 Hi everyone. This is Sanali. Thank you all for coming out some time for attending today's webinar on the episode 28 of the Business X Learning series, Invest, 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 Sanali and thank you for hosting this webinar every week and today, even if you're traveling, you made a point to really post this webinar also. So thank you very much. Welcome friends and welcome to another edition with Business X Learning series. This is a series we started a few months back and every time we talk about four different topics. We talk about valuation, we talk about scaling the business, we talk about how you want to exit the business. A lot of people are discussing on exit and also how do you really scale the business. So we talk about different topics every time and today's topic is about valuation because the largest request we get from our audience, especially at Business X. Business X is the biggest platform for especially startup to mid-sized companies when they're looking to raise capital or want to sell the businesses. So we get a lot of requests on business valuation. People want to really understand why they should regularly valued your business, why people should value your business and is it a good time to really look at an exit, is it a good time to raise money, what is happening in the investment space and so on and so forth. I feel particularly 2021 would be a great year for India. That's what my own outlook is and I feel that we have already started seeing a lot of signals. I think the industry is starting seeing a big rush back to the normalcy. I feel also most of the industries would be able to recover over the next six or months. There were a few industries which might take a little longer to return back but the next six months is really my understanding that this would really bring back most of the businesses and a lot of businesses would really go back to their basics and almost every business which is today now people are looking at how they can really get more focused and so I see a greater opportunity of a lot of MNA happening because if you don't have something which is very strategic to you, you might let it go and I see that already started happening. We're getting a lot of requests from companies coming to us and say we have this business alight but it doesn't make a really sense with us. Can we get this business out of us and we make a better balance sheet and also bring the liquidity back and so a lot of people are selling their non-strategic assets to their businesses. Also this is also an opportunity for some of the companies which are sitting on cash to really consolidate their positions. They are looking at acquiring so I see that sign is very, very good. The sell side was strong but I see now the buy side is started coming back. We particularly work on a lot of mid-sized opportunities so I see a lot of action on the small businesses and mid-sized businesses. That is a very strong action which is going on. So today we are going to talk about valuation. Why do we need valuation? Why do we need to really hire maybe a professional to help us to do our valuation, how the valuation is done, what are the types of valuation and things like that. And I'll also be sharing some of the examples in between and what has happened and why a particular company at a different stage would look at different set of valuation and how you should prepare. But the starting point is that there should be no company which doesn't know the value. I always ask that if you are having anything with you, your house, your car, the watch you have, anything you have, you know the value of it. But the business which you're putting about 10-12 hours every single day, you don't know the value. And most of the entrepreneurs and business owners, especially small businesses, when I asked them this question straight on, I said do you know the value of your business? Most of them would not have an answer or they would have a very big answer to it or they would not even sure that is this the right answer or not. So it's a very wrong situation to be in because if you don't know the real value of the business and how your business is moving from where it is to next level and the value is not growing, you're just doing a job and you're just making earning out of the job. You're not really building an enterprise which has a inherent value which you can really do that. But the new age entrepreneurs are very different. They are less emotionally attached. They are very clear about both their entry and exit strategy. They build businesses for value and they want to really get the value out in a certain period. And that's what we've seen in the last 15-20 years. New age entrepreneurs, tech entrepreneurs are very, very clear. They are driven by value. They are driven by what they really create for shareholders. And that's where they are more certain and you've seen the wealth creation also in the last 15 years really come from these kind of companies. Not so much of old conventional-style businesses. Other conventional-style businesses are failing out and we've seen that they are cracking down and their old method of running their businesses pretty much are not working. I mean historically, if I joke that small businesses at a certain page in India were making money out of some form of doing things which were not legitimately right for the business, saving taxes there and there or not paying your taxes on time and all the other things which were happening, these used to really create better incomes for them. They were driven by incomes how they can really take more money out of their companies. They were not really seeing the bigger potential of how they can build businesses which are more valuable. Now the approach for businesses are very, very different in these times. People are looking for a long-term value creation of their businesses and that's how they will be able to attract that. So when you look at a business valuation, what is a business valuation? Business valuation is your economic worth of the company. What is your company's worth? That's very important and worth can come from your tangible assets which can be equipment, your inventory, your property or anything which sits as a solid asset in the business. But it is also linked on what is your management structure. Today people are investing on founders. What is the founder coming in? What degree he comes from? A lot of early stage investments and valuations are done looking at the founder and the management structure. What is the management structure? What is your projected earnings? How do you really see 3 to 4 years the future of the business? What is your share to revenue structure? So we'll talk about all that aspects a little more in detail. But you also are valued on a lot of intangible assets. What is your, you know, you have trademarks or IPs being registered or you have contracts in hand which would... I sold one company which had a very large railway contract and the business was absolutely nothing. They just incorporated a company, got it registered with railways. They got a big contract and they had no capital to really fulfill that. They brought that actually the business itself which was sitting in that company which had to be fulfilled over the time. And this company needed a lot of capitalization. The new investor which came in didn't want to have the older investor stay on. And so they sold the business itself. The complete business was sold. It was done in trenches because it had some kind of a railway guidelines that the person who's been allotted this. It takes some time internally to clarify that but they were able to sell that business. So sometimes your future contracts which are sitting in the business also adds up to your value. So you need to really see what is your tangible intangible assets sitting in the business. Evaluation is always a combination of what I call art and science. Science comes from solid numbers which is either futuristic projected or your past performances which needs to be done. And art is how do you really structure your business and how it becomes attractive for somebody to really invest or look at that. And we'll talk about the software side of the art part as we go along. But why do we need people need evaluation? There are many reasons for people need evaluation but larger reasons are obviously when you want to sell your company. If you want to sell your company there are 30 million businesses in India and given a choice one third of them would sell. And now why they want to sell because they are having no future interest left in that or there was a diversification happening. People are migrating and they are working on few businesses where the promoters are shifting to Canada. They have taken up PR there and they have nobody to look after their businesses. Or there is somebody whose age now doesn't have a succession plan. He doesn't have anybody to really take over the business or the business has got itself pretty or business is not performing. Any of these reasons can happen and there are a lot of reasons available these days in management issues can be a very big problem. People invest into assets which they are not able to supervise because of distances and things of that nature. These days we're getting a lot of these queries because travel is less. So people want to say that look I have a business in Chennai and I don't want to run it if you want to sell that business. So we're getting a lot of these. So whenever you're looking to sell your business at that is the time you need evaluation. At this time you want to merge your business with somebody else. That is all the time you need evaluation. If you are looking to finance your business or even get investors in your business which is all the time. Businesses need a lot of cash to continue to run there and the growth chart. So that is the time you need to valuation. If you are changing some shareholding in your company, a lot of time multiple partners are there and they want to really buy into each other or think of that nature happen. That ownership structure has to change. Then also valuation would be required. Adding a new shareholders if you are bringing in another person who wants to invest in your company and when you started you were at X level then at a certain level we want to do that. It's now also required that you need to go and get the valuation done and then only the allotment of shares can happen. And this is very much required. Today earlier it was not. If you have any other areas which are happening these days, family separations, very complex valuation structures because multiple businesses, multiple assets, emotional situations. But when family separations happen it can take a lot of time to really come out to be a definite value how we need to go down. And also for a lot of other taxation purposes and so on and so forth. So there are different reasons why people need to do that. What is an ideal time you need to get a valuation? You should really get a valuation. You should always have a valuation ready. But you should continue to do yearly updates. Looking at what has happened like for me this year is unique for all businesses. 2021 March closing would change valuations for many, many, many businesses. And how you are able to adjust that? How do you really, some investors would not really, they might like to see sell the March 2020 numbers because that number would be more realistic. Because this is a little bit of a force major kind of a situation where you are not in control and you're not be able to manage the businesses shut for reasons. So these kind of things can be given an exception. But if you really have to look at 2021, there will be a lot of erosion of valuation for many businesses. And this can also be quite dangerous for companies which will be valued by this a lot of investors do your future valuation. And they have a deadline of a year where they would convert at a certain equity. So a lot of companies which were looking at March 21 balance sheet for their valuation to really do that and have to go back to the investors and ask for more time. Because this would actually can give a disproportionate conversion to the investors because they might and some might like to use this as an advantage, which is actually wrong. But some might be pushing the case up. So now let's understand what kind of valuation that available and then valuations are in different forms and they're a market based valuation. They are return based valuation. What return asset can give you it is income based evaluation income and sales based valuation and then also replacement value, which means that if I want to replace the next asset with the new thing. So it's a pay I was buying a restaurant and I feel that for me to get into this restaurant would take as if I would have started a new one would take much longer, I would have to take licenses and things like that. So there is a certain amount of replacement value if I can really plug in and that becomes a valuation but there are about seven different valuation types, which we want to talk about it today. So one is first is a market based valuation method. Now this is mostly used if there is a comparative business available, which I can compare to. So which means that if I have a particular industry or a particular business and I have a similar business which is sold at a certain value, I can do the comparative. So, but it needs a comparative and become very difficult if you don't have comparatives available in the market. So you need to see which industry is comparing to you are you're in the same industry, what businesses are very comparative to you and what valuation they got. And if your numbers and your performance looks similar or better, you can adjust your valuation and do that. And also you need to be also chasing this time sometimes it's not very clear because it's very subjective kind of evaluation because the numbers might not be really true because it's more comparative in nature. But also let's understand before we go into the next, I think, six other types of valuation. Let's understand what are the multiples. So people talk about these multiples and different multiples people take when they are doing. Most important is price to earning multiples. How do you really do price to earning, which is more about profit after tax, how do you really create value. So that's one earning multiple. Then it's also price to sales, which is more top line based, which is better than the price to earning because earning sometimes have to do a lot of accounting adjustments. And the after accounting adjustments the valuations can significantly change. This is the best used in the listed kind of companies, but sales is a more function where you are driven from a top line numbers. A lot of retail companies would use this kind of a structure like pantaloom was sold by Kishore Viani to Madura purely on the on the sales numbers what they were doing kind of throughput they're doing store to store. And that was a parameter of valuation. Sometimes you do price to book value kind of a valuation. This is more done by what is a book asset which needs to be done like recently, India Bulls sold their entire book value to a KKR, which is a large P fund. A lot of P buy these financial assets or banking assets on a book value, which means that say you are like a lot of these banks are merged or taken over by other banks. They would just do it on this perspective and this more about book value. What are the assets sitting on that on that books and that book is bought by another company. So this is very, very common happening in the in the banking kind of space. But most multiples in in the valuation are used on a beta, because the beta gives you a more correct kind of multiple because it will not have any impact of your capital structuring, your tax structures because different tax structure would be done. And also there are some kind of a non operating incomes which are available. So that beta multiples are the most commonly used or closely used kind of a multiple. So now let's go to valuation back and the second site of valuation after the market valuation method, the second valuation method is what I call the asset based valuation method and asset also has to be divided into performing asset and a non performing asset. Now performing asset, which means that the businesses have a continuity and you're selling that business to somebody. This is easier and this would get you much better valuation and the assets are calculated and then the valuation is right. But when you're doing more what I call the non performing which is a liquidation process mode, which is done by normally bankers would do or other, you know, companies would do a lot of investment bankers when the company is getting into liquidation or closing down to do that. It would be much lesser than the what I call the fair valuation, the asset would be taken on a much lower value on that. And this is quite a bit going on now because of. And I personally feel in next six or months because the whole period of companies gave to companies has been over now and I think that they will have a lot of defaults coming out. You will see a lot of liquidations coming out in the market. It can be a complex and a tricky process now. The third type of valuation is a very ROI based valuation. This is very popular in small businesses and also investment products. Investment products are like these are fractional ownership products and things like that. So you can say you are having a big KC a big large building and you're selling fractional ownership of that businesses to people while they're buying into an asset at a certain value but it's very clearly given bond on the ROI is which needs to be done and ROI is also further would depend on how your exit is possible because these are ROI based valuations and the investors are liking I mean they always look at what is the exit, how can you find an exit of that that has to be very clearly defined. What is the ROI timeframe which is looking at a certainty of that getting the kind of ROI it's also very important because this is at this stage when this valuation is done the buyer wants a little bit of a result oriented they want to have certain amount of return on the on the capital. And also it was on the past past record of the performance of the asset so you need to really see when you're doing ROI based valuation methods, this is normally very predictable. It has to have a very clear demonstration of predictability in the future on terms of earnings and what kind of earnings you can get how you would get your money payback. So you need to really very clearly define your original investment payback that's very very important part of it and also you need to really balance where it is it is on a list take ambitious conservative what level you are predicting your ROI. And depending on asset class also, and the nature of the business, you will be able to place this into is it very realistic or it's very ambitious or very conservative and investors normally would like to see all three. In that sense and then make a choice for making that investment if the business performs better than it needs to be done what can be the what I call ambitious and I think it performs 20% less. What is the kind of conservative valuation on that and if it performs as it is then what is a realistic valuation. Now the fourth valuation which is more common for businesses which don't have a past so to say record and a lot of times the startups and people who don't have a track record at past. And this is a valuation which is most used by practitioners is called discounted cash flow DCF method DCF method is where valuations are based on your projected cash flow discounted to its present value. That's what becomes a discounted cash flow methods very very useful valuation practice done by most of the company most of the valuations today you see is done by DCF principle. The fifth valuation style is capitalization on earnings valuation method which is also about your earnings in future what kind of earnings the business can do and if you can do a capitalization on that the sixth type of valuation is how do you get multiples of earnings valuation method very similar to capitalization but it's all multiples on the earnings valuation of your future earnings, which needs to be done. And the seventh valuation is what I call the book value valuation which is very clearly there. The companies especially companies which have low profits but very valuable assets, they would only go by the book valuation kind of structure. So how the valuation method works it's very important for any company which is now getting into valuation they need to ask a few questions to themselves that first where your business is at this stage, is it beat out, which means that you don't see this going beyond a certain model of performance next. At that level, maybe that is the best time where you need to get the best value, or it has much better future in the forward, then I will discount my future getting through is the business very high income and structure so then I will do return on investment kind of a model which is as strong income based, which I can predict over the time and I can do return on investment kind of a diving. And if it has a consistent income, then also it can be discounted you can have even more years to discount that income. You also need to see where you are on how you are or a low asset business or a heavy asset business or, you know, what which stage you are in depending on which stage you are in you need to really choose your valuation methodology. It's also dependent on how your data is there. Do you have enough critical background or historic data or you're a fresh startup, then also it would depend on what valuation structure we need to do that. So data to me is very very important, both in terms of your past and also predictability of your future that data is very very important. Also it would depend on the kind of industry you are in and the business at what stage it is in. It is still an early stage, mature stage or are in the still a very high or a scale growth stage depending on where you are you need to choose any kind of valuation. So this is what today's session was it was a short session for business valuation. I'll be happy to take a few questions if they are there. So now to have some questions for me I will be more than happy to do that. Yes, sure sir. So thank you so much for another wonderful session Gaurab sir. And I apologize to anyone who might not be able to hear me very well because I am stuck in a crisis so I'm really sorry to all the attendees as well. We do have quite a few questions lined up with us already. So I'll just take up the first one. The first question is from Mr. Amreish and the question is, is a valuation mandatory for raising funding? Yeah, if you're raising fund, it's not word mandatory but what are you raising money on? The asset has to be valued then only you can raise capital and it has to be anybody would invest with you without knowing your current value is very difficult and also depends on where you are in terms of your stage of the company and at what stage you are raising would also depend but valuation is absolutely must Right, the second question is on similar lines and the question is, I'm sure you get this asked all the time but what is the significance of a valuation report for a startup specifically? Yeah, so startup obviously I said it doesn't have a historic data so it is starting off. So you need to really do the valuation, future valuation which means that how the startup would perform over the next three to five years and that has to be critically defined. Most of the valuation reports I see startups, they are one not used a good professional, most of the times they do their own projections or numbers and then create some answers on that which can be very unrealistic at times. You need to really use some professionals and put some very strong data to support every argument. Say if I tell that my sales today is X and you go to X in next year and 3X in the third year then what is it showing me, what is the compelling reason showing me this would happen. That's more to me realistic because most of the times projections are an objective to reach to a certain valuation. So people would when you're a startup you are thinking that my valuation should be 100 crores and it's not bad to think through but by the time you can very clearly demonstrate that the business over the times would reach there and they are compelling reasons and that data is supporting that. And most of the times investor would also look at the same space. If they are convinced on your valuation and your projections then they might like to do the investment also in taranties. They would like to see your sporting confidence in terms of your numbers what you projected are falling in the same place. So they would like to place themselves in a similar manner. And that's what is becoming a norm now and that's why the money is also coming a certain branches on performance link so that there is a certain amount of pressure on the founders to really go out and deliver what they really do that. But you need to go a very deep understanding of your future business and define that in your valuation report. Right sir, the next question we have is what are the methods to value the management that is founders and leadership. Now this is where art is this is where the performance would be and how both things from founders performance not over dependent. You know please try to understand sometimes the founders demonstrate that this business is completely dependent I am the critical part of it that doesn't work rather it isn't it is to me a negative question to that. But if somebody can demonstrate that he is the best guy to write the ship for next three to four years to take it to certain value and your historic performance demonstrates that or you are in certain companies, your domain itself becomes very important like in IT technology or technology person who is a product guy running his own company and creating a new product, you always get a very good valuation for that. And this is significant part of valuation especially when it is a startup. I would say it can go up to 40-50% of the valuation structure today's time where early stage investors would look at between the founder and the business idea because commercial success is not being done. So I would see this would be rated very very strongly on that. The next question is from Mr. Amjad. He says how to evaluate a film or TV or OTT program production company before sending proposal for capital raising to investors. No, this is now this is sunshine industry. A lot of market valuation methods would work because a lot of investments have been done in the same space. You need to do a comparative valuation structures and then match it with what kind of value creation you are bringing in if you are in a particular content area or some kind of background and also very importantly your past performance in this business is very very important. Your linkages of past one or the kind of assets you have deployed for your production and things of that nature. So all would have to be mixed in but there is a lot of comparative available in the market and this is one of the top most industries currently for more valuation multiple viewpoints. Right, so I'll just take up the last two, three questions now sir. One question is what is the difference in purchasing a liquidating company and a startup and which one should be encouraged according to you. They both are different, purchasing a liquidating company is a turnaround story and what are you buying into that company is also very important because any business has a strategic asset and subscription value. So when you're buying a liquidation company, strategic value is most times eroded and you have either some customer base or some accounts which they had or the brand which had some kind of an audience which is there or some assets which are useful. So you need to really see and this is not everybody's job and I feel that this is adventuring if you have not done it in past or you don't have some kind of a strategic value to look at asset to turn around those assets. But startup is easy startup is much easier to do that and depending on but they are two different principles and two different efforts required. One is very clearly the new growth story, the idea is itself is to be powerful. The liquidation has a very big turnaround capabilities and I feel that I have seen different founders or different business owners who have different kind of skills. Some are very good at this and some are very good at this and this is very rare. You know, turnaround stories are very, very rare. Nakshmital is a great example. He's picked up all the assets which were dying and turnaround and build a steel empire out of his own company which he was part of his path actually going into bankruptcy. So fundamentally he's all his life he bought over businesses and turnaround those businesses and converted them and made them very, very successful businesses. And we'll see a lot of this happening this year. And people are really on a lookout to see some of these assets, but I can help you if you are clear on that if you can write to me, I will love to understand where you what you're looking at and would be happy to advise you. Absolutely, so another question we have is how do you value a franchise business. No, franchise business is, you know, it has two parts to it if you're a franchiser then obviously you have a brand and your performance and your earnings by a poor franchisee. So that becomes and your potential to growth. But if you're a franchisee, then it is clearly an income business, which means that return on investment kind of a model I will have to do and then sell that say for example I was running a subway. Then I would only discount the performance of that subway and discount that earnings to create a valuation. And it also now this is a very important question a lot of people come to me and say why I'm running a subway, and I have three lakh rupees monthly earning now if I discount three lakh rupees that asset value would go very, very high. So it will go extremely high, because if any particular discount also I do on a certain earning levels, it will become very high. Now the second question is I have to do comparative and a replacement value, which means that if I have to buy a new subway. This is obviously bought and running successfully making three lakh rupees, but if I have to buy a new one, it's only 60 lakh rupees, say for example. So if this valuation is coming said two crores nobody's going to buy this because your new one is 60 lakh rupees doing that. So what we do is we take the 60 lakh rupees of replacement value, which means that this is a value which you have, and I will put a good will of this earnings on that. And then it becomes a so this is where game becomes art and science how do you really put structure on that hope I was able to answer that in a structure so different objectives when you are doing a as a franchiser, then there's a very different valuation structure. Largely I would like to see earning by per franchisee kind of thing an opportunity to grow. And combination of that is a valuation structure, but if it is just a franchisee then I will have to discount the incomes. Right sir so the last question that I would like to take up is the question says in your experience which are the critical intangibles which one should really not miss out in valuation. Any parameters that you would like to mention specifically. So now these are intangible is becoming big list actually tangible are becoming smaller intangible can be any kind of systems in technology, your IPs your trademarks your any kind of patents you're holding anything which is which gives it can be also your go to market capabilities your your brand equity. All these are very, very important aspects for your intangible values and team, how is your team and how it is ready for being transferred to the new management if it is sell out or if it is a new investor just investing into that how the team is there and what is their stickiness on the business and and things of their nature is always a very, very important aspects to it. It's also your consumer understanding how your consumer is telling about your company. What kind of ratings you enjoy what kind of reputation you enjoy a lot of that is very important and I've seen some some companies quickly get into a very big evaluation purely good PR because they they were very much in news not so much the business when we evaluate the business business is still very small and but but they get a very good valuation because of the you know the good PR they're holding and the equity of the brand which has been built. Absolutely sir and now finally we have a lot of questions from people asking if our company helps in business valuation and how we can help them and a lot of details regarding that so anything you would like to add to that. Sure so business X is actually designed to help small and mid size companies, what the big four big five do for the larger groups we do it for smaller groups smaller companies, which is helping them to do valuation, rather we have the, we are partners with the world's biggest fintech company called biz equity you can go on a biz equity dot com biz equity is world's number one fintech company for business valuations. French as India and business X are a joint venture partners for them in in Asia and we operate out of India and Singapore. So that does valuations beautiful report comes out of biz equity and then we also help you to raise capital or if you want to look at an exit. Then we work on that any business which needs an exit and it ranges from what I call five crores to 100 crores I would love to personally talk to that business. These are the segment I particularly work myself. And I will be straight if I have ability to do it because some industries I don't do because I don't personally champion on that, but some industries I can I can be good at it, especially if it is a consumer based businesses. That's something which is my personal area but we have other consultants a lot of good consultants in the system and they work on all sort of industries manufacturing retail trading, all sort of businesses. But I personally myself focus on franchise businesses or consumer based businesses. Right so with this we'll just wrap up our Q&A session Gaurav sir. So thank you so much. Once again for a wonderful session and for very patiently answering all our questions as always to anyone who wants to reach out to Gaurav sir directly I'm sorry I wasn't able to take up some personalized questions. So if you have any kind of questions at all please feel free to reach out to Gaurav sir or to me if you want to know more about our services and want to discuss anything in details anything you would like to say in the end sir. I'm writing my email id is gm at gauravmarai.com please write to me if you have any questions for me I'll be more than happy to do that and this is all no obligation this is a you know process of education, our purpose for business is really to really educate people on that we still feel that most of the businesses especially small businesses which contribute 97% of our business in India are not valued, less than 1% of businesses are valued and they largely are listed. So there is a big problem of businesses not being valued, because they're not valued, they cannot have ability to go and attract investors, raise capital or logically find exit. A lot of businesses go into liquidation or erosion of capital, because they were not able to either raise on time or exit on time. Business was good every business is at a sometime good and has some inherited value, but because they lose that time and they're not able to act fast or they're not able to raise money or they're not able to find a good buyer. They actually erode and then it goes into liquidation, liquidation is the lowest form of valuation you can ever get because you're just selling the remaining assets and at that also not on the fair value much lower than the fair value. Thank you very much. Right, absolutely sir. Thank you so much once again and thank you to all our attendees. We really hope you were able to add some value to your lives through the session and we'll see you next Saturday with another session next week session will be about exiting a business. So if you're more interested to know more about this, please join us next Saturday at 3pm and thank you so much once again.