A business plan is the equivalent of sixty days of “walking the imaginary dog.” My nephews really really really wanted a dog but my brother was leery of getting stuck with all the work if his boys flaked out on caring for the pet. My brother, John, offered them a deal: the family could get a dog if both boys awoke every morning at 6am, sixty days in a row, and walked around the block to simulate the responsibility required by a dog. It takes a lot of discipline to get up early, out of a warm bed, and head out into a Boston winter! If you can’t be bothered to spend some tedious hours on a business plan, do you think you’re cut out for the challenges and demands of actually starting a business, which are significantly more difficult?
(For the record, the boys walked the imaginary dog exactly zero times.)
Various military minds over the centuries are credited with the idea that no battle plan survives first contact with the enemy. Substitute “business plan” for “battle plan” and the wisdom survives to this day. Leafing through ours from 1998, about 50% of our predictions came to pass, but I couldn’t have guessed back then which half we would be wrong about. For example, strategically, we thought that Subaru would be our “foot in the door” to owning a chain of dealerships. At the time, Subaru stores didn’t make much money. But Subaru would become a mainstream brand, currently the third best-selling car in New England, so we never needed to open a chain of dealerships in order to make a good living. Our expansion plans stopped in 2004 when we bought a Jeep dealership and ran out of siblings to open any more. (We asked our sister if she wanted to move up and open another one, but she declined since it didn’t make sense for her to move her family from Virginia to do it. Instead, she founded a non-profit to help young women with cancer.)
Your business plan will have a written component including an evaluation of the competitive landscape, the amount of capital you’ll need to start and run the business, and your marketing plan. You’ll also include a “pro forma” financial spreadsheet that forecasts expenses, revenues, and profitability.
We never referred to our original business plan again after we opened. Still, there are many benefits of developing a business plan, and the earlier the better:
· If you can’t make a business plan work on paper, then you’re going to have a real tough time making it work in the real world. Paper does not refuse ink, but reality can definitely reject your false assumptions about how well the business will work!
· Dreaming is easy but the business plan makes you look at real data and analyze the situation objectively to see if the business might actually work financially, logistically, and practically.
· The business plan forces you to focus. What opportunities will you seek and which will you ignore? As Professor Michael Porter said, “The essence of strategy is choosing what not to do.” You can’t be all things to all people, and the business plan helps you get clear on which products and services you’ll offer, how you’ll source or create them, how you’ll deliver them to customers, and how you’ll attract customers through your marketing efforts.
Things to consider in your business plan
Identify the factors that could kill your business. If they’re too daunting, let them scare you away into some other opportunity. If you think the risks are manageable, make sure you have a Plan B for each one. One of the most common threats to young businesses is running out of money before the business can sustain itself with positive cash flow and profits. What will you do if you run low on cash? Can you develop a plan to cut expenses enough to keep fighting until you can generate more revenue? Is there a family member who would loan you additional money if the business is viable but needs more capital to really make it work?
Anticipate “summit fever.” Serious alpine climbers pick a firm turnaround time on the day they plan to reach the top. Without an strict turnaround time, their desire to reach the summit could get them killed if they stay up at too high of an altitude at night without adequate shelter, heating, and supplies. I recommend thinking through a similar cut-off point if you lose a certain amount of money or fail to achieve necessary objectives in a reasonable amount of time. Unfortunately, the “never give up” cliché you often hear is unwise in many situations. Sometimes it makes more sense to be quitty rather than gritty so you can cut your losses before they overwhelm you. The wise persevere when they can still see triumph on the horizon, but abandon other projects when the costs exceed the potential rewards. You have to know when it makes more sense to walk away than to keep throwing more money and effort into an unsustainable business.
Begin with the end in mind. Will you be satisfied with one outlet, or do you want or need a chain to achieve your goals? If you need a chain of stores to provide enough revenue to make your plan work, figure out that growth strategy now. How will you finance the growth? What will you do if the first few stores aren’t as profitable as you predicted they would be?
Use debt responsibly. If you need outside money, figure out where you’ll find the financing or how you’ll attract investors prepared to take a stake in your company. John and I hated the feeling of owing a lot of money, and we feared a recession could jeopardize our ability to make payments. We wanted to grow up strong, not grow fat. There’s a Chinese parable that advises expansion “like the forest—slow to come in but difficult to remove.” We bought both of our stores after previous owners had bankrupted them, so we had a front row seat to watch what happens to entrepreneurs and their families when their businesses go bust. After selling us the dealership that would become Planet Subaru, I witnessed the managing partner and his wife sell their beautiful home and move into an apartment. Going backwards in life really hurts. Even at the risk of slowing our growth, I resolved to never let that happen to us.
Beware of optimism bias. As a simple mathematical principle, projects have many more possibilities for failure than success (Geographer Jared Diamond popularized the “Anna Karenina” Principle, named after the famous first line of Tolstoy’s eponymous novel. “All happy families are alike; each unhappy family is unhappy in its own way.” Many successful conditions are required for a happy family or successful business which makes them all very similar, but of course there are innumerable dysfunctions that can haunt unhappy businesses.) Beware the tendency to think that the world will align to accommodate your needs. It won’t, especially early on, when it seems like Murphy’s Law is the only rule that applies to startups: anything that can go wrong will go wrong. We never would have predicted that Planet Subaru would go many days with partial or no phone service right after we opened because of technical and bureaucratic snafus with the phone company. There would have been no way to predict such an occurrence, of course, which is why you might want to arbitrarily cut your first-year profit predictions, just to incorporate the cost of inevitable but unpredictable early problems. Would your business survive on 75% of planned revenue?
Take on partners?
John and I were brothers first and business partners second, so we swore an oath before we opened that we would never allow business matters to interfere with our family relationship. More than two decades on, we continue to get along great. I would like to say that this would have been the case had we failed in business, but you never know.
Perhaps my brother could have started a dealership without me, but I would not have had the gumption or enough experience to do it on my own. We complemented each other well, especially early on when he focused more on strategic matters (e.g. finding a facility to buy and figuring out how to finance it) and I focused more on tactical concerns, including hiring and day-to-day management. By separating into different spheres of influence, we avoided stepping on each other’s toes. After we bought our Jeep dealership in 2004, he took responsibility there and left the Subaru operations to me. We continue to be accountable to each other, and we consult often, but we give each other final authority to run the store we know best.
Here are some of the advantages of good business partners:
· You have someone to talk to about all the business problems that your employees, family, and friends most likely won’t want to talk about day in and day out. A good partner is part colleague, part therapist, and part coach.
· You have a shoulder to cry on and someone to talk you off the ledge during struggling times, protecting your spouse from hearing a litany of problems at the dinner table every night. It’s lonely at the top. Shakespeare was dead on when he wrote, “Uneasy lies the head that wears the crown.” It’s a comfort to have a partner for therapy and strategy. Without a partner, it might be tempting to lean on your team for support, but this can be dangerous because of the importance of keeping a modest professional distance from your people. Venting with a team member about running short on cash, for instance, might help you but frighten her.
· Partners bring complementary resources. For example, they might have the capital you need but don’t have, they might have more industry expertise and connections, or they might be better at building and supervising a team.
Disadvantages of partners:
· Unlike other team members, you can’t fire a partner if things don’t work out. It’s a lot like being married—you have serious practical and legal obligations to each other.
· It’s difficult to keep objectives aligned over time. As the business grows, one partner might want to throttle back while the other wants to expand. Such dilemmas can cause resentment if profits are split but effort varies.
Questions to work out:
· Are you able to effectively resolve differences with your proposed partners? Do you know them well enough to be able to reasonably predict their behavior under favorable and unfavorable circumstances?
· How will you work through differences? Do you have a track record of resolving disagreements with this person? Fortunately, John and I are pretty practical by nature, we get along well, and we respect each other, so we were confident that we could work through all kinds of business and personal problems together.
· If the person is a family member, do you think the relationship is strong enough to survive a business failure?
· Can you agree upfront on the terms under which one partner would buy the other out? A fellow Subaru dealer opened with two partners who brought the money to capitalize the store. They did not have a written agreement that dictated the terms of a potential separation. When my friend, the operating partner, got to the point where it didn’t make sense for him to continue with the substantial effort required to run the business unless he enjoyed a larger share of the profits, he asked to buy his partners out. One accepted a reasonable offer quickly; the other insisted on unreasonable terms, and the conflict dragged on for way too long. A simple buy-out agreement would have prevented this ugly situation.
If you’re interested in learning more about the nuts and bolts of a business plan, the US Small Business Administration has a nice introduction.
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