 This is Sonali. Thank you all for coming out some time for attending today's webinar on the episode 16th of the Business X Learning Series in West Scale and Value and Exit. Today's topic is on business valuation, myths and facts. To all the attendees out there, please type in any questions you might have in the Q&A section and we will try to answer as many as possible at the end of the session. I would now like to welcome our speaker, Mr. Gaurav Maharaj, Chairman and Founder of the Franchise India Group. A very warm welcome to you, sir. Thank you. Thank you, Sonali and thanks for hosting this every week. This is a very Saturday edition where we talk about how do you invest in businesses and how investors behave and second is value, which is how do you value your business. Today's topic is about that and then we also talk about scale and exits. So, valuation is a very unique discussion and I think you need to understand that it would have a different meaning for different set of companies and different stage of companies. Particularly business period of COVID going on and other things happening. We're getting at Business X, two kind of inquiries, a big time. One, a lot of startups which were thinking of raising capital at this stage are coming to us and saying and rediscovering their value and understanding where they stand and how they can attract capital and so on. So, there are a lot of what I call the growth and the scale companies which are raising money and they want to see their valuation how it needs to be done. And then we have a lot of companies that are coming to us and they are largely between Business X is known for the entry to mid-sized companies and they're coming to really exit the business and they're also looking to do valuation. Now, these are very two different phenomena and then they are what I call performing assets which are performing and making money and they are ready for scale and they're going the next level and then there are businesses which are non-performing and they are losing. And the non-performing also have further two types. One, I think there are businesses which are currently non-performing from a financial point of view that means that they're not profitable but they are also divided into two parts. One, I think companies which have a large opportunity over the years to really become profitable and so on. So, they might be in a life journey of gestation where they're not at this stage making money but there is a future to make money. And then there are companies which have reached to a point where there is no current for unless and until the full restructuring or recapitalization or turnaround can of the businesses can happen. So, they are a mix of businesses and valuation becomes a very different structure. So, I today thought that I'll probably take multiple myths which are coming in the valuation and talk about few things which are very important for people to know and especially if you are at a stage where you are looking for value for businesses how this can really help and benefit you. So, one of the references I want to really give to everybody if you really want to refer anybody I would say in the valuation space who's a real genius is Damodran. I think if you not read him or not reading about him I think you should really go and refer. This is a source where I would do all my reference point. I think he has done some real good work in understanding how valuation should be done and his understanding level of valuations for a different class of companies is absolutely genius and I've met a lot of people in valuation. I think they don't have the depth of the knowledge and structure. So, I picked a few things for Damodran also but a mix of few things we will discuss on discussion today and I've also some experiences upon my own because we deal with a lot of these small and medium size businesses how they really look at it and so we will talk about a few things and if you have questions you please go on a Q&A box and just ask your question and the end of it I'll do maybe a 20 minute discussion and then we'll start taking some questions and I'd like to answer if you have a specific question about your own business how you want to really see your valuation. So, starting point is that valuation is always about it's a quantitative approach where valuation itself is an objective. This is one of the areas which I really learned from Damodran because fundamentally most of the times we really stack up our numbers to really reach out to objective of valuation we want to do that and this is what the first is that this becomes a structure. This is a this is the approach which everybody would take and this can be sometime very biased and it can be extremely biased because just adding on numbers doesn't give us the final outcome. So, one has to really see through that this is just a way of valuation. I mean people set an objective of what they want to have a value for and do the numbers actually stack up on that. Another area which is a myth that the valuation is once done is what you have. I mean people come to us with valuation which they've done last year to last year and they still feel that the business was at that level and they continue to do that because or rather they would sometimes increase because their last year revenue to this year revenue is increased so they would feel that the last year value to this year value would have also increased. This is myth, again a myth because valuation is also subjective to a lot of other things. It is largely broadly from economy if people are coming at valuation at this hour where I would say the businesses have churned and changed and what is your industry doing? Is your industry in a long-term hit situation or a mid-time or a positively hit where you are? Everything is changed. Even if somebody is taking numbers which are even March 2020 I would say this has changed drastically over the next four or five months and it can be for some reason some business has gone up and some business has gone down. This is largely broadly how the economy is doing, how your industry is doing and also what stage of market we are in. Are we in the bullish market? Are we in the moderate market? Are we in a recession? So depending on these things your valuation would constantly change. I would say if you really in the line of doing and raising capital for yourself or even in the market to sell your business you need to really take a quarterly approach minimum to really set that your valuation is right or not at this stage and you have to have a good practitioner who can really set some valuations and also understand the market condition, the demand side and so on so forth. So a lot of these are very important to do that. Another area which is a myth that is a very scientific way of doing valuation. I think the science is just one part of it. I think it's a art and the science combination. Art is really the softer sides of businesses and I'll talk about in the future in the further structure and science is about stacking up your numbers. If you'd not create a combination of both your value would not become. The more quantitative is better. I think Hansar again know rather I would say the softer side is much more prominent at this moment. I've seen business has been valued on founders who are the leadership team, how nimble the organizations are, how scalable the businesses are, how resilient the businesses are. These are things are getting more valuation just an absolute numbers. So a lot of times people just follow the numbers and I feel that they forget about this other part of it. However, business is ready to be transferred to somebody and these are things are becoming more and more and more important for somebody to really look at it. Another area which is a myth is that a lot of times the way people do valuation and then they get a feedback from the market and they don't trust that feedback because they feel that the markets are sometimes wrong in terms of assessing their valuation and things like that. Actually markets are always right. So you need to really see that something's not wrong with your approach to valuation. I've seen people getting a lot of frustration because they set a very different valuation for their businesses because they believe in or their numbers are telling them but there is a lot of other things which are part of their businesses which create and especially in Indian businesses I think there are a lot of complexity in the businesses which really surprises me that even great businesses are so complex and design wise that the capability of transferring and transparency of the businesses becomes a big big challenge. Even the numbers look very interesting everything is good but still a lot of investors would shy away from these businesses because they've looked so complex in that nature. Another area which is you know very important is that how do you really justify the beliefs and beliefs are objectivity and quantity. So how do you really bring these two beliefs together and and then only your because it's all about demonstrating next five seven years of the business and how five to ten years your business is going to be taking and unless and until you really bring in strong objectivity to it you know how this objectivity and predictability both are very important part of the next four five years of your journey of the business and that's something which to me is more critical. It's not really about the absolute revenue which we really think it's the it's the objectivity of that in terms of how you can really demonstrate that's why companies which are SaaS companies you know companies which are which have a certain amount of ability to demonstrate that the same subscriber would continue to consume or consume even higher in four five years time now get more valuation you know sometimes people get surprised and a lot of people come to me and say these very young companies are able to get that kind of valuation but if you really look at these businesses they have a subscriber business model and if they have demonstrated on a small sample and a small sample they've demonstrated in last six seven months or one year that these subscribers continue to purchase and then now they continue to buy for the next five ten years and they would continue to purchase more they would want to spend more these are the trigger points which would set some exceptional valuation of businesses a lot of businesses have a great present but they are not able to present a better future so I think the valuation is a combination of your past performance your good present and a great future if you are able to get this piece right if you have a you know past which tells me that there is a there is a consistency in what you're doing now you have a good present you have a reasonably good present and you have a very strong extraordinary future reflected you get the top most value and you need to really ask yourself is your business ready for the manager if your business for say past had a consistency but your today is not looking good and a lot of people actually come to raise capital or want to transfer the companies when this is actually happening it to me they have actually eroded the value right so because they were they were doing okay at the past but last one or two years their business has gone down and then now they want to exit or find that so it's not a good situation to it and more importantly they would not be able to demonstrate the future right so how the future is going to be done so first we need to go and correct the model itself why this decline has started why the company has gone down and how we have an idea to really take that business back to and I think and continue to show so this is to me a very strong fundamental of how do we approach valuation another area which is is that there are standard multiples a lot of people I mean I think almost every discussion I have with with somebody wants to valuation they would start with what do you get a multiple in food what are you getting multiple in this and these are perception they would read either by listed companies how there might be multiples are there or a lot of other companies and they take that as a myth answer is that no business is same you can take a reference points of these multiples that's all right but every business to me is extremely unique every business is led by a unique leader it also has a unique marketplace to operate he has a unique customer base to do that so no two businesses are same no two firms are same really speaking and how do you really put the differentiation on that you can take a little bit of a reference point you know in the past transactions and multiples needs to be done but normally these would have to be assessed independently so don't really just because something happened in your industry at a certain multiple and you heard this in the business you think that your firm is also likely good to get that one that thing and this is one of the big big problems especially in the startup to midspace a lot of people just to hear a news and say oh x y z delivery company got so much of valuation at certain content I think we are also similar to that actually is a myth you know it's a it's has no reality to me because they are they are that's this comparison is a wrong comparison to do you know there is a recently a company came to me as this immediate competition will value that a certain value and they were two different businesses two different businesses one was extremely completely on technology and one was very classic model while their numbers at the top line to me looked same but they were very different companies they were differently placed companies this company would have ability to demonstrate a very strong growth in the next five seven years has a possibility to better control the business and operations this classic model was very different it had a lot of other inherent challenges which was there so really don't compare just multiple you need to go in the depth of the of the business and try to do that and sometimes there is not so much of a space for multiple companies to really in the business phase just becomes overcrowded and and there is no more acceptability and the first few would get bigger and bigger like this what happened in the in the co-working space right so first few five four five companies really got exponentially in valuations and then a lot of people just rushed into getting to co-working because everybody wanted to do the rework and things of that nature and look at them most of them are collapsing they're not even get a single buy play so so and the market actually has also gone under on the south and the valuations are also going south so it's a you have to be really don't really just rushed into because there's somebody who's in the same space got some valuation and and you want to do that another is a myth which i touched upon earlier also is that everything is financial attribution you know and a lot of times great balance sheets which are financially telling you everything right still don't get good valuation because there is a a lot of other things which are very important and some of them i will share management team and founders to me is extremely much how much is the strength depth profile background their experience their commitment levels what is that telling you is extremely important capability and intention of the team you know it's team is also extremely important how the team is aligned to the growth cycle of the business growth in the past growth and what is this analyzed growth telling you what kind of numbers you're doing or in or in basis reputation and brand equity what kind of brand you build and how you enjoy the equity and this is the most difficult part to really build some kind of a number around it because it's very difficult to measure non tangible assets right a very very difficult you know and and and it becomes a this becomes a more art part of it because you need to really understand that and i think what is the firm size how do you really how you spread how far you've gone in are you spread thin or you are clustered things of that nature almost every company which is coming to me i'm giving them a cluster approach today i had a call with a good company which is in EV vehicles and they they are coming with the product and i said don't worry just focus on one state and capture that one state right while you have ambition to go everywhere but don't go everywhere because you have only this window if you see the EV space this window is only for two and two and a three years because it's not that the hero doesn't know the bajaj doesn't know the the other companies don't know tv s doesn't know that electric is the future but they are because there is so much investment in the classic technologies that they don't want to really make it too big but they also know that by 2025 uh it was must that only EV vehicles would be sold because this is a guideline by government supreme court and the things like that so what could happen is this is two-year window in two-year window while they would continue to sell their own conventional old technology because they have a lot of investment riding on that and so new players have this window of two years two and a half years and and they can if they can spread thin they can go all over which would not matter to a hero or a bajaj or any other big OEM because he was just small and you hear him there and they would not be able to but imagine if you became and gone to one state and build a strong deep cluster in that and and you actually created an entry barrier for any person to enter it right then they have to buy you out right so the maximum valuations would come there or invest with you so a lot of these times if i have seen in last particular 25 years either you were a strategic entry entry barrier advantage or you were strategic from a early go-to-market capabilities or something else which gave a significant advantage to a buyer and that's where the valuations jacked up you know so you really have to see what are you doing to one keep the competition on the fence and second make so attractive for a competition to look at this most of the strategic buyouts in the industry really comes from there you need to also see what is an organizational design today you know because i've been there's one particular deal i was doing working on and that he called because at the latest stage the buyer really realized that he will not be able to pick this deal because it's so complex to control the business and i'll talk about this even more detail you know another thing which is very important is that a lot of people say that how is the multiple of revenue approach really works you know multiple of revenue approach is most of the time then this is another big myth where people think that they are buying business which is today actually it's a mistake nobody wants to buy a business which is today they want to buy a business what this business today can do in future right so if you show your business for today i don't want to value because this is something which this is your business and you brought to this level and i'm going to taking at this stage and i will take it to the next level and i want to really see where this from today to go to the next level that's why discounted cash flows and all these things were so popular because fundamentally it's your demonstration and how convincingly you demonstrate a business which is today would go to the next five years and continue to rise and grow and over the time so that's something which is extremely important and unless and until you have very clear structure that you are able to demonstrate somebody that this is in that another area which is very important is just not the precise value of the valuation would make a sense to me me i would give more marks to the deal structuring than just a purchase price right purchase price is just a number and the comfort is the deal structuring how you structure the deal what comfort the investor is getting into getting into the deal that to me is equally important so when you are discussing valuation you need to also discuss in the same sense what is the deal structure if they don't come in a combination i think sometimes the comfort you get from a deal structuring this is very important for for an as an aspect so this is where the value would really come in uh another thing which is that that yeah so another approach which i have i've seen where a lot of these business uh resale people are coming to us and this is very unique uh when i talk to them uh so the typical example would be somebody come and say i was running a restaurant and i want to sell that business now and i would ask that what would be you expecting as a value of the business while they don't know but they would just calculate what they've invested and uh and when they say what they've invested uh is a value is is actually their perception of value right it's a perception that i i invested so much and i want at least that to come in and they don't understand that people are not interested in what you invested i mean you can do a lot of mistakes you can do a lot of burn in your working capital and a lot of other things they're not at all interested in that so don't perceive your own value by just by your investment or what you want from it so there is a desire value also a lot of people say oh i want to exit i would at least expect this that has no meaning to the market right that has no meaning to the market people would go and give only what you worth that you know like i was selling a one existing subway uh and somebody came to me and says i want to buy a uh sell at a subway at 80 lakh rupees i said what would a new subway would cost if i want to start a new subway absolutely brand new equipment brand new everything in maybe in the great neighborhood at this stage and especially this was actually in the covid times going on i say and the covid times i'll get probably rentals which is 30% cheaper he said maybe another 50 555 lakh rupees i said then what it makes me reason that i should invest 80 lakh rupees with you that's one approach of it but fundamentally can we still argument look i'm already done the gestation i'm already profitable i have a top site available all these arguments can come in you can still get a good will but you need to be realistic on what is your expectation on if you just take expectation most of the times people who are exiting the business their expectation is what they've invested at least that come out that has no meaning to me you know that has not meaning to me and i've seen businesses which were invested 10 crores and they were actually sold at nothing you know they took almost haircut and took a little bit the money and then they were excited because the investment they did was actually a cash burn you know this were not really anything which contributed to the company so that's very very important for you to understand that how do you really do that another thing which comes to us is classic businesses old businesses which come to us and they say i have a good revenue and a very controlled expenses very controlled expenses so i'm profitable very profitable business and i want to sell that now in some cases this i can discount it over some return on the capital which is donating and if it has stability i can give a certain mode of valuation typically i will do a valuation which is reporting 15 percent of the capital deployed and i discounted back to them i think but i will not give you a very big valuation on the business why i will not give you because fundamentally what you're dying is that you're not reinvesting in the business so what you're doing is you're keeping the expenses low you're not growing the business you're taking a lot of cash out and you're not reinvesting in the back end business and so fundamentally to me this is not a business designed for a larger growth right so that also is a problem so like a lot of businesses are classic old businesses very controlled they just they keep taking promoters keep taking cash out for their own lifestyle and their own things and things like that the business is not reinvested and the business has become flat and actually stagnant for very very long so those businesses also not really a big valuation businesses you know literally true and the businesses would need to continue to show growth and they need to have some kind of trajectory of growth and where the business is going and that's very important another area is that a lot of entrepreneurs who are varied the business is totally dependent on them that also is not so valuable if you if you really want to make your business most valuable make yourself redundant in your own business this is something which i always say you need to make yourself redundant because if you make yourself redundant then your business model would be great to be transferred to somebody else if the business is too dependent on you again you will not get a value and a lot of businesses and particularly one business of mine i had a great term sheet great valuation everything and the CEO said that this business is too much around you and that was true because it's owned by franchise business and and everybody knew me because of franchising so i was too involved in that business and and it was a joint venture it was joint venture with a big company and they felt that eventually they wanted to take a larger share in the business and they said because the business is too much around you and if you're not there in the business this would not make sense so fundamentally if if you don't make your own business model redundant of you you know you don't you're not required anymore in your business that time the valuation of the business goes to the other side another area which we get this especially for small businesses when we treat the balance sheet of the small businesses they come to us and i would see the finance and then diving and bottom line is very low and you ask them what is why this so low it says no no no i put a lot of cost here and there i've taken my own compensation my car loans and like this and my diet and and that's why the bottom line is so low and uh because uh this is my company i didn't want to do i want to save taxes and i put my money in my compensation my salaries my travel bills and other things these all actually are wrong you know all takes away your valuation this creates a lot of doubt and uh in people and and i've seen uh this doesn't go with investors they don't like it uh they don't like uh situation like these they don't like the situation of uh things which are putting the business and which were not part of that and and so so at this stage i think we are in a very different uh sphere at this stage more cleaner more predictable more scalable more uh you know uh businesses which have a trajectory of what i said uh showing very clearly a great uh you know a performance in past good growth good today and a very excellent and extraordinary future if you are able to demonstrate that that's where you get the maximum value every business has an inherent value there is an inherent value and always call it the SaaS principle there has a subscriber value there's an assets and there's a strategic value between these three things how do we really come out of the outcome of the value is very important so now i'll be happy to take a few questions from sonali if you see any questions uh because i have another three minutes to go so any any questions you have i'll be more than happy to take it sure uh sir so we have quite a few questions lined up with us uh i'll just take the most relevant one so uh one of our attendee asks why are valuations so high for startups when in reality they are actually in big losses yes so as i said i mean the valuation is not done for today it's done for future uh those startups have a have a great ability to demonstrate that future now the problem and this is actually like the surprising part you know this is actually uh because they don't have a past so they can they put all the maps around showing what is future going to be while this objectivity of what they're showing has to show with a lot of merits and maybe a little bit of a commercial performance they've done to demonstrate that look they got they spend 100 rupees to get these 200 customers and then they say can the because they are 200 but the market is that big and if i spend this much i can get so much so these are things which will tell them that there is a future on that they will also have some clearly a problem solving value which was clearly demonstrated to uh uh you know investors they like the the issue where you really solve a problem you're solving a big problem which which would create a new customer base for you so those are businesses which then you get a serious amount of value and sometimes you need to take to early adopters because you already know that this is going to be the next big thing when e-commerce was invested in India a lot of startup investing if you had any name anything you call and you had a platform which is ready and technology was ready you will get money because everybody knew that money is chasing e-commerce for india there's no brainer in that so sometimes some industries i call are always chasing capital they're always inviting a lot of capital and if you had the right time right stage you'll raise money absolutely and i can tell you a couple of things which are which are in in that thing like edutek there was no brainer i mean last year edutek anybody was even it's early stage business who would attract capital there's no problem but year from now i don't think so i don't think you as a startup you will be able to attract only the big boys would get even bigger even bigger and then only strategic acquisitions would happen which means that you have a tool which buy juice like and buy juice would buy you you have some window here and then somebody would buy you so that's how the market would now really uh one and uh work now the problem with business which are existing they have a lot of past and suddenly they they behave like a startup and say the next five years i'm going to be 10x but you have another five years behind you which is not even showing your two x and how you can demonstrate 10x and without changing anything which you're doing today just because you ask money and say give me three million dollar and i will be 10x nobody's going to buy you so fundamentally is that even if you're an old business and if you re-engineer this everything and and really demonstrate that now you're ready for a new trajectory for a growth cycle then i think so or you have a new technology or you have a new innovation or you have a and then you will be able to get back absolutely wonderfully explained sir so another question we have is from Mr Paranjeet Singh he says how do you value a brand name or logo which is already closed for example king fisher is all whiteed up but only the logo and the brand name is there if they want to sell actually this is a big good question very very good question all big private equity firms buy chapter 11 companies and just not because the company is anyway dead and finished and they buy logos and the logos become very very big and i can tell you some names which you you would be surprised that there is no company existing all night codac codac packed up logo was sold to a private equity polaroid another camera company everything sold out and logo was sold at the investing house company closed a brand was sold to another so there are so many brands this is very new to india it's not been done so much but it's a very very popular way of buying businesses intangible assets sometimes become very important now codac is the licensing into everything they are making iware they're making laptops they're making phones they're making everything the owner of the trademark is using these names and since really king fisher is a phenomenal look phenomenal brand rather before it got packed up five years back you know uh vijay malaya and his four team really invited one of our licensing team badford to explore licensing because he always knew what power of his brand was he always knew that uh and it's unfortunate that he was not able to take it because his idea was to really do a lot of things under licensing bring fashion line bring this line this was all a part of the plan but unfortunately this took a different term altogether now the asset is with banks obviously the banks would eventually need to see that how they unlock it but banks sometimes don't understand this i personally if i would have to give advice i say auction the name and you'll get a good name and now the problem would be that king fisher is not owned just by airline this is owned by ub also which is already sold to digio so the brand owner i don't know who is the brand owner and how the brand would be different because the logos were differently placed king fisher at different logo and ub's beer logo was a little different and and they i don't know how was the license it was ub license to king fisher airline or vice versa because that is already it's going on beer brand is already there and they're actually i think they already started licensing i've heard that they've licensed a brand for a non-alcoholic beer called zero on zero by king fisher so they are doing brands which is a little complex in that sense right so sir if your time permits can we just take one more question so another question we have is why our valuation approach is different in different cases for example if i'm trying to raise funding then it's different but if i'm trying to sell my business or take a loan then the valuation is different yeah so it's it's it's as i said in the start of the business it's obviously would be absolutely different if you're selling the business then there is there is obviously a deeper risk with the new buyer because he has to run and manage the business and and you are completely exiting the business and so there is a there is a challenge of legacy future handling operation capability a lot of things would come in the mind but if you're running the business and you're going on the track and you invite me as a minority shareholder in the business and i'm participating in the business my my investment is just limited to my financial investment and i'm very limited to this kind of operational contribution of business so valuation would be absolutely different right great sir so we have we don't have another question but a comment that we have from Dr. Rekha she says make yourself self-redundant for high business valuation is great advice and i've seen lots of exits due to self-dependence so she did ask if you can give some cases but i think you gave a case of yourself only for this so yeah i think that's absolutely right Dr. Rekha and sir anything you would you know like to add to that you'd like to say in the end i think it's a good session we continue to bring these sessions every every Saturday it's a it's essentially designed for what i call early stage businesses and a lot of startups and and businesses which model sell there and i think so this is how and we will we make sure that we we do our best to from business experience to continue to take up the knowledge up and help our business community really transit and network better thank you very much wonderful thank you so much for your time gaurav sir for a wonderful session as always and for sharing your valuable insights with us thank you to all our attendees for attending the session as gaurav sir said we see you next Saturday at 3 p.m for another session and the next session will be on exiting your business so if you're interested in that please join us next Saturday thank you so much