Chapter 9

Chapters
1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9
2007-08 Lamp Application Guide

Franchising & Business Strategies
Franchising
Mega Salons & Chains
Securing A Loan
Writing A Business Plan.
Signs A Business May Fail

CHAPTER NINE

Franchising & Business Strategies

This chapter examines franchising, which is gaining more and more momentum in this industry. The chapter contains an in-depth look at franchising and also provides solid business strategies for all tanning salon owners and operators. Sections include franchising, mega salons, securing loans, writing a business plan and planning for a successful salon.

Franchising

Owning and operating a salon in today’s economy is no easy task and requires a substantially larger start-up investment than it did 30 years ago. Over the past seven years the number of tanning salon franchises has grown, providing a branded image for tanning in many cities nationwide and a way for outside professionals to enter the industry with an action plan and support.

The Marketplace 

Since the late 1970s, the indoor tanning industry has grown into an industry with an economic impact of more than $5 billion. Statistics suggest that there are about 25,000 freestanding tanning salons and another 20,000 locations such as health clubs, spas, video stores and beauty salons that offer indoor tanning. The industry has been able to deal with the last few years of economic uncertainties that have hit many other industries in their pocketbooks. One reason for its resilience is that tanning provides consumers with a way to look and feel good.

According to the Indoor Tanning Association, most indoor tanning facilities in the United States are small businesses, and more than 50 percent of them have female ownership, as compared to 25 percent of businesses in other industries. The ITA estimates that the business of indoor tanning employees approximately 160,000 individuals and tans about 30 million people annually.

Industry experts agree that the only way the industry will grow dramatically is if there is an improvement in professional management of salon owners. That means salon owners must make a long-term commitment to the industry through sound business plans. More professionally run salons will lead to the ability to present a better financial picture of the industry to lenders. It also will allow salon owners the ability to educate the public and grow the industry.

Independent salons account for the majority of salon ownership; however, more and more franchise operations have joined the market over the past few years. While some salon owners view franchise operations as intense competition, many industry veterans believe it is important for the industry to continue to become more mainstream—and that includes franchise and chain operations. This thinking holds true for almost every other industry and helps expand the concept of indoor tanning.

The International Franchise Association’s Educational Foundation economic impact study, conducted by PricewaterhouseCoopers, found the nation’s more than 760,000 franchised businesses generate jobs for more than 18 million Americans and account for $1.53 trillion in economic activity. (The 630-page study was published in 2003 and was based on 2001 economic data—the most current data available.) The study also found there are more than 760,000 franchise establishments representing 75 industries. In fact, Entrepreneur Magazine’s 28th Annual Franchise 500® issue recently ranked the 2007 top five fastest-growing franchises as Subway, Dunkin’ Donuts, Jackson Hewitt Tax Service, 7-Eleven and The UPS Store/Mail Boxes Etc., in order. Four indoor tanning franchises made the 2007 list: Hollywood Tans, Palm Beach Tan, Planet Beach Franchising Corp., The Tan Co.

Franchises & Chains 

Franchises are not the same entities as chains. A chain is created when the successful owner of a conventional salon decides to open an additional store or stores in a complementary area. A chain consists of two or more stores; however, it is not always a franchise.

Operators that have a good and profitable business concept actually can make more money if they just open their own stores, but chains are very capital- and resource-intensive from the standpoint of human resources. Operators are using franchising to expand their names and get more brand recognition at a more cost-friendly rate than simply opening more and more chain stores.

Defining Franchising 

According to the International Franchising Association (IFA), franchising is a method of distributing products or services. At least two levels of people are involved in the franchise system—the franchisor, who lends his trademark or trade name and a business system; and the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.

Technically, the contract binding the two parties is the franchise, but that term often is used to mean the actual business that the franchisee operates. Franchising basically is signing up with a company that gives all of its years of experience the day the franchisee salon opens. In a franchise system, the franchisee is the owner and operator of the business, very much like a conventional salon owner. However, the franchisee also has a business entity (the franchisor) to show them the way. In many ways, franchises can be likened to turnkey operations with the franchisor offering the franchisee guidance on location selection and operation manuals to run the business, as well as customer service and marketing programs.

A franchisor has everything set and ready to go for the franchisee. Everything has been researched including advertising print work, computer programs and sales techniques. However, it’s important for potential franchisees to know how much experience the franchisor has.

Starting A Franchise 

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations.

At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself, he or she may decide to franchise the store name and business system to an independent businessperson, a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee’s sales. The business now is franchised.

The IFA says the franchisor must have some degree of distinctiveness, or the potential to achieve distinctiveness. Without distinctiveness, the franchisor will have difficulty attracting high-caliber franchisees. The elements of success must be teachable to persons with capabilities that exist among prospective franchise buyers.

Some salon owners say the documentation required to start the franchising process is very extensive. Experts agree that the franchising process is multifaceted and somewhat confusing.

Consulting an attorney who specializes in franchise law will help guide the potential franchisee through some confusing and costly times.

A franchise attorney is tasked with ensuring that a franchise system meets with federally mandated standards and that the franchisor has addressed very important issues regarding the franchisor/franchisee relationship such as protected territories, performance expectations and payment arrangements.

A franchise-development firm is another option salon operators can consider. Franchise-development firms are instrumental in creating a franchise structure that is marketable and has all of the necessary components to make it run smoothly. When developing a franchise, the use of the attorney and the development firm are important because they offset one another. The attorney creates a legal and compliant atmosphere with contracts that favor the franchisor, which tends to reduce the franchise’s marketability, so the development firm is used to bring the system back in balance.

The Challenges 

As with any business venture, there are challenges to being a franchisor and a franchisee. Franchisors have to satisfy their own goals as well as everybody else’s. For the franchisee, the biggest challenges are to keep up with the franchise system, make it better and be more productive. Franchisees don’t have the same challenges as a chain-store operator. They don’t have to develop programs; they only have to make the franchisor’s program better.

It is important to note that franchising is not something anyone can just go out and do. First of all, a potential franchisor has to be in business one full year legally. Next, the franchisor needs to be able to show the franchisees how to open a business and make money at it.

It’s very important for anyone who is looking into buying a franchise to choose wisely. Beware if somebody who boasts that his or her salon does X amount of dollars. Federal law makes it illegal to make earnings claims.

Franchisors do have to give franchisees audited financial statements when they are presented with a franchise agreement. The Uniform Franchise Offering Circular (UFOC) contains information that the franchisor must disclose before selling a franchise. The Federal Trade Commission regulates the subject matter and format of this document to try to make the information as useful and comparable as possible. The UFOC must be provided to the potential franchisee at least 10 days prior to signing the deal.

This audited financial statement gives the franchisee a clear picture of how that particular company is doing; beyond that, franchisors really need to do their own homework and figure out whether their market is conducive to what they are trying to do.

The challenge is to not just go out and sell the name, give it away or make deals to move some equipment and turn some cash. The real challenge is to constantly have salons that make good money for the owners so the owners can get people to invest with them and grow the business in their exclusive territory.

While it may be complicated for the franchisor to put together a franchise, it isn’t difficult for a franchisee to own one. And whether a person is a potential franchisor or franchisee, the best advice he or she will ever receive is to do the homework.

Ask a lot of questions. How many locations does the company own? What kind of unique items does it have that goes along with the franchise? How does the franchisor define why it’s different from somebody else? Does it have operations manuals and an ongoing training program available? A franchisor has to have a good enough training program and facilities to fulfill the needs of the franchisee.

It is important that a prospective salon operator be aware that the brand and the system are there to service the customer, not to service the franchisee.

Advantages & Disadvantages Like everything else in life, there are advantages and disadvantages to owning a franchise. First and foremost, with a franchise, franchisees have the backing and knowledge of a corporation. They also will share in the advertising costs, and because the corporation is dealing in mass equipment purchases they will get products at a discounted rate.

One of the biggest advantages of owning a franchise, or a chain for that matter, is name recognition. While name recognition is a huge advantage, the financial advantages also are tremendous.

Some veterans agree that people want to buy a franchise because they want somebody to put them in a successful business overnight. Franchising is great for the industry as long as the franchisor is doing the right job. Franchisors have to provide support. Otherwise the franchisees aren’t buying franchises, they’re simply buying a name.

Another advantage for the franchisee is security of knowing somebody else has worked through the majority of difficulties in running a business. That somebody, the franchisor, has been through all of the hard knocks and has set up a program that has demonstrated success in the past. So the risk of failure to the franchisee has been reduced.

The annual fee that franchisees pay to franchisors can be classified as a disadvantage, but it is a necessity. Franchisors cannot support the franchisees entirely. The annual fee goes toward marketing and the franchisor’s efforts to continually fine-tune its program. On the other hand, it should be noted that the annual fee works out to be an advantage as well, because the franchisor is there to increase the franchisee’s productivity.

Another disadvantage exists when a franchisor wants to convert an existing salon. It might be difficult for an existing salon to buy into a franchise. Some companies have found that hiring employees from other tanning salons can be very difficult because of some of the bad habits they have acquired.

It is much easier to start with a salon and do everything correct from the beginning.

Experts agree that business-format franchising helps bring uniform standards to the industry. Franchise systems are monitored by the FTC, state regulations and mostly by the franchisees themselves for their compliance with regulations, their ability to meet the needs of the customer and to provide a safe and profitable business environment. Higher standards set by tanning-salon facilities will lead to a smarter customer, which translates to a growing and profitable market.

Whether a person is developing a conventional salon, mega-salon, chain or franchise, the top priority should be professionalism. That professionalism should be passed down to each and every location.

The bottom line is salon owners should not open their stores on shoestring budgets or hire barely living people to work behind the counter. In addition, owners of conventional salons, mega-salon, chains and franchises need to make sure they emphasize education. That still is a major part of a professional’s responsibility.

Conduct Research 

The Federal Trade Commission suggests that prior to investing in a franchise, do your research. In addition to reading the company’s disclosure document and speaking with current and former franchisees, you should examine the following:

Lawyers and Accountants. Investing in a franchise is costly, and an accountant can help you understand the company’s financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based. An accountant can help you pick a franchise that is best suited to your investment resources and goals.

Franchise contracts usually are long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you understand your obligations under the contract so you will not be surprised later. Choose a lawyer experienced in franchise matters.

Banks and Other Financial Institutions. These organizations may provide an unbiased view of the franchise opportunity you are considering. Your banker should be able to get a Dun and Bradstreet report or similar report on the franchisor.

Better Business Bureau. Check with the local Better Business Bureau in the cities where the franchisor has its headquarters. Ask if any consumers have complained about the company’s products, services or personnel.

Government Departments. Several states regulate the sale of franchises. Check with your state division of securities or attorney general’s office for more information about your rights as a franchise owner in your state.

Federal Trade Commission. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. The FTC publishes other information that may be of interest to you, including business guides such as Getting Business Credit and Buying by Phone.

10 Questions A Salon Operator Should Ask Before Franchising.

1. Do you have adequate financial resources to fund your expansion?

2. Will your concept be successful in other markets?

3. Do you want substantial control over your expansion?

4. Is your trademark or service mark capable of being federally registered?

5. Will a franchisee obtain an adequate return on his/her investment?

6. Are you prepared to support your franchisees?

7. Do you have sufficient management staff?

8. Are you prepared to enforce standards?

9. Will the projected fees and royalties that your salon will receive from franchising offer a significant profit?

10. Are you willing to learn the methods and techniques used in franchising?

Mega Salons & Chains

There are a growing number of mega salons and chains sprouting up throughout the country. If you look around today and see who’s doing the business in computers, videos or office supplies, it’s super stores. Everything is bigger, flashier and brighter. In other words, as an industry begins to develop and mature, offering more selection and more upgrades entices more customers into stores and generates more business opportunities.

The tanning industry is following this trend. Traditionally, there are three different concepts of salons—standard stores, super stores and mega stores. The standard salons have seven to 14 tanning units and occupy about 1,500 square feet; super stores feature 15 to 25 units and occupy 3,000 square feet; and, mega stores have 25 to 49 units and occupy about 6,000 square feet.

“It’s quantity over quality, and customer service tends not to be as detailed,” adds another salon operator. “It’s a matter of processing the service. At a mega salon 10 customers easily could show up in two or three minutes. They have an expectation when they walk in that they will get right in. Without a doubt, mega salons should be quick, easy and convenient.”

This brings us to the three most important features of a mega salon: location, location, location.

Yes, the term sounds like an overused cliché, but location is still an all-star. Not only is location important, it is critical.

Finding the right location for a mega salon is all about demographics. The location has to be able to support a mega salon. Mega salons are expensive to operate, and if they are not set up in a demographically correct area, failure is imminent.

There is no room for error in finding an appropriate location. Before opening, an operator should examine the general demographics of an area, as well as specific types of shopping centers.

Expense is another factor to consider when deciding whether to open a mega salon. The bottom line is that opening a mega salon is not an inexpensive proposition—in fact, the initial investment could be anywhere from $250,000 to $350,000. To do it right, operators need to invest in a quality electrical plan, which can cost between $30,000 and $35,000. It takes a lot of air-conditioning to keep a mega salon cool.

Other expenses include maintenance and repair on many more beds, lamps, acrylics, towels, not to mention that more employees are required. Basically, a mega salon has all of the expenses of a conventional salon, but with a mega salon the costs are doubled and, in some cases, tripled.

The goal of a mega salon is to service the public in large quantities. It should be convenient for customers and not require them to make an appointment because they need to get in and out quickly. It’s also generally less expensive, but, again, mega salons should be very accessible to the public.

“Mega salons make tanning easier for customers,” says a New York salon operator. “Customers prefer the flexibility they get with a mega salon just like customers prefer the flexibility they get with a Home Depot versus a mom-and-pop hardware store.”

However, customer service should not suffer. Perhaps the best advice for potential mega salon owners is to be able to cater to both their younger clientele, who might need little, if any attention, and their older clients, who want to keep abreast of the latest educational information, as well as get a healthy dose of tender loving care.

The return on a well-run mega salon is excellent, and the customer service can be too. The very successful mega salons are able to maintain their managers over a long period of time. By being able to do that with a properly motivated management team they can get very close to the kind of care a mom-and-pop shop can give. Knowing your customers is a necessity that is often overlooked but just one key element in properly operating a tanning salon.

Employee Issues 

In exploring mega salons, a repeated concern seems to be the difficult task of finding good employees. Yes, mega salons need more employees; however, that is not the problem. The problem is that because of their size, mega salons also need different levels of management skills.

Today’s successful salon owners must do everything they can to entice good employees and keep them.

For mega salon owners, it won’t be hard to pay your valued employees good money. Why? Because, apparently, the No. 1 reason for owning a mega salon is the possibility of mega money rolling in. Some operators claim their salons make 20 percent to 30 percent more gross revenue than the average salon owner.

However, interested parties should be cautious because everything involved in a mega salon is large and mega salons generally are forced into large marketing programs. Gross receipts are a lot larger, and mega salons do not have the grace period that individual salons have.

After all, mega salons have large leases on equipment, large leases on property, and large payrolls for employees— everything is large. So, mega salon owners cannot sit around and wait for business to come to them.

Successful marketing methods include direct mail and well placed signage on the building. Just seeing the sign is as effective and productive as anything else.

The Advantages & Disadvantages Of Owning A Mega Salon

Advantages:
Money.
Money.
Money.
As easy to run as a conventional salon.
More beds available to customers.
No appointments necessary.

Disadvantages:
Money (initial investment is extremely high).
Money (monthly expenses are high).
No room for error on location.
Less time to interact with customers.
Finding excellent employees.

Proper preparation and knowing the correct answers to the most common banking questions often determines whether a bank will grant a loan. The best way to prepare is to be ready to answer all objections. This section covers five of the most common reasons that a bank rejects a loan, followed by some suggestions on how a salon owner may turn a denial into an approval.

Preparing A Business Plan 

There are a number of key steps a prospective salon owner can take to ensure that a loan officer is properly informed. First and foremost, prepare a business plan. The plan may only be a few pages; however, the key is that it’s well thought out. Having a business plan available shows a loan officer that you have credibility as an owner and also that you put time and effort into the project, and you’re not just rushing into a business you are unaware of.

Additionally, be prepared to supply business credit references and a personal credit history. An applicant must have a proven track record in repaying distributors and suppliers. The most important factor is that all personal obligations including mortgages, car loans, student loans and credit cards are made in a timely manner.

If an applicant has a history of slow payment, an exceptional explanation, in writing, will be required or the loan request will be immediately denied. Good personal and business credit policies are the key to success.

Finally, a brief description of the indoor tanning industry also might be helpful. Remember, most bankers are not aware of how successful the indoor tanning industry actually is. The description should include how the industry has grown into a multi-billion-dollar profession. A bank has to feel confident that the industry is professional and has the potential for growth. In the past, individuals who have not run their business on a professional level have tarnished the reputation of the indoor tanning industry; however, the industry has come a long way over the past decade. Educating a bank shows that you have done your homework, which in turn, may put a bank at ease. This alone could turn a no decision into a yes decision.

Outlining Specific Needs 

When a loan officer asks how much money you need to borrow, don’t reply with an answer such as, “How much will you lend me?”

While preparing for a bank loan, perform an in-depth analysis of your borrowing needs no matter if you’re starting a new business or remodeling or expanding an existing one. The first step is to meet with a local equipment distributor to find out the cost of the equipment that you want to install in your salon. After this step is complete, a contractor should be able to offer an estimate as to how much renovations and construction will cost. In addition, by using a business plan, it should give you an idea of how much operating capital is needed to open and run the business throughout the first couple of months. All this information is needed when you apply for a loan.

Balancing The Numbers 

Even if a current business has been marginally profitable, or even losing money, there is still hope; however, it will not be easy. Banks are trained to make decisions primarily based on a company’s ability to generate sufficient cash flow through consistent profitability.

If a business has lost money, you need to know the reason for the loss. The losses may be caused by the economy, health, labor problems or even the weather. The bank will want to know what changes you will make in order to fix these problems.

The most important aspect to the bank is the income and profit a business reports on its tax returns. If business owners engineer their profits so they pay little taxes, it is hoped that they have saved this cash, because they will not get a bank loan without a sound profit and loss statement for their business. Remember, hiding income from the government when filing your taxes will only hurt you when applying for a business loan. In addition, keep in mind a loan officer never wants to hear, “My tax return doesn’t reflect what I actually make. I make double that in cash.” This certainly will not give the right impression and will guarantee a decline of the loan.

Collateral 

Small business owners often complain that lenders lack an adequate understanding of the market value of assets such as equipment and inventory. Many times this is true. Bankers are not experts on most of the collateral against which they lend.

Don’t expect the bank to lend dollar-for-dollar against the collateral given, no matter what is being pledged. Banks have certain guidelines they follow in setting loan-to-collateral value ratios and generally will lend no more than 70 percent to 80 percent of the value of real estate, equipment and accounts receivable, and 40 percent of inventory.

A salon owner may have personal assets such as debt-free automobiles, bank certificates, stocks or real estate that could be used to secure a loan. It is guaranteed the bank will ask to secure your entire business and usually will look for other avenues outside the business, as well as personal assets, for collateral. You must address these issues before applying for a loan because an unsecured loan almost is impossible to find in today’s banking world.

Personal Guarantees Most banks will not loan to any business without personal guarantees from the owner(s). The purpose of a guarantee is to provide a secondary repayment source for the loan in the event the small business is unable to pay. What this means is if a salon owner borrows $10,000 and defaults on the loan, the bank personally can go after said salon owner for the balance of the loan. If the salon owner doesn’t have the money, the bank has the right to seize any personal assets that equate to the amount of the loan.

As a matter of policy, banks ask for the owner(s)’ personal guarantees. This demonstrates a full commitment on their part that will enhance a salon owner’s chances of getting a loan approval. If a salon owner shows any reluctance by asking the bank if a personal guarantee is necessary, it will throw up a red flag and show that the salon owner is unsure of his or her business plan and ability to repay the loan. Putting this thought in any banker’s mind automatically will decline the loan.

Applying for a small business loan is not an easy process. Banks are not in business to lose money: that is why procedures have become so arduous—they do not want any risky propositions. However, if you are prepared to answer these common objections, you will improve your chances of obtaining the financing you need. Good preparation and showing the confidence in your ideas as an owner will help establish the credibility necessary to convince a bank that you have the business sense and what it takes to be a successful business owner.

One of the first steps when formulating a strategy for any new business is the writing of business plan. If you think only Type A personalities compose business plans, you’re wrong. Talk to a random sample of successful business owners, and you will be amazed at how many took the time to put their business plans into writing.

If you are truly determined to succeed, you will follow their example. Why? Without a plan, you are leaving far too many items to chance. Just as a blueprint is used to ensure that a building will be structurally sound, a business plan will help you to see whether your business will be able to stay afloat financially.

A Simple Plan 

The idea of a business plan is simple: to bring together in one document the key elements of your business. These elements include what products or services you will be selling, what they will cost to produce and how much sales revenue you expect during your first months and years in operation.

Most important, your plan will help see how all the disparate elements of your business relate to one another, which will allow you to make any necessary alternations in order to maximize your business’s potential to turn a profit.

Additionally, business owners who want to borrow money or attract investors often write business plans. This is good because most lenders or investors will want to know as much about your business as possible before deciding to back it financially. Unless you are prepared to show them a well thought-out business plan for how you expect your business to become profitable, you won’t have much chance of convincing them to finance your project.

However, creating a business plan also is a good idea even if you don’t need to raise start-up money. The discipline involved in developing financial projections such as a break-even analysis and a profit and loss forecast will help you decide if your business really is worth starting, or if you need to rethink some of your key assumptions.

ABCs Of A Business Plan 

All business plans needs to show two things: that the business idea is a good one, and that the numbers show a profit. In addition, all good business plans have two basic goals: to describe the fundamentals of your business idea, and to provide financial calculations to show that it will make money. However, depending on how you intend to use it, a business plan can take somewhat different forms.

For example, if you expect to use your plan to borrow money or interest investors, it should carefully be written and edited to sell your vision to skeptical people. Normally this means that it should include a persuasive introduction and request for funds, in-depth market research information, an evaluation of your main competitors, your key marketing strategies and a management plan. Additionally, it should contain detailed financial information including your best estimates of start-up costs, revenues and expenses. Finally, since your plan will be submitted to people you don’t know well, the writing should be polished and the format clean and professional.

On the other hand, if your plan primarily will be used for your own information, if you don’t need to raise money then it is not as important to make a sales pitch or slick presentation. However, don’t skimp when it comes to doing your numbers. The last thing you want is to experience the very real misery of starting a business that never had a chance to make a solid profit.

It also is important to plan to get the help you need. Not all businesspeople are great writers. However, excellent writing skills can be a huge help in creating a compelling business plan. Consider paying a freelance writer with small-business savvy to help you polish your plan. Similarly, if numbers challenge you, find a bookkeeper or accountant to provide needed help.

Describing The Business 

The first several stages of your plan should describe your business idea and why it will work. If you will show your plan to potential lenders, investors or people you want to work with, show them that you have hit upon a product or service that customers really want. For example, show the rise in service-related spending over the past five years. Or, provide numbers describing the growth of the indoor tanning industry over the past couple of years. In addition, In order to show investors you are the right person to make this business work, include the following:

• A statement of the purpose of your business.
• A detailed description of how the business will work.
• An analysis of your market.
• An analysis of your competitors.
• A description of your marketing strategy.
• A resume setting forth your business accomplishments.

Again, depending on how you intend to use your business plan, you may be able to skip some of these elements. For example, if you don’t need to raise startup money and are writing a plan mostly for your own use, you may decide to skip the resume of your own business accomplishments. However, twice before leaving too much out. Any new business will need to introduce itself to suppliers, contractors, employees and key customers. Showing them a part or your entire business plan can be a great way to do just that.

Making Financial Projections Besides describing how your business will work, including how it will reach all of its new customers and fend off competitors, you also will need to do some number crunching to show that it will in fact turn a profit. All the rosy predictions in the world will not make your business a success if the numbers turn up red. Projecting the finances of your business may seem intimidating or difficult; however, in the reality it is not terribly complex. Basically, it consists of making educated guesses as to how much money you will need to sped and how you will take in. You then use these estimations to calculate whether your business will be sufficiently profitable.

Needless to say, predicting and planning the finances of your business is an important task, not just to attract investors, but also to demonstrate your business idea will be successful. If your first projections show your business losing money, you will have an opportunity while still in the planning stages to make sensible adjustments such as raising your prices or cutting costs. If you neglect to make tight financial projections, you won’t realize your plan is a money loser until you actually start losing money—at this point it may be too late.

Nonetheless, many new entrepreneurs avoid crunching their numbers, often due to fear that their estimates will be off-base and yield useless results. This is a poor reason to avoid forecasting your finances.

If you do your best to make realistic predictions of expenses and revenues and accept that your approximations will not be absolutely correct, you can learn a great deal about what the financial side of your business is likely to look like in its early months and even years of operation. Even a somewhat inaccurate picture of your business’s likely finances will be much more helpful than having no picture at all.

Standard Business Plan Format 

The form of every good business plan, although not set in stone, tends to run along the same basic lines, containing the following key sections:

Cover page—The cover page should be professional and informative and should contain an appropriate confidentiality legend.

Executive summary—The executive summary is the introduction to your business plan and the most vital section.

Although it comes first, you generally write it last, because it summarizes the entire plan. Effective summaries generally cover:

• The company’s origin.
• The product or service and its uniqueness or competitive advantage.
• The company’s goals.
• The market potential for the product or service.
• A 3- to 5-year summary of key financial forecasts, especially sales and profit/ loss. For new businesses, do some market research and make realistic assumptions about how your business can compete.
• The management team and its track record.
• The financing required to grow the business.
• The exit strategy.

The company description—This should convey a sense of history of the company, as well as its goals.

Management—The management section of the plan identifies key members of the management team, describes their responsibilities and establishes their relevant experience and accomplishments. It is here that you may want to include a resume that stresses accomplishments and relevant track records in an appendix.

The product—If the company is selling a product, this section describes what the product is or will be and shows why it can penetrate the existing or developing market. Investors generally are not interested in a one-product company. Therefore, you should discuss logical extensions of the company’s product line and future enhancements in the product section.

The market—You must convince prospective investors that the company’s market is large, growing and receptive to your products or services. If the market is small or stagnating, investors are less likely to invest. Appendices can include more detailed market information.

The competition—The competition section of the plan identifies competing products and technology. Compare your product or service with the competition. How will your price or quality be different? What will make it successful.

Marketing—The marketing section of the business plan should describe the company’s marketing plan and strategy in as much detail as possible.

Financial statements and projections—The body of the plan should include a summary of the key aspects of the financial forecasts, which appear in more detail in appendices. These may include total cash requirements, the time frame for positive cash flow and the anticipated growth in sales and profits. The financial forecasts appendices should have more detail: balance sheets, income statements and cash flow projections for a 3- to 5-year period, with the information presented monthly for the first year and quarterly in following years. The projected income statement probably is the most important projection. The most significant aspect of the forecasts is the set of assumptions supporting your numbers. Make sure your discussion sufficiently communicates the basis of your assumptions—they must be realistic, logical and attainable. If you are not a financial statement guru, get help. Credible financial forecasts are very important-if you are not familiar with financial statements, seek help from an accountant or other reliable source.

There are many reasons why a business owner or manager prepares a business plan. However, for most business owners there only is one reason—to get needed capital for their company’s startup, survival or expansion. Unfortunately, many business owners never receive funding because their business plan falls short of capital sources’ expectations for their business and their business plan. By avoiding the following shortfalls, you can help ensure that your business plan thoroughly prepared and ready to stand the challenges posed by the investment community.

Know Your Product Or Service You know what you sell; however, has your business plan clearly and concisely described those products and services? Too many business plan writers make the incorrect assumption that the reader is as familiar with their business as they may be. Unfortunately, this assumption leads to a quick and final no from lenders and investors. Instead, define and describe your product for someone who knows nothing about your industry. When describing a service such as indoor tanning, make sure to explain to the investor in clear and understandable text, instead of industry-related language. Be sure also to include not only the features of your offering, but also the benefits. Tell the reader what need it fills, why it is better, faster, cheaper or how it can improve their life.

Do Demographic Research Understanding your target market can be the difference between success and failure. This understanding helps you to further develop the benefits important to your clients, enables you to focus your marketing efforts to reach the right audience and allows you to determine the most cost-effective channel to get your product in the hands of paying customers. Define your customer in as much detail as possible, including demographic traits as well as more subjective terms such as lifestyle and personality type. Preparing and implementing a primary research technique—such as a survey or focus group—can help you gain a deeper understanding of your customer and help tailor your business to meet their specific needs.

Know Your Competitors A business plan lacking a comprehensive competitive analysis is destined for the out box of most investors. In order to avoid this fate, your business plan should include a thorough analysis of your competition—direct and indirect. Experienced capital sources know that competition exists; however, they also know that competitive forces can have a very positive effect on a company’s attitude and performance. Remember, Coke has Pepsi and Nike has Reebok. Be sure your business plan identifies who your competitors are, what they sell, what market share they hold and what strengths and weaknesses they have. Also, by identifying that competitors exist in the marketplace, you have proven that a market truly does exist for your type of business.

Surround Yourself With A Winning Team No one ever said running a company was easy and with the lack of hours in a day, a well-rounded team of people often is critical to the success of a company. Most capital sources view one-person operations as limited in terms of time, experience and core business skills necessary to launch and grow a serious business. They also expect a team of professionals that are highly competent in each business function (marketing, sales, operations, finance, etc.). Once you have assembled your team, be sure to provide your reader a thorough description of the background and job responsibility of your team as well as a discussion of your board of directors, board of advisors and key consultants.

Have An Exit Strategy Business plans are excellent tools for company owners to plan a business or to raise capital. However, when seeking capital do not forget that an investor’s commitment of capital hinges upon their ability to recoup their initial investment and a healthy profit.

The lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital. When deciding upon an exit strategy, buy sure to take into account your particular industry, business life cycle, competitive environment and management needs. It also is important to consider your personal and financial goals and how they relate to the future of your business.