By Judd Hollas, CEO of EquityNet
If you’ve considered starting your own business, you’re going to need a business plan at some point; there’s simply no getting around it. Whether it’s for fundraising, recruitment, marketing, or just to determine the viability of your company — a good business plan is a vital tool that’s needed to help you succeed.
For many entrepreneurs, writing a business plan is a daunting undertaking that can sometimes include costly mistakes, when not done correctly. Fortunately, by reviewing some of the most common business plan mistakes below, business owners can easily avoid these missteps.
1) Not using a fair and realistic valuation for your company
This can be a difficult task for some entrepreneurs to accomplish because of the emotional and financial attachments they have to their companies. Still, an entrepreneur needs to determine how much his or her company is worth prior to receiving any investment. Savvy investors will ignore companies with unrealistic valuations or valuations that do not line up with their revenues.
There are several approaches that can be used to estimate the value of a company including discounting cash flows and multiplying existing revenues. Both of these approaches can be used for companies, although the discounted cash flow approach is one of the most universal. It’s a method of valuation that is recognized and accepted by the Financial Accounting Standards Board and is also incorporated into EquityNet’s multi-patented Enterprise Analyzer software.
2) Not seeking the right amount of money
Entrepreneurs often seek the wrong amount of capital during their fundraising campaigns, which can ultimately have negative impacts on their companies. You run the risk of running out of capital if you ask for too little, and since investors expect a return on their investments, you also don’t want excess cash sitting in your bank account. They don’t invest so their money can sit in someone else’s bank account earning less than one percent return. In most cases, entrepreneurs should seek enough capital to adequately fund their growth and operations for at least 12 to 18 months, if not to reach profitability entirely.
3) Not addressing an appropriate target market
It’s very important for entrepreneurs to identify their target market. Often, entrepreneurs will claim their product or service applies to a much larger market than it actually does, which is a common red flag for investors. Investors want to invest in companies that have clearly identified their markets and have a realistic view of their market share. For example, if you own a coffee shop in your town, your target market isn’t going to be everyone in your town that drinks coffee. It’s likely that not everyone in your town visits the area your coffee shop is located, and there are several other coffee shops that have established a share of the market.
4) Providing too much information
Entrepreneurs often feel that they need to explain every single aspect of their company in order to prove to investors that it’s a solid opportunity. In reality, investors already have a checklist of a few things they want to know before they make their final investment decision and don’t want to wade through extraneous information. Providing too much information simply dilutes your message and can cause you to go off topic. Keep your plan concise. Not only will that help investors find the information they need, but it can provide an opportunity for further discussion should an investor want to learn more.
By following these simple steps, you can avoid these mistakes and develop a winning plan that can help to grow your business for years to come.