Built to Sell.. For India

I really love this book. If you haven’t read it by now, then you should soon enough (Click on the picture for the Flipkart page). John Warrillow narrates a simple story about a person (like you and me) who wishes to sell his business off and chill.

But he can’t.

Because like many first time entrepreneurs and a majority of Indian Businessmen, he creates a business that is fundamentally unsellable.

The book walks you through a relatable story of a good guy who wants to move on and expects to be rewarded for all the work he has done in building up his company.

Unlike what Steve Jobs and his ilk might say, I feel that selling out a business, which you have created, is a very valid exit route. Steve Jobs might have found ultimate happiness in creating highly priced touch screen toys for the hipster crowd but many others just want to retire on a beach and spend time with their families. After all we are all in it to make a profit.

In this post I choose not to ‘recreate’ stuff written by others since I don’t feel good about restating what has already been written (rather well at that). However I feel that a few rules apart from those given in Built To Sell are relevant for Indian Startups and businesses.

 

10 ‘Built to Sell’ rules for India

1. Black Money – Most startups or young businesses in India really depend on Black Money in one form or another. Informal markets around India, especially in the urban centres provides most entrepreneurs with the capital to start businesses at low or moderate interest rates. Sometimes this money is from a relative or a friend who wants a piece of the action. With cash still King, not only in the financial but also the physical sense, this is a fairly easy and painless form of capital. Our risk-averse banking system really isn’t made for first time entrepreneurs and that’s where the black money market helps support millions of small businessmen across India. The problem happens when your business can not graduate from Black Money based capital and transactions to white money based business operations. If dealers, vendors, customers etc are dealing with you in off-the books transactions and black money then it becomes very difficult for a large players (who themselves are highly regulated and well known) into buying your company out. It also restricts the actual sales you can declare. With most buyers being progressive, large domestic or MNC firms who are, in general moving towards cleaner operations, this is a real issue. Even if you have a great business, the best step is to wean your business off black money and work on white.

2. The Law – Indian businesses have a penchant for breaking laws, not taking all the licenses, permissions, not getting into contracts, agreements and having a multitude of cases against them. Due to our fabulous (read slow, lousy and corrupt) legal system, most businessmen don’t really mind cases against them as long as it doesn’t lead to a stay against major business operations. However a prospective buyer will in all probability put his money only when he knows that there are no extenuating legal issues against the business. If there are, then the buyer considers it a potential threat to future revenues and business operations. A firm interested in buying you out will look at long term contracts, agreements, permissions etc since it not only considers them as safeguards to business activity but also increase long terms revenue projections and hence the valuation of the business.  

3. Family Members – Involving family members in a small business which looks to spread its wings and grow fast seems like a great idea in the beginning. After all you are ensured order, loyalty, motivation, a quasi-managerial set of people and low salary expectations. This also leads to the dreaded mix of the personal and the professional. In many cases it leads to family disputes, ego hassles, staff loyalty issues and development of company fiefdoms. This is a major turn-off for buyers.

4. Markets with major player interests – This is really a no-brainer but for some reason most people get this one wrong. A businesses’ ability to sell itself to a major player/MNC/Domestic Company only exists when (A) It’s an exciting sector where a number of players are looking at gaining traction and market share (not necessarily revenue… yet) (B) FDI limits are 100%/high/Going to increase hence ensuring that buyouts can happen by a foreign player for domestic presence. This also increases domestic competition (C) The sector is strategic in nature i.e. it is important from a technological, geographical or social perspective and not only from a revenue point of view. (D) Low regulation by government agencies.

5. Process Process Process – My biggest issue with Indian businesses and startups. The lack of process and systems. The absence of it makes most prospective buyers jittery and unsure, leading to lower valuations for your business. A proprietary process and system set up for your operations and sales will make it really easy for a professional business to put faith in your business and buy you out. A process and system oriented management shows that the company is poised to take on scalability issues head-on.

6. Documentation – Usually this would be a part of the above point, but I just don’t think that would cut it from an Indian perspective. Indian startups and businesses refuse to document. Actually it’s not in our cultural DNA since we are a verbal story-telling based culture. While this may lead to some great traditions and promote faith the in informal business sector, it also leads to bad records, adherence to policy and issues with creating processes and systems. It makes duplication of results and activities really difficult while making the business extremely people dependent and reduces organizational intelligence.

7. Don’t offer to sell everything to everyone – This is a like a disease which afflicts every Indian startup and business at some time or the other and totally goes against all practical advice regarding scalability, identifying differential advantage, identifying your TMS, creating great products/services and organizational focus. Too many companies have lost money, time and resources trying to please too many people at too many price points in too many ways. This also confuses the living hell out of a potential buyer of a business since they want to fulfil a specific need by buying your business but can’t identify what to do with all the rest of stuff that you seem to be doing. It makes your business look poorly organized and very muddled. Why? Because it is.

8. Hire a great CA – Just take it from me. Hire a great CA. Pay him more than you pay yourself if you have to. Just make sure your ass is on the right side of the law/tax department and that your financial papers look ready to be entered into the next Harvard Case Study series. It really really helps.

9. Build a Board – Most boards only exist on paper and consist of family members who either are already part of the management or don’t even know what you do. That is a fatal mistake. A board made up of local business leaders, professionals, professors and socially known /respectable citizens not only make it easier for you to do business and look good, leads to better credit ratings and it also increases valuation.

10. Don’t look at the US/EU valuations – Please understand, the US/EU (especially the US) is a crazy place where valuations go into bubble mode at regular intervals. The US/EU markets have a very well developed M&A market/players, with deals being done every day and companies being used as short/long term investments by PE/VC firms. In India we don’t have a developed market for M&As, we also have FDI restrictions, low valuations, cultural aversion to selling out and most importantly we have the Rupee (not the dollar). So don’t expect to be offered a deal on the lines of the US. You will be much happier and will also close the deal better. Don’t convert your Rupee valuation into dollar, unless you like being depressed.

Different types of Business Plans (Business Plan Series)

A business plan, in essence, is part blueprint of your business and part sales pitch for those reading it.

This is true for lenders, investors, stakeholders and employees.

However, each person looks at a business plan from his/her own perspective since everyone wants something different from it.

This post is about the 3 major kinds of Business Plans based on the type of Organization/People involved

 

There are 3 types of business plans

1. For Startups/Investors

2. For Banks/Lenders

3. For Corporates/Organizations

 

For Startups/Investors

This Business Plan is meant for those investors who want to be part of your growth story and are in it for the long haul. You need this while raising funds for your Startup in return for Equity.

What is it all about?

1. This business plan must be created with the view of someone who wants to invest in you today, so that he can reap the benefits of your success at a later date. 

2. Depending on the kind and background of your investor, it is essential to tell him about the dynamics of your market and why it is an exciting space to work in.

3. Projections are known to be assumption based to a great extent.

4. The focus, especially if you are a startup, is to showcase traction and not necessarily the financials, unless you are a revenue generating startup looking for 2nd round and above investments.

5. Factors of Management Team, Skills, Past experience are of great importance.

6. A stressed out credit situation may be seen as a positive, if it is due to sudden growth/scale of your business.

7. A well thought out Go-To-Market strategy is essential.

8. Long term vision of the organization and future plans must be underlined to showcase various avenues of growth and diversification.

9. Exit plan for your investors is important – After all, they want to make their moolah at some later date.

10. Competitive risk may not be as important as risk from the environment and internal issues.

11. Past performance is not that important.

The Bottom Line

This type of Business Plan must be able to communicate to your investors why this is such a great idea, how exciting this space is and when you expect to make it large (By extension making them lots of money) 

 

For Banks/Lenders

This type of Business Plan is required for Banks and Lenders when you are looking at a Loan/Debt for your Startup/Company. It is also known as a Project Report.

What is it all about?

1.This Business Plan must be created from the point of view of lenders/banks who want to minimize their risk while funding your business with the expectation of making a small margin (interest).

2. While it is essential to mention the dynamics of the industry/market you aim to work in, one must realise that Banks have all the resources at their disposal and that bankers are usually comfortable with funding businesses which are in established markets and matured ecosystems. This is because there is a fair amount of personal discretion involved, which finally hinges on the fact whether they understand the market well enough or not.

3. Projections may be based on assumptions, but they need to have a rational and mathematical basis especially in comparison to the industry and your own historical financials.

4. The focus is on showcasing past successes, financials and investments with an emphasis on future projections.

5. The Project Report must mention, how the loan will be utilized by you to create capacity or assets for future revenues which may enable you to pay off the loan.

6. The reputation of the Management Team, Market Dynamics, Macro Industry Financials, Competition and Credit history are of great importance.

7. A well document financial record is essential along with credit rating, investments etc.

8. A long term vision is not essential, what is important is a plan on how you aim to pay back the loan.

9. No Exit plan is required.

10. Competitive risks are very important as the Banks and Lenders will use your competitors and market as a benchmark of your performance.

11. Past performance is very important.

The Bottom Line

This type of Business Plan must be able to communicate to your lenders why your plan has a great chance of success due to present market conditions, reputation of the company/management and the absence of major risk issues. 

 

For Corporates/Organizations

This type of Business Plan is required for Corporates and Organizations when they are looking at buying an asset, acquisition, creating a new Product/Service, entering or exiting a market etc. It is also known as a Business Case. You need this to get an approval from decision makers for the required resources and Go-Aheads to make the plan successful. 

What is it all about?

1.This Business Plan must be created from the point of view of how your company will be effected due to the proposed actions and how to communicate them to members of your team, bosses and decision makers. Benefits to revenues, awareness, customers etc need to be underlined

2. Your bosses, department heads know the macro dynamics of the market and industry and unless you have something new to tell them, or have a new insight, the emphasis of the business plan should be firmly on ‘Whats New!’ and not “As we all know”.

3. Projections are essential to your Business Plan. A hint of bullshit will be caught by competent colleagues and bosses since they all know the market and industry you are talking about. The Projections must be based on numbers derived from business realities, competition, market realities and existing projection models.

4. The focus is on future projections, effects, benefits and how you aim to get to them. 

5. The plan must mention in detail, how the resources required will be allocated and utilized by the company to create capacity or assets for future desirable results. This will also include the support required from various departments and functions of the organization and change in existing budgets and projections.

6. The reputation of the execution team, overseeing authority and reporting authority are important. However, based on the hierarchy and structure of the organization, care must be taken to ensure that one isn’t stepping on toes or handing over the project to those without the capacity or capability to execute. Competency and compatibility must also be underlined while allocating work related to the project.

7. ROI figures will help push the case further.

8. A long term vision is essential and must follow or be aligned to the vision of the organization. 

9. An exit plan known as Plan B here, is required in the event of failure or due to uncontrollable risks. Also a credible plan to hedge risks will make the plan far better.

10. Competitive risks and relevant competition details /activities are very important.

11. Past performance of competition and the market or proposed area of business is essential for comparitive study and projections 

 The Bottom Line

This type of Business Plan must be able to communicate to your bosses, superiors, department heads and other decision makers why the proposed set of activities will be beneficial and what will be the effect on the company/division/department.