What Exactly is a Business Plan? Clear the Air on Financing Due Diligence

The entrepreneur who wants capital has to answer to questions to be successful: is there evidence of an investment opportunity? and, is there evidence the promoter can pull it off?  The feasibility study answers the first question and the business plan of operations answers the second.  When we conduct a business or commercial real estate income-producing property private placement offering funding due diligence review and order production of the business plan, 99 times out of 100 the client sends us a capital funding proposal and has no idea what a business plan of operations is required.  The business plan of operations is the most important document in the due diligence review for default risk underwriting purposes because it is that singular document that demonstrates whether or not execution risk is going to be managed for the benefit of the capital investors or not.  In the absence of clear documentary evidence that execution business plan of operationsrisk management and mitigation is intrinsic to the opportunity, the underwriter is forced to resort to subjective measurements like reputation, experience, FICO score, personal wealth, etc., that have no more bearing on whether or not execution risk can be managed than the phase of the moon.  The reality is that the average entrepreneur cannot win that battle and the statistics bear me out on this: more than 4 out 5 companies seeking capital investment fail to get it according to the Small Business Administration.  The failure to demonstrate adequate execution risk management is often the critical determinant that causes these failures.  So, if you want capital financing for your business, it would pay dividends to investment some resources into creating a full and complete business plan of operations.  This begs the question of what a business plan of operations should actually provide.

The key elements of the business plan of operations revolve around the concept of understanding what would likely happen if the promoter (or any other employee of the business) is no longer with the business.  Does the evidence suggest the person steppingbusiness-plan-capital-financing into the position will cause the capital investors to suffer a potential loss due to delays or errors in decision-making due to having no clear instructions on what to do or not?  This is the core issue that directly bears on whether execution risk has the potential to be a materially-significant condition precedent to loan/investment loss severity risk or not.  In the absence of demonstrable proof to the contrary, the answer to this questions is automatically “yes”, and that means the answer on funding approval is automatically a rejection.

If you don’t understand what is required or how to get there, save yourself the time, money and aggravation of experiencing continual rejection of your proposed funding opportunity by finding out what needs to be provided, when it needs to be provided and how it needs to be provided.  Acquiring capital financing for your business or commercial real estate project can be a win-win for everyone and proper planning and due diligence is the only way you are going to part of that outcome.


Leave a Reply