 Hi everyone, this is Sonali. Thank you all for taking time for today's webinar on the part 3 of the VX Learning series all about finding the right value in a business. 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. Request you to keep the questions within the scope of today's discussion and not to your personal business queries. I would now like to welcome our speaker, Mr. Gaurav Mariah, Chairman and Founder of the Franchise India Group. A very warm welcome to you, sir. Thank you. Thank you, Sonali. Thank you very much, Sonali, for inviting me again for another series and organizing this regular webinar. This is the third in the series. We have divided every week to take up one topic. The first topic we took up was how to invest. Then the last week was how to scale and today's is how you value your business. And today's webinar, we'll talk about why I should value your business, how you should value your business and when you should value your business. That's very important that we go through this whole cycle. This webinar is now, and that's my apologies also for the little delay in terms of starting because this is in three platforms running. It is running on our Facebook live. It is also on Zoom and it has also been real-time telecasted on our first digital exhibition, which Franchise India is hosting today, which is attended by over 4,000 people. It's also been telecasted there. So the integration of technologies and also everybody working remotely, sometimes a lot of people. So sorry for that. So let's start with the valuation part of it and why so it is so important, especially now. And these times where everything has changed, the way we looked at businesses before March are very differently way we're looking at businesses now. The promoters who were very involved and committed to their businesses may would have changed by now. So a lot of people who are not looking to exit the business might like to exit the business now. And some people would see this as an opportunity to acquire a lot of businesses. So a lot of things would change in, which has already changed as a mindset. I call it in last three months, and this would start changing significantly over next two quarters. And we will see the large amount of MMA is coming in 2021. And especially at the, we have never seen this happening at the entry and the mid level. And I see a huge, huge opportunity coming at the entry and both in terms of the consolidation, a lot of MNA, a lot of equity participation and so on. I also feel there is a big worry that a lot of businesses would exit without having any value. And that's very painful to me because I feel that every business, whatever it is and whatever stage it is, it has some inherent value. And sometimes business owners are so busy in their own businesses and in their work, they have never had time to value a business. Now I asked this question to every business owner that you know the value of everything you possess. You know the value of your house, you know the value of the jewelry you have, the investments you've done in financial world, the properties you own, even the watch you wear, you know the value. But the business which you run for years and years and years together and every day you put in 12 hours or 14 hours of business, you don't know the value. And I'll tell you why you don't know the value. And that's why in India only 1% of businesses or less have been valued. So fundamentally and these are also companies either listed because listed you have a market capitalization. So you know more to the market cap available with you or the companies which have unlocked their equity, which means that they have invested, they've got an investor coming in the business. And at a certain stage they have got the valuation of the companies and startups normally have done that and they are able to attract a lot of investors. Now the family businesses, traditional businesses, a lot of these businesses have no idea what the business is valued for. And I'll start with giving you some point a firm can value and this is basic. You know a lot of people come to me and give me a lot of answers around the valuation and try to make their own presumptions what valuation should be. I'll give you the starting point and this is something which you should first of all note. The firm can have a value only if it ultimately delivers earnings. If the company the business is going to eventually deliver earnings and what the quantum of earnings is that's where the value is really built. The intrinsic value of an asset is determined by the cash flows you expect that asset to generate over its life and how uncertain you feel about this cash flows. So fundamentally you need to really see what is what do you expect from this asset and the life value of this to what needs to generate and how much uncertainty it carries. If you bridge these two things then only you come with a valuation. So valuation by nature by structure is an art. It's not so much of science. I call it valuation is an art. It's not so much of science. While we have a lot of scientific and a very proven methodology is available by registered valuators, chart accountants, a lot of other consulting firms have a lot of methodology and we talk about it. But still this is still an art and it's still not a science. So I will talk about how it becomes a structure. Now another thing which is very important that capital raise is no more a business is a no more choice because the businesses are changed. They continue to ask for their growth. They need to have a reinvestment in their business, especially now the cycles have changed. You have to do a lot of innovation, a lot of reengineering, a lot of new equipment you need to bring in new packaging, new ways of selling, what was interesting to reach out to customer like what happened in retail. If you see the retail environment, the first 10 years everybody was putting a lot of capital in building these brick and mortar structures and so on and suddenly they realized that they're losing on to the digital world and they all have to invest into their digital capabilities. So their fresh capital was required and I know a lot of good retail companies which didn't have that money available and they were not able to raise at the right time and they were not able to sustain the change and now the changes are becoming even more faster. So unless suddenly you have ability to constantly raise through your capital, you will never be able to be ready to handle the changes which the environment would offer you or the challenges the environment would offer you or the competition would bring in or destructive ideas which would continue to come and hit the markets and these destructive ideas would force you to really bring in that and if you're not adequately capitalized, you will not be able to cope up with that. And I can tell you a lot of traditional season businesses which were running for decades are going out of businesses just because they have they've not able to unlock their their value or their capital. So you can only unlock your equity and this time I think the greatest example we all are hearing these days is reliance industries, reliance industries, you know, had chosen the path and shown the path to the entire corporate world that how important it is to really create a solid asset which can be valued and and how important is to continue to raise that value because now so they have actually taken off debt out of their balance sheet and and actually brought in a lot of equity partners. This is the way we should really look at businesses going forward and I strongly recommend that small businesses because we are a very large ecosystem of small to mid businesses and I every forum I say that is not good for these companies because that is a cost of capital in business models like one, it would it would it would disturb your balance sheet forever, you know, so cost of capital sitting in a balance sheet is not good for small and medium enterprises. They just run to pay the interest which keeps coming in businesses, they're not able to take the business up. So always don't mind even if it is your family run business, even if you inherited your business from your father, there should be no problem in unlocking your equity. So let's get into understanding of there is no one set formula of putting a business valuation but let's understand what are the few starting points what needs to be done. First, whenever you're designing your valuation, see from the eyes of the investor, you know, so calculated valuation doesn't mean unless an investor and a buyer agrees with your assessment and past performance of the past performance indicators. So unless the buyer or the investor is also able to see your assessment and in the same way as you are able to see that assessment and also your past performance indicators are also showing those those benchmark and then I can relate and validate those benchmark then only I have something which is moving on. So always design your valuation from the eyes of the investor. Second, understand the valuation cycles. These are changing very fast. Why? Because our macro and micro dynamics change very fast. economical changes, industry changes, competition has become very important and destructive. Now, you don't know, you know, there are visible competition, and there are a lot of non visible competition, which which suddenly come to you, right? And these are these can be anything it can be for, for any industry for, you know, even a Ola and Uber became a big competition for auto sales, right? There were invisible competitions, you felt on one side, there would be more cars on the road because all over would come in. But the truth is that if people start using these shared vehicles, then they will not buy new cars. So fundamentally, sometimes we see the competition and different perspective and there is unseen competition, we continue to get you and a different structure like these days, this everybody saying, you know, television on demand or digital content on demand is a big but it is also a big threat to multiplexes and your regular conventional channels and a lot of other things. So so sometimes, you know, any destruction which is coming in can become a very strong part. So you need to do your valuation cycles in accordance to that. You need to see where you are and you need to adapt things of that nature. So I've seen a lot of businesses which get into fatigue. And and then they're not able to get into the right valuation, how you can keep your business is relevant. And so I always insist that you do get your valuation done and every almost every year, and then you will be able to do that. And also, why is so it is so important that you need to really find out what is your business worth? And maybe we'll talk about this piece a little more in detail. And what is the reason why you should really have importance of finding out your business? You know, I've realized that most of the times when the need really hits you hard, you know, when like these times, these times are very challenging times, very, very demanding times, I'm getting calls from a lot of companies which are reaching out to us, especially our franchise companies and so forth. And they're coming and telling me I want to really look at an exit, I'm looking for investor, I'm looking for things of that nature. And when we look at their businesses, their businesses were currently not designed to be rightly valued. Why I say so because they were running the business as they used to run, they never thought that they would have to make themselves ready for a future investor. So they never really brought some changes to really design the business that it becomes more attractive to investor. Look, please try to understand one single investor is always looking at hundred odd opportunity, right? Why your opportunity to shine out out of the hundred, that's very, very important. And unless and only you also mentally and organizationally, prepare yourself for that right valuation, you will not be able to do the valuation right. I mean, you will not get the right valuation, rather people get shocked sometime, when they get the valuation and people like us, we go and say, you will not get that valuation recently, one of the technology companies we were evaluating. And we find that there was nothing really about this company, this was just a simple CRM product. And there are multiple competitions available go to market was extremely tough. While being a technology product, young startup, the expectation of valuation is very, very different. The others were sitting as only 30, 40, 40 lac rupees as a business model. So we expect that this business has no, no real value, you know, and why would somebody go in while other than putting some maybe 20 lac rupees to build the similar or better platform. So fundamentally, you need to really see through and really get realistic on your business model, that how your business model is right. I always say that getting yourself valued can actually give you the biggest insight about your operations. You know, and these are very important. I always say that people because they don't sit on, they don't get time, business owners don't get time to sit on their own balance sheet and put it in somebody's else perspective, and especially if you invite some independent evaluator or a business consultant who can value your business, and you will find a lot of indications in your business, which will tell you how you need to fix those things in your operations. It can be your brand valuation itself. Let's see brand valuation is a one topic. You know, how much you're spending on brand valuation? What is your cost of acquisition of a customer? Is it sustainable? Is it going to reduce as we go down? Because now your brand would become more popular? Would it would it make sense that the early years you are spending more but in three to four years this come down? But what is the inherent brand value which it needs to run or what are you chasing as a value? Because sometimes we get in love with our brand and we start spending too much on marketing. I also did this mistake in our company and we went on I would call it berserk in terms of our spend in marketing. But now I'm realizing that there was a lot of audience we already build our focus should have been engaging rather than just doing more propaganda marketing. So sometimes you're doing things but you don't see from a balance sheet viewpoint. You don't see from a future of a business viewpoint and businesses and and emotions have to disconnect, you know, somewhere you need to see business in the full light of business. So you need to really see what is happening on your brand. You need to see what is happening on a lot of other things happening in your businesses and especially one of the areas which I have realized in especially in retail kind of a companies or manufacturing companies. They see inventories as stock as as a as a as lying asset in the books while it is fine. But I feel that you have too much of money been locked in as your inventories or non performing assets. You know, I know a lot of companies which would say I have 10 crores of stock and if I go deeper into the business and find out that five crores is not moving. This is what never move. But it continues to show you on a balance sheet. You continue to make you happy that you have 10 crores of stock. I know one big jewelry company used to claim that I have a thousand crores of jewelry. But when the audits were really deep down done, they found that is only 300 odd crores and 700 was just pulled up. You know, and this was not working. You know, it was destroyed and a lot of stuff. So it's a and in especially in the diamond and the silver jewelry, a lot of damages were there. But in a book value, it was still showing you a very big value and this creates a little bit of a memory effect in and businesses and business owners that they start believing that this is a good asset sitting on that while to me that this has to be checked. So you need to really go and check what is what is your asset side? What is what is one performing is how much inventories are real good inventories and so on. And also then you need to do your micro analysis of numbers, your HR cost, your occupancy cost. These days, everybody has realized that this unwanted offices and large infrastructures which created no real value to your balance sheet was not to be done. Even a company like TCS has said that they want to move 70% of people work from home. Not so much from security viewpoint because three years from now this virus would have gone. But TCS found that this was not wanted. If they can invest into more into data security and give that same promise to people to work out of their home, the 70% of this infrastructure which they've deployed and they have millions and millions of square feet under under management which is a lot of cost and expense on their balance sheet. They can correct that. This can empower their people better. They can hire better kind of people because they can pay them well. They can give them more value and they will be more happy to contribute back to the system. So it will all change. So these are all important areas which whenever you are valuing yourself you need to really find that how you bring business efficiencies in your company and these businesses efficiencies should reflect in your value. So one of the areas I always say is one who knows price of everything but value of nothing. So one means that you know you've run a business you will have price for everything. I invested so much in my office. I invested this much in my computer. I invested them but you need to understand what value it is bringing to your business. What is the value which is it is providing you. So unless adding up summing up in the value it has no meaning. It has no meaning. It just mean depreciated asset line in your systems which you continue to carry as business owners and feel happy about it. So and we'll talk about how do you really do this structure. Now let's get into the business valuation side and how to value your businesses. You know one of the areas which surprises me that you know people especially young people who come out of colleges and we have many in business x coming and doing valuations they sometimes come with ridiculous numbers right. They come with some numbers which I look at it you know they would take a startup and value it for 40 crores 50 crores and and this is just maths up. It's a maths up structure and I'll explain you how. So valuations are always quantitative. When I say quantitative which means it's a number game right. So I would say next year I will have so much more revenue. I will have so much of better margin. I have so much of this so much of that. So and I do 30% year on year growth and I will continue to do for 10 years and then I discount my sales at a certain level four to five years from now and I will come down to discounted cash flow and then say this is my valuation of business. This is very simple. This is this is a quantitative structure of adding up things right. It's adding up from x to that level. While this is the way valuation should be done there's no argument in that but here the valuation itself becomes an objective. I'll tell you how most of the valuation people keep objective in mind that I should be valued at 40 crores and they sum up all this to come 40 crores. This is the maths which which disturbs me because I feel that fundamentally they just sum up something. There is sometimes no back history. Your last two years three years performances have only been 10% or negative growth and next three years you want to show that you will do 25, 30, 40, 50% in some cases 100% growth. How this is going to be possible right. As the companies become you know first two, three years have passed and the company has gone down to a little bit of maturity cycle then growth rather becomes even more difficult to achieve. That's an argument right. So bringing growth is not easy then because you've already done your honeymoon period and honeymoon periods are always easy for the first two, three years. You can you can actually grow very very fast. Everybody grows very fast. Every startup grows very fast but after three years four years your growth actually declines and that is the time you are actually reaching out to investors and telling them that look I will grow at 30% or 40% how this is going to be done and then the functional is that you will create some kind of a matrix to show those numbers but these would not add up. This objective is very clearly already set that you have a valuation in mind and there will be always uncertainty in numbers as they will never predict the company's real performance and economy as a large because when we also change you might predict your numbers but economy has a different indication right like these days you know we will have a negative growth. If you have negative growth on the other side you are showing your growth very high it would should not it's not collaborating it's never going to collaborate. So before you go into I mean detailed on valuation you need to really understand a few things in your on your balance sheet. You need to understand your tangible assets tangible assets which are still you know actively adding value to your balance sheet and adding value to your business. So tangible assets can be anything which is this property you know machinery inventory any kind of asset which is available in your system can become a tangible asset. Intangible assets can be all of lot of things you know which can be your recognitions, trademarks your sort of a brand value the kind of investment you've done in building the brand and your patents and so on so all that is becomes your intangible value. Then you also need to very carefully understand your library side. How much is a library sitting on your on your balance sheet? What are these libraries which are software loans other loans which you have carrying on the entire thing or you have to pay some vendors payments are standing payouts other payouts have to pending some security payments have to anything which is which is running on on this everything you need to create your overall financial matrix. What is your financial matrix looks like and how do you really see in in changing few things on your you know library to asset size changing how you can really define overall profitability and performance of the of the business. So I over the years have found a very simple method of finding a structure of valuation. I call it SAS principle SAS principle. Now this SAS principle is very simple. Every time a business is presented to me for valuation. I always look at while I would tell my financial guys to do the financial part of it business but I always look at from the SAS principle. I always look at business that what is the first as as first as said for the subscriber value. What is the lot lifetime subscriber value in this business which means that what is this customer base how this customer is going to continue to make purchase decision with this asset for the next three years five years 10 years 15 years what is the lifetime value of that subscriber. And if there is no subscriber it means that you're acquiring almost every time a new customer. It disturbs me. I don't see the business from a subscription value. So businesses should have a strong subscription value if you're acquiring almost every time a new customer in your business then I will not give the marks on this S this as I will take it out. I will say this has no subscriber value you pretty much have to acquire every time a new customer. But almost every businesses I would know would have some form of subscription value. You know they would have a lot of businesses which have not so much of subscribers being built in. I feel that this S is missing. So the second S is A stands for clearly assets. You're fixed assets your current assets your investments and your intangible assets. So all kinds of assets which is which is available your fixed assets which you already deployed as an investment in the KPEX your current assets which means that you have whatever the current assets your money lying in the bank and things of that nature which is your current liquidity and your overall investments as a business you've gone and invested in investment in some properties some other businesses or mutual funds or any other in financial investments you've done and your intangible assets. So we will bundle these assets and look at from the depreciation of some of the assets and come out of that value. And third is what I call the strategic value. Strategic value is also very important because it gives me a lot of understanding of why this asset is available. So a lot of time that we've sold especially in the retail side we sell businesses because there was a fantastic location you wanted to acquire or there was a go-to-market capability you know so you always wanted to get into market and you wanted that spot and you will never get it. I give this example like in Bangalore almost every bar used to have a good value because licenses were not available. So if you wanted to get into a bar business in Bangalore you have to acquire something. So there was a very clearly value of that license in there. What is the strategic value in that business model? So we look at SAS from three perspectives subscription value, asset value and a strategic value. Sometime in assets you have all three. Sometime you have two sometime you have only one and whatever that is you will take the business to the next level. Now look at the cycles of stages of valuation when you look at a very early stage company which have a new historic data performance and so on so obviously it carries a lot of risk and predictability of that business model. So how do you really show that predictability to an investor that this business of next three to five years looks promising and unless and until there is a very strong technology innovation or this normally early stage businesses run on two basic foundations to me. I always value them from two foundations. One, what is a real valuation? What is a real ask they are trying to deliver? And second is who's the founder? Founder has to have a huge credibility. He actually carries the sometimes 60% of the valuation only on his own shoulders. That's normally on the startup kind of a company. Then you have a mid-sized companies which have some performance already been done but they've come down to a little bit of growth trajectory and at a growth trajectory they need to really change the orbit and they need more capital to come in. So they need differently and when the large company is coming that's much easier to value because these companies have a very historic data which tells you how they're going to do. So we need to ask a few questions before we really go into valuation of any businesses. We say how predictable is your future cash flows? You know, if somebody is able to show predictability in that kind of book size and say this is what my business want to look like. I like those businesses. How do you improve your margins hence profitability going forward? You know, one of the areas which I feel that margins actually get become more and more tighter as your businesses grow and you have more cost coming in, you have inflation hitting you, your margins rather shrink. If somebody really demonstrates to me that look, I have a method to improve my margin and at some time the margins are not just a basic match of saying oh because I will have economy of scale, I will scale it up more my margins would improve. That's a dumb call, right? Because these are very small shifts you were able to do very, very small marginal differences you were able to do and your inflation is then even in India very, very high. So eventually that call is actually almost all every time failed. You've seen a lot of private equity companies investing into businesses which actually made commitments that I will because of economy scale I will be able to improve margins. That other actually the example is that they have not been able to do. The clear fact is that economies of scale alone cannot handle your operations margins. You need to do something very radical to improve your margin in profitability. What is, what would you, how would you sustain and stabilize your performance? You know this is another very important that you know stability in businesses are very important. You know sometimes I've seen good businesses not so great they're not so good now because they were they lacked few things they lost some customers for something they lost their key teams they lost something else happening in them and I think the stability of the business is very, very important in sustainability of that. What is your founding team? Who's your key guys? Who are the bankable resources would always be remaining there? Who's your competition inside and outside? Sometimes you have bigger inside problem. You know there are companies now which are actually started by the CEOs of the same company. Right. So they've become competition to them. I think they take the talent they take in financial services this was a big problem. Financial services almost all companies came from another company. Right. So, so they know the they know the game very well and they were able to quickly shift the entire business to the entire thing. So there is a lot of inherent risk these days in technology IP businesses. You know that there is a competition which is really coming from inside. And so how do you really control that and how you're controlling that problem with the inside and outside also. And what is their influences and what is the larger threat to businesses? So this is how business is done. Another area which is very important for everybody to understand when investor invest into businesses he doesn't look for so much of dividends. Please take it that out to the market. They look at more from their equity performance which means that how if I invested at max valuation is this valuation going to go up for next three to five years? And second I'm able to find my exit at a particular time which is forecasted by which means that if I say I will invest into this asset one next three to four years I have predictability of my equity growing. Second in three to five years there is a mechanism being built that I will be able to exit the business. No investor gets into business to stay there while they claim that I'm a long-term always invested kind of investors but very few investors I know would not would go into business without having a very clear predictability of exit in New York. Now other few things which business owners do a lot of mistakes they don't understand the difference between the asset value and the overall business value. Most of the times I ask people what is the value of your business they would say oh I invested so much I have so much lying and I have this inventory and I have this asset and I have my own office and I have so things of that nature they just try counting their chairs and tables and computers and a lot of those things and they don't understand the value of the business and I can give you a golden rule the only thing which matters to businesses and value of businesses is profit everything is around it so and profit is a life journey of a business life journey which means you might not be a profitable today that's all right but three years from now four years from now how can you show a demonstrate a very large profitability of the business market if you're not able to show that profitability very very clearly to investors they don't like your business that's out and clear so don't try to show they're not impressed with what you've invested nobody is trying to impress get with what I've invested rather they see this all as a as a waste because you deployed monies in in depreciable assets which are all going to depreciate eventually right they're buying into a balance sheet and balance sheet would find a depreciated asset you might still have physically assets available but they're all depreciated in the balance sheet right so so so how do you really show your net profitability of the business and then on profitability you would need to then concentrate on what kind of multiples you can get on that profitability and and a lot of people come and talk to me and say what is the top line multiple and things that I always look at the bottom line multiples and even if you have don't have now that's okay you can demonstrate in next year next to next year next to next year whenever you do this profit indication in any that's where the valuation really can has to be hit if you tell the investor that look third year from now I will have a strong arbiter and that becomes your position of multiple and then you can ask for a multiples if you're a really smaller company and it will be early stage company this can go from maybe two to 10 anywhere depending on which industry you are how your performance has been what is the competition how crowded the market is and so a lot of other things can come in but if you are a much mature company market leadership category creator a couple of other things then your multiples can go even beyond 10 it can go up to 14, 15, 16 in very very unique cases we have found that multiples can go 20 and and even above that and so that's how the multiples would really so first you really have to understand what is your most performing year and your profitability for that year that's the year where you would get the best valuation from anybody who's valuing your business at that stage and you need to also see what is the you know structure and also you need to really see what is your industry telling you have you researched the industry what is the other players in the industry how they've been valued in the industry that's very important and why they were valued what what they had which is better or bigger than you had to have and that also has to be realistically done sometimes the market is not that big you know so not everybody gets valued there's only one or two early players get value and rest everybody is just copying them because that guy got valued I will also get valued look at what is happening on Ola now there was a Uber which is a global company then there's Ola between these two companies they're doing their dire fulfillment you're not facing the shortage of cabs you're not facing anything now a lot of other players are trying to come in the same space with trying to understand that they might we get valued like Ola and Uber actually is absolutely waste of money waste of money and effort unless and until you have either a very big again shift of customer the reason for that shift which means people would stop using Ola and start using you unless and until there is a big shift of that customer happening with the entire thing I don't see there is an inherent value you know so you might deploy any kind of money you know unless and until you have ability and you should have not have mindset like we used to have a license Raj in license Raj you used to have a license and once you get a license you also have a right to get market share like telecom companies I have you can they will give two more licenses and these companies would also come and also get some market share when you are in open market consumers are very clear that they want the best they don't want the second, third, fourth, fifth best right so so don't try to do that that this whole license Raj has gone finished it's not that you get a cement license now I can also manufacture license and you will build a value in the business it is an open world now unless and until you have a very strong competitive edge you will not be able to deliver value so research on your industry understand your health of your business from a financial history if it is not being good at least it takes 18 to 18 months to two years to restructure your company so a lot of restructuring has to be done in your business model how you want to do that there is never a late situation never a late even if you are a 30-year-old company 40-year-old company you can give yourself year and a half or two years and say let's restructure this company and restructuring might call for a lot of radical answers to be done a lot of changes to be brought in a lot of the way you want to look at businesses how you can become you know this asset light and OPEX light and how you will build better performances in business a lot of changes in your talent management organizational structure everything can be done and you can bring in a better health of the company and if you are able to demonstrate that change cycle in your businesses you again refresh yourself and you are ready for a bit of valuation and another thing which business owners have to also see that some businesses are extremely dependent on the entrepreneurial side so one of the reasons I see a business is not able to sell and one of my companies was not we took the business that investor wanted to buy and he asked me the same question and he says this business is totally dependent on you and if you're not there this business would not really be running and while I did my own convincing but he was very damn sure that I was very deep rooted in that business and he felt that this business because it's running because of you and if you are trying to leave this company or you would like to depart from this company this business would not remain same so fundamentally you need to understand that if you are so integral to your business and you cannot leave this business or business would have a deep impact where you're leaving out what plan you are making or what succession you are making that this change happens and business becomes radically able to handle while they all live love founders but they also get threatened by founders and founders become too close to their businesses they don't leave the business isn't that easy and now these days we're seeing that that companies find it a full cycle there was a themselves have 10-year cycle with flipkart growing it building it up valuing it and exiting it and the flipkart is still running so but this was very clearly planned this was a very planned structure to get them exit because eventually if you want to create a larger enterprise or institution this would need to churn that fortunately in India we have succession plans coming from family and and so on so forth but if you want to completely exit the business the one of the areas we need to do is that you need to find out is your business can run without you now what is the right time for valuing your business you know what is the good time you should look at the valuing business one you have picked out so one of the reasons I always say when you want to exit the business or you want to do that because you picked out you did whatever you want to do that you have getting no answers from anywhere no book you're reading no strategy attending seminar you're attending you're getting any idea to grow your business this time has come find a buyer and that's what business X does business X actually finds you buyers if you want to sell your business so you have picked out second you will see that there is an orbit change and it needs fresh capital and you clearly see that there is a bigger audience available but you need a bigger capital right if you if you want to catch that orbit you need to reinvest business and that either you don't want to reinvest your family wealth again in the business or you don't have that money to invest because this would need a new churn cycle right Reliance retail is just about 15 years old and now they're getting into a fresh cycle of investment because of the geomart and the technology and everything else and everything else in the past they've invested might become redundant right so they are coming with a fresh cycle of investment and I know other company I don't want to mention which is the competition doesn't have that capital so what would they do they have to exit they have to exit because they don't have that capital because like in telecom Reliance is ready for 5G and other companies have no money to even sustain 4G they have no idea to get 5G and if 5G hits by Reliance everybody customer would ask for it and if they don't have capital do it they would end up so what they need to do either raise or exit and find another buyer who is much more credible and much more bigger and they would need to do that also another thing which is opportunist way of looking at a valuation which a lot of people are able to do there is a early sign of consolidation in any industry any industry gets into early sign of consolidation this is exactly a good time where you should jump on it where you should ask for a valuation for your business I've always found that people who get the best valuation when this co-working thing started the first 4, 5, 6 companies which came in the market all got valuation because there's early sign of consolidation the early sign of you know the industry and there was a you know and there is some kind of a early stage advantage to never miss that board never some people get into this whole cycle no no I would like to value myself going one year from now or two years from now let me build more and I don't need the capital at this stage or I don't want to disinvest at this stage or think of that nature they miss the board they miss the board because this is a very another area which you should always see never fight the elephant right so anytime you start a business you're great you're doing well and you suddenly start seeing a elephant coming through which means the large company is already entered that market always be very sure that you want to collaborate at this stage just knock the door of that company and say you're inventing this I've already done this I'm already ready with this it might give you a much faster go-to-market strategy rather than going and creating yourself and this would create a lot of merit I know an early stage whenever large companies start looking at a category they always look at evaluating businesses which are already there in the market gives them a lot of market understanding they say very expensive corporate has a very expensive you know mistakes which they don't want to do because corporate mistakes are not like small business mistakes they end up using a lot of money because their resources are expensive their structures are expensive and it also can create a a lot of setback for the reputation of the corporate so they always goes with with a bit of a question they don't they don't mind putting a top dollar to get their learning in the system and I know a lot of corporate I can give you examples which actually bought over businesses brought this business in their system and then made them redundant right just because they wanted to get their learning out of that business inside and that and sometimes you are able to redundant sometimes the business is such inherently rooted in the system like Coca-Cola acquired thumbs up to kill thumbs up and kill the other brands and bring Coca-Cola up but they later realized that this was too rooted in this business and they cannot do it it's still a quality asset when they started running that apparently but there are many examples which these companies acquired and they left it and they took the learnings they took the the whole IP around it and these IPs were so important to them that they never wanted to look back so another area which is how expandable your your you know consumer basis this is very also very important aspect of valuation because sometimes you have built a very large consumer base but you're selling very tiny product line to them and if you can show the unlocking of your the same consumer base this consumer base can go wider you know some people have I see small companies they would come and say I have a 1 million people with me and in my data bank and they consume from me and so such a large ecosystem they create but they're not able to sweat out that ecosystem right that's also very strong inherent value creation structure there's also a timing where you have built something extremely innovative and this is a path breaking like if you are doing anything in business intelligence artificial intelligence and things of that nature these are all future you know if you're doing anything in green energy and a lot of these things which are what I call sunshine sectors that's also time where you will be able to do a lot of valuation so this is covers my perspective of what kind of valuation you need to do I'll also touch upon two points whenever you are looking for valuing businesses if you're a non-performing asset at this stage which means that you're not making money or you don't see especially in these times you don't see that your business is going to perform in four five six months seven months one year and you don't see yourself and this is my genuine advice to business owners that you're not ready for one year more investment in the business that you can sustain be absolutely honest right away right today itself don't even wait for Monday so going start going in the market and asking for a right buyer you might get it if you delay this cycle you might erode the value of the asset completely you know so one of the companies called me is in business which is badly affected in these times and asked you a question he says I can I can still pay for two three months of my my bills my salaries and that thing I said do you think it's going to change everything in two three months and if you feel that this is not and we all know this is not then why don't we take decision right now why do you want to be emotional about it take the decision to exit the business right now and and be fair that you will not get the what you ask for it the market will decide what you are worth today and go with the market and take whatever you get from this today sometime I've seen a lot of deals gone crashed because the expectations were unrealistic in both sides and at this time this is a buyer market right this is not a seller market so you you have to go with the market at this stage you need to understand what market is telling you so if you're a non-performing asset normally your buyer is somebody who's more strategic somebody who can turn around your asset and can make it profitable right it can be your somebody seeing a forward integration backward integration somebody is a value addition to the business or something which you miss in your business currently to turn around that business he can bring that fix he can bring that fix he knows that he can bring that fix but he's also taking a risk of going into an asset which is non-performing so it's always been strategic 70 percent of buyers would come become become strategic and only 30 percent financial investors but if you are a performing asset then your 70 percent of buyer is financial and 30 percent is strategic so first place yourself where you are where you want to be and and structure so this was a you know I wanted to share 45 minutes I've already done seven minutes over we started about five minutes late so this is a today's topic was valuation business X is a platform of franchise India which helps companies to find their value and then we also help them in terms of either raising equity or selling the asset this is what we do at business X if you have any need on any help you require or even want to understand further down in terms of what you should do in in in your in your call for raising equity or or selling your business or something like that and and these days there should be no harm in in the open that if you if you want to really go out of this business and and that I think is changing very fast and this has helped last five six years when people were open about talking about there because they should not wait for this bigger damage to happen and if you cannot openly talk you are actually doing already started doing a damage to your business so thank you very much I hope that I gave you some insights and hopefully you like some of the parts of this all three series are available invest scale and value next week we again start the same series we'll add a few topics and we continue to add like in valuation I'll go deeper into some more detail on the valuation side and on invest side we'll take some case studies and scale also we'll take some case studies we'll continue to work on this continue to enhance the knowledge of our subscribers people who are trusted franchise in India so thank you very much so Sonali over to you please thank you so much for the wonderful session sir it was absolutely great as always listening to you and your wonderful insights we have a few questions signed up with us I know we are running short of time but would it be fine if we take a few questions at the end now sure so the first question that we have is from Mr Manish Bahra he says on what parameters should freelancers focus on to value their business they must be working independently so this is very tricky Manish in terms of freelancers what kind of business you are in are you consulting are you building the business and again the problem would lie that if you are a freelancer the business is around you and if you raise capital because you feel that what something which you incubate is good and now it can be scaled and you need capital for that another reason which is very important sometimes you know I have seen people raising money without even defining why they want to raise so unless and until you go deep down and say Manish and say where you need this capital what would capital do you know capital needs to sweat out where I want to deploy that if your business is freelance and it's micro business is more you know depend on you itself where is this money going to go and if you have a very clear and firm idea which can create shareholder value then obviously you can raise anybody can raise money any good idea can raise money that's not a problem so the next question is from Mr Selva Ganesh he says as a franchisee what should be the profit before tags to look for an FMCG I understand early years may not be paying enough but what could be the average it's more franchise the ROI business is not more for valuation but you know average franchisee returns which we call the the return on investment ranges from anything which is 20% to 25% in FMCG kind of business which means three to four years it would take you to four years or it would take you to get return on capital it's a low margin business FMCG is a low margin business and I can go answer this even more specific sometimes I shy away giving these numbers because I don't know the brand and the business of margin or anything which you discussed and just throwing numbers is not a good idea you know it can be better performance also depending on what business model it is and what margins it's an integrated career or it's just a trading company so it depends on which position it is if you're an integrated player you obviously have better margins hence better profitability better returns but if you are a trader then it's trading then you have only a trading margin so it all depends on that so so our next question is from Mr. Sriram he says in case of e-commerce companies they are accumulating losses year after year for several years but they still are able to attract huge funding continuously during various periods in these cases did the priority of profitability change? no no no this understood my statement valuation would always be done on the profitability but I have never said to you that the profitability would come in the first year second year third year right so while there is a larger goal to eventually hit profitability and that's the end shareholder value like in older years you know I don't know how much of you would follow but you know I bought a share for a company called Jindal Vijay Nagar Stee and it was a pre-launch offer and it took six years for the plant to get set up and six years the plant started functioning and then plant started selling and then the company became profitable and we invested in six years back when the plant's construction was to start right those time ideas worked like that so shareholder also is like that shareholder understands that when you're investing in a company this has a 10-year or 15-year horizon but he knows the horizon he knows he can see the end of the tunnel where is the tunnel going and every stage of benchmark which means that year 2020 to year 2021 is your valuation and your subscriber base and your performance on balance sheet is improving are your margins improving are your acquisition cycles improving are your consumer base increasing is your so all that is is increasing and your valuation is increasing by the time as an investor I see my valuation either intact or growing I'm happy with the company and that's what happens with these young startups when they raise capital they put this whole projection and anytime they are not able to fulfill that projection things start changing the shareholder is very worried and they push these investors and sometimes that's why these mistakes also start happening because the founder gets into this whole worry to really cover the balance sheet and try to get into businesses which is not there I mean some companies have become confused like look at OLX started for what known for what doing what so this this is all because of shareholders are after their life and say they want now they have already parked for six years seven years they want returns and they want profitability and and they start selling everything they start selling everything and this is what happened in a lot of startups and that's why startups went wrong because they are not able to they change their core business model because the business model was not more good but I mean these are closed boardroom meetings where if you have if you have done mistake neither investors are going to agree neither the founder is going to agree what they're going to do is they're going to try to save that investment and they want to try the same investment means sell whatever it needs to be done get your balance sheet right that's what people start doing right so I think we just take up the last question very quickly so it is from Mr. Joy Khan he says other than investors what kind of consultants can founders approach for selling states apart sorry I missed your question other than just investors what kind of consultants can founders approach for selling states you can call any kind of consultant to you know anybody who's your industry reference you have investment bankers there's so many investment bankers even business x and equity India is also a i-bank you can have industry consultants reference points sometimes just pick up phone and hire you know is I mean I always ask people who should be your buyer and then only you say I know my competition he can buy as I just pick up phone and call him up if you're not calling I'll call you on behalf of you so what should we worry in terms of reaching out if you genuinely feel that somebody is there but if you need somebody to take up a full landscape for you that can be a buyer in your business then obviously go and take a professional advice now there are certified evaluators you can only get valuation from them and they do the right valuation for you again I said they do what they do is more you know quantitative valuation sometimes as a business seller even if your evaluator comes and tells you you were was 25 crores you should not be happy about it if you don't feel that you're not 25 crores because you run the business you know what your value should be right you can you can get a little bit of goodwill but you cannot be unrealistic if you become unrealistic you will never get us buyer so seller has to always understand and appreciate that you need to look from the from the buyer's eyes and if you can see through and say if I would have been in the same place same time I would have also paid the same price if you can match that that's the value of your business wonderfully said sir so with this I think we'll just wrap up the session thank you so much once again sir thank you for a wonderful session and we'll see you it will be a pleasure seeing you again next Saturday at 3 p.m. for another session of the series anything you would like to say in the end 5 seconds enough for 15 minutes is quite a bit of 15 minutes listening thank you to everyone and thank you very much for having the patience to hear from us and thank you from French as India and Business X thank you very much