Whether you're an investor, an entrepreneur or a business skills teacher, you'll be exposed to a wide variety of business plans and should have a solid, somewhat standard approach to evaluating each of them. Analyze each section individually, and then look at the plan as a whole to determine the viability of the business and the likelihood of its success in the manner proposed. Also consider the writing skills and attention to detail that went into formulating the plan.
Read the executive summary. This should be a concise "elevator pitch," not a summary of the business plan. In one or two pages, it should convey the market opportunity and the uniquely compelling features of the business that will help it meet that opportunity. The executive summary should excite you and make you want to turn to the next page. If it doesn't, the entrepreneur might lack marketing or writing skills.
Evaluate the market opportunity. It should be growing at least 10 percent per year and have a substantial potential relative to the size of the business and investment. For example, a small company seeking an investment of $50,000 should see a potential market of $5 million. The larger the potential market and the faster it is growing, the better. Look to the exhibits and appendices to ensure that the business actually has done the necessary market research and can back up any claims.
Examine the company strategy for capturing its market. The plan must clearly describe the problem the company is solving or need it is meeting for customers, and then propose a solution. Closely examine the alignment between problem and solution. Will the company actually address that need? This evaluation must take into account the product or service being offered, the operational capacity and efficiency with which the business actually can produce its product, and the quality of the proposed marketing efforts.
Understand the business environment. The business plan should describe the competitive landscape in which the company operates, preferably by referencing Porter's 5 Forces or another well-established tool. Look for detailed breakdowns and analyses of each of it competitors, and of how the company is different and better than the competition in a particular niche. This section should include the regulatory environment and mention any costs or necessary delays associated with regulations.
Look for experience, integrity and passion in the executive team. Bios and brief highlights of each executive's strengths and expertise should accompany standard business information such as headquarters and corporate structure. The company should have experienced advisers, either formally or informally. It is paramount that the principals involved in the business convey their passion and drive toward success with this project. If the founders haven't invested their own capital into the business, or plan on keeping their “day jobs” while running the business, they might lack faith in the project.
Ensure that the financial projections are both promising and realistic. Most entrepreneurs vastly overstate their company's potential, starting with the market size and market share. Financial figures should be based on historical data if available, or very conservative projections if the company is not yet profitable. Entrepreneurs that project capturing 20 percent market share in the first two years probably have unrealistic expectations.
Investigate the returns provided by the investment. Good business plans include exit strategies for pulling the initial investment back out of the company, and have a realistic valuation of their shares.
Evaluate the business plan as a whole document, and as a reflection of a real-world company. Determine whether the market need is adequate, the company's offerings are compelling, the management team experienced and committed, and the financial statements realistic. Does this company as a whole have a chance of success?