Are Business Plans a Waste of Time

I recently attended a national entrepreneurship conference along with a number of other college instructors and well-known entrepreneurs. I found it interesting that two concurrent sessions offered conflicting points of view on business plans. One session featured a panel of successful entrepreneurs questioning the real world relevance of business plans. The other session focused on teaching students to quickly and correctly develop business plans.

I was intrigued by the panel discussion so that’s the session I attended. None of the entrepreneurs on the panel had ever written a business plan-at least to launch a business-yet they were all extremely successful. The revelation that they did not use written plans is not surprising, most entrepreneurs don’t. One reason given by the panel for forgoing a formal business plan is the natural tendency for entrepreneurs to cling to a business plan they wrote due to the investment in time and effort. The reality, they said, is that things change so much in the real world of business that the assumptions underpinning a business plan must often be altered or even abandoned to allow the business the flexibility necessary to survive. In addition, the entrepreneurs were adamant that a good plan will not make a bad idea work and a great idea probably will not be hampered by a poorly written plan-or no plan. Another concept discussed in the session was that what the entrepreneur is really selling to the venture capitalist or angel investor is the entrepreneur. One of the panelist remarked that, “If the investors believe in you, they will invest in your business.” The consensus from the panelists was that investors look for passion and vision in addition to the idea. They must be convinced that the entrepreneur is capable of persevering and making good decisions and adjustments to keep the business moving forward. Since there were college instructors in attendance, and most entrepreneurship programs require written plans, all entrepreneurs on the panel diplomatically agreed that requiring a business plan as part of a course or program of study was not a waste of time. They concurred that the process itself could offer valuable insight.

As a college entrepreneurship instructor I try to convey as realistically as I can the realities that entrepreneurs face. After attending this conference I realized that students may have difficulty reconciling the two seemingly conflicting points of view presented in the workshops. Certainly my students are aware of the statistics which suggest that most entrepreneurs enter a business without a written plan. To attempt to convince them otherwise would be disingenuous. If the panel was right why bother with a business plan at all? I believe that the answer can be found in the last nugget offered by the panel of entrepreneurs; it is the process that is most beneficial.

The planning process does not begin with the business plan. In fact, it is a mistake to write a plan too early. A feasibility analysis should be conducted prior to writing the plan so that the key assumptions underlying the plan are properly vetted. The research conducted as part of a feasibility analysis can also lead the entrepreneur to better understand their business. For example, if a focus group is used to better understand the target market, new insights can be gained which can lead to the development of a more competitive business model. The results of the feasibility study and the articulation of a compelling and competitive business model are the most critical components of a business plan. Coupled with a cash flow analysis these facts can be critical when procuring the necessary resources to launch a new enterprise.

Another point I like to make with my students is that the importance of a business plan depends on the type of business. A retail store with large capital requirement, inventory, payroll, etc. is completely different than a new venture in a technology driven industry that is rapidly changing and evolving. A business similar to Facebook, for example, has much less need for a formal business plan than the owner of a new sporting goods store.

In addition, the amount of borrowed capital required to launch a business will impact the need for a formal plan. Venture capitalist typically will want to review at least certain sections of a formal plan as part of their due diligence.

I believe that the entrepreneurs had a valid point regarding the tendency for business owners to become too attached to a formal plan. A critical time occurs when the business is launched and the entrepreneur begins receiving real feedback from customers. The decisions made at this juncture can make the difference between the success and failure of the venture. Should the entrepreneur hold to the assumptions of the plan or should minor or major adjustments be made? The entrepreneur needs to remember that the business is not on autopilot just because a polished business plan is in place. Adjustments must be made as conditions warrant.

The panel was not wrong when questioning the necessity of a formal business plan, but the planning process is distinct from the plan. A business plan, whether required or not, will enable the entrepreneur to better articulate their vision which may make writing a plan well worthwhile.

Importance of Terms When Buying or Selling A Business

In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.

In the current economy, the seller must be willing to carry a note for part of the purchase price. Very few buyers have the capacity to pay cash for a business. Also, in simple terms, it’s ‘good business’ for the buyer to use cash as a down payment on the business but then leverage the rest of the purchase price via loans as any interest paid is tax deductible. This also allows the buyer to buy ‘more business’ which means if the business is performing well and throwing off the right cash flow, the buyer can get more cash flow for each dollar of down payment. This is obviously attractive to the buyer.

The terms of a deal don’t just swing on the price and whether or not the seller will carry a note. These are both very critical questions but whether a deal works or doesn’t work can include many things. These include how much free training the seller is willing to provide, if the seller is needed to provide paid training after the free training, what costs are incurred for the business to change ownership and who pays them. For example, using a title company to handle the escrow will incur fees, the landlord may charge a fee to process an assignment of the lease, if the business involves a franchise there may be a franchise transfer fee, how long should the covenant not to compete be in terms of distance and time, and there are many other items.

Buying and selling a business involves many complexities. The longer both parties take to reach agreement on the complexities the greater the chance the negotiations will fail as one or both parties burn out from the inability to reach an agreement.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.

Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest credential awarded by the IBBA and the Certified Business Broker (CBB) designation from the California Association of Business Brokers. He also holds a Brokers License with the California Department of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Chair of the Sacramento Chapter of the California Association of Business Brokers.

Business Tax Tips

You have seen the commercials where business owners use expensive law firms to get their tax liability to the IRS reduced – upwards of 90%. One, in fact, owed the IRS some $3 million and settled for just over $100,000. Not bad if you find yourself in that situation and can afford to pay the attorneys to take care of this issues for you.

A better way to avoid owing the IRS or having to pay lawyers to get your tax liability reduced is to not put yourself or your business in that situation in the first place.

Thus, the business mentioned above could have saved both that $100,000 and their huge attorney fees.

While I have no direct statistics, I can almost guarantee that for every one business owner that gets his tax liabilities reduces there are nine or more other firms that end up paying the full amount to the IRS (plus additional penalties and fees) as well as covering additional unnecessary legal expenses – most of which puts such a huge burden on the business that the company is force to shut down and the owners end up in bankruptcy court.

But, all of this can be avoided very simply by understand the tax requirements of owning and operating a business or by hiring someone that does. Paying an employee who understands tax requirements and keeps up with the constant changes or hiring an outside firm to handle your day-to-day tax obligations is always much less expensive in the long-term than having the IRS come after you, your business and ultimately your personal assets.

NOTE: It is usually not the amount that is owed to the IRS that hurts the business but all the interest and fees included in the IRS’s lawsuit – sometime more than 1,000% of the original amount owed.

Each year the IRS puts out tax tips for new and existing businesses to help both you and the IRS avoid the costly task of auditing and fining businesses. These will be discussed here as well as a few of our own suggestions:

First, according to the IRS, your type of business entity matters (not just for personal liability protection but for your tax liability as well). In fact; “you must decide what type of business entity you are going to establish (or change your business too). The type of business entity will determine which tax forms you have to file. The most common types of businesses are sole proprietorships, partnerships, corporations and S corporations.”

Know that most LLC’s are considered partnerships in the eyes of the IRS and can be taxed as either a pass-through entity or as corporations.

The key here is that there are different tax rates for each of these. Some, like partnerships and S corporations, pass-through their income and expenses to the business owners, partners, members, etc; who then pay taxes on their individual amounts. If your personal tax rate is lower than what an alternative corporate tax rate would be – then you might be better off filing for or changing your business to one of these forms of organization. Plus, with recent legislation targeting businesses – more tax issues will focus on the standard corporation as opposed to other forms of organization that are seen as smaller business entities.

Further, unless your business is a corporation, there are other taxes that business owners might face such as income tax, self-employment tax, employment tax and excise tax.

Just because you pay your personal taxes and include your business income on line 7 does not mean that you have covered your business’s tax liability. Keep in mind that each government organization from your local and state governments to the IRS wants a piece of what you make and will not hold back in collecting it.

Additionally, the IRS also advocates and we agree whole heartedly, that; “Good records will help you ensure successful operation of your… (business). You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.”

Some times the main issues is not something the business owner failed to do or even an attempt to defraud the IRS but that its management and financial systems failed to properly account for some taxable items.

Moreover, not only can keeping good records help you avoid tax penalties and such but can be an invaluable tool in helping you run and grow your business. Wouldn’t you like to know the return on your business’s assets and if they are being deployed to provide you the greatest profit?

Furthermore, all businesses, and persons for that matter, should file an annual return – regardless if you owe money or not. This keeps you and your business from coming up on “red flag’ lists for missing filings as well as creates a solid record of all your transactions – should you need them later. In addition to filing annually, each business should understand when it is required to pay certain taxes. Not all taxes are due on a yearly basis. In fact, some employment taxes and self-employment obligations are require to be paid quarterly or sooner depending on the amount owed from prior years.

Lastly, avoid anyone (even tax professionals) that try to convince you that you can reduce or eliminate your tax obligations using so called ‘tax schemes.’ Most of these types of schemes are earnestly looked for by the IRS (and state tax authorities) in reviewing returns. Know this, if is seems too good to be true, it ALWAYS is! Much easier to pay your portion of taxes (even though none of us likes doing so) then trying to keep one step ahead of the revenuers.

Paying taxes is never pleasant but it is necessary if you want to own and operate a business in the United States. Thus, instead of wasting energy on trying to avoid taxes altogether or scheming ways around them – which will only end up costing you and your business in the end (think about the 9 of every 10 businesses that don’t get relief from an IRS lawsuit or that tax attorneys win when you try to cheat and when you get caught) – and divert that energy into understanding the whys and whens you need to account for tax issues as you manage and grow your business. Much better to pay the IRS a small piece of what you earn now than end up with a shuttered business and no personal assets to show for it.