In its simplest form, a business case is a powerful decision-making tool. It is often the first step in securing an investment opportunity, guiding a business and its stakeholders in making the right investment decision. In this article, we will explore the various elements needed when drafting a business case, providing key insights into what contributes to making a business case successful.

With any investment or business opportunity, there is a need to assess the feasibility of the business idea and, importantly, understand the potential value that could be derived from the business and, more importantly, what needs to be done to unlock and achieve this value.

A strategic approach to holistically understanding the opportunity and the nature of the specific business model is critical for several reasons. These reasons will collectively advocate the viability of the investment decision, garnering key stakeholder buy-in and communicating the extent of the opportunity.

The starting point in achieving this is undoubtedly a well-crafted business case.

At Step Advisory, we are often asked, “How long should a business case be and what level of information is required?”. There is no limit to the amount of information added to your business case. Still, the quality of information is critical, and the validation of all the assumptions made needs to be robust. When drafting your business case, you can include any information you deem appropriate, but we believe there are five key elements that are critical for every business case. These elements are: 

1. Identify the size of the prize – who is your target audience? 
2. Establish your Customer Value Proposition (CVP) and unique selling point within the market.
3. Develop a succinct go-to-market strategy.
4. Calculate the projected value of and Return On Investment (ROI) on the investment for potential investors.
5. Understand how and when a business will generate revenue.

As a starting point with any business case, it is essential to determine the size of the prize. Identifying who your target audience is – sizing the total addressable market – is the primary concern when determining the size of the prize. The total addressable market will be used to determine potential uptake based on market demand by the target audience for the proposed product or service. This is the starting point for forecasting the potential revenue to be generated.

When addressing this particular element of a business case, it is important to remain cognisant of market penetration challenges, current market saturation, and competitors within the relevant market category. Monopolising the market, whilst preferable, is extremely difficult and should be factored into the calculating of potential uptake by your target customer in your business case. If the assumptions around uptake have been well thought through and researched, it will give the decision-makers and stakeholders a sense of comfort that the forecasts are based in reality.

The crux of any successful CVP is the ability to articulate how a business will address its targeted audience’s needs. Through a well-formulated CVP, businesses can convince customers of their product or service, making a CVP a powerful tool for communication.

The composition of a CVP is threefold. Firstly, you need to communicate the product or service’s value, i.e., what is the product or service, and what are the related benefits? Secondly, highlighting the key differentiator of the product or service is imperative. This would be the feature or aspect of your product or service that differentiates it from competitors within the given market category, i.e. the unique selling point. Finally, your CVP should convey the relevance of your product or service to the customer.

Ultimately, a clear and concise CVP is critical to success as it is an important engagement point with the targeted audience identified through the market sizing analysis.

A key element that is often missed or overlooked is the inclusion of a feasible go-to-market strategy, i.e., a plan for distributing the product or service. The go-to-market strategy talks about the market entry strategy and how the product or service will be distributed through channels to reach the target customer. Often the obstacles around successful distribution and access to the target market are not thought through sufficiently, and that is why it is a critical element of every business case. All the assumptions made around the go-to-market strategy will need to be validated.

The go-to-market strategy is notably different to a marketing plan – which outlines the actions to execute against the strategy. A marketing strategy will define the overall direction and goals for marketing the product or service.

When developing a marketing strategy, it is important to include the following:

• A clear description of the product or service and its position within the market.
• Who is the target audience, i.e., who are your customers?
• Who are the competitors within the relevant market category?
• What marketing tactics you will deploy to distribute the product or service, i.e., the distribution method you adopt.

Overall, it is important that from the onset, the route to market and the related marketing strategy are factored into the business case presented. Notably, these costs then need to feed into the financial model constructed.

With a thorough market sizing analysis, coupled with a strong CVP and a clear go-to-market strategy, is the need to calculate the investment required and the associated enterprise value. The calculation determines the value of the business and is used to analyse the profitability of a projected investment or project.

The starting point, however, is determining the amount of investment required to start the business. It is critical to think through not only the capex needed but also the amount of working capital required to fund the business until sufficient revenue is generated to cover the operational costs. This is where all the previous assumptions made in your business case will feed into the financial model.

Once the cost base of the business is modelled together with the potential revenue generation (taking into consideration all the appropriate uptake assumptions made previously), you will be able to calculate the projected value of the business.

You can use several valuation methods when calculating enterprise value, but the most common approaches include –

1. An income-based approach; which is conducted using a discounted cash flow methodology.
2. A market multiple-based approach; whilst there are different examples of market multiples that you can apply to derive the value of the business, the most common is an appropriate P/E (Price/Earnings) multiple.
3. An asset-based approach; where the value of the enterprise would be calculated as the Net Asset Values (NAV) of the business. Under this example, there are various iterations, such as the liquidation-based approach, which would essentially reflect the floor value of the enterprise.

The Net Present Value (NPV) calculation is valuable in establishing whether an investment is sound. It is based on projected cash inflows and outflows, discounted using an appropriate discount rate to the present day. This should be included in a business case as well as the calculation of the Internal Rate of Return (IRR) to determine the long-term profitability of the investment.

Finally, a business case should communicate how and when an investor will earn returns. This is achieved through understanding the business model developed, as this captures the business’s core strategy and key growth vectors for driving profitability.

In conjunction with understanding the business model, a projected monthly financial model will inform stakeholders of the business’s financial position moving forward, thus answering the question of “when” returns can be expected.

This will also be helpful for potential investors to understand when potential tranches of funding would be required over time.

In conclusion, a business case should provide a comprehensive but concise overview of the elements discussed. Collectively, these will inform stakeholders of the various facets that underpin an investment opportunity – allowing for well-informed decision-making.