Pre-Start-Up Preparations: Why the Business Plan Isn't Always Written

Abstract

INTRODUCTION Herman Holtz (1994) pointed out everyone talks about the need for a business plan but most people starting ... small businesses ... do nothing about it. There doesn't appear to be any person who has systematically determined the percentage of entrepreneurs who start out with business plans. Available estimates have tended to relate to strategic plans for ongoing small businesses. See, for example, Rue and Ibrahim (1998; Karger, 1996; Mazzarol, 2001; Sexton & Van Auken, 1985). As far as new small businesses go, Siropolis (1997) guess-estimated that only about 5% of them start out with business plans. There are many reasons why most start-up entrepreneurs do not write business plans. One common reason is the view that business plans are intended only for raising business funds, implying therefore that if an entrepreneur doesn't need external financing, there is no need to prepare a business plan. Although existing literature doesn't seem to support the view that business plans are written exclusively for raising business funds, there is some support for the view that the single most important reason for writing business plans is to attract external financing (Kaplan & Warren, 2007). However, according to Zimmerer & Scarborough (1996) and Ford, Bornstein & Pruitt (2007), the first and foremost purpose of business plans is to provide guidelines for successfully managing a business. Raising capital is a secondary purpose. Another common reason why most entrepreneurs do not write business plans is what David Bangs (1993) called the Man of Action Problem, the preference for doing things instead of thinking about them or even writing about them. This view about business plans reflects the Just Do It philosophy, made popular by entertainer-turned entrepreneur, Wally Famous Amos (1999). He argued that formal business plans take too much time and require too much skill. Moreover, the analysis that goes into business plans may predict negative outcomes. Such outcomes could prevent the would-be entrepreneur from actually becoming one. Mazzarol (2001) has distinguished between formal business plans and the process of planning. Almost all start-up entrepreneurs undertake some planning activities, which may fall under what Van Auken & Neeley call pre-launch (2000). Start-up entrepreneurs, often intuitively and informally, develop a sense of an unsatisfied need in the market and the relevant customer segment that can be helped to satisfy their need. They then proceed to satisfy the need, often a small group of customers at a time. This intuitive planning is good enough for the overwhelming majority of start-up entrepreneurs (Mazzarol, 2001; Sudikoff, 1994; Gwendron, 2004). Like Wally Famous Amos, most start-up entrepreneurs informally ask themselves some tough questions, but they just don't document the answers they get in formal business plans. This study examines the nature of pre-start-up preparations to determine when such preparations get documented into formal business plans and when they remain undocumented and at an intuitive level. For those start-up entrepreneurs who do not prepare business plans, what are the specific reasons why they don't prepare business plans? What is the nature of intuitive planning that some start-up entrepreneurs use. The study also examines the value of business plans to those who prepare them. While it is generally known that most business plans are written for raising business funds, what other purposes do business plans serve? How do these other purposes stack up with the purpose of raising business funds? METHODS A common activity textbooks ask students to do is to find out for themselves what entrepreneurs do in way of preparing themselves for their ventures (Longenecker, Moore, Petty & Palich, 2003; Zimmerer & Scarbough, 1997; Ryan & Hiduka, 2006). Following this hint, senior undergraduate students taking a course on Entrepreneurship and Small Business Management at a college in New Jersey were asked to conduct interviews with small business owners who had started their businesses in the last ten years. …

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