Along the lines of the first deadly sin, the lack of a formal business plan is also common among small businesses and startups. New entrepreneurs often mistakenly believe that opening a business and putting a sign outside is enough. It is usually the business plan that segregates viable businesses from an entrepreneur’s hobby that they hope to make into a business. In some cases the hobby may be a viable business. Successful entrepreneurs create a thoughtful and realistic business plan prior to opening the business to determine if the business is feasible both financially and operationally. The business plan includes aspects such as how the business is going to market itself and generate revenues, its target market, operational plans such as staffing requirements, supplier analysis, capital budgeting or expectations regarding the need for fixed assets to start the business or maintain operations and meet growth demands, etc. The business plan is the roadmap for the entrepreneur, telling where they are going, how they are going to get there, and what resources they need to get there. A business plan that is well thought out and researched does not necessarily have to be a one hundred page document, but it should be sufficiently long to provide insight into the expected operations and “path” of the business.
The lack of a formal business plan in the valuation process once again suggests that the entrepreneur may not understand the importance of planning for various aspects of the business. Just as the absence of a business plan bodes poorly for the value of the business, an unrealistic or haphazardly prepared business plan also instills little confidence in the business appraiser with regards to the entrepreneur’s ability to be successful. A similar statement can be made about the likely confidence level of prospective investors.