Three reasons why writing a small business plan avoids the 60%
that don't make money

Why do you need a small business plan? You want to make money now! You don’t have the time to wait. Can’t you write it after making a few dollars?

These are some of the same questions I heard and even had myself when starting my first business.

Did you know that only 39% of businesses are profitable over their lifetime? According to the National Federation of Independent Business (NFIB). The remaining 60% break even or loose money.

Did you know that 70 out of 100 businesses that have employees survive the first two years? And of that 70 approximately 35 survive 5 years. Of the 35 approximately 12 survive 10 years. And of the 12 approximately 3 survive 15 year or more. Unfortunately, self-employed entrepreneurs have a much higher failure rate, approximately 3 times as high. According to the Small Business Administration (SBA) Advocacy statistics (www.sba.gov).

Unfortunately the data above doesn’t give details on why the entrepreneurs closed the doors for their business. Just because the business closed doesn’t mean it was a failure. There are several reasons for exiting a business, besides bankruptcy. The SBA advocacy report shows some data on bankruptcy closings. But it is not clear enough to make a judgment.

Sorry for the statistical data that might of confused you more. But I’m about to wrap this up for you.

Why only 3 out of 100 business that hire employees make it 15 years or more? Why do self-employed entrepreneurs (non-employer firms) have a harder time making it past two years? Why are only 39% of businesses profitable over their lifetime?

They plan up front. That is our theory, but we do not have data or evidence to support this but our own experience.

“The business that fails to plan, plans to fail.”
- from the Anatomy of a Business Plan

Self-employed firms fail faster because of no accountability. They have no reasons to organize a plan. They have no responsibility for others. It is much easier to get in business and to get out. When you have to hire employees, you are forced to plan your business, because you are responsible for your employees and their lively hood. You have a since of responsibility. Therefore, you will take the time to write a detailed business plan.

In addition, it is believed that most businesses that make it past 5 years probably close for reasons other than bankruptcy. Which leads the discussion to one of the major reasons to start a small business plan.

Exit Strategy: #1 Reason for writing a small business plan

“Start the race with the finish line in sight”
- from the Anatomy of a Business Plan

There are five ways to exit your business.

1. Sell all or a portion. The goal of some entrepreneurs is to start a business, make it profitable and sell it. They enjoy starting businesses from scratch. That is there niche and that is what motivates them. Running it for a long period of time just isn’t fun. Or some people may choose to sell so they can retire and live the rest of their days in peace.
2. Pass the business to a family member. Good way to leave your kids or grandkids something. Just hope they want it.
3. Get out by selling to an employee stock ownership plan (ESOP). If you plan to hire some great people that have your passion for the company. You might want to sell it to them. There are great tax advantages for using this strategy, but as always, you must set up your business entity the right way. Go to the National Center of Employee Ownership to read in detail how an employee stock ownership plan works.
4. Go public. Take the company public to gain cash quickly and have the option to share in future stock price gains. If this is your exit strategy you must set the company up correctly.
5. Close the doors. Shut down the business. Pay your debts, sell the assets, pay your taxes and hopefully have some money left over. This is what most would consider failure. But it might not, especially if you have money left over.

A Guide: #2 Reason for writing a small business plan

A business plan is a road map to your exit strategy… a road map to achieve your goals. If you are an architect you might call it a blueprint. What ever you call it, now that it will provide the tools necessary to implement and analyze changes to make your business profitable. Treat it as a living document. Must be reviewed regularly and updated when needed to achieve the reasons for your business.

The Money: #3 Reason for writing a small business plan

In a classic movie called Jerry Maguire, Tom Cruise is a sport agent for a NFL football player named Rod played by Cuba Gooding Jr. Tom Cruise’s character Jerry Maguire wants to be Rod’s sports agent. Rod likes Jerry, but in order to keep his business Jerry has to show Rod “The Money”. Click here to see a YouTube clip.

The clip is funny but gets the point across. As an entrepreneur if you want a bank or investor to “Show you the Money” you must have a plan to get it. The best way to communicate that plan is with a business plan.

What to do next?

• Set your goals. Complete the goal setting worksheet.
• Pick one or two exit strategies that meet your goals.
• Review the small business plan outline.