Excerpt from ‘The Young Professionals Guide to Conquering Private Equity Transactions’ available on Amazon

Business Plans (Chapter 2)

The business plan is the first point of contact with the business for the private equity firm. First impressions are crucial. It is recognised that many good investment opportunities may be passed over principally due to the quality and content of the original proposal document sent.

It is important to achieve a “clarity” and “brevity” which invariably is contained in ‘sharp and punchy’ documents. The 200 pages of narrative, graphs and pictures are unlikely to find a willing reader prepared to write off half a day for a first read. Similarly, a marketing type plan which contains plenty of narrative yet contains one page on the financials and the funding requirement, will find little favour.

The plan must be written in a concise and understandable manner. Because of this, it is sensible to have any document “proofread” and edited by a financial adviser. The adviser should be experienced in preparing documents to the required standard.

The purpose of the plan is to document the business and outline clearly and persuasively the investment opportunity being offered. A business plan should be prepared to a high standard and be verifiable.

Steps to producing a business plan: a guide

Step 1: Prepare an evidence file.
Produce an evidence file covering detailed information on the following areas, where appropriate:
(a) concept and business explained
(b) market opportunity and growth prospects
(c) explanation of past track record, financial and otherwise
(d) product range(s)
(e) customer profile
(f) competitor analysis and barriers to entry
(g) sales and marketing strategy
(h) sales process from start to end
(i) production process from start to end
(j) capital expenditure requirements
(k) market data and research information
(l) management team CVs
(m) organisation chart
(n) strengths, weaknesses, opportunities and threats (SWOT)
(o) statutory accounts for the past five years
(p) copy of the memorandum and articles of association
(q) copy of any relevant lender facility letters.

Step 2: Prepare a financial forecast assumptions file.
Produce a financial forecasts assumptions file providing base data to support the assumptions used to construct a detailed financial model. The following major areas, where appropriate, will need to be covered:
(a) sales assumptions by product volumes and unit selling price; in a manufacturing company it is also necessary to relate sales to production capacity and plant utilisation levels;
(b) the impact of seasonality on the business: on sales and working capital, the impact of holidays and shutdown periods and the number of working days in a month;
(c) relate the cost of sales components (e.g. direct materials) to sales;
(d) analyse sales by customer and forecast prospects for three years;
(e) work out required payroll numbers and specific salaries/pay rates to accommodate planned sales;
(f) quantify and specify overheads by caption, whether direct or indirect;
(g) review capital expenditure requirements over the next three years;
(h) analyse stock and work-in-progress levels and relate to sales activity;
(i) analyse debtor and creditor days, historically by month;
(j) quantify all lender and hire purchase repayment profiles.

Using the preliminary work carried out in steps one and two, a clear understanding of the business will have been achieved. The next steps are to produce both the financial model and the written document.

Step 3: Detailed financial model.
A three-year financial model is required with monthly profit and loss accounts, monthly cashflow statements and monthly balance sheets. The monthly financial statements should be supported by integrated workings covering each of the major areas highlighted in Step 2.

The monthly cashflows will pinpoint peak funding requirements, which will then have to be met by an appropriate funding structure.

In reviewing the corresponding monthly balance sheets and the interest cover levels as shown in the monthly profit and loss accounts, the debt capacity level of a company can be calculated, leaving any funding shortfall to be fulfilled by private equity, and/or deferred vendor consideration.

Step 4: Prepare the business plan.
The business plan should be a succinct and stand-alone document, presenting a cohesive investment case, consistent with the financial model. The business plan should incorporate a summary of the annualised financial forecasts and contain a dedicated section on the funding requirement. The document needs to “stand alone” providing readers with sufficient information to evaluate the opportunity.

It is best to avoid the use of superlatives and statements which are not capable of being substantiated and should chart a cohesive story without unnecessary duplication. At most, excluding the financial section, it should consist of 20 to 30 pages. The detailed financial model should be supplied separately. Arguably, if it takes more than 30 pages to convey a concept it may indicate that management are incapable of demonstrating a convincing and succinct argument. Irrespective of this argument, the private equity manager is unlikely to invest the time in assessing a larger business plan… (continued in ‘The Young Professionals Guide to Conquering Private Equity Transactions’ available on Amazon)

The Young Professionals Guide to Conquering Private Equity Transactions - Business Plans