Words by Wes O’Donnell, Managing Editor, inmilitary.com/inmilitary. Wes is a Professor of Leadership and Predictive Analytics at Baker College. He is also a documentary filmmaker and recently spoke at the US Air Force Academy on Veteran Empowerment in February. Most importantly, Wes is a veteran and believes that when all 21.8 million of us are united, we can change the world. Connect with Wes on LinkedIn.
If one doesn’t know to which port one is sailing, no wind is favorable.
–Lucius Annaeus Seneca
When thinking about starting your own business, and need to raise money via outside investment from an angel investor, venture capitalist or bank for your “next big thing” or awesome ecommerce store, then you will absolutely need a business plan.
If you decide that you can start this adventure with your own money, you still need a plan for yourself. The difference is that if it’s just for you then you can omit the fancy sales pitch and slick presentation. A word of caution: do NOT skimp on the numbers, even if it’s just for you. You need to be brutally honest with yourself when it comes to forecasting start-up costs, revenue and expenses. This is the stage that you need to dial back the optimism. Over-optimism is a relentless start-up serial killer and a great many start-ups have fallen victim. And I’m about to show you in the “Cash Forecast” section in this chapter how not to do a business plan… As you’ll see shortly, my cash assumptions for MD-Advantages were way too optimistic, and it almost torpedoed us.
Below are the most important constituents of a business plan. You will want to include these whether the plan is for investor’s eyes or yours alone. However, you should always endeavor to look at your business through the eyes of a potential investor, especially throughout the early days of your start-up.
If you had one and a half minutes going up in an elevator with a potential investor, you should have enough time to talk her through your executive summary; that’s how short it should be. In some cases, it’s the only thing that an evaluator will read before moving on to the next plan. It should be a page or less and cover answers to questions like: What is your company’s ultimate mission statement? How and why you think your company can make cash in pursuit of that mission? What, in your personal resume, makes you think you can be successful at this venture? How much cash do you actually need? What kind of return can an investor expect? Even though this is the first section in your business plan, it’s actually the last thing you should write.
“ Executive Summary” From Actual MD-Advantages’ Business Plan
MD-Advantages, LLC (also referred to as “the Company”) is a medical supply company that specializes in the growing customized medical cart market segment. The company will provide a modular medical cart system that allows full customization ensuring that the customer receives a medical cart that is functional for their specialization. The main distinction of the company’s products will be its patent pending interchangeable components. The modular components of the cart are interchangeable allowing the customer to change the role of the cart at any time or upgrade the cart for another use entirely.
Founded by Wes O’Donnell, the company enters the market at a time when interest in customized medical products is at an all-time high. According to IBISWorld’s 2012 Medical Supply Report the U.S. Medical Instrument & Supply Manufacturing Industry produces more than $106.6B annually. Well established companies have tried to fill the market niche of custom medical carts but they fall short in product turn-around time and the depth of customization available. The company’s goal is to empower the healthcare provider. It is the company’s belief that a provider with more control results in better patient care.
To achieve the Company’s objectives, MD-Advantages is seeking $750,000 in total funding. The funding will be allocated in a variety of ways including staffing, operations, and marketing initiatives. The investment risk is minimal based on the management experience and industry growth rates. The MD-Advantages’ financial model shows consistent growth for the brand over the next five years. By year five, plans call for the Company to achieve $27.8MM in annual gross revenue with a net profit of $12MM or 43%.
If you have more than one and a half minutes, the investor will want to know more. The product description should describe the details of your product that is going to help you achieve that mission. This description should also include special things about your product that differentiates you from your competition.
“Products & Services” From Actual MD-Advantages’ Business Plan
MD-Advantages will provide a modular medical cart system that allows full customization ensuring that the customer receives a medical cart that is functional for their specific focus or specialization. In addition, the modular components of the cart are interchangeable, which is being patented, allowing the customer to change the role of the cart at any time or upgrade the cart for another use entirely.
The company’s ultimate goal is to assist the healthcare professional in their effort to provide the best patient care possible. By starting with the patient and working backwards, MD-Advantages can guarantee that the company’s cart will be a valuable, multi-use tool, not a distraction. The guiding philosophy at MD-Advantages is identical to that of its customers and many of the healthcare providers that they have relationships with: put patient care first. What follows is a listing of the types of products that are available through MD-Advantages.
- Customization before Purchase: The Company’s primary innovation is allowing customers to customize the cart before purchase in an easy to use online interface or over the phone with an experienced technical representative. MD-Advantages’ online inspiration comes from the automobile industry where customers can customize a vehicle with only the options that they want, see things added or removed in real time and rotate the vehicle 360 degrees to get a visual feel of the car.
- Customization after Purchase: In addition, once the customer is in possession of their customized cart, the company’s patented quick lock design allows modules or pieces of the cart to be exchanged or swapped out on the fly to accommodate any role that workflow dictates without the use of any tools; something that the auto industry doesn’t quite do yet.
The target market section details which group of potential customers your company will target. It should explain why you picked the market that you did, its size and growth rate, and typical profit margins in that particular market. “But Wes, where do I get info on my target market?” The internet is more than just a platform for lies and false statistics; in rare cases, it can actually be used for good instead of evil. Just make sure your source is reputable. For instance, Wikipedia is pretty good about maintaining accurate information these days. I recently wrote and submitted a Wikipedia article on Film Industry legend R.J. O’Donnell and I was shocked at the scrutiny my article received regarding accuracy. If I couldn’t back up a particular claim with a source, they would reject the entire article. I submitted it four times before it was accepted. Needless to say, I have a new respect for the accuracy of the information on Wikipedia. Trade association websites and professional journals are also an excellent source.
“Target Market” From Actual MD-Advantages’ Business Plan
The $106.6-billion Medical Instrument and Supply Manufacturing industry has been resilient during the recession, and it is forecast to grow strongly in the coming years. Although revenue will grow 5.8% in 2012, IBISWorld estimates revenue increased at a faster average annual rate of 5.9% over the five years to 2012. Demand for medical instruments and supplies have grown as a result of increased public and private health spending, continued innovations and new product introductions. These trends are projected to continue during the five years to 2017, with strong average annual growth of 4.1%, pushing revenue to $130.5 billion. The industry has enjoyed favorable demographics as well. The aging population needs more healthcare procedures, which require medical instruments and supplies. Additionally, rising obesity and diabetes rates have boosted the need for devices that address these health issues. These trends will likely continue during the next five years, supporting product development and industry sales.
In addition, MD-Advantages’ Founder is a Service-Disabled Veteran. Executive Order 13360 directs that at least 3% of all federal agencies’ contracting dollars go to businesses owned by service-disabled veterans. Agencies a reactively seeking service-disabled veteran owned small businesses (SDVOSB) as vendors. Furthermore, agencies have been unable to meet their goals in contracting with SDVOSBs due in large part to the lack of identified SDVOSBs in the marketplace. This will allow the Company to place our medical carts in a vast number of military hospitals, veteran’s hospitals and dozens of government medical facilities.
Plan To Gain Market Share
The plan to gain market share section starts with something called a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and talks about how you plan to penetrate your market and what will differentiate you from your competitors.
“Plan To Gain Market Share” From Actual MD-Advantages’ Business Plan
By upholding a positive corporate image in addition to providing its top-quality medical carts, MD-Advantages will increase its market share, stand out among its competitors, and become a dominant player in the market. The Company will also fervently track any direct or indirect competition in the marketplace to ensure it stays on top of cutting-edge industry trends and opportunities. Moving forward, MD-Advantages will strive to meet the following objectives as it accomplishes specific keys to success:
- Become a recognized market leader in the medical cart supply industry
- Develop a strong customer service model
- Remain flexible in product offerings
- Remain attuned to the marketplace and integrate products into the business mix that meet the needs of the targeted audience
Keys to success
- Effectively managing resources
- Developing a strong customization process and user experience
- Patents on product flexibility and customization
The management team section of the business plan will illustrate the backgrounds and CVs of the members of your team or just you if you’re going it alone. If you have no prior entrepreneurial experience, investors will be looking for signs that you can actually pull this off. This could show up in outstanding academic, athletic, extra-curricular accomplishments, or military service.
“Management Team” From Actual MD-Advantages’ Business Plan
About the Founder
Wes O’Donnell is the founder of MD-Advantages. Mr. O’Donnell is a seasoned business professional who is well connected and attuned to the needs of his targeted market. Having served in both the US Army and US Air Force, his work ethic and business acumen will be the key drivers that propel this venture towards a position of lasting success. Mr. O’Donnell holds a Masters in Business Administration with concentration in IT Management and has extensive experience in the healthcare industry. MD-Advantages is registered with the US Government as a Service Disabled Veteran Owned Small Business.
The key phrase here is “Realistic Assumptions”… Investors can easily spot a business plan with over-optimistic assumptions so if you’re seeking funds from them, they will ask you pointed questions of how you came up with your numbers. Trying to fool an investor to get start-up funds is forgivable, but trying to fool yourself if the plan is just for you, is unacceptable. The key here is to develop realistic assumptions and to prepare for investors to ask you questions about why you chose them and your sources of information. Let’s walk through some of MD-Advantages’ numbers assumptions and you’ll see how optimistic and naïve I was when I developed this plan, we’ll all have a good laugh and then get back to business.
Market Segment & Size
|Market Segment/ Size||Annual Growth||2013||2014||2015||2016||2017|
|Hospitals (>1000 Beds)||6.1 %||120||127||135||143||152|
|Nursing Homes||5.0 %||16,100||16,905||17,750||18,638||19,570|
|Assisted Living Facilities||4.5 %||28,000||29,260||30,577||31,953||33,391|
|Hospitals (<1000 Beds)||6.1 %||5,734||6,084||6,455||6,849||7,266|
|Private Doctor’s Practice||6.2 %||230,187||244,459||259,615||275,711||292,805|
|Total Projected US Market||567,825||599,912||633,836||669,705||707,631|
Above is the “Market Segment & Size” section and is actually the only accurate section of MD-Advantages’ financials. That’s probably because these aren’t “assumptions” but actual numbers. For instance, there really are 16,100 nursing homes in the United States with an annual growth rate of 5.0%, so next year there will be 16,905 nursing homes. Totaling these real numbers up gives me 567,825 potential customers for the Omnicart™ in 2013.
Projected New Customers
|Projected New Customers||2013||2014||2015||2016||2017|
|Hospitals (>1000 Beds)||36||76||94||114||152|
|Assisted Living Facilities||14||59||92||128||250|
|Hospitals (<1000 Beds)||57||183||1,291||2,055||3,633|
|Private Doctor’s Practice||46||196||779||1,241||1,464|
|Total Projected New Customers||323||873||4,982||7,740||11,562|
|Projected Customer Base||323||1,196||6,178||13,918||25,480|
|Projected US Market Share (%)||0.1%||0.2%||1.0%||2.1%||3.6%|
Above is the “Projected New Customers” section. You can see that I “assume” that I will go out and find 323 total new customers in the year 2013. Unfortunately, “finding customers” isn’t as easy as I initially thought and the art of prospecting for customers can fill up a book in itself. I like to use the gold mining analogy: You will prospect and mine for months and get mostly worthless rock for your efforts. However, once in a while, you score that gold nugget.
|Product Pricing ($)||2013||2014||2015||2016||2017|
|Core Cart||5.0 %||$1,400||1,470||1,544||1,621||1,702|
Above is my expected pricing for the Omnicart™. Okay, in hindsight, $1,400 is a little low for a medical cart and doesn’t leave me much room for margin after I pay the manufacturing and advertising costs. But let’s roll with it for this example.
# of Units Expected To Sell
|Projected Product Revenue|
Above is “Units Sold”. As you can see I expect to sell to 323 people in 2013 since I used that number earlier as “New Customers”. Also note that I added 258 custom options included bringing my sales for 2013 to $452,200 for the Omnicart™ and $206,400 for Omnicart™ accessories.
|Upgrades Made After Purchase||10 %||$47,400||$52,140||$57,354||$63,089||$69,398|
|GSA/ VA Contract Using SDVOSB||0 %||$250,000||$250,000||$250,000||$250,000||$250,000|
|Total Projected Additional Revenue (2% average growth)||$297,400||$302,140||$307,354||$313,089||$319,398|
|Total Revenue (182% average growth)||$956,000||$2,389,330||$12,355,915||$23,168,311||$39,816,058|
Pictured above is “Additional Income”. As you can see I threw in another $47,400 from customers that made additional upgrades purchases after their initial purchase (this is complete fluff; I had no basis in fact that my customers would make any upgrade purchases after their initial purchase) and I threw in an assumed government contract for $250,000 per year for 5 years. Now, my government contract amount is not unreasonable… I personally know someone that makes $40 million per year from his dealings with Uncle Sam. But wait! Surprise ending! You have to be in business for a minimum of two years before you can apply to become a GSA government contract holder. Another assumption shattered. Don’t get discouraged; you can still sell to the government even without a GSA contract. There are subcontracting opportunities and some agencies, like the Veteran’s Affairs, don’t require you to hold a GSA contract. If you’re keeping score at home, added together my total projected revenue for 2013 is “assumed” $956,000.
Expenses & Net Income
|Cost of Goods Sold||20||$191,200||$477,866||$2,471,183||$4,633,662||$7,963,212|
|Average Gross Profit Per Customer ($)||$2,368||$1,598||$1,600||$1,332||$1,250|
|G & A (General and Administrative/ Overhead)||12||114,720||286,720||1,482,710||2,780,197||4,777,927|
|Annual Net Income Growth Rate (182% average growth)||150%||417%||88%||72%|
|Average Net Income per Customer ($)||$899.76||$607.32||$608.00||$506.05||$475.04|
Okay, let’s look at this one carefully. The percentages in blue that I used as expenses to be taken out of my total revenue of $956,000 are actually really accurate. – 20% for Cost of Goods Sold (COGS), that’s basically my manufacturing costs. Assorted R&D and Marketing Overhead expenses to which, when totaled up comes to – 42% which lowers my revenue from $956,000 to $363,280. This is my “Operating Income” which is revenue that is left after expenses have been paid, but before taxes are taken out. Take out another – 20% for taxes and my “Net Income” for 2013 is $290,624. Now that I’m older and wiser, I know that this is a high number for a start-up for year one.
If I would have taken out a business loan or found investor dollars, you would see another expense on here for loan repayment or interest on my loan, reducing my Net Income even further. Realistically, it’s not uncommon to make no money in year one of a start-up, so the very fact that I expected to make a profit at all in 2013 should have been a red flag that my numbers (the estimated Units Sold of 323 and the GSA contract of $250,000 are the culprits) were off. That said, it’s very likely that you can make a profit in year one if you were to open an ecommerce store. Remember that this plan was for an original product that had to be manufactured and sold. An ecommerce store has a very low cost to start and depending on how strong your product line is and how much time you devote to Search Engine Optimization, you can start bringing in the dollars after a few months, if not sooner.
Frequently, new entrepreneurs will omit the exit strategy from their business plan altogether. But having been in the military, you understand the importance of a clean exfiltration. Once again, I’ve used MD-Advantages’ business plan as an example to illustrate what exits from your company are possible. If you are looking for an investor, they will also want to know what your plan is for getting out and getting them back their money.
“Exit Strategy” From Actual MD-Advantages’ Business Plan
The market for MD-Advantages’ products is clearly on a continuous path of expansion, giving the company a prime opportunity to grow at a significant rate over the next five years. The rapidly expanding annual sales figures and industry growth rate of 6.1% for this market support MDA reaching its break-even point by Q2 of 2014 and profitability in just 3 years. After careful consideration, the Company has developed the following scenarios for the investors and management to recover their investments.
Scenario One: Repayment
MD-Advantages chooses to remain a privately owned enterprise. The Company repays its investors in full, consolidating ownership in the Founder. By driving 62% of profits back into the company annually, the company expects to reduce their line of credit balance to zero and be debt free by Q4 of 2015, a full 2 years ahead of schedule. The increase in profits generated by the company’s educational line of carts including their expansion into the education industry will allow the company to have the funds to repay loans in 3 years.
Scenario Two: Buyout
MD-Advantages, as a successful income-generating operation, experiences growth and sees the opportunity to expand its brand into additional markets. This opens the door for additional product offerings and revenue streams. Due to its substantial market growth and industry recognition, major competing brands begin to take notice of the Company. These businesses approach MD- Advantages with attractive buyout offers, and the Company negotiates and sells to the best deal. In addition, MD-Advantages may choose to sell its patent rights to interested companies. Some possible strategic acquirers include:
- Anthro OEM – they will want our patent and hospital relationships
- Harloff, Inc – they will want our engineers and patents, as well as the strategic relationships that we have developed.
- Numerous Medical Cart manufacturers – they will want our design patents and customers
Scenario Three: Merger
MD-Advantages merges with another company to expand its market reach and development capabilities. Potential merger partners include companies that can offer a more diversified market reach or provide expanded resources for product research and development. MD-Advantages’ management would maintain majority control of the Company and combine its operational and sales efforts with its merger partner.
Scenario four: Business Ceases
MD-Advantages liquidates all assets, pays its debts, repays investors, and ceases business activities.
Scenario five: IPO (Initial Public Offering)
The Company sells its interest in through the sale of stocks on the open market. Going public is an arduous and challenging journey for a Company but, if achieved, is highly rewarding. As a public company, or IPO, will enjoy increased exposure and prestige, helping it to attract and retain the most talented executives and employees. MD-Advantages’ ownership and management may also liquidate its equity in through the sale of its ownership shares. If the ownership sells, the new stockholders will own the brand and will be responsible for its operation and future activities.
MD-Advantages may entertain merger or acquisition scenarios by a major company upon the realization of anticipated operating results and favorable market conditions. Aside from merger or acquisition, the Company may instead strive to sell its interest in through the sale of stocks on the open market, likely reaping outstanding reward for investors if IPO-status is achieved and potentially handing control of the brand over to the new majority stockholders. The Company may also choose to liquidate its assets, repay its investors and debtors, and close the business. A final option would be repaying investors and remaining a privately owned enterprise. The Company will entertain all scenarios that could be lucrative for the Company and investors. The final decision will depend on market forces and the wishes of the MD-Advantages’ owner and investors.
This post is by no means all you need to get started on your business plan, but it’s a good start. So where do you go next? I highly recommend searching for business plan templates online, you can find dozens free to download. In addition the Small Business Administration at SBA.gov has a world-class template completely free and built into their browser. The key is staying optimistic without reflecting that in your numbers. Be honest with yourself. Your drive and motivation will always see you through the tough times of a start-up.