Common Reasons Business Plans Get Rejected
Believe it or not, business plans often get rejected or passed over for some of the most basic reasons. Experience tells us that many of these causes are avoidable, but some are not. Owners and plan writers often fail to realize these shortcomings because they are:
- too close to their business (sometimes known as the “blinder effect”);
- too optimistic about a concept’s ultimate financial potential (emotional connection); and/or
- under the belief that a market exists when it really does not (market misread).
Aside from these generalities, we have compiled a list that examines some of the reasons why business plans get rejected. Some causes relate to the substance of the report, while others revolve around the actual execution of the proposal. Regardless, these missteps typically result in the same outcome – elimination.
Financials that do not tie together or properly align with Generally Accepted Accounting Principles (GAAP); overly aggressive sales assumptions; expense inputs that are too lean; and simple mathematical errors are possibly the worst financial infractions and are often deal-breakers to potential investors. We highlight and discuss a number of specifics in another narrative, The Art and Science of Financial Modeling.
Business concept lacks clarity
Not all plans have a strategic vision. Sometimes this is a function of the underlying concept being incomplete, while other times it reflects a poor executional framework. Unless a plan features a revolutionary business or paradigm shift, it can sometimes be challenging to substantiate the underlying need. This lack of differentiation can make it appear that the business concept lacks clarity or purpose. For this reason, proposal writers need to clearly identify both the opportunity, as well as the product/service solution.
Lack of need
Similar to a lack of clarity surrounding the strategic vision, some business concepts fail to define a solution or service that is needed or desired. There might be incremental value to an existing product or process, but it may not be enough to substantiate an entire business. One example we offer here is the concept of opening up a coffee shop and bakery because the would-be owner discovered a great-tasting seasonal coffee drink. The new beverage may not serve as the best reason to open an entire restaurant.
Thinking too big
The belief that your business is going to be the next big thing – another General Electric, Amazon, Google, or Microsoft. While it is possible and many Fortune 500 companies started out with a business plan not too dissimilar to yours, practicality suggests that your business may not evolve to these meteoric levels. Suggesting that it will progress to such heights, particularly without any tangible operating history, invites a high degree of skepticism.
Lack of a proper sales and distribution strategy
We have seen many instances where an entrepreneur’s primary focus is a product or service. Beyond that there is little consideration for a discernable go-to-market strategy. While the core product offering is important, it is typically not the end-all, be-all, unless the underlying transaction is the sale of some product or intellectual property. A business without a clear vision for sales and distribution is a concept that is likely to fail, and one that will not receive investor consideration.
Sales function not developed enough
Effective sales people typically carry the day across most product and service organizations. Our experience, however, is that people frequently overestimate the effectiveness of sales executives and their potential reach. In other words, they assume their sales staff will be able to cover a greater territory and generate far more revenue than is realistic.
Much like a good bottom-up revenue forecast, business plan writers should (if possible) spend some time understanding and quantifying underlying sales metrics and reach, and have those sales efforts tie back to unit sales assumptions. If the sales assumptions do not tie out with the revenue expectations, there is a near certainty a business plan will get rejected because an investor will not be able to reconcile the financial model – a huge red flag.
Inexperienced management team
Regardless how good a product or service is, a business staffed with ineffective managers and executives is often a non-starter for a potential investor. Further, a business owner that fills their management ranks exclusively with family members can be a red flag to investors. More often than not, those individuals often lack the necessary or relevant backgrounds to drive long-term results. And while they may have the skills to learn on the job, an investor is unlikely to finance what is ultimately the training of others. Results often need to be more tangible and immediate.
Too much information, plan is too long
Savvy investors are incredibly busy and their time, like yours, is valuable. The absolute last thing they want to do is to set aside a significant block of time to page through a 50 or 60-page document. Unless a proposal has numerous supporting documents that are highly technical or scientific in nature, the core of a business plan should be somewhere between 20 and 30 pages. Individual sections of the report that become plans unto themselves can indicate an inability to focus on what is important. Be concise, make your point, and move forward.
Lack of flow
We often tell clients that when they are writing a plan they are writing the story of their business (or idea). Reports that lack flow and present concepts out of sequence are very difficult to read. The order in which the sub-components are raised is certainly not a trade secret and numerous examples can be found online or in text books. Simply cobbling together different sections haphazardly can be frustrating to the reader as they have to frequently flip around and reference other areas of the report. Ignoring flow is one way to get your business plan eliminated.
Typos, poor grammar, and improper punctuation
Technical writing is a skill, and one that can take years to master. Typos, poor grammar, and improper punctuation indicate a lack of attention to detail and general lethargy. Contractions (isn’t, don’t, can’t, doesn’t) typically have no place in technical business writing and provide the image of a less formal piece. None of these attributes will play in your favor.
Style, Appearance, and Formatting
The choice of font can have a big impact on reader satisfaction. An attractive report has a degree of balance to it. Constantly changing fonts and multiple colors can be distracting, annoying, and take away from the message. You want investors to focus on your concept, not be distracted by formatting issues. Some standard fonts that are acceptable for business and technical writing include sans-serif typefaces such as Arial, Helvetica, Futura, Verdana, and Calibri.
One caveat to this general rule is if the underlying business includes more artistic elements. At that point you may want to consider fonts that are more expressive and congruent with the medium in question – just as long as it is not too excessive. In this case, it is a matter of honing in on the proper balance.
Some argue that reports where the text is aligned to both the left and right margins leads to an attractive layout. The fact is that reports formatted with left-right justification take longer to inspect. A reader’s eyes travel across the page easiest when the spacing between words is static. This occurs when the text is aligned with the left margin. Do yourself a favor and justify the text to the left margin ONLY.
Other relatively simple formatting suggestions: no double space lines; put one space after a periods or question marks; no exclamation points (unless it is part of a marketing campaign); no single lines of text at the top or bottom of a page (referred to as widows and orphans).
Overly technical writing that fails to capture a mass audience
Occasionally (in particular with more scientific and technical material), the author is simply unable to bring a complicated subject to the masses. To combat this problem, we recommend giving your business plan to a college student (in some cases a high school student may do the trick) or someone without a significant background in business. If they are able to grasp the core concepts, then you are in good standing as far as readability is concerned. In addition, if their primary questions center around general business or financial terms (e.g., accounts receivable, inventory turn, direct marketing, etc.), then there is a very strong likelihood an experienced investor will understand your plan.