Chapter 7 -
Business description

The business description section of your business plan should be straightforward. Unless you have discovered a particularly unusual market niche, most readers won’t have any trouble understanding what you do. The business description can be much more challenging for would-be producers of products and services that have never before been marketed.

Although your business description is simple, it’s usually the lengthiest aspect of your business plan. A small trucking company’s business description should include:

• General description of your business
• Key customers
• Key suppliers
• Competition analysis
• Marketing plans
• Employees
• Properties and facilities
• Governmental regulation
• Company history and organization

This is a long list, but it shouldn’t be difficult to compile.

General description of the business
The general description of your business should read much like your mission statement, though more detailed. SCU Trucking’s mission statement says it provides “the most reliable refrigerated truckload service east of the Rockies.” The general description might state the foods SCU Trucking hauls and the lanes it serves. SCU Trucking operates generally east of the Rockies, but it probably doesn’t haul goods to or from every state east of the Rockies on a regular basis.

Don’t forget to list all your services. If you are primarily a truckload carrier but you also run a small LTL operation, describe the range and scope of those services as you did for the truckload operation. Do you provide services related to transportation, such as warehousing or brokerage?

Separate services you provide now from those you plan to operate in the near future. If, for example, you now offer truckload and LTL services but you’re expanding into logistics, include logistics under a “Future Operation” heading. You also will outline in your action plan (discussed in Chapter Eight) the steps needed to implement this new line of business. If you plan to obtain capital to develop these new services, you will account for it in the use of financing section.

Also list in the general description the number of power units and trailers you operate and the location of any principal places of business, such as your headquarters and terminals. Describe properties such as equipment, buildings and real estate more completely under the “Properties” section of the business description.

Although you will address it in more detail later, mention the legal status of your business. Is it a sole proprietorship, a general partnership, a limited partnership, a limited liability corporation, a C corporation or an S corporation? The legal status will interest anyone who has a vested financial stake in your company because that status answers important liability and tax questions.

The general description of business also is an appropriate place to point out some basic features of your company, such as whether you use company drivers or owner-operators, or whether you operate under your own authority or as a leased fleet. And don’t forget to list all your authorities. Even if you routinely serve only half the country, you should let lenders know whether you have 48-state authority.

Customers
Someone considering providing you capital will want to know the companies you do business with. Probably most important, they want to know your key customers. The SCOR form asks you to name any customers that account for 20 percent or more of your sales. It also seeks disclosure of any special legal or business relationship you have with the customer and whether the loss of the customer would have a “material adverse effect” on your business.

If you haul for some shippers under ongoing contracts, disclose whether any of those contracts are oral or informal. And you should list any major contract that is uncertain or subject to cancellation in the risk factors section. On the plus side, list any customers that have committed to using your company contingent on you obtaining the necessary equipment and drivers.
More broadly, business plan readers want aggregate and average information on your customers:

• What were your total sales for the most recent fiscal year?
• What’s your average revenue per load?
• Is your hauling seasonal or cyclical?
• What percentage of annual revenue do you earn in each quarter? If the answer shows significant variation, explain why.

Suppliers
Financial backers want to know about your suppliers. They want to know how much risk there is that your expenses will spin out of control. They like to see stability in expenses, even if that means long-term contracts that surrender opportunities for lower prices.

In trucking, an obvious example is diesel. Many large carriers hedge and lock in stable prices over a long period. But to do this, you need a volume that most small trucking companies don’t offer. So diesel prices are often a big risk factor in your success, particularly if your profitability has depended on abnormally low diesel prices. Other questions regarding your suppliers:

• Do you have any major supply contracts? If so, are you obligated to purchase a minimum amount or to purchase the supply at a specified price?
• Are there a limited number of suppliers for your needs? This concern isn’t as great in trucking as in manufacturing, where a disruption in the supply of a raw material might make it impossible to continue production. But certainly there could be important truck components that have only one or two suppliers.
• What would be the effect if prices rose sharply or one of the suppliers suffered a prolonged work stoppage? This won’t be the biggest concern of your business plan’s reader, but acknowledging the issue shows that you are thorough.

Competition
What’s your competition? The answer isn’t always as easy as it sounds. It’s easier to identify who your competition is not: carriers that don’t run on your lanes. But are all the trucks that travel the same Interstates with yours — even those with the same types of trailers — your competition? It really depends on your definition, and that definition differs from one trucking company owner to the next.

If you provide long-haul truckload service, for example, it would be reasonable to include large national truckload carriers among your competitors. But do you truly compete with them? Some small trucking companies are more likely to accept a brokered load from — or even lease equipment and drivers to — a large trucking company than to lose business to or gain business from it.

A more direct way to look at competition is to identify those carriers that routinely bid on the same freight. If you and your sales staff, if you have one, are sharp, you will learn from the traffic manager who bid on the business you won. And, of course, it should be fairly easy to determine who won the business you lost. Just drive past their dock one day.

Carriers that haul for shippers whose business you plan to pursue also are competitors. These potential customers could be shippers in your core market that you have yet to court, or they could be shippers in a new type of haul that you are considering. In the latter case, you probably will address these potential customers in more detail in the action plan.

To some extent, rail, sea or air carriers may be considered competitors as well. If you believe this is the case, include those companies as competitors just as you would other trucking companies.

List your competitors, along with any information you have on their size and financial strength. Also, identify each carrier’s market strength. Is one competitor a rate cutter? Does another offer soup-to-nuts logistics service? Does one carrier promise Internet booking and load tracking?

Competitive strategy. Do you compete or plan to compete based on price? If so, what cost or productivity advantages do you have or think you have over your competitors? If you can’t answer that question, you won’t convince financial backers that your strategy is sound. If you get into bidding wars with one or more competitors, you will either lose business or win unprofitable business unless you have a cost advantage. (Of course, you also must know when to walk away from business altogether; just because your competitor takes on freight that loses money doesn’t mean you have to.)

If price is your competitive edge, lenders and investors will insist that current market rates per mile on your lanes exceed your cost per mile. Regardless of your strategy, they will want to know your cost per mile and the market rates; a strategy of superior service can’t succeed — particularly in trucking — if the spread between market rates and costs is too great.

Another risk for a competitive strategy based on pricing arises if your business plan calls for a new type of haul or service. Bankers and investors are much more confident in your ability to assess the costs of conducting your current business than in your potential costs for a new business. That’s a risk factor, and it’s significant if your new business will be a big piece of your overall operation.

Do you compete or plan to compete on service? If so, what do you offer that others don’t? A good mission statement addresses this question. In the case of SCU Trucking, for example, the competitive strategy is maximum reliability in a particular type of hauling. And if your strategic planning is sound, you should have a good roadmap for delivering on the promise.

A competitive strategy based on service might require more justification than one based on price. With a price-based strategy, a lender or investor can determine with some certainty that you will either succeed or fail just by looking at your cost structure. But banking on service is tricky because success often depends as much on perception as reality.

In addition, a lender will be skeptical of any competitive strategy as cliched as “we’re small enough to give the customer the personal touch.” Every other small trucking company in the country can make the same claim, and it’s not enough to distinguish you in the marketplace. It may be enough for a trucking company that’s content to continue at the same size with the same customers, but if you want capital, financial backers want to see something meatier.

Outline your service-based strategy in detail as you did in your strategic plan and include any evidence that your particular approach to service is in demand. Discuss whether any of your competitors can — or are likely to — claim to do the same.

Marketing
Marketing is competitive strategy in action. Your business plan should outline how you plan to market your company during at least the next 12 months. If your plan calls for marketing services you don’t yet offer, refer to this discussion in your action plan and account for the marketing expenses in the use of financing section.

How do you sell your services? Suppose you have depended for years on a few long-standing customers and don’t have a sales staff. If your business plan assumes growth through new customers, lenders will want to know how you expect to attract them. Discuss whether you intend to land new freight through a sales staff; by working with brokers, freight forwarders or other intermediaries; or by using load-matching services on the Internet.

Who will you target? Is your growth strategy dependent on attracting new customers or getting existing customers to increase either their volume or rate or both? Explain why you consider the marketing approach you have chosen to be appropriate for the type of customer targeted.

Note whether you have a commitment from one or more new shippers contingent on your ability to service the contract by a certain date. State that you have new business lined up and include the shipper’s letter of intent within your business plan’s supporting materials.

If your marketing plan includes advertising, outline the message you are highlighting and the specific publications, websites or other media you are using. Explain why you chose the specific advertising outlets and how the advertising supports your competitive strategy. Include advertising examples, if you have them already, in your supporting materials.

How much will your marketing activities cost, and how will you fund them? If you are seeking capital for promotional efforts, identify the costs in the use of financing section.

Employees
To get a sense of your company’s scope and efficiency, lenders and investors want to know how many employees you have and what they do. Although the Internal Revenue Service says otherwise, consider leased owner-operators and any other regular independent contractor or consultant as employees for the purposes of this exercise.

Break your workforce down into categories, such as drivers, dispatchers, mechanics; clerical/administrative; sales/marketing; and management/executive. Estimate how many employees by category you expect to have within a year and discuss how many of these are contingent on receiving financing.

Next, discuss the labor market. Are you having problems recruiting and retaining good employees? If your answer is no, explain how this might give you a significant advantage over the competition. If recruitment and retention is a problem, explain what steps you are taking to address the problem.

If your business plan assumes no growth, chances are you already have learned to adjust to any turnover problem you might have. But if your business plan assumes significant growth, then availability of drivers and, to a lesser extent, mechanics might be the biggest risk factor. If you can’t fill your trucks now, how do you expect to fill 10 or 20 more? Your entire business plan may rest on a credible recruitment/retention plan.

Discuss employee relations, including whether any of your workforce is unionized and whether a strike is a threat in the foreseeable future. Outline benefits or incentives you currently give employees, as well as those you plan to offer.

Properties
Describe your company’s principal owned and leased properties, both tangible and intangible. Tangible properties include power units, trailers, terminals, warehouses, office buildings, maintenance facilities, real estate and items of similar scope. It’s generally not necessary to identify minor properties, such as automobiles, tools or office equipment.

Any property of consequence held by a small trucking company almost certainly will be tangible. You might hold a service mark on your name and logo, but it’s highly unlikely that you own any patents, copyrights, trade secrets or other intellectual property of value. Your own know-how as a trucking executive is probably your most valuable intangible property, and that’s difficult to quantify.

Identify which property is owned and which is leased, and divide owned property into property owned outright and property being purchased in installments. Note any property essential to your business plan that’s obsolete or must be replaced soon and discuss how you plan to replace it.

For leased property, summarize the terms and discuss why you chose to lease rather than own. If your lease has a short term, what will you do if you can’t renew it?

If your company has purchased or leased property from you or other owners or investors, you might disclose that fact and whether the terms were as favorable to the company as those generally available in an “arm’s length” transaction. Investors scrutinize such sweetheart deals to make sure owners haven’t bolstered their personal finances at the company’s expense.

Unless you are selling stock or are asked this question specifically by a prospective lender, you might be under no obligation to disclose such arrangements. But if you believe the company received a competitive deal, disclosing an owner-company transaction may help reinforce your honesty in the eyes of the investor or lender. If there’s a good chance the lender or investor will discover the relationship anyway — he probably will if you include tax returns in your supporting materials — consider why you shouldn’t divulge the transaction.

List property you intend to buy or lease in the next year and discuss why you need the property and how you will pay for it. If you are relying on new capital for the acquisition, list the acquisition in your use of financing section.

Governmental regulation
One of the wild cards for any trucking company is potential adverse action by state and federal agencies and legislatures. Whether the action is directed at you specifically — a conditional or unsatisfactory safety rating, for example — or at the industry as a whole, regulation is a huge risk factor.

If your potential lender routinely provides capital to trucking companies, it will be familiar with these risks. Unless you have a history of serious compliance problems, your lender will care very little about the risks of regulation; it accepted that risk when it chose to become involved in trucking.

But bankers and other local lenders may understand very little about how the Federal Motor Carrier Safety Administration and its state agents oversee motor carriers. They may be familiar, however, with regulation by the Environmental Protection Agency and the Occupational Safety and Health Administration because those agencies closely monitor businesses of all kinds.

The most important regulations are the Federal Motor Carrier Safety Regulations and the drug- and alcohol-testing rules. Describe generally how the safety regs relate to the safety of commercial motor vehicles and their drivers, and provide a copy of the regulations upon request. It is important, however, to disclose the consequences of failing to comply: civil penalties, conditional or unsatisfactory safety ratings and, in extreme cases, a shutdown order.

Even if you have a satisfactory rating or have never been audited — and you certainly should emphasize that point — mention the FMCSRs and the controlled substance-testing regulations; they clearly constitute “material regulation” of your business. Adverse enforcement action based on non-compliance with these regs can have serious consequences. If you haul hazardous materials, for example, an uncorrected unsatisfactory rating puts you out of business. In 1999, the Department of Transportation proposed to extend this fate to all carriers drawing unsatisfactory ratings. But a conditional or unsatisfactory rating already can hurt motor carriers in the marketplace — particularly now that everyone’s rating is available on the Internet.

Governmental action need not be directed specifically at you to have serious consequences for your business. If FMCSA were to limit drivers to 10 hours on duty and eight hours driving per day, how might that affect your operation?

Finally, to show your business plan readers how thorough you are, try to determine whether any of your shippers or receivers are subject to governmental regulation that might indirectly threaten your traffic volume.

Suppose, for example, that your biggest shipper is a Northern California-based manufacturer of redwood furniture. Because you, as a savvy manager, follow furniture industry news, you learn that California is proposing to severely limit the felling of redwoods. This is a serious threat to your business that you might list among your risk factors. But even if you choose not to disclose this threat — and unless you are selling stock you probably aren’t required to — it’s a danger you can’t ignore in your strategic planning.

Company history and organization
It’s important to many lenders and investors to grasp the larger context of your business. Is your company young, or has it been in business for 50 years? Are you the founder, or was it your grandfather? What did your company haul when it first started? How and why has your company’s strategy changed over the years? If your company is closely held, who are the owners and what are their relative stakes?

Summarize your company’s history, including any mergers, acquisitions, spin-offs, bankruptcies or similar events, with particular focus on the past five to 10 years. Explain the reason for each transaction.

Describe your corporate structure. Does your trucking company have a parent company? One or more subsidiaries or affiliates? Which entity or entities hold significant assets? Which produce significant earnings? How do the earnings of a parent, subsidiary or affiliate benefit the trucking company? The point of all this disclosure is to show that the entity that obtains financing isn’t just a shell that holds all of a larger organization’s liabilities but none of the assets. Lenders and investors want some comfort that their claims won’t be wiped out by corporate shenanigans.

By compiling this information you have done more than summarize your business for outsiders. You have created a reference guide to running your company that a successor could, in a pinch, rely on for direction. It’s hardly a substitute for a formal succession plan, but it’s better than no direction at all.

In Summary
The business description gives a comprehensive view of your company. By studying this section, a reader should be able to visualize your operation and begin to gauge your likelihood for success. The business description is the foundation for informed analysis of the more forward-looking portions of your business plan.