying you may not be the person consuming your service. Your business decisions will be affected by who you think your client is. You may even adapt your product or service thinking that the entity that pays you is the one you need to satisfy. To have a successful business you have to eliminate all the noise and find out who your client is.

The way I do this is that I eliminate all of the surrounding interests and look closely at the product. I use the product and try to insert it into the things I normally do. This usually generates numerous questions about the “why” the product or service is structured the way it is. I then ask the partners and from their answers I can tell if they are focused on the client or if they have somehow ended up on a different path. I suggest different ideas about how the product could be different. Again the way they look at and evaluate the suggestions tells me how they are thinking about their client.

Recently I looked at a company in the anti-spam arena. They had developed some very good algorithms identifying spam and could successfully eliminate about 90% of unwanted or unsolicited emails. Their idea is that they could get email marketers to pay a fee to get the emails through the filters. There was also a fee paid to the user if the email that was let through was considered not of interest to the user.

Conceptually, this is not a bad idea, the marketer gets to advertise to a targeted market and the end-user gets paid if he has to read something he is not interested in. The company is convinced that its client is the marketer who will be paying them to send emails and their product development shows this belief. Their model is much more complex than that. Since most email accounts are on services such as Yahoo or Google they have to convince these service providers to not develop their own email filters and use the companies product and the real client is the end-user. Although the end-user does not pay anything and in fact would receive some type of compensation over time, if the company is not able to convince the client to use the email filter the marketers have no incentive to use the service. Thus, without widespread implementation and characteristics that appeal to both the service providers and the end-user, the product has no market.

So, know your client. Put yourself on the other end of the service, watch the order flow, how the product is used, who benefits and what the basic needs of each interested party are and you will be well along the way to a successful business.

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Know your Product

After an initial time speaking with the management of a target company to understand what their ideas and objectives are, I begin looking at the product, service or technology. I usually have been able to verify, through supplied documentation, that product exists and fills some need in the market. Before I look at the product in detail I talk with both operations and technical management. I am looking to understand what their perception of the product is and where they see the product in the market.

I also want to create an outline of how and why the business has changed, what was the original idea and what the process was to modify or fine tune the business over time. Finally, from this discussion I want to know what they feel are the business’ strengths and weakness. I then take a close look at the product and its characteristics to determine how close the unprofessional user would evaluate the product in its current form.

The choices of the company are often dictated by these perceptions, as are their expectations for growth and valuation of their venture. This step is extremely important. I have found that management’s vision changes as they gain greater knowledge of their addressable market and the perceived capabilities of their product. This is not necessarily a good thing.

One of the first projects I verified in Dallas was a fresh pasta manufacturer. The primary competitor was not a similar product since it sold primarily dried pasta and had a small production of fresh pasta that it sold into existing clients. The company I was looking at had been through a couple of ownership changes and was currently going through a generational transition, from father to son-in-law. The son-in-law, an Ivy League graduate, decided to ramp up production and attempt to take advantage of economies of scale. To do this he picked up numerous OEM contracts and also supplied several school districts. To get the new contracts he had to reduce prices.

Consequently to pay the bills he had to cut costs and began reducing both the quality of the flour and the type and amount of eggs used. Slowly his most profitable portion of the business, the retail sales with a trusted name, began losing market share. As the brand name product lost share so did the demand for the OEM contracts. He now had a company that was slightly profitable that was now losing money on a regular basis.

He was convinced that with additional funding he could revamp the production facilities with more efficient systems and return to profitability but I had to return a negative evaluation of the company. He did not understand what he was selling. He thought that Fresh Pasta was simply a marketing ploy and that the clients would never understand the difference.

If he had protected the company’s main product and brand name we could have found a way either to finance or purchase the company. In the current condition our evaluation was that the investment necessary to rebuild the brand would no longer allow us to have the desired return in a five year period. The company later that year liquidated.

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Know Yourself

When someone talks about tax cuts for business or globalization helping business do you feel they are talking about you?

If this is the case you need a reality check or this is not a blog for you. Although mega international companies are a limited number of the US business environment they are the most widely represented. They spend billions of dollars in lobbying and supporting business groups. Their interests come before yours. A start-up or small business, that is the target I go in and look at, usually have less than 100 employees and have been in business for two to six years.

It is important that you understand who you are and where your best interest lie. Most of the time this is not with the groups considered business. Medium and larger style businesses are organized to eliminate the human factor. Procedures take the place of customer service and quantity rules over quality. In a free market, that is where unfair trade practices are eliminated, a small business will usually win in a direct competition with a larger business.

A simple example of the difference may be in personnel. A large corporation needs to have an individual with all the right credentials, a small business needs an individual capable of doing the job. This changes the way you look at hiring. For the large corporation the credentials create credibility both inside and outside the company and the product quality is defined by the procedures, with a small company the quality of the product or service directly related to the employee’s attention to detail, imagination, and problem solving capabilities.

Knowing who you, and your company, are will be one of the cornerstones of a successful business.

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Welcome

Welcome to my new blog. I also write another blog Travel Italy.

I work as a consultant for a limited number of private equity firms performing pre and post investment due diligence. Some of the important parts of this process include identifying the feasibility of technology, addressable market, the implementation of production facilities or expansion, scalability, and labor issues.

Too often I express a negative opinion because the entrepreneur, the eternal optimist, either has unrealistic expectations or has not identified risks to the business model from an ever-changing market environment.

The purpose of this blog is to allow others to see into my world and, perhaps, gain some perspective that will help them be more prepared to develop a successful business.

Good reading and Best Wishes in your venture!

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