Thinking of starting a new business? You’re not alone. According to research by the Kauffman Startup Index, there are approximately 550,000 new entrepreneurs entering the national, state, and metro level each month in the United States. Will they all succeed? No. Statistics show nearly 50 percent of small businesses fail within four years, but with the right preparation, financing and luck, you may survive the odds. Many entrepreneurs and business experts extoll the importance of having a smart, organized and well-researched business plan. Then again, it cannot be discounted that in some circles of entrepreneurs, lengthy business plans are being eschewed in favor of improvising, cultivating, and pivoting your company to success.
However, a recent article published in the Harvard Business Review by authors and researchers Francis J. Greene and Christian Hopp found evidence that a strong, well-written business plan may make your startup more likely to succeed. The authors wrote of their research: “We found that it pays to plan. Entrepreneurs who write formal plans are 16 percent more likely to achieve viability than the otherwise identical nonplanning entrepreneurs.” The U.S. Small Business Administration (SBA) agrees. It recommends that entrepreneurs write a business plan before moving forward with a company, calling it the “road map for the early years of your business.”
There are no cookie-cutter solutions when it comes to creating a personal business plan, but there are certain guidelines to follow that can help. “Keep everything short—no one wants a novel. If you are going to write a business plan make sure to keep it short, concise, and straight to the point,” recommends Jason Perkins, founder and CEO of San Diego SEO.
How short is short? Here’s a rule of thumb: The SBA reports plans range on average anywhere between 30-50 pages. “Second, keep in mind that a business plan is also used as a tool to keep your business running smoothly, and make sure not to overlook the details,” says Perkins, who wrote the business plan for San Diego SEO. “When I was just starting out, I needed partners and investors, so my plan had to be as detailed as possible. Today, we use business plans for our clients, and we update our own business plan annually. You really should write a plan that you can update on a regular basis, depending on your needs.” The Small Business Administration recommends that a business plan “project three to five years into the future and accentuate expected milestones and revenue projections.” While length may be arguable, the SBA website does provide a checklist for what you need to write a better business plan. These items include:
For entrepreneurs seeking seed money, a business plan may actually be necessary to secure much-needed funds, says W. Jody Schrandt, a strategy consultant and executive coach with Veriquest Partners. A former executive, Schrandt has led development of over 20 business plans while working with the Kansas Technology Enterprise Corporation. “Business plans are generally required to gain access to financing. Whether you are pitching to a bank for an SBA loan (which will require more than your plan), or to an investor or capital group, they will all want to see the business plan,” he says. Why? “Because they [the potential investors] need to verify that the concept is reasonable and unique, and that the financial projections are sound.”
There are three routes to financing your business: self-financing, small business loans, or finding investors or capital groups, he shares. “For the SBA loan, they are basically determining if the loan amount required is worth the known risks, since it needs to be paid off. With the investors/groups, these documents allow them to conduct company valuations so that they can determine an investment level. The business plan is certainly not the only document needed to gain financing—but it is near impossible to gain financing without it,” he says.
Mario Costanz, CEO of Happy Tax, a mobile-based tax preparation service company, says it is important to understand that a business plan, like a trust, is a “living document.” He says, “Circumstances in business change, and you should regularly revise your business plan whenever unexpected events impact your company.” This year, for many small business owners, the changes in the tax laws mean changes for business plans. Most tax professionals are in agreement that these tax cuts will have a huge impact on startups and small businesses. “For many, the 2018 tax reform was just the sort of unexpected event that impacts business,” says Costanz. “And, as a result, many small business owners are [now] looking to revise their business plan. The idea behind the recent tax reform is that giving small businesses and corporations a break on their tax bills will stimulate overall economic growth,” he says. “Starting in 2018, the corporate tax rate drops from 35 percent to a lean 21 percent, and the alternative minimum corporate tax rate will be eliminated.
Costanz adds, “Also, the new law allows businesses to take a 20 percent deduction on all pass-through income. Making sure your business is eligible to take advantage of these valuable tax breaks may require some changes to your business plan, and if you are writing a plan, make sure you understand these new tax laws.”
“My first business plan was for a niche social networking site in 2007,” says Dayne Shuda, founder of Ghost Blog Writers, who has over 60 independent contractors working for his Eau Claire, Wis.-based business. “I took out a loan for it. I had a pretty nice plan, but it was light on ideas for getting revenue. I had a pretty good idea of costs, but no idea on how to make money, so the business failed. I wish I had known enough to force myself to go through the planning process of getting customers, which would have been advertising customers.”
Taking the time to write-out, revise, and even have an expert review your plan, may be worth it in the long run. “I always recommend that it is a good thing to bring in a pair of outside eyes to review documents like a business plan,” advises Schrandt. “I don't believe that everyone needs to pay an advisor or writer to create a plan—it really depends on the entrepreneur's communications skills. If you excel at communications, go for it and have some outside reviewers to make sure your ‘voice’ is right (and to provide some constructive feedback). If you are not as confident with your writing, then it may be a good idea to bring in a partner who can help craft your plan.”
Ghost Blog Writers, born out of a one-man freelancing gig, grew organically, says Shuda. So, while he planned out ideas, a formal business plan was never written for it. When he looks back on his social media idea and its business plan in 2007, he says, “Maybe if I would have created a better business plan I would have seen that it [the 2007 business] was doomed from the start, and I could have saved myself a great deal of money.”