 Everyone, this is Sonali. Thank you all for carving out some time for attending today's webinar on the episode 17th of the BusinessX Learning Series, Invest, Scale, Value and Exit. Today's topic is on planning a successful business exit, unlocking and monetizing value. To all the attendees out there, please type in any questions you might have in the Q&A section and we'll try to answer as many as possible at the end of the session. I would now like to welcome our speaker, Mr. Gaurav Mariah, Chairman and Founder of the Franchise India Group, a very warm welcome to you, sir. Thank you. Thank you, Sonali. And thank you for hosting this every week session. BusinessX is a platform of franchise India which works on helping businesses, especially small and mid-sized businesses, to run raised capital value themselves and also help them to exit. We are the largest marketplace for helping businesses to find new buyers. So we are in a very interesting time, you know, and I've started seeing last four or five months we had a lot of problems in the economy, businesses was collapsing and things of that nature and now it's started coming back. And a lot of businesses are coming back, a lot of new potential buyers are coming back in the market and we're starting seeing a lot of transactions happening. On one side we are seeing companies which are becoming more opportunist, they are looking for acquisition of businesses which are strategically or financially attractive for them. And on the other side, we are also looking at businesses which are now looking to use and it's not really about the businesses which have some kind of a stress in their business. We are seeing rather a lot of businesses which are doing extremely well, they are using this as an opportunity because a lot of people are out there who are also looking to successful running businesses, rather than starting their own startup now, which has a lot of uncertainty, but it is better to invest into businesses which are already established. So it's a good time and I see particularly in 2021, 2022 would be one of the biggest times for MNAs and we would see a lot of action going on in the mid-market MNA. And that's where the space where business X really works on because fundamentally there is a lot of work, I mean a lot of big consulting firms actually focus on the top MNA opportunities, but nobody is doing it at an entry or a mid-level MNA and that's where our focus really is. So today we're going to talk about how you really plan your exit structure. It's always planned, it's not really, you can obviously sometimes be opportunist and look at something comes to your way. I mean I just finished a call with the group out of Chennai and we proposed a healthcare practice run by a doctor and just reached out to him and say, we have a buyer if you would be interested do that. And he says, why not? Why should I not look at it? So at a given point in time people are always open. I always say that one third of businesses if given a choice would exit, not necessarily they need cash or then I think there must be some other reasons they want to pursue. There might be fatigue which is coming. So today we are going to talk about is why you want to sell the business, when you want to sell the business, how you want to sell the business and what are you going to sell them? It's also very important that we need to understand what is the real inherited value in your business model which you really want to bring it out and sell the business to somebody else. So I would say that it is actually unlocking your equity into real cash. So always in the back of the mind we know our value of businesses. A lot of people don't go through the whole exercise of hiring a good valuation consultant and getting that done. It's a very big recommendation. I would say India has a big problem we don't have. We have less than 1% of businesses valued. So people run their businesses all their life. They spend about 60-70% of their active life into their businesses but they don't know the value. They know the value of their house. They know the value of their car, their drive. They know the value of their watch. They wear everything they know value. But sometimes when they run the business they don't have a value. And this is true with almost all businesses. And I go to them and they have a very vague idea about what is the right value for their businesses. So one of the strong recommendations I do for small businesses is that always periodically keep your value and see how your value has been built. And if you really want to sell that it will come handy to you. But let's talk about a few questions which is very important for you to really go through. When is the right time to exit? And what are the typical signals which you will get when you need to do it? I personally feel that a best time for selling a business, you know, this is like a, you know, S-curve kind of thing. You don't know where you are and when you go down and you're going to come up. Whenever you have a early signal which has started showing that you are back on the curve and the company is back on the growth side, that is probably a best time to really look at growth because you are able to demonstrate. People are not buying what you've done. People are buying what they can do with your business in the next 5-10 years. That's where the value is. So if you can really demonstrate next 4, 5, 7, 10 years of your business in showing that this business is going in, that is the time you really have to be the best time to really look at selling a business. There are also some other compulsions come in, you know, which are forced upon you. It can be non-performance of business, cash flow issues. It can be fatigue. It can be succession issues. A lot of issues come in where people think that this is the time they want to do that. Now these are days. A lot of cases we are getting is where good business, but it's prolonged issues of this period, which has gone to about 6, 7 months now where businesses are not doing well. This prolonged period have actually dried cash flows. A lot of people don't have enough cash flows to restart or regrow or recapitalize their businesses. Businesses are great, but they don't have that kind of capital or they have too many assets, which means that I'm talking to a restaurant operator which runs about 25 different restaurants and now to really bring all 25 back in order, he needs a lot of cash to be done. So he's decided he'll set some part of it, some part of that business he will sell it to somebody else so that he can really do that. In some cases, you can really sell the asset and still retain the brand name, which is through what I call the conversion franchise. You convert the business into a franchise, sell that something which we call the built-operate transfer, you sell your running businesses to somebody as a franchise and still retain the brand and still retain the customer base. So a lot of other structures are available in the market to bring the liquidity back. So what is the best time? So time is you need to really decide at what stage you are in. And if you feel that the build-up is too short and you don't see the business, you will be able to retain or survive over four or five months, then you need to really start planning right away. I feel that a lot of people come to us when they are at a point where they don't have any ability to go forward and they're pretty much like a 30-day away from closure and that's the time they really start running around and finding a buyer and they don't get a buyer because three days is too long a time and you're not be able to do this whole exercise and you'll actually lose the entire asset. So where you see your predictability, don't overestimate yourself and especially in these days, don't overestimate yourself. If you feel that you don't have that kind of window, don't go too fast, start planning your exit and we'll talk about what all you need to do that. So then a lot of people say, how do I exit? How do I really get to the level and where I'm able to find the entire thing? So you need to really see where you are. Are you a performing asset? If you're performing asset is financially making money, you'll always get a good financial investor. Largely financial investors would like to invest into businesses which are performing and we'll talk about how the valuation would come in. We have done a lot of episodes in the past where we've talked about how you need to value the businesses and what kind of parameters you need to use. But if you're non-performing, then you have to really look at somebody who's strategic who is able to really turn around the asset and that's the more difficult part of it. If you are, say at this stage, not financially performing and who would have that ability to take the business and I've seen the businesses are sold in many frames. Look at the technology viewpoint. There are three stages I've seen businesses are bought. The one where you are early and you have some kind of a proprietary technology which you've built in or you have an interesting talent, you would normally bought. People would buy that part of the business. So they would quickly buy the business because they want to get that breaking technology or some kind of that thing. A lot of acquisition at early stage happens purely from a talent and the technology which you built in. Which is very early stage with ICON people buy innovation. They feel that if they have to pass through this whole innovation there would be a gestation and companies don't want to lose gestation especially on breaking technologies. They would like to pick up these and I think so innovation would always play and this plays in other businesses also even consumer side and anything anything which you have done a strong innovation and there is somebody who has ability to pick up that innovation they would just pick up that innovation and buy that and that. Then you get into a little bit of maturity of a product. So if your product has gone to a mature, the company would come down. Like mid-sized businesses and then you have a full blown company which has a strong balance sheet then you acquire that. So you need to really see where you are. If you're early stage company with a strong innovation there is somebody who needs that innovation from you and that would be somebody who has a companion reason. If you have a strong, mature product or a consumer base which is building there is somebody who wants to go to market and enter that space and would have to acquire you and when you are really a performing large company reasonable size balance sheet then companies people would like to completely acquire that business. So one has to really see what stage you are in. Then we get into what is the typical challenges of exit. Exit are multiple challenges can come in. Most of the challenges I've realized is expectation. Expectation on both sides. Expectation sometimes is not very real. The expectation from a buyer or a seller and these days this is unrealistic going on. Most of the buyers think that they buying peanuts. Almost every time they mentally expectation is that they want to buy businesses which are coming at a very, very big haircut. On the other side the sellers are not in that mood to do it. So there is a big problem there while the demand side and is very high. We are seeing a lot of cases coming to us but transactions are slow because of this mismatch of expectation. So I'm not picking up cases because I always say that if you don't have, especially on a seller side at this stage he has to have a certain amount of expectation alignment because most of the buyers are becoming more and more opportunist. We have seen deals. We go back and renegotiate and renegotiate because their expectation is very unreal. And I feel that mature buyers also have to understand that you don't get businesses that kind of. You need to have a realistic offer to really take businesses at the right time. So how do you really execute the right strategy and strategies which can scale and achieve your exit goal which means that sometimes there is a company which are not ready for immediate sale point. They need to go to a certain amount of size before they can even trigger this. So you need to, if you really look at a good company which are designed for exit or raising capital they would set some benchmarks at what stage they would be ready to do that. And this needs a little bit of faster scalability but very consciously you just cannot scale just for sake of designing a business or what I call dressing the business. It doesn't work because eventually it will collapse and it will create greater problems but you need to consciously design that how do you next two to three years show the significance because the last two to three years of your business performance would determine the most part of your valuation. And that's very, very important. If you're really able to show through that next six months or one year traction how you are able to do that it builds a lot of confidence in a new buyer who needs to be done. Another myth is that not every business can sell I can tell you every business can sell every business has a narrative value and how you present that net value to a business we call the SAS principle that what is a strategic value asset value and a subscriber value. So that you one has to really determine and then you need to present to somebody who needs to do that. Another law for other nitty gritties are there how do you really transfer the business what is the kind of structures you need to do that should the only business be transferred or the complete company is transferred what is the right fair valuation structure who can be eligible doing valuation we'll talk about all those issues we'll also talk about a lot of mistakes people have done in doing these valuations a lot of times I feel that the sellers who want to really sell the business I mean somebody who's coming in and diluting that he or she has real I mean business is a little bit confused and I when I go deeper into the businesses they have a lot of other ancillary things which are packaged around business which doesn't make any sense and the good buyers would start taking them out and the business they would like to take the core part of the business and that sometimes it becomes changes of huge amount of valuation structures so people really put a lot of things when you're building your own business you really bring in a lot of other things which are actually looking good to you but from an outside maybe you have a nice beautiful corporate office and a lot of other issues which you really value which are part of your existence because it was your existence in your own persona your own I think but has no meaning for a new buyer the buyer is actually a little detached and this is one of the areas that sound when you build a business from scratch and you're building this entire thing you're emotionally committed to the business you're emotionally involved in the business every smallest thing you have really done but actually when the new buyer comes in he's not he's only interested in the business part of it he has no emotional angle in diving so a lot of things which would look valuable to you as a seller would not look so much for the a new buyer a new buyer would not like to have that I've seen people have really bought businesses closed the corporate offices taken to smaller places integrate facilities clean up a lot of people a lot of team members are there which are old in the system which you will shy away and they would come and cut those costs out so a lot of these changes are part of that and I also feel that sometimes in a buying cycle cultures don't match and that also is a big mistake and I've seen businesses a lot of Roger the companies also have run big mistakes where one of their two acquisitions for them have actually been not so great because culturally they were never able to integrate themselves and and businesses become very very difficult but what all you have to prepare before you get into any kind of a sell-out you need to prepare one your strong financial statements you know you need to have a very clean balance sheet if you don't have a very clean balance sheet first work on five to six months to make sure that your balance sheet is very clearly defined your profit and loss statements your cash flow statements your tax returns are completely compliant your additional financial support for your financial representation your leases or contracts which you have done your supplier and vendor contracts how they are placed and how strong they are and how well defined they are your certificates your IPs your trademarks everything is very important even any kind of litigations any kind of cases which are filed in the content I've seen in past last stages of the when the DD really starts even a small case would become a very big point of issues because liability side is the most worry part for any new buyer because the buyer really gets scared that what is coming with this which I am not able to see their anxiety is only about that if you present that anxiety in a proper sense which doesn't come out on DD then it's fine but in the DD if it comes out even a smallest thing which was not told it looks very big at that time because then they think that there might be more which can come through which has not been told you know so any kind of personal withdrawals all has to be divided and presented very well because a lot of time when entrepreneurs and business owners run there they have a lot of their personal withdrawals which they have done in the business all that is very very important and also to demonstrate your some kind of a leadership team now the next question would really come down to a point and another thing which I always say in the most valuable businesses are where the business owner himself has become redundant you know so if you really represent yourself too much and say this is all around me because I built the business and I am doing the entire thing actually is negative for your business valuation fundamentally because it looks like that when you take him out like just now I was doing the call with the one buyer seller and I thought buyer did the right question he said if I even buy a business right now because you are a doctor whenever you go and practice somewhere else take your client there and it was a very valid point it's a very valid point because the doctor was integral so how do you really invest into businesses like that where there is a larger chance that the entire consumer base can move with the new owner or with the older owner and the business is lost so these are things which get comfort it needs to show a very strong comfort and these cannot be just verbal assurances or a non-compete for two years or three years would give that assurance we have seen businesses which are like that I mean I give you an example one of the classic wastage of a good company was a company called Sagaratna Sagaratna great business built very well franchise business we worked with them very closely for long years and it was invested by a good private equity firm they bought all the business the mistake private equity firms do that they take controlling stakes and they take controlling stakes they put their own CEO started running the business and here the gentleman who founded Sagaratna started another company by somebody else name while he was still in the non-compete Sagaratna and he started opening up businesses next to Sagaratna now this got into a major fight it had legal issues it had multiple other issues eventually that business started losing money because now you created your own competition and you started telling the value of the bandadi while there was not a complete exit so just Sagaratna Parigala there was still a partial part of it and eventually what happened then they would really come back and start investing so they actually transferred back the business to the original owner now I'm not saying it's a strategy it's a business strategy that's their call but I feel that one has to really clearly define where the obligation of both buyer and seller was set because eventually any kind of dispute which happens either for anybody's reason I don't know I don't know I have no authority to really say whose mistake was here but I know that because of this whole issue businesses of Sagaratna which was a great company suffered and now obviously they are trying to revive and bring the business back hopefully it does but that's where the some of the wrong M&A deals would go so one has to really be very very conscious that how do you really structure these deals these deals are very very sensitive and more you confidence you give and to the new buyer that you are cooperating in this transfer and building of business and rather you are no more important in that business business is so professionally run that it can be taken over by a new management very easily that gives a great comfort and that's where these sometimes international organizations are very well designed where their ownership is not so much locked in so they very professionally design business and business can be easily transferred to a new buyer another thing which you need to do is how do you really value your business and what kind of estimate you would put for your business model so you need to really see which time you are in is it a time which is very bullish we are not in that time we are partying to a prism as a recession time liquidity is tight so how do you really structure the deal would also make sure that how your valuation would be paid that well valuation would be very clearly what I call the art and the science of it science is more number driven how do you really put up the numbers and future forecast of the business what is about how critically you present that business opportunity and what other IP or other than the numbers itself the real inherent unlock value lies in the business if you marry these two then present that would get you a maximum valuation I feel that you need to today you need to hire a certified valuation professional who would be certified now Government of India has a particularly started a certification which would be only certified can be able to do your valuation so you need to reach out to any of them at business X also we have a team of valuation which does it we also have India's first print tech product actually is a global product called biz equity dot com where you can go and put your own numbers and actually get yourself value yourself another thing which you need to do is when when you have the first you know preparing yourself which means that you do your financial statement structure and you have the full team ready then you get into the valuation get yourself valued and get the right valuation in place then you start presenting you need to package it all thing together which means that how do you what I call in the investment banking that's the bride how do you really dress it up how do you really put not dress from not from a wrong reason is not that you are trying to put things which are not true I'm saying but still you need to create an aspiration in your asset how do you really present that we call it a information memorandum go into deep into that it should have a very detailed understanding because please try to understand the new buyer might not be so much understanding your market your business your structure more in a very very crisp form you're able to do that sometimes people overdo it they don't need to you need to give a very strong very sharp but very clear understanding of the business but very very presented very well presented that that's the third stage fourth is you need to really now start going in and putting into the marketplaces right so you need to really go down to do that the mistake again you do is you talk to a lot of people a lot of people and and present different cases there and this is one of the areas which you should shy away not to do that use one or two marketplaces don't over put yourself if you are selling a small business or even a mid-sized business stick to that the don't over reveal your innovation don't put it all over people use open forums they put social media and other places don't do that it's actually harm the business sells you need to really do a very professional sting if you want to do that if you want to directly interact or use a good advisor that's my last point you need to use a good advisor who on your behalf maybe sometimes most of the times like in business X case we don't really the if we are having a mandate to sell we would not reveal the information about the seller we always would keep it confidential we would just go out and say running school in Delhi NCR always available for sale and these are the facts for the entire thing so unless we really find out somebody is really serious otherwise your competition your other people your even employees a lot of people come to know and actually damages the business your trade people your suppliers actually suppliers the biggest problem you know one supplier knows that you are ready to sell you're at sending the business they have credit running with you they become very very conscious giving you credit so it impacts your current business also so you have to be very conscious when you're doing a business transaction use a good advisor and this advisor should do everything confidentially and not even even go out and claim once the transaction is successfully done and if you allow then they can go out and make some people don't that allow also because they don't want to even tell people that they have sold the business of things like that so at business X we take a very strong confidentiality as a very very strong part of the transaction because most of the times even if you go on French as India or other times we will not see a lot of assets which we would like to market or put in I think we will very very be consciously doing it and only and when if a client approves us that you can go and use our brand or something like that we will go and present so this is where exit would be I think there is a particularly now I think the both sides are getting out there and this market is what I call getting into full action a lot of transactions I would see next to what it would start coming in if you feel that you are on either side which means that either you are a buyer or seller please reach out to business X and we will be more than happy to really take your discussion ahead and also suggest you what is right and when do you want to what kind of value you will get for your business and what kind of a buyer you should look at so this is a 30 minute presentation from my side I have another 3 minutes to go if I have any questions which Sonali you want to pick it up I will be more than happy to take it. Sure thank you so much for another wonderful session sir and for sharing your great insights we do have quite a few questions lined up with us our first question is from Mr. Karthik Sahu he says do you think I can sell an advertising agency which is 4 years old profit making 72 lakh rupees revenue but a business which is completely dependent upon my goodwill with the clients how can I exit from a service based business like that. So Karthik you very very good question you have asked we have sold actually multiple advertising agencies and accredited agency if you are accredited then there is an inherent value already because there is a value for that while it is tough business now very tough business both margins are eroding the conventional advertising which used to be done through agencies has also changed quite a bit. I would say you should look at not a new just a buyer anybody can buy you should look at somebody strategic maybe find out another agency which has not in your region and would like to look at not in region or not having the kind of client you have so your book would become more strategic and also it can create a comfort for your clients because you now being part of another big agency so I feel there would be another round of consolidation in this space a lot of independent agencies would have to merge to create some business sense and and this is very doable it's a very doable thing but I would say more strategic than just a financial investor sure so the next question we have is will someone be interested in buying a business which is currently in losses but has good potential so it will do good if it's put in the right hands very very good question in this question I get almost 5 times a day and this question is about how do you define good business really you know first we have to really visit that point if the business model is an early stage and you've still in what I call gestation or a product discovery or distribution discovery or cycle where you are very close to where the business would start trading and getting into the next height and things that then I would say it's a good business all startups scale up businesses are like that they're not making financial money they're losing but the direction is very clearly showing indication your cost of acquisition of customer is coming down you're adding more customers are spending more so like we e-commerce what we used to say cost of acquisition continue to show coming down I was spending a thousand rupees to get one customer and now I'm spending 500 to get one customer it's good sign second my overall consumption cycles are going on people were purchasing one time in a month now they purchase two times in a month third I'm adding this so by the time I can show the trajectory where it clearly tells me that at this stage it can be profitable at this stage I'll start multi-fold profit and this stage I will get into that if that is a case then obviously it's a good business and that means that any good business would need continuous cash if it is on a early stage and sometimes you have run out of all the options of raising that equity through your internal accruals or from your own sources and you are not currently also getting somebody to participate as a minority shareholder then I think it is always a good time to pass the pattern to somebody who is more more diving and you need to proactively go there but if the business is struggling from other business issues which looks very difficult to turn around then also there is a chance only if somebody has a extremely big strategic value which comes in forward integration backward integration or something so one has to really understand what is the definition of a good business and where you are but value is always there, value in business is always there I'll explain you again this is called SAS what is the strategic value it might be location it might be and I think I have sold one factory but somebody just bought a factory not for anything else because he had a order book so another player had a big order book and if he would have ordered the same machine from Italy it would have taken 6 months to come 3-4 months to run and how do you would have service order and one choice was that he outsourced to somebody second he bought this business and not for anything else he says just buying the asset itself because asset itself is good so strategic asset and subscriber value which means that you might not have the first two but you have a customer base which is already there so for that also people can buy so you can have 3 of that or you have 2 of it or you have only one out of it but still there is a value very well explained sir the next question we have is as you said people acquire innovation but how do you value the technology of a company yeah so again it's a it's a very tricky and important question because how much this technology would benefit somebody is it a technology by itself or it would be integrated part of it so which means that I am doing something and I needed this tool to be done but there is somebody developed let me acquire and my speed of doing it sometimes it is a technology in itself has become a potential to become a full product itself right so then the valuation would be different so it depends on where you are but there are many mechanisms to really see the value but most of the time it's more as art and science this is not so much science it's going to be art how do you really put that and that's why sometimes we hear some unrealistic sales of early businesses being sold because they were disruptions and these disruptions were very clearly seen by these large companies and said they don't want to be losing on that and especially if you are in the space where you can shift like in social media facebook to buy it whatsapp was very clear that if they would have not bought this whatsapp would have been a bigger challenge for them so it's it would have been they would have had the ability to socially connect and engage much more than any other medium so they clearly saw that there is no choice for them they would have put any dollar on the table to bought that and piece of technology so that's where most of the early stage the innovation happens so if any innovation really comes in I feel that that's the value being built and if the product got making money then also is value and then when you become a complete mature business model and the whole balance sheet itself is a very strong asset another question sir that we have is are people still interested in buying businesses like restaurants, schools etc which obviously have a great future ahead but currently not functioning much because of covid actually if you really ask me what gives a great arbitrage for buying such businesses I have a buyer for a big preschool chain they want to buy a preschool chain and almost every preschool is shut but they want to buy a good chain because they know it will come for a song and actually if you really are intelligent investor and somebody who has ability and spare cash I would say this is a good time to look at investment but investment cycle should not be you should not be on a shopping list and do it all today I would place if somebody has some x money to invest I would say start your shopping speed from today and continue till the time the market recovers and market start coming back to boom continue to do it so if I was a I want to build a restaurant business I would say maybe buy one restaurant in this quarter I will pick up maybe next one in next quarter and next one next quarter and slowly slowly slowly I build a portfolio and continue to build that and so I will I will be passing through this whole cycle so buying and selling selling obviously doesn't give you that window so much but always buying you can plan it you can very well plan it and do this like very clearly like stock market I never advise it just go and because the market is around just pick it up keep picking up at a certain stages and the theory of averaging out would really come through very well in this so I will just take up the last question for the day sir this question is from Jaya Kumar the question is we are a start up and working in the electric motor cycle space do you also help us in finding a venture to raise funds absolutely very very keen rather we have a good investor available today from Andhra somebody who has interest to invest into two wheeler electric mobility and there's a lot going on on that there's a huge window which is open in the last next two to three years by that and the OEMs the big OEMs really start coming and putting big push on the market so this window is only open for two years I would say so it's a great time for looking at it we obviously can help you in terms of finding out the right investor I don't know if you are an assembly line or you are a full OEM manufacturing I don't know what you are in or you are just a trading company but depending on where you are one has to understand and then we can obviously advise you on raising capital lastly sir I would just request you to also put your email id or any contact details for anyone who would want to reach out to you and know more about their personal if you want to reach out to me I am putting my email id gauravmaria.com please reach out to me and I will be more than happy to take your question or reach out to Sonali for anything which you want to do on businessx for raising capital or selling the business or even listing your business for sale Sonali and team runs full structure on businessx.com it's the number one platform in India selling your businesses you can list yourself and leads would come directly to you or on your CRM so when you can confidentially talk to them and do their transaction if you need more help and involve consultants like us are more than happy to do that and if you want to set up a call with us reach out to me or Sonali and we will be more than happy to come and have a call with you and we will be able to tell you if we can help or we cannot help so thank you very much thanks for your time today thanks Sonali for organizing this 17th edition we have done so we we have 17 weeks we are coming and giving you learnings on investment scale value and exit thank you very much thank you so much for your time Gaurav sir as always it is absolutely a pleasure to have you with us and thank you for your time and for sharing your valuable insights with us thank you to all our attendees we will see you next Saturday another session which will be all about investment so I hope you will see you there next Saturday at 3 o'clock thank you so much