Question: The loan officer asked me for a business plan. What should it include?
Answer: The lender uses your business plan to assess your credit worthiness and decide whether to give you a loan. A poorly executed document makes the loan process very difficult, if not impossible.
A business plan should include enough information to give the lender a clear idea of what your business is about, where you've come from, where you expect to go, and how you plan to get there. It should also explain why you want the loan. The following business plan outline is appropriate for the insurance industry.
EXECUTIVE SUMMARY
Loan officers have to read through scores of business plans. You'll flunk the first stage of financing if you waste their time by making them read all the way to page 33 to understand what your business is about. The executive summary should include 10 pages of description or fewer describing your company and your reasons for applying for the loan. Include the following information:
Company description. Identify the kind of firm you have - P/C or Commercial insurance brokerage, for example; where you're located; your subsidiaries, if you have them; and your principle lines of business.
Loan description. Specify the amount of money you want to borrow and why you want it. Examples include acquiring another agency, buying out a shareholder, investing in technology, and increasing working capital. It's hard to get a loan for working capital without demonstrating that your firm is growing faster than the industry norm. If you're growing at an average rate, the bank will expect your firm's cash flow to support operations.
Capitalization. The bank will want to see a schedule showing your firm's total debt and equity today and what it would be after you receive the loan.
Competitive advantages. Include a short paragraph about how you're different from your competitors. Why would customers prefer to come to you? How have you positioned your company?
Ownership. List owners and shareholders. If you're getting the loan to buy out a shareholder, list the shareholders who would remain after the buyout. Indicate which shareholders are also employees. For shareholders who are not employees, identify their relationship to the company.
Summary financial information. Include historical information about net revenues; income before taxes; earnings before interest; taxes; depreciation and amortization (EBITDA); profit and EBITDA margins; total assets; total liabilities; and equity. Include at least three years of data, but preferably five years in a summary format.
Firm-specific information. The executive summary should include a paragraph describing how your operation is unique. If you've achieved exceptional growth over the past few years, tell how you did it. If you've had successful acquisitions, explain how your acquisition strategy worked.
BUSINESS STRATEGY
Explain how you've succeeded and how you plan to continue to do so. Examples include:
- Association endorsements. Describe how your acquisition strategy has worked for you. What are the characteristics and sizes of the firms you acquire? Do you look for distressed situations or well-run firms?
- A unique product. If you've enjoyed a rapid revenue growth because you have the exclusive right to a carrier's product or line, explain why you expect the growth to continue.
- Unique technology. You'll probably have an uphill battle if you try to get a loan for an Internet strategy. A technology initiative that's backed by a reputable carrier may go over better with the loan officer.
- A particular market. If you've been successful pursuing a particular market, such as the entertainment business, the middle market, high-end Personal Lines, or contractors, describe reasons for present and anticipated success.
- A new product. Are you trying to increase your offerings by including a product with cross-selling opportunities?
If appropriate, include a section about why your strategy is compatible with the market. For example, you could discuss your target-market size, your market share, and how the right resources can enable you to reach your goals. If you have an acquisition strategy, discuss the consolidation trends of your acquisition candidates.
DESCRIPTION OF BUSINESS
This is the most detailed section and should include these elements:
Background. Briefly discuss your company's history, and describe its organizational structure.
Products and services. Describe your products and services in detail. For example, you might describe your P/C products, employee benefits, special programs, alternative risk transfer products, and any others that are important to your organization. For each product line, describe how important the product is to your firm; how you charge for services, and which services you provide.
Leading clients and carriers. Include a table of your top 10 clients and carriers. If you're uncomfortable disclosing client names, it may be acceptable to omit them as long as you provide annual revenues from each one. Your firm would have a different risk profile if its top 10 clients brought in 90% of revenue than if they brought in 20%. It's useful to list the A.M. Best rating for your top 10 carriers.
Revenue per employee. Display historical revenue per employee of your firm compared with industry standards.
Firm-specific characteristics. Explain how your firm stands out. This section may include a discussion of the state of your technology if it's your defining characteristic.
Other matters. This section should include a brief description of items such as Errors & Omissions insurance, open litigation, and lease obligations, if appropriate.
MANAGEMENT
This section should describe the composition of your board of directors and key officers. Include short resumes for all key personnel. Briefly describe management and producer compensation, stock-option plans, bonus plans, and employee benefits.
FINANCIAL PERFORMANCE
This section should include the following:
Detailed historical income statements. These can be internal statements or audited statements prepared by a CPA. Mention whether the statement is audited and list the auditors. Display at least three years of statements and preferably five. Include a statement for the most recent 12-months, whether or not it represents the end of a fiscal year. For example, if the business plan is prepared in July, include fiscal years ending December 31, 1996 through 1999. Also include results for the 12 months ending May 31, 2000.
Breakdown of revenue components. Explain the importance of each principal business line. You could include a table showing revenue from a specific line along with the percentage of total revenue. You could report the most recent year or the entire historical period. Explain significant changes in revenue from year to year.
Discussion of changes in expenses. Include a brief discussion of how and why summary-expense captions have changed over the period. For example, your income statement may break down into compensation and selling, operating, and administrative expense. Discuss significant changes over the five-year period, focusing on the most recent years.
Analysis of year-to-date results. Compare year-to-date results with those of the same period last year. Explain significant variances between the years.
Balance sheets. Include detailed balance sheets that correspond with the periods shown in the income statements. Briefly explain any significant variances.
Pro forma income statement. A pro forma income statement is for the most recent period. It incorporates substantial changes, but excludes non-recurring revenue and expense. Include income statements for important pro forma adjustments, such as recently selling a business segment, opening a new location, acquiring another agency. The acquired agency's results would be added to the buyer's results. Describe the profitability that you would have had if these events had occurred at the beginning of the period. This statement should tell the lender how increased profitability will increase money available to repay the loan.
Pro forma balance sheet. If you prepare a pro forma income statement, include a pro forma balance sheet. It would include debt you've applied for and the balance sheet of the acquisition target. It would exclude the assets and liabilities of any business sold.
To convince the lender that you'll be able to repay the loan and stay on a profitable footing, make sure your plans make sense and your expectations are in line with your firm's performance. The lender will question your credibility if you predict strong profits in the coming year, even though you failed to show any profit at all for the past five years. The lender will be looking at your business plan to determine whether you've thought through your strategy.