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Is a Business Plan necessary when you have a PPM to give to investors?

December 24th, 2007 · 12 Comments

I get this question quite often.   When we screen companies to present at the private equity investor forums we put on for the Network of Business Angels and Investors (NBAI.net), they complete a comprehensive application form and submit all the documents that they will provide to investors.    Business plans communicate different information than a private placement memorandum.  

Business Plan:  A well run business with real potential to scale and grow will have a business plan that is their blue-print for building the business.   They have an internal document that has the details about organization plans, production, distribution, compensation, and marketing strategies.    We call this an operating plan.   Investors want to know one of these is in place because it shows the company has a mature attitude regarding planing and preparing for growth.  They likely will not read it in its entirety, but they will spot check areas as part of the due diligence process.    Then there is the business plan a company uses to get money.   The ‘Investor Ready” business plan differs from “bank ready” business plan.   These business plan version summarize the operating plan in providing a high level over view of each section, not an executive summary, but about 16-20 pages, and the financial forecasts.  The Investor Ready Business Plan is a marketing document.   It is “selling” you company as an investment opportunity.  It can be “confidential” without the same controls necessary for distribution of  a PPM.

Private Placement Memorandum:   This is a  legal document that is provided to potential investors and serves to protect both the investor and the company.   It is used for unregistered offering.   Without one, companies can be sued for refund of the invested capital by their investors if they don’t produce the results expected.   The PPM establishes the risk of the investment and the process for liquidation of any assets should the company fail.   It is highly confidential and should only be given to an investor that has stated an interest in investing, not just “this sounds good”.   The PPM usually is 60 or more pages, which is 2/3rds legal and regulatory information.  It is not an entertaining read.  Therefore, investors only read it when they are pretty certain they will be investing. 

So a company that is seeking angel investor money (from new investors not known directly by the company) needs to have 5 documents:

1.  One page executive summary that provides a snapshot of the company’s investment oppt.   This is the most public piece of information and should be designed so anybody can read it.

2.  Investor Ready Business Plan.   This is the marketing document that is going to move the company along with the investor and garner interest.   They may receive it after talking to you or a representative or after seeing a presentation.  They may also receive it cold from one of their trusted sources, and therefore the document must be a compelling read and answer the fundamental questions an Investor wants to know:   how do they get a pay raise and what is their mitigation of risk.   You should have someone, impartial and not connected or familiar with your business to review it before sending it out to a lot of investors.   We often see business plans that jump from point A to point C and assume the reader knows point B, only because someone who knows the business well has reviewed it and connected the dots in their head.   The business plan will end up in the circular file if it has this type of gap in it and other typical errors we see as companies go through our investor screening process.

3.  Investor Pitch:   the 8-10 minute presentation used during investor forums and when you get the initial face to face with a potential investors.    Typically this is about 12-15 charts at the most, with some charts for back up and questions.

4.   Private Placement Memorandum or Offering Memorandum.  Depending on the amount being raised and the type of raise (504, 505, 506) a full PPM may not be necessary.   Always check with an attorney.    You should have some document that communicates the structure and terms of the offering and the risks associated with that offering.

5.   Operating Plan.   This is the blueprint to build your business.   It is necessary for two reasons.  First, investors may want to view it to make sure you have the right strategies for growing the business and using the funds they will give to you.   Second, and more importantly, you cannot expect to grow your business with any sort of structured steady growth without a business plan.   It communicates to your team what they are expected to do and it helps you chart your progress and anticipate shifts in strategy that will be needed to stay ahead of the competition and continue to improve your efficiencies.

Here is a podcast that I did a while ago that goes through some of this information in greater details.   

http://www.digi-pagesradio.com/entrepreneur_show_1.htm

You can also get more information from 3rd party experts on strategy, planning and growing your business at this media website: http://www.kyrmedia.com/books.htm

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Tags: Entrepreneur Biz-Buzz · Entrepreneurs Seeking Capital Corner · Just Ask Karen!

12 responses so far ↓

  • 1 504 Plan » Blog Archive » Is a Business Plan necessary when you have a PPM to give to investors? // Jun 5, 2008 at 8:32 pm

    […] Is a Business Plan necessary when you have a PPM to give to investors? I get this question quite often.   When we screen companies to present at the private equity investor forums we put on for the Network of Business Angels and Investors (NBAI.net), they complete a comprehensive application form and submit all the documents that they will provide to investors.    Business plans communicate different information than a private placement […] […]

  • 2 fundcafe // Jul 17, 2008 at 8:23 pm

    I got listed at the investors board at
    http://InvestmentsBoard.com and have only received requests for PPM

  • 3 shelby bock // Jan 17, 2009 at 11:47 am

    We always start with the exec summary with investors and depending on level of interest move directly to the PPM because it includes a business plan in it.

  • 4 Zashkaser // Aug 5, 2009 at 11:41 am

    Sorry but I don’t share most of these ideas.

  • 5 Broanogaminge // Mar 28, 2010 at 6:34 am

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    impatient to browse a whole lot more of your web content, goodbye!

  • 6 Whorrhilm // Apr 3, 2010 at 1:27 pm

    i came across, quality webpage with all this blog info and links to other great sites for info. Thanks karen you keep dishing it out and I’ll keep eating it up.

  • 7 GertrudJegido // Oct 17, 2010 at 2:47 pm

    Nobody ever really talks about this….. you are straight forward…. black and white on what entrepreneurs need.

  • 8 Steaven Mainfield // Oct 30, 2010 at 9:47 pm

    Can you incorporate some of the video tips into more of your blog posts?
    Steaven Mainfield

  • 9 ebsblog // Nov 25, 2010 at 9:52 am

    SInce we launched http://youtube.com/karenrands we have tried to incorporate those videos when possible.

  • 10 Avril Benedict // Nov 13, 2010 at 2:03 pm

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    Avril Benedict

  • 11 Kate Trider // Jan 5, 2011 at 4:26 am

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  • 12 Mary Smith // Apr 1, 2011 at 1:06 am

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