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Business Lunch
The Unexpected Power of a Dynamic Business Plan in Today’s Unpredictable Market
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Hey everybody, Roland Frazier here. And today we're talking about why do you need and how can you benefit from a business plan? So a lot of people ask about business plans and it's really kind of interesting. Business plans used to be a whole lot different than they are right now because it used to be that we're going to write a 10 year business plan for our business and we're going to follow that and then we're going to assume that things aren't going to change a whole lot and this is going to be the kind of a one time thing. We're going to write this and then we're going to execute and follow it and all will be happy with the world. What we found through hundreds of businesses that we have owned and advised is that business plans don't really last that long. So when you go to plan for a business and you're trying to create some plan that's going to be even a three year plan, it's just too long. It's just not going to probably work out that way. And your financial projections are going to be, you know, of course they're always up and to the right. They're, they're, well, we're going to start here and then we're going to have crazy high growth. But how many businesses actually do that? Well, I can tell you that the 90% of businesses that start and fail did not have failure in their business plan. So that's like stuff happens. Entrepreneurship is hard, business is challenging. Things are going to get thrown at you all the time and it never stops. Good news, right? But the rewards obviously are. We entrepreneurs have decided that those rewards are significantly better than the challenges and the headaches and the hassles that come with it. Which is one reason it's really good to go into a business that you like. So the first thing is that business plan can be used as a tool to help you understand your business better. So rather than saying we're really going to focus on the, this is stuff that we're going to do for the next 10 years, I think that having a time horizon that is much more reasonable, which would be one year and three years, and then breaking that down quarter by quarter in our scalable operating system, we break this down into quarters and we say, what are the big three things? Like we first will say, what's the theme for this quarter? So the theme for this quarter might be increase customer satisfaction or serve the customer better. That's a great one. Right? So if that's our theme for the quarter, then we're going to say, okay, let's brainstorm in our quarterly strategic meeting. We hold a meeting once a quarter to do this ahead of the next quarter. We just held three of ours recently, and I've got one more this week that we'll be holding. And in that, we, we pick our theme, the executive team meets, we pick our. Our theme. That's going to be for this quarter. And so let's say that it's serve our customer better. Then we'll say, okay, well then what are the three big pillars that we're going to pick to help us achieve this goal, this overarching goal for the quarter of serving our customer better? One pillar might be, in that case, let's increase customer satisfaction. Let's implement customer satisfaction monitoring. So how would we do that? There's several tools for doing that. There's a C SAT score, which is csat, stands for customer satisfaction. You can Google that and check it out. Basically, on a 1 to 10, how happy are you with our business? That's the question that's asked. And then we see how many people are happy and how many aren't. And that gives us an idea of what percentage of customers are satisfied. If 8 out of 10 people rank us an 8, then we're kind of like at an 80% satisfaction. If 8 out of 10 people Rank us as a 2, then we're. We're not doing a good job right now. The more sophisticated approach to that is something called nps. So that's Net Promoter Score. And the Net Promoter Score is something that we manage. And it was something that was created by Bain, which is a big fancy consulting group. And they said, well, really the question we should be asking isn't how happy are you? It's how likely would you be to recommend our business to a friend? And that's really smart because it tells us how likely is our business to grow. Like, is the customer so happy that they would actually recommend this to a friend? This is why I call it Net Promoter Score. Are they going to become a promoter for us? And the way that it scores is if. If on a scale of 1 to 10, with 10 being I'm most likely to recommend and 1 being I'm least likely, then what it does is it says the nines and tens, the people that say I'm 9 out of 10 likely to or recommend or 10 out of 10, those are considered promoters. The people who are anywhere between 1 and 6, 1 and 6, they're considered detractors. They're actually going to tell people, hey, I mean, I don't think I'd go there, you know, what do you think of that restaurant? It's not that good. Somebody said that today, right? They're like, oh, the food's really not that good. That's a detractor. So they're actually going to be negatively promoting your business. And the people who are at 7 and 8 are considered neutral. And so you divide one by the other and that gives us a net promoter score. That's pretty good way of managing things. And so in our ability to think about creating this business plan and thinking with the specificity of what do we want to have happen in three years and what do we want to have happen in one year and what do we want to have happen each quarter to get us to that one year and each year to get us to that three year, you're really learning a lot about your business and where the weaknesses are. Because to set a good business plan, you have to have this meeting with your executives, with your top team, and you have to have discussions about hard questions like what is our goal, where do we want to get and how are we going to get there? And then you start saying like in our meeting that we just had, we picked a financial target for the quarter. And then the next question is, okay, how do we get there? And it's not, well, let's just hope that it works out. It's actually, let's sit here and talk about what are the campaigns that we're going to launch to make this happen. And what we found was that we, with the campaigns that we were planning on launching during Q1, which is the planning meeting that we were in for quarter one, there was a gap of a few hundred thousand dollars between the goal that we had all set together and where our promotions and calendar of things we were going to do to get there were likely to result in. So then we knew in advance through this planning, we knew about our business that we did not have a promotional schedule that was likely to help us hit the goal we all agreed that we wanted to hit. So then we had to go back and say, okay, what can we do to fill the gap? And I think a lot of, a lot of the benefit of business planning is that it, it shows you where those gaps are. Now the business plan that you're going to write, if you just write it one time, is not going to do that because it's not considered interactive. Modern day business plans typically come as part of some sort of operating system. So Ours is called the scalable operating system or sos. There's another one called entrepreneurs or entrepreneurial operating system called eos, which is Gino Wickman. And Vernon Harnish has his. There's, there's a few of them. But having one that is dynamic, that has the interaction and the ability to expand or contract or change based on customer feedback, executive feedback, employees situation and, and the market conditions generally is really important. And those things are changing all the time. Imagine if you did a business plan in 2019, that was your three year plan and you had no idea and you were, let's say, a hotel. Well, you had no idea that Covid was going to come along and cause no one to be able to travel for a period of time and extremely limit the ability of international travelers to come, including entire countries that might be shut down, like Australia. Maybe you catered to Australian clients and you got, you've got a hotel that's in the United States. You're kind of screwed because they ain't letting nobody leave, or at least if they leave, they're on this ridiculous quarantine to get back. That is not the way that you want to do business planning. So thinking about an interactive business plan is really important. Now in terms of how does it really help you understand how your company's put together? Well, some of the components of the business plan include who is going to occupy what positions. So that means that we kind of need to understand what is the organizational structure of our company and who's going to be reporting to whom in that structure. That's generally done through something called an organizational chart or org chart, that's a little diagram and the CEO sits at the top and then we've got our key executive team and then people under them. It's important to have that though, because now by seeing that the people in the company know who they report to and who has the right to tell them what they should do in their job. And they also have their job title and they also have their job description laid out there. The next thing is that the business plan typically has an overview of the current market conditions. And so it's going to tell us this is the size of the market, this is our TAM or our total addressable market. We have, Airbnb would say we have, I think it started out there were 30 million was their total addressable market. And then after they met with their VCs and started thinking about it, it became 30 billion. And, and that's important because that process helped them see that the market was much bigger than they thought it was. And the service offering that they had and the structure of setting things up needed to be different than they initially conceived. Because in thinking about this business plan, they realized that to get the funding they wanted and actually get to where they wanted to go, they had to do much, much bigger things. And so that's really helpful. Also, typically a business plan will say, here's our vision and here's where we're going. That makes you think about that. You have to articulate it after you've thought about it, right? So thinking through that, thinking about what your financial goals are as well is going to help you make adjustments. And thinking about what your budget is is going to help you figure out how much money do we need to have to move forward to accomplish our goals, and when will the money run out and when do we have to have revenue and profits from the business surpass expenses so that we actually won't run out of money and stop being able to do this? So the business plan helps with all of those things. It's definitely a good thing to have. Just be sure that you understand it's dynamic and it requires quarterly analysis and feedback and modification to actually be effective. The next thing would be a business plan allows you to monitor progress and to hold yourself and the company accountable. Now, in this case, your business plan has laid out what your financial projections are and what some of your other goals, which might be soft goals like you may say, we want to impact 1,000 businesses by helping them double their sales, or we want to improve the. So improve the conditions for animals in shelters across the United States or whatever. When you have committed to documenting your goals in a business plan, financially and service wise, growth wise, all of those things, you now have baselines that are benchmarks you can measure your actual performance against. So you've got financial projections that say you're going to hit $10 million, right? Well, if you don't hit the $10 million, then you get to be held accountable to yourself, if it's you, to your team who's helping you have this vision of where we're going to go with this business, to your CEO, to the people that are running the company, also to the board of directors who are responsible for electing the CEO and the other people who are in the company, and to the shareholders and owners of the company as well as the world at large. So accountability becomes possible because the business plan forces you to articulate what you're going to do and when you're going to do it by. And now with that articulated, it becomes the measurement focus where we can see how close did we come to what we had as our targets. It also helps you in terms of are we advancing towards our overall mission because we say what our overarching mission is in the business plan as well. And so you can say, you know, gosh, we failed our, you know, Google's initial one was do no evil. And a lot of people are like, well that didn't last very long, right? And so the people at Google can look at that and say, are we bad? Like are we actually doing no evil? Because there's an awful lot of people out there that say that are saying we are. Are we being true to this thing that we stated in our initial business plan as our mission? We're darn sure hitting our financial projections and exceeding them. But are we sacrificing our underlying desire to be good while we're doing that? And if we find that we are straying a bit from that underlying mission, are we going to hold ourselves accountable to say, you know what, maybe we don't need to make quite so much profit and maybe we can be more good or less evil. So that's really kind of a good thing about business plans being able to hold yourself accountable. And that's a very big trending topic right now. I talked about ESG in another video that people are more and more wanting companies to be responsible for the ESG components of environment, social impact and governance. And so your business plan can help you see are you really focused on things in addition to just profit that are important out in the world right now. So that's a really cool thing about how you can use that to monitor your progress and hold yourself accountable. The next is how can a business plan be used as a sales and recruiting tool and a retention tool. So here's what's cool about having a business plan when you are talking about to potential employees. Particularly now because we're going through this thing called this great resignation and there's millions of people that are just walking away from their jobs. Many of them are walking away from their jobs to go to jobs that pay more because a lot of there's a lot more competition for good employees right now. And so a lot of that great resignation is they're resigning to go and up level someplace else. But a lot of those people are also going into business and, and they're going to need people to help them. So what happens when you are trying to get employees in a market that is favorable to employees because there's not enough of them and there's a lot of competition for them, is that the businesses that have articulated something about their mission, something about where they're going, what their goals are, how they're going to get there, who are the people in the company, what do they believe in, what's, you know, what are all the things that are important to the company, they can share that information with prospective employees. And that looks, number one, like they got their act together, because a lot of companies don't. And so if you are competing in an. In a thin pool of employees to try to get good people at reasonable prices, then the fact that you've got documentation that you can say, hey, look, this is what we do. Here's something you can read. This is all about our business. This is where we've been. This is where we're going. Here are the key people. This is our vision, this is our mission that's really appealing to people because one thing that people like is certainty. And if they come into a company and they. They're interviewing for job and they say, well, tell me about the company. So, well, we sell widgets, you know, okay, well, that's cool, I guess, you know, that's great. And they come into another one. They say, we sell widgets to people who ride horses. And those widgets help them to overcome a lot of really significant challenges. They've got one thing that was part of our focus in creating this product is that a lot of horses were suffering damage as a result of the way that the equipment was being put on the horses. And so what we've done is we've invented something that does it differently. So we're actually out. Our mission is to help save 10,000 horses over the next 24 months, because so many of them have had to be put down because of these challenges that were happening as a result of improper equipment. And so not only that, it improves the overall experience for the people that are riding the horse, and it creates a bond between the horse and the rider and blah, blah, blah, well, that is a whole lot more compelling than we just want to sell a whole bunch of stuff to people for money to make profit, right? So you can use your plan, your business plan as a recruiting tool and also as a retention tool. It also will help you recruit the right people. It's a filter to filter out the people that don't fit. We use a thing called a we believe video in all of our businesses. So we create a statement of what we believe to be True. And what we believe about our businesses and, and that value system in a video is shown to every prospective employee when they come in to interview. So they know we believe that it's okay to say the way things are. We believe that you should be authentic. We believe like that's a powerful thing to communicate to people and it actually really helps you get rid of the people that aren't right and get the people into your company who are right and competing with other people who don't share that kind of transparency. That's, you know, that's a pretty big advantage. The next thing would be how can you use your business plan to help you review your value proposition and your operating plan and your financials. So I talked about this a little bit before, but the business plan has several sections and so it's very good if you haven't thought about this to think about what is my value proposition. So what is it that we do for our customer and the world at large that we do well, that we hopefully do better than anybody else and ideally that we do in a differentiated way so that we are in fact doing it differently than other people. Now hopefully the difference means that we perform better or more efficiently or more effectively. Either we do it faster or we'd get it done more completely or it confers other benefits that we are articulating. So, so understanding what your value proposition is is something that a lot of business owners don't ever think about and so they just thinking, I like making coffee, so I'm going to open a coffee shop. Where are you going to open? I'm an open it downtown because that's where I live. Well, okay, there's 20 Starbucks down there and 40 other coffee shops. So why are you doing that? Right. What's the value you're going to bring? Well, I'm going to provide coffee to people that want coffee. I mean, I don't know that that's good enough. Right. I mean, could you open the shop? Sure. And will you get some walk in business? Sure. But did you think about it? Right. Did you think about what you might do differently? Well, maybe my value proposition is that most of coffee shops open at 7am but I know that there's law firms and investment bankers down there in that area and they all are coming into work around 5. So I'm going to open earlier and therefore I'll be, I'll have better hours than other people. So my value proposition is then I'm going to have better hours. Yeah, but then what if the people that have those other coffee shops expand their hours? Well, here's the thing is that our, they're sourcing their coffee from Kenya and from these African and South American countries and a lot of them aren't doing in a sustainable way. So we're going to provide sustainable coffee and we're also going to give the people in our shops information about the people in those other countries that we're buying from and how we are helping those people to create sustainable, environmental friendly coffee and operations and also how we're training them to hire other people and it's doing good in the local communities. Or maybe your value proposition is we're having, we're 100% U.S. coffee making company and we have all of our stuff grown here in the US of A. And you know, and it's nationalistic kind of prospect. Or maybe you've got a loyalty program that's better than anybody else or maybe people make their own coffee there and it's a whole bunch of coffee machines and that's different. Right? But what is the daggone thing that you do differently than everybody else? That's really important and your business plan will help you articulate that. And then you should be asking yourself and the people who you're giving your business plan to and having them review it should be saying, okay, so why see the thing that's different here? Or hey, I tell me what's different about you than everybody else? Why does this company deserve to exist? That's really the question. So that's, that's the value proposition in terms of the operating plan. But the operating plan is laid out in the business. So and as I mentioned, we like to do that quarterly. And then you can measure how you're doing from quarter to quarter by referring back to your business plan from the prior quarters and say, hey, generally we're always over optimistic when we do this. We always think we're going to grow faster. We are never thinking about supply. We're not thinking about how the labor shortage is affecting us. We're not thinking about challenges with the supply chain. And therefore we should adjust our operating plan going forward because we've consistently fallen short or maybe you consistently overachieve. We've consistently hit above our operating result projections every single quarter for the last 14 quarters. Chances are we're sandbagging. And so we should raise our expectations and raise our targets because we can actually do more than we think we can do. And so it'll help you understand the strengths or weaknesses in your plan of operations as you do it if you're regularly doing a business plan and you've got projections, you'll be able to say, hey, we're hitting our projections within 5% plus or minus year after year. Now there's a really big advantage to this one. The other two are primarily internal or non specific. Like they're just general good things that you can think about, are we doing good in the world? Because. But with financials, when you are looking for either capital from investors, when you're looking to exit your company to sell it to somebody else, or you're looking for credit from lenders to grow, the ability to hit your financial projections that you've put in your business plan consistently will have a huge impact on your ability to access money. Okay, so money and credit. Because you'll be able to go to the bankers that are making decisions about credit and lending and you'll be able to say, here are our projections for the next 12 months. And by the way, we've been 98% accurate in our projections for the past four years. Well, that's going to give them tremendous confidence that you're going to hit your projections for the next 12 months. Right. And that their investment of money through a loan to you and the risk is going to be pretty, pretty low. Therefore the interest rate will be low and you'll get the loan. That's really important in that situation. In terms of someone who's coming in as an investor or someone who's coming in as a buyer, then you're going to be arguing about what's the valuation of your company. And the valuation is typically going to turn to a large extent on the revenue and profits of the company. So typically if you haven't done any kind of budgeting process, you're going to be judged and valued on TTM or trailing twelve months of profitability. So they're gonna look at your ttm, your trailing twelve months of profitability, and let's say that that works out to a million dollars. And then they're gonna look at the average comparable companies that have sold that are like yours, similar size, similar area of the world geographically and similar customers and industry. And they're going to say, okay, well, businesses like this typically sell for a multiple of five times EBITDA. Your EBITDA or profit is $1 million. So five times $1 million is $5 million. Your, your company's worth 5 million. That's what we'll pay you for it. But if you had instead meticulously kept track of your financial numbers through your business plan and your comparison of your actual results to your projected results over time were 98% accurate or 95% accurate, then it's very possible that you can argue successfully that your projections for the next 12 months is really what the valuation should be based on, that you're already headed in the direction to hit those. And our certainty of hitting them is whatever your certainty, whatever your accuracy was previously. So now I'm 98 or 95% certain that I'm going to hit this and it's going to take us to 2 million. Our projections show that we're going to go from a million now to 2 million over the next 12 months. And therefore your valuation should be based on forward looking projections. And that would make it twice, twice what it is currently. Maybe you're growing even faster and it's going to be five times or 10 times or 20 times, or maybe you're going a little bit slower and it's going to be 50% more. But 50% more is a lot, right? So the business plan helps you look at all of those things. And then last but not least, business plan can be used to attract future prospects for selling your business. So when we're looking at a business, when we're getting a business ready to sell, we typically want to start that process two to three years before the actual marketing of the business for sale happens. And I've sold a lot of businesses. I got a couple I'm in the process of, right now I'm in the middle of negotiations for one. And within the next 30 days I'm headed out overseas to someone, to a company that wants to buy a company of ours as well. So like this is something I do very, very regularly. And when I'm talking to people who have a business that they want to sell, one of the first things I say is we're going to have to put together a deck. And that's an information, basically an information PowerPoint or presentation about the business. And if we've already got a business plan that we can draw from, I can get that deck put together super, super fast. If they've never done a business plan, it's really hard. Now one of the things that the, one of the first things after they get the deck that a prospective buyer of your business is going to ask for is what's the business plan? And that means that they're going to want to know what does the market look like? Where do you see yourself sitting in the market right now compared to the top three to five competitors who are Those competitors and how are they doing and what are they doing and what percentage of the market do they have versus you? What's your operational plan to move forward and gain more market share and achieve growth on a continuing basis for the next several years? How much room is there for you to grow? Who are the people at your company who have helped you do what you've done so far? And are those people capable of seeing this company through to its next level of growth? Or have they never done this before? Have they seen the success that you are saying the company is going to achieve, or are they just kind of learning as they go? How deep is your management team? If somebody leaves, does that mean the company falls apart? How key are you to the company? What is your plan for hiring more people? What is your plan for measurement of growth? What are the KPIs, the key performance indicators that you use to track performance of the business? How close is the actual performance of the business that you have to the projected business that you have said that you were going to get in the past? Because that's going to be an indicator to me as a buyer as to how I, how much I should pay for the company? What are the risks that you see that are facing the companies? What are the biggest opportunities that you see? How much farther can we grow? How much blue sky is left in this company? Are we at 98% market penetration or 8% right? Are we a leader among our competitors? What is the culture of the company? Does this culture match the culture of my company that is buying your company? All of these are questions that a buyer is going to ask, and they're going to want to see this in some documented form, not just you think it's going to be good stuff in the future. So when you're thinking about selling your company, you can give a buyer greater confidence that there will be a continuity of personnel and a continuity of financial performance and operational success in the company going forward under their ownership. If you have a business plan, and particularly if you've had a business plan for the past few years, that's going to be very, very helpful. And so the less risk that a buyer perceives that they have when they acquire your company, the higher the valuation they're going to give you. Because valuation is all about risk. What is the performance of the company and what is the risk that it will not continue to perform or that it will not continue to overperform what it's performed in the past? And if you can't convince the buyer that the company has its act together through having a very solid operating system and business plan, then it won't be able to give you, or they won't be able to give you as high evaluation as you might otherwise get. And therefore, you're kind of shooting yourself in the foot. So having that business valuation can be tremendously helpful. So these are several of the ways that having a business plan can really help you be more successful with your business.