A potential entrepreneur is facing a banker or group of investors who might fund his idea. He has just presented his best pitch to secure the funds he needs. Then, they ask the obvious question, “Sounds good, but…what could go wrong in your plan?” Unless he has a well thought out answer to this question, an embarrassing silence may be his initial response.
The point that needs to be made is that the plan might be stellar and the business should, in all probability, deliver terrific returns, but Murphy’s Law is always in play. Not anticipating those potential problems and providing solutions, sends a signal to the investors that the prospective business person may be unprepared. Therefore, he must raises those issues before the investors do and realistically provide cogent solutions to anticipate and stifle any doubts.
Why Bring up Problems to an Investor?
The answer is quite obvious. If the entrepreneur doesn’t bring up potential problems, most certainly the investors will. And if they don’t, they will most certainly be thinking about them. To place this in perspective, investors are interested in three things:
Not losing their Investment
The hope that their investment in this opportunity will earn high returns
Being assured that the management team is honest, very competent and can handle any unforeseen (and unpleasant) situations.
How and Where to Present these Issues in a Business Plan
There should be a section near the end of the business plan which could be entitled, “Potential Issues and Solutions Affecting the Business Model.” In this section, one must present all of the potential problems that might arise adversely affecting returns or the viability of the business model itself. This must be realistic and is obviously a serious to any investor. Anticipating potential problems in a sober, business like manner signals to the investor(s) that such issues have been anticipated and addressed.
Obviously, someone that is seeking funding shouldn’t go over board and present every scenario, including those that are relatively unlikely to happen, that might damage the business. Obviously this is counterproductive. Further the proposed business should have some key competitive advantage over competition. Keep in mind, one should present reasonable issues and solutions. After all, prior to deciding to enter this business opportunity, the business person should have evaluated the business in light of problems and business conditions that might arise.
Typical Issues that Might Affect Corporate Profitability and Demand
The following are a few areas that might generally apply:
- Changes in economic conditions negatively effecting product demand or the market in general
- Changes in government regulations/laws or local ordinances or the income tax code
- Technological advancements adversely affecting the demand for the product
- Safety issues regarding the product’s materials or its use
- Newer, better marketing strategies: use of Twitter, Google, blogs, website
- Material cost increases,e.g. import materials cost, foreign regulations, etc
While a few more issues can be added to the list, this approach should address the demand for the product, realistic gross margins that can withstand the onslaught of changes within the market or safety regulations and anything else that can be realistically added. Check with the SBA for more information and resources.
Playing Devil’s Advocate
Obviously, the approach is to explain any adverse situation in a way that is even handed and realistic. Simply put, the business owner anticipates and obviates such roadblocks in a legitimate manner and deflates some of the negative emotion associated with the potential loss that an investor anticipates. This does not mean that the case against the potential funding of the entrepreneur’s business is so strong that he has has lobbied himself out of the opportunity. Rather, this approach means that the business person has prudently assessed the situation and has realistic approaches to counteract problems, if the situation in the business deteriorates