 Hi everyone, this is Shanali. Thank you all for coming out some time for attending today's webinar on the episode 24 of the Business X learning series in where scale, value and exit. 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, Sonali and thanks for hosting this session and my apologies for missing out the last session because of some emergency. So this is a 24th session where we talk about every time a different topic. So sometimes we talk about how to scale your business, sometimes we talk about how to exit your business. We talk about investing and value. So today's topic is value. I will do a little bit of refresher in terms of what needs to be done when people are looking to value their businesses and I feel that this is a very critical time. A lot of people, a lot of companies, a lot of business owners are looking to value their businesses for various reasons and they're looking for a future investment in the business. They are looking for getting an M&A situation. They want to look at an exit from a business. For multiple reasons, I think you need to really value your business and it is good to continue to value your business and see where you stand and how the business is performed and so on and so forth. And I feel that most of the times if you're running a business and you don't know the value, you're actually driving a ship which has actually you've not gone into say understanding why you're doing it because end of the day, therefore any business to really perform and see there should be end of the tunnel. There should be end of the tunnel for shareholders to really see where they want to exit or they want to find some long-term value from the business. And that's very important and now these days we get a lot of companies reaching out to us and have a perception about themselves in terms of the value they've not gone and taken advice from somebody who's a professional and now it is required to have a professional registered evaluator who would come and work on your asset and understand what the value really is. So today's session we will divide this into three parts. One I'll take you through the what I call the 10 areas which to me set the valuation of any organization. These are very very important aspects and you need to really maybe make a notes on that that what are the 10 points which you need to really see where you stand in your businesses and they would be really very very critical when you're putting up a valuation of the business and then we'll go into a little bit of what you need to do to structure your valuation document they call the information memorandum. What all needs to be covered on that what kind of information is required on that so that's would become the second part of the valuation document what are the checklist which you need to really have for your valuation document. So let's get started and in the meantime if you have any questions for me you can go on a Q&A box and just ask those questions and we'll be more than happy to really advise you on that or any information you would require will be more than happy to help you on that. So Q&A box on the bottom just go on and ask your question and I'll at the end of the session would be happy to take that. So the 10 points which would set the the valuation for your business are following one you need to really discover your inherent strength this is very important this is actually connecting a lot of dots to really come down to a point where you have this inherent strength and this is to me sometimes is a missing point we think that the businesses are just about top line bottom line answer is no there is much more to any business and much more to this end and that's why it gives you surprising a lot of these young startups sometimes get a phenomenal amount of valuation because there is something which is much more inherent in the business model which is so attractive to our investor to evaluate at a certain level and sometimes large businesses family-run businesses running for many many years don't get that kind of valuation just because they don't have they've run the business purely as a commodity and and and like a trading companies like if you are trading company or an importer you buy something in and then further sell it out you more or less are doing a dollar plus kind of a model cost plus model kind of a structure and you are a pass through you have no inherent value which you are building in and that's something which is sometimes looks like a good income businesses but they don't have any any sort of valuation I have seen businesses which are 500 crore in turnover 1000 crore in turnover but really if you go out and see the valuation of the businesses they have nothing they are just pass through in in that nature so what we need to ask yourself is what kind of a business advantage you really bring in what advantage you are bringing in are you a entry barrier to somebody a lot of businesses eventually get successful like these days EV is becoming a very big space the electric vehicle space and I've been approached by about not more than a minute I think should be about 20 odd companies which have approached us in these are startups and some mature companies now mature companies are running for larger market share quickly go in the market and capture as many markets you need to do that and sometime this early stage company also want to follow the same route which I am advising not to do that I'm saying go and take up one city one of the companies was in Goa and I said just follow Goa itself create an entry barrier in Goa don't go and put your dealerships everywhere you cannot service them you will not be able to launch your products you will not be able to aftermarket don't even worry you know go and focus on one market and create a stronger entry barrier somewhere when the consolidation would start happening which would happen I think two years from now two and a half year three years from now where they will see a lot of acquisition happening in this space currently there are about a hundred different startups which have come in the market I think a hundred more would emerge so these 200 would actually then come down to 2030 and then eventually to the game 89 the big boys would be there so there would be some players which would go that high and you have big competition you have Ola announcing that they are doing a 2500 crore plant investing into e-vehicles you have some other companies today I saw Bajaj saying that they also want to put up a big plant with Maharashtra government with 650 crore investments so the boys are also coming but if you're building your market share quickly then you will get a chance to do that but you need to go deeper and create an entry barrier another thing which is always I like about businesses that what kind of problem they are solving what is the larger problem they are trying to solve and how this can help even other organizations to really go out and capture you because you have actually addressed that problem and you're very close to solving the problem and this is where one of the companies I advised was actually a company which used to do business on diabetics and a big insurance company really saw a value in them because they had a huge amount of data of people who were diabetic and and this was health insurance large company and they they felt that data can play a very important role for them and and things of the nature sometimes you have some problem which you're solved and that problem or that which can help other other businesses to look at it so you need to really see what problem your business is trying to solve that's one point so discover your inherent strength and just play on that and make sure that you are much deeper into that rather than just going wider and and spreading thin the second piece to me is obviously profitability you know in short time or a mid term you need to really show profitability it's not no more a system especially post-COVID nobody everybody is interested to really look at a very very long-term profitability they're looking at sometime in short term or looking at a mid term of profitability where do you really stand how do you really demonstrate the profitability that's very important third is how do you demonstrate your increasing of cash flows and margins again these are two different parts you know a lot of people are able to demonstrate their increased cash flows but they're not able to really give answers on how they would improve their margins to me this is more important cash flows is still in a strategy base more marketing more advertising more markets to go you can still increase your cash flows but how do you want to demonstrate that you want to improve your margins is more important and more value fourth point is how long to go and unlock your value in which markets you want to go so one of the areas which is very exciting for me is that are you making a brand which is global and if that is a case then one of the markets you want to do at what phase you would like to go this is very very important to me and if a good investor especially global investor wants to look at it you would like to look at it how how much this business model has a has a strength to spread how far it can go and that's something which is which is becoming the biggest becoming larger the larger is becoming very very large companies so that's how the scale is going look at the companies like oil rooms I mean they can go to 80 countries very very fast while there is challenges in the business now but fundamentally this business model was extremely globally scalable so why would you not have an opportunity which can go into multiple markets think a much larger spread can come to your businesses finally fifth point is how do you really do what I call the your diversified consumer base you cannot be just focused on one and like these days if you were to say supplier to one industry say you are doing something with hospitality and hospitality is shut and and then what would you do so if I was a technology product and only doing hospitality and then if this has been now in that stage if business is eroded so you need to really see how do you diversify your current consumer base the sixth point is how do you demonstrate controls and compliances in your business a lot of good businesses really lack this part so they don't really put emphasis on on control and compliances any good startup these days I am looking at it has a strong financial control and they demonstrate that financial control in in depth and that's something which investors love it I've seen a lot of investors walked out of their deals because they felt that the business was a little bit of mystery they didn't understand that how it was really that thing or it was too too cloned to the control with the with the founder and founder was running businesses like his own thing not like an independent enterprise and and investors don't want to touch it another area which is very important which is seventh point is that how is your resistance towards not becoming commoditized maybe you are at this stage sitting on a business model which is uprising great to move in that thing but how do you ensure that your business would not become commoditized in coming time what kind of differentiation you would continue to create so that you are able to retain your margins or improve your margins or retain your customers which will not move in just because you become commoditized now sometimes it was brand in the consumer days it was brand sometime it was technology sometime it was something else which is very patent to you which you could control them I think so you need to really ask yourself what is your control mechanism that your product or service would at a certain stage would not become commoditized that you would have still a preference point to retain your customer would not just move in because of somebody else is offering the same product cheaper than what you're offering or convenient what you are offering at this moment another area which is eighth point is predictability how do you really bring predictability into business which is what I call subscriber base or recurring revenue base how is your recurring revenue base being demonstrated how you are able to really demonstrate that the same customer would have multiple times buy rather it will buy much more frequently in times to come and continue to improve their purchase value so these are points which every investor really love you know because you can demonstrate the same customer would buy over the time many times would one try to buy more often and second would also start buying and putting more money in every single purchase as we go now that something is very very exciting to me this was all e-commerce story e-commerce story was really to demonstrate oh I got this customers they currently buying only 300 rupees per customer they would go to 1000 rupees and they are only buying once in a month they would start buying once in a week and then once every day so if you are able to demonstrate that story you become amazon right so this is what everybody loves everybody loves the life of customer and continue to see that the purchase cycle is reducing earlier you were buying only certain things on amazon now you order almost everything which you consume daily so now they if they come and would allow liquor they would allow dairy they would so all that would also start coming in in the amazon platform because they would like to bring in customers happy to come down to almost daily and that's where the value would really be built ninth point is what is your replacement value somebody wants to get into the same business but it would take a lot of time for them to get into what you have already done so you have a strong replacement value i'm doing working on a deal where somebody is getting into a business and we are buying into some asset purely for the reasons you can duplicate that business but it'll take you at least one and a half years so so the replacement value was coming in that if they save that one and a half years and we get a ready customer base this is a good good value this normally happens in manufacturing if you go on acquire a manufacturing plant because by the time you order machinery your machinery would come in you will establish the entire thing get your plant licenses and all that would take a lot of time so people would go and value something and just buy it out because they know that this there has a strong replacement value and last which is not the least is that are you still a business which is totally dependent on the founder and if that is the case then also it's a very touchy point because they don't like that i mean investors don't like that situation they don't value those businesses businesses have to run by processes and systems a good management team which is very important which creates a good value but not overly dependent on any one individual if it is a too much dependent on one individual that would not run that's why if you see healthcare practices which are run by a particular doctor doesn't get a value because it's too much around him and and there is no way he can be redundant on that business but healthcare practices like Apollo where you are not dependent on one single personality are valued much more and that's where because it's a healthcare brand and it's not really dependent on one professional or one practitioner so this is of the 10 points i'll just repeat it again for anybody who's not made notes inherent strength profitability increasing cash flows and margins unlocking value for new markets diversified consumer base control and compliances resistance towards not being commoditized bringing predictability replacement value for the business and what i call making the owner redundant in his own business you don't have to really be dependent on that now let's get into discussion on if you're creating your what i call a business valuation report what all needs to go there strong organizational structure that's very very important you need to have one obviously you need to hire some some professional to value your business but once you've hired that you wouldn't need to understand your organizational design what is organization design who are the investors in the business and what is a professional team that's very very important and what care has has been allocated to each of them which has to be defined second piece is who's your external consultants any advisors you have you have any kind of attorneys tps consultants any kind of people on retainerships with you all that has to be also very clearly defined then you need to also start working on building your financial statements which would mean your your last financial five years for balance sheets how the balance sheets are filed on a quarterly basis normally about three to five years of historic balance sheet minimum of three years balance sheets are required then you need to also understand your organizational other company structure your legal identity and a lot of people are don't understand the difference sometimes they do i mean i'm seeing a lot of startups coming in which are just limited partnerships kind of structures being used or still using some kind of what i call a sole proprietorship or things of that nature it actually creates much more difficulty because one conversion of these companies to a private limited companies is also a complex process it looks very easy but it is a very very complex process and most of these times when you are running these kind of firms which are more partnerships and structures they are your individual returns would also be calculated so those are also to be presented and sometimes that becomes very weak points on these pieces so really see that what kind of a legal identity structure which you're taking another in in last three to five years any kind of litigations which you had in the business which were not resolved and there's a lot of times these litigations look like very simple because from a business owner viewpoint when you run a business you're prone to some kind of exposure and you might have some notices which were which are lying or some kind of cases which suits been filed which are not being addressed those can create a big roadblock because you might have your viewpoint on them because you can see that that's not going to be too damaged entirely but from somebody who's looking to buy a business they don't want to jump into entirely so it can sometimes either stop the the course of that investment or sometimes it can delay because they would have to then invite any kind of external legal advice on that that should they go in should not go in what kind of exposure they are doing and sometimes investors would like to hold some monies of transaction unless and until those are resolved and this can take especially in Indian courts many many many years by the time the settlements can come because there was a pending dispute and now you saw one of the big deals which Reliance did with Future they also at that level didn't understand that there was a side agreement being done with Amazon which can create a trouble in this deal and this can get go even more complex going forward and so it can be that they have captured that they knew that if Reliance looking at Reliance as a company they would 100% knew and they would have actually held a lot of monies to Future on that perspective so my guess is that Future would not be paid those monies unless and until they are out of this whole thing and which can actually further trouble Future because they were selling those assets in that company purely to get some remittances coming from Reliance and they would not do that unless and until this is over with them so it can be actually for a seller it can be a double trouble because on one side you've gone business is gone second side you not got your own monies in the complete sense because and you are also now fighting legal structures outside so you need to really see is there any kind of illegal cases which are pending which has to be very clearly defined and on upfront rather than been discovered more it is told upfront more it is better because you're not getting and I think more it is discovered by anybody it creates more complexity so again intellectual property of rights kind of patents you have copyrights you have trademarks you have any kind of service marks you have all that at what stage they are at what stage they need to be renewed all the licenses which you've got what stage they are when they're going to be renewed all that needs to be very very clear now very critical part we will discuss is these adjustments in your financials you know we get reports on financials every single day and when we start reading those numbers there are a lot of numbers which are which are good for our perspective but they are not good for you know from a valuation viewpoint they are weaker points sometimes in the say assets some assets are not critical assets for the business except you know their assets which are available in the business and people feel happy because they bought some property or they have some you know cars on the you know in the balance sheet and these look like an assets but they are not critical they are not doing anything to the business you know business owners buy these things because they want to put it in the company but fundamentally it's not adding any value to the company so when the valuation really starts or the investor looks at it it takes out all the assets so that has no meaning to entirely sometimes extra cash you know people put FDs in businesses and these FDs are lying there because you just want to hold some money normally this is discounted and the earlier owners can really take that money and only the working capital can be left in the business which can be accounted for so those are also not really part of the entire thing non-ranking income items there are a lot of non-ranking income items if you see the balance sheet of Unilever every year they have sold some assets and they come in their incomes right so but they're non-ranking which means that there was a building or some property lying there which you sold it came in that year's income and that would have to be removed because it would still not be part of the business it was a particular year or a quarter you had that impact because you sold something which was not required so those are kind of things which have to be removed and a lot of times this happens I'm telling about even the company like Unilever if you see the baron balance sheet of Unilever you'll find that from last 15 odd years they've almost been selling some assets which they're older buildings and so on so forth so they do a lot of real estate like this they sell some older ones and they buy new ones there was always a structure which is available which is a good from a financial structure viewpoint but it is obviously not to be counted in the in the in the valuation structures any kind of wages salaries or benefits which are being done or would be done at the current levels not from the past levels and also like these days I'm doing some valuation for businesses where they are talking about the current levels which which is not also realistic because like say for pre-COVID you were on a rental of 9 lakh rupees now because you never shifted for 6-7 months your current rental load is lesser you're also paying some salary cut to your employees but we will have to see the pre-COVID numbers structure owner salaries is a big big challenge owner salaries we are normally counted a lot of times people would say oh because I did my own personal withdrawal that is part of the profitability that becomes very complex to really answer so don't do all that pieces these were a classic style of businesses no more it has a valuable in that uncollectible amounts which have expired so things which have not been collected and don't look like to be collected it sits in your receivables also have to be taken out or any liabilities which you would have can potentially come out you might feel that it's not going to be impacting but might come back on the on the business at a later stage and especially when the big companies buy into smaller units looking at the larger company coming in which has to be more compliant as more exposed as a as a legal identity a lot of unseen unregistered your liabilities in the system would start rising up so normally they would give a cooling period and they would do those announcements hold some money and suddenly you start seeing notices from people coming in look I had this liability Disney number this number and it can become very very complex even a company like run back see was sold at a normal valuation the big story at that time and later the new owners got into huge trouble because they bought so much coming out from libraries which was not recorded receivables which were shown was never caught patents which were told in the US so much existing was expired so a lot of challenges it really started coming in and they had a almost 20 years of war a legal war and eventually they won and there was a big penalties we passed on to the earlier owners because of the misrepresentation of their facts and so forth finally you also have to really talk about how your industry view what is your industry telling you what where do you stand in your own industry how you're positioning towards your competition where are you in terms of your competitive analysis how much advantage you have over your competition and things of that that's very very important because this would really come out to be one of the most important aspects because most of the times a study buyer would really look at who else is available in the system and why you versus any other asset they want to really acquire so what you bring in as a as a special advantage to your competitive landscape now finally I'll just do a summary of if you are writing your own information memorandum following should be the cases which you need to really put as a head first put a brief history about your business sharp but don't go overdo it but talk about the history of the business from from where you founded what was the reason you to found to where it is and what is the future looks like and that's how your business has to be defined go into very detail of very clear sharp product information don't go too much outside but go very sharp on the product information or a service information what do you stand for what is your value proposition who's your target group why the target group would continue to buy you and so forth finally your market position your brand where it stands how your market is perceiving you what is your customers telling you or have they have any kind of data which tells you that they have increased or you know they have purchased decisions with you or continue to do that so especially last four quarters what are they telling you it's an upward trend which is which is very important you need to also talk about your employee and vendors suppliers databases all that organizational design very sharp design how it is done what is a vintage who are the critical resources what are the you know process center owners each process is owned by somebody who's run that what is his background how much domain experience to really contribute that piece who's your primary competitors in the structure so you need to have a very strong competitive graphing in very very position yourself in in your it can be quality versus price it can be markets it can be features it can be multiple graphs people like to understand where you are versus anybody else in the market and where do you see the bigger chunk of consumer bases and which you are trying to address you need to also do a lot of you know you know physical demonstration in your I am I sometimes see a lot of data but doesn't show a lot of you know pictures and so on so use as many pictures you want to do that it's much more better when you're representing to people to see through what you have built and and most of the time especially on the initial pitch stage or initial valuation people are reporting them that thing they like to see the brand experience right so they need to really see the brand experience they don't just won't want to read data data would come obviously when they start the DD process and also any other critical information don't indulge too much in the first I am too many information about the business it is not worth we will go down to when the DD process starts when they would start digging into much more and deeper into the business so this was about valuation we talked about the 10 critical points which were which are the foundational points for your valuation we talked about what is the data which you require to compile when you're putting up a valuation and then finally what should go into your information memorandum document so this was today's session so I would like to invite Sonali to have any questions for me and Sonali over to you please. For a wonderful and insightful session Gaurav sir as always it's been a pleasure having you with us and yes I would now like to take up a few questions that we have so the first question that we have is how to actually improve my valuation if I'm planning to sell as soon as possible what is a realistic time period for improving the valuation in documents? I don't know what is a time period you're looking at to sell a business but I think give yourself a lead time of 180 days that is a rightfully time for any kind of a value-to-term sheet kind of a situation but I feel that even if you want to get realistically valued yourself there's also another 120 to 180 days time so if I have to really see somebody value and then looking for a right kind of investor or a complete MNA situation or an exit situation then you should give yourself a good one-year kind of a scenario and that means the first six months a lot of preparation time now to change the second part of your question was that how do you improve your valuation? I feel that it has to have to do with your business model how do you really address your business model? How do you find a lot of things? I'm these days advising one restaurant chain which obviously wants to either exit or bring in another investor to partial exit of their current investors and I had somebody sitting with them and one of the areas which the founder told me is that he was surprised that a lot of inefficiencies they were running in the business which they worked last because of forced work because of COVID so they were working on say 15 people they now started working with the seven people and they had a lot of back of the house and where they were producing everything live now they created a central kitchen where everything they're doing is frozen or another technology which is now has cut down their expensive cost people so they don't have to have chefs so they have worked on a business model to really turn around and show that the business is much more sustainable high growth and also would improve the margins as we go along so these are a couple of things which investors like investors like to invest in the future how do you become future ready that's something to me is very important so you need to really go back and retwist your business model sometimes you don't do it when we're running when we start designing the business model for building value you need to really go out and say how do I make the business model future ready in future it is it can run another thing which you need to really do is make the business model process oriented so you're not required in the business so that business can be transferred sometimes you know it is too dependent on you and around you and a lot of your own personal skills are required every single day in your business then it will not be able to multiply or find the right one sure next question we have is how to create the valuation report for a startup which obviously has no historical data it's much easier actually if you really ask me you know it's like a doing a painting right so it's a it's much easier for you to really you know put kind of maybe obviously it has to be a search based you need to do a lot of research you need to do some kind of comparative analysis again there I think you need to fundamentally demonstrate three things one is what's the problem you are trying to solve and how big is that problem and why do you think that problem needs solution right now you know some problems are there everything has a problem right and pollution is a problem right this is a problem everything is a problem but sometimes the demand is not urgent demand is not now demand would be has to be addressed everybody knows it but it's not really right now I want to address this problem right now so that's a that's a situation one has to really understand and define then your own value why you are the right person to solve that problem third what would you require to solve the problem so if you are able to justify these three things to invest in your presentation then you're fine so again I'll repeat problem why you're the best guy today to solve the problem and what all you require to solve the problem which means that kind of capital organization team technology and all that this is what people want to see maybe these are three slides that's it absolutely and you have actually answered the next question within this question itself but the question was what information do I need to give in order to get valued and is only the financial information required for it no no financial information is actually 20% of that night 80% is is a lot of other things which are told in the 10 points in in this piece right and again following up on that we have a question that says is a confidential information memorandum mandatory for funding or valuation yeah it is it is it is an essential document mandatory I will not use a word but it is it it's not that is required it's a it's a transaction between two private enterprises so it is not mandatory so to say the word but you need to have it this is this is your so to say a deck which you present for valuation and if it is covered and done by somebody who is respectable on valuation whose own credibility to do valuation is is also very and I think it creates much more weight on on that and the last question many people have asked if you're if our company can help in creating a valuation report that's what business x does so please reach out to Sonali she has a full team and the business x has a full team for business valuations we have senior professionals who work with you on business valuation we also have a fintech product called business equity dot com which is world is number one valuation side we are a joint venture partner for India so that also is a product which creates a valuation for any business and if you're looking to raise capital you can also reach out to business x and if you are also looking to exit your business then also business x can help you sure so with this we'll just wrap up the session thank you so much God observe for your time it has been a pleasure like always to welcome you and hear your insightful thoughts on each of our topics every week and I would also like to thank all our attendees we really hope we were able to add some value to your lives through this session and this is our last session of this year and of course it has been a difficult year for everyone but everyone has come out stronger from it so anything you would like to add in the answer no I would like to wish everybody a very happy new year we will see you in the next year every Saturday we come back and we have this sessions we are also trying to bring in some interesting more topics in the next series which would start from next Saturday and and this is going to be every week every Saturday structure so it's good for when you are it's a refresher for a lot of people who would like to know more about how to really structure the businesses businesses have changed the way that people look at businesses have changed the way the investors were there now the new investors new age investors are very different so it's good to really refresh yourself and continue to be updated on this so stay tuned with business x and we will continue to bring in fresher content for you thank you thank you so much sir and with this I just say everyone a very happy new year and thank you so much for your time