This post originally appeared on Entrepreneur.com - #StartingABusiness
Follow this expert advice to create a business plan that proves you know what you’re doing and can start and grow a profitable cannabis business.
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In every section of a business plan, investors are looking for a depth of knowledge about your industry and your business and the ways in which you’re preparing to manage with all the considerations identified. They’re looking for what you’re doing and why, who’s involved, and how you’ll be able to execute. They want to see a solid playbook that will serve as a set of operating principles to get them through unforeseen challenges when things don’t go as planned.
Here are some recommendations to help you write each section of your business plan:
It’s best to write a four- or five-page executive summary that can also be shared by itself. The contents should make sense to someone who would read it independently of the plan or accompanying presentations. It should summarize the entire scope of the business plan and company overview, be high-level but fact-based, and highlight the key tenets of the business that are necessary for anyone to properly understand what the business does, why, who’s involved, and how it will build from where it is currently.
Include the company’s mission statement in the executive summary up front. The final section can include, for the purposes of raising capital, a summary of the transaction that’s being pursued (amount of capital and what it’s being used for) and where the company is projected to be as a result of that investment. It’s also helpful to conclude with a statement about the business’s goals regarding an exit strategy.
It’s critically important for anyone reading a business plan to know the key people involved. This is more than just bios and backgrounds—it should include a description of both the organizational chart outlining the reporting structure and the key roles and responsibilities. Also include the advisory board or other key external members of the team, like bankers and attorneys.
Product/Service or Technology
Every company has a value proposition that’s most commonly rooted in identifying an unmet need in the marketplace or a novel solution to a significant problem. Investors need to clearly understand what your value proposition is and what you sell. This could be a whole roster of products and/or services or a single scientific development or proprietary technology. Clearly knowing what you have to sell will define how you build the business in the near and long term.
Clearly articulate how the company plans to make money. For example, if you’re a direct-to-consumer CBD brand, the profitability and long-term value you’re creating will be predicated on your ability to 1) source the best quality CBD at the best prices; 2) create a recognizable brand; and 3) sell better than any of your competitors. This means your business will focus not on the production of CBD but rather buying it at one price and marking it up to resell to customers.
This section should start at a macro level and describe the sector and industry the business operates in. This should be brief as most readers will already know that the cannabis industry is rapidly growing. Include statistics and research; cite the source anytime you present data. Validating that you’re in a large and rapidly expanding market is the objective for this section. Once you do that, move quickly into the “addressable market”—the market you can directly sell to or otherwise monetize. “All cannabis users globally” isn’t an addressable market because no company can sell to all people everywhere. This section should also point out what needs your company is specifically solving, sometimes referred to as a “pain point.”
Sales and Marketing
Here’s where you describe your strategy for marketing and selling the product or service. Marketing is the promotional efforts you undertake to create a potential client. Selling is the conversion of customers’ interest into sales. Investors want to know how you’ll generate sales and who your clients are. This section should also show how you’ll scale and identify the key hires and how they’ll be managed. How do you pay commissions? How will you find the talent you need? Have you considered payroll taxes and benefits in your projections? How will your customers pay you? The more details you add about “how” your business will deliver on sales, the more believable your projections will be to investors.
This is the all-encompassing “how.” How you’ll build the business’s infrastructure will impact the financial projections, the cost basis at which you’ll operate, and the ability to deliver profits. This section should include the organizational charts, both functional (the roles and responsibilities) as well as reporting structure. Also describe the third-party companies and resources you’ll require such as accounting firms, law firms, and partners within the supply chain. Do you need to source products from a distributor? If so, who is that distributor and what terms have you negotiated? Do you need to leverage industry-specific software or regulatory compliance services such as testing or reporting? What are the costs and contract terms? Who will manage these key relationships?
When you describe accurately where your company’s place is within your industry, direct and indirect competition becomes clear. A word of caution is that every business has competition, and to say that you “have no competition” is not only inaccurate but also shows a lack of maturity and understanding to investors. A good way to define your competition is to analyze your industry and highlight others who are trying to face the problems or have a similar value proposition. You can then select the industry-specific elements of the business that all the companies can be compared against.
It’s also good to identify direct and indirect competitors, including non-cannabis businesses. For example, if your company has a novel solution to processing credit cards, American Express, Visa, and Mastercard will be your competition at some point. Direct competitors are companies that operate with a similar business model in your industry. Indirect ones are other businesses that would have an interest in participating in your industry if they’re not already there.
This section should include a profit & loss statement, cash flow statement, and balance sheet. For companies that have been operating for a year or more, this should include all historical statements as well as projections. It’s also good to include relevant financial information for a transaction here that should include a detailed use of proceeds and a capitalization table (the current ownership of the company). Your objective is to show that there’s some real financial planning in place and that you’re setting targets that can be used to measure success. Investors will always scrutinize the financials heavily, so it’s wise to provide as much detail as possible.
The number-one concern from investors and operators alike in cannabis is regulatory risk. Every cannabis entrepreneur should have their finger on the pulse of the regulations that impact them most directly and have thoughtful contingency plans and risk mitigation strategies that are clearly articulated in the business plan. The regulatory playing field needs to be defined in order to build the playbook for the company that can adapt.
It’s important for the investors and company to be aligned on how the value will be created in a company, then extracted through some liquidity or exit event. Include the exit strategy in the business plan because the desired outcome will inform how the company will be developed. For example, if a management team is really focused on going public, the company will build out resources and spend differently than a business that will remain private. This is critical data for the business and financial modeling contained in the plan and a section that investors will want to spend time reviewing to ensure that there’s a reasonable expectation that they can receive a return on their investment.