How to build valuation and the right time to exit your business IP
As we develop a strategic plan for an IP/Buisness, one must consider not only how to drive growth but also on how one can achieve long-term financial gain. Roshan Abbas, founder, Encompass moderated a session at EEMAGINE 2017 on ‘Building valuation and the right time to exit your business/IP’. The key objective of the session was to understand how to build valuation for your business and the right time to exit at a stage where you can maximise the return on your investment and ensure meeting personal financial objectives. The session also briefly touched upon how the talent and employees react in such situations.
All of the panelists, Harshad Chavan, owner, Cream Events; Brian Tellis, director, Fountainhead Events; Vijay Nair, founder, OML; Sachin Mutreja, CEO, Scapes India; Vivek Bhargava, CEO, DAN Performance Group; as well as the session moderator, Roshan Abbas and session curator Deepak Choudhary, director, Event Capital had experiences to share with regard to building value of their businesses, and the right time to exit.
Roshan Abbas shared that in 2008 JWT acquired a majority stake in Encompass India. WPP announced that its wholly-owned operating company JWT, the leading global marketing services network, would acquire a majority stake in Encompass, a leading independent events and promotions agency.
Brain Tellis of Fountainhead Entertainment is latest in the marriage. In 2015, international advertising firm Dentsu Aegis Network acquired majority stake in Fountainhead Entertainment, a Mumbai-based entertainment, events and activation agency.
Seeding the idea of a partnership
Vivek Bhargava said, "When you are an entrepreneur, there is no safety net. An exit allows on to have a safety net below, which allows you to push yourself harder and makes you resilient. The safety net ensures that failure does not mean “death” of ones business, today failure post acquisition (exit), might mean a lesser appraisal which is better than going bankrupt. Therefore, this leaves space for bouncing back".
For Brian Tellis, even post acquisition Fountainhead continued to work with the same passion, and building the brand, even a bit of a legacy. Post a partnership, they tend to be free spirits, and they thought less and less about building numbers and bottom line for example. While it is obvious that the entrepreneurs want to monetise their efforts, while they operate in less stress but the pressure is still on. Couple of things that drove Fountainhead post acquisition included, firstly, to continue creating the brand and legacy as the opportunities got wider and more fulfilling. Secondly was the monetization of all the hard work that was being put in.
The idea is to let the company grow, when you realise that you’ve reached an optimum level where irrespective of what you do you might not be able to grow any further is when you decide to make the decision of exit or selling.
Harshad Chavan, was a late starter. Even though they were doing great work, they never got a chance to pitch to the bigger clients. For him the idea of partnership was to expand his clientele, and make it happen via partnering with one of the leading PR and digital firm only to gain access to the bigger clients. While money was a big part of the decision, the major reason for him too was growth.
While the case for Vijay Nair was absolutely different. OML got the money from a private equity firm, and contrary to the rest of panelists Vijay did not sell majority stakes. OML raised money close to 8-9 years ago, and has done multiple rounds since then. Two things that contributed to his decision in raising the capital or getting into a partnership were they didn't know how the event industry works, nor he knew how the private equity side of it functions. They were kind of winging it. Vijay raised money only for one reason of wanting to do a music festival. At that point of time, the debts were too high and he was happy to welcome any cash to clear the debts. They were
probably the smallest company to ever raise private equity in that sense, which is extremely unusual. The key selling point for them was the “vision” they had. The second and third round of investment came in for the simple reason of scaling up. Where they stumbled upon the opportunity of building IPs and they went ahead that time. The valuation in IP business is phenomenally different than in case of events and activations. The funds helped in continuing to add verticals in the business, like Live & Content where IP was the common one in between all of these.
Investor’s reaction in times of crisis
During a time of crisis like demonetization, NH7 Weekender was around the corner, and it hit the company in a big way. In such a situation it becomes very important who your investors are, to have them understand the situation. In case of OML, they received great sympathy, and understanding from the investors. Since rest of the business did really well, they were at a position to absorb the losses faced. It is important for an investor to understand, what it means to be investing in events business. It isn't about short-term profits, rather long term returns.
Frustration in the process
There is a lot of frustration in the process where sometimes the opportunity you are looking for it does not gets fulfilled. Harshad in response to the same said, “After Toast Events was acquired it was suddenly about an events company operating like a PR Company. While the acquisition was supposed to be about understanding how we can work together, it was not materializing that way. I figured after we were acquired we could bring a lot more creativity and a lot more ideas to the table. So this turned into the biggest frustration. We were doing great, we were growing the business probably 100% year on year. The frustration was that at the end of the day, they wanted to run an event company like a PR Company, which is why it turned out to be an unhappy marriage. And in about two-three months I didn't think it could continue. The frustration was more about the systems, which I am more than happy to follow, but to put a system of a PR Company to an event company model was something I wasn’t ok with”
The Right Time
“Sameer Mutreja’s company RAMS was among the earliest ones to get acquired by G2 Worldwide, a Grey Group company. Many think it happened at an opportune time. Abbas asks Mutreja to share his thoughts. “No, I think it was the worst possible time. That time, we all know what happened in 2008, the markets crashed
and the numbers didn't make it. If you don't meet those numbers, you don't meet the earn-out. You have to be very careful about the numbers which you are projecting. When you get your company evaluated, the number which they actually want is the number it is! Secondly is the synergy, you think you’d get all the support you want which may or may not happen. Therefore it is essential for you to project your numbers based on your understanding and vision.”
The formula to make it work
Since Brian is in the process right now, he says “everything is okay as long as you meet your Q1, Q2, Q3 Numbers”. To elaborate a little bit, he continues, “One is to monetise what your effort has been, and two is to strategically grow. And In our case it seems to be working because of strategic support from Dentsu”. What is different in case of Dentsu is that it share one P&L, and to meet the target is a collective responsibility for all the companies which is not the case everywhere.”
One must note the whole process before you get sold out, the critical part is for you to see the culture of the company you’re getting acquired by and meet the entrepreneurs who’s companies have been acquired before. This helps you be prepared for what you’re getting yourself into.
Roshan said, beyond a rosy picture it is essential to have a reality check. Be it about what kind projects you have, retention rates, long term contracts in place etc. For us it was critical to help our investors understand that we have a set of “captive” business, and it stays with us. While the key point remains, long term contracts for your talent, retention plans and future for the business is what he notices.
Vijay Nair said, “Two questions that we have to address are- What if you get hit by a bus? And what if your biggest client gets hit by a bus?” Largely, is your secondary operation strong enough for the companies to come and invest into it. Secondly your recurring business is important, what if you lose your biggest clients, does the business remain? In the events industry we have noted way too many founder dependent companies, which is also one of the reasons why OML hasn't been able to invest into any. The depth in management is a huge shortcoming.”
Reassuring the employees
"People like being associated with big names, big companies. And an acquisition becomes a win-win for both sides this way. For the acquirer they get the entrepreneur his company’s talent and the entrepreneur gets access to a larger pool of talent in the big company", says Vivek.
While talent is very important credibility of operations is extremely important too, expresses Brian.
In conclusion Vijay adds, “How your talent takes it is extremely important, you cannot hit your employees by surprise. At the same time, on the flip side, it is important to take this information to your talent at the right time. You have to continue rewarding your key employees, to keep your secondary strong. You ensure that the messaging is right to make your employees aware that things are not going to dramatically change. The assurance that “we will continue to operate as we have been” is a very important one.”
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