Exit Strategy – Dutch Uncles

How can Intellectual Property Monetisation be an Opportunity During Exiting a Business?

Preeti Verma — Thu, 18 Mar 2021 08:35:04 +0000

Starting a business and maintaining it through the good and bad times is an enormous task in today’s period. With the COVID-19 pandemic storming across the world and shuttering employment nationwide, this stark truth is even more relevant. When a business owner faces the most difficult decision to wind up his company, there are some important choices and strategies that he must consider. This is the most important thing, especially leveraging and protecting assets such as Intellectual Property (IP) that the business has generated after working days and nights.

Witnessing the current situation, there are challenges galore. The companies are facing organic and persistent hitches like access to talent, performance of staff, trade policies and technologies shifts, revenue, and funding issues. Apart from this, many businesses are grappling with shutdown and the difficulties of working remotely.

As a result of this ongoing crisis, either companies are getting merged or planning to sell off their businesses. Industries like pharmaceutical, biotechnology and technology are doing this more frequently. More and more smaller companies are looking for options to get acquired by larger, wealthier competitors. But then acquisitions can be a big betting, especially if a company’s true value isn’t properly accounted for. Also, when investors pump in capital into a company, then they eye for a hefty return.

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Value of intellectual property is often disaccredited, with large corporations sometimes overlooking their intellectual property positioning.

Importance of Intellectual Property in Business

This crisis has highlighted new ways for companies with actual or potential intellectual property to generate income. And in some cases, to recapitalise themselves. Apart from tangible assets, they can also generate capital through these intangible assets such as goodwill, brand recognition and intellectual property.

All enterprises can create economic value by leveraging their assets in order to fund their operations and future needs of capital. In the past 50 years, the value of assets has taken a shift. During the industrial economy, mostly tangible assets held the most value. But with the changing times, this scenario has changed. Now it is intangible assets too such as knowledge-based, intellectual-capital assets that are considered as the most valuable assets. These consist of brands, intellectual property such as trademarks, patents, copyrights, trade secrets, licenses, and trade dress, human capital, databases, contracts and other knowledge-based assets.

Most of the crucial aspects of a business’s worth are often unnoticed. Value of intellectual property is often disaccredited, with large corporations sometimes overlooking their intellectual property positioning. So, how can you make the most from an acquisition as part of your company’s exit strategy? More importantly, how can you use intellectual property data to show your investors that your exit strategy will bring them value?

Understand The Value of IP Portfolio

Intellectual property helps to identify the market valuation of your patent portfolio as well as those of your competitors. This fetches a monetary value to your patents, in comparison with those of other companies in negotiations with investors and potential acquirers.

You could even have proprietary assets you haven’t thought of, like customer databases, which are often overlooked and undervalued. In 2014, the instant messaging service WhatsApp had over a billion users. Facebook paid $19 billion for it, because its database could be monetised. Buyers are looking for the edge, competitive advantage, which sets your business different from your competitors. And at the same time, it provides an opportunity to exploit.

Intellectual property protection rewards innovation by empowering the inventor to reap the rewards of investment in ideas. If there is no protection or reward for innovation, why innovate at all? Intellectual property is often the largest asset portfolio that a company has, with a greater value than offices or factories. It is also playing an increasingly significant role in mergers and acquisitions (M&A). Let’s look at this, Google acquired Motorola for $12.5 billion before selling the company to Lenovo. This was minus the valuable intellectual property in smartphone technology for $2.91 billion.

Technology can now help companies understand which patents are most valuable to a company, and support growth of revenue from intellectual property licencing. Similarly, technology can even support the future direction of research and development (R&D) activity to help drive more of the most effective innovation.

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Filing a patent before having a global strategy in place is like shooting without aiming first!

You can also show the value of your patents using metrics such as number of citations, patent families, patent renewals and patent litigation history. Analysing these can also help you negotiate a better merger or acquisition deal and reassure investors. Let’s understand some of these metrics in details:

Forward Citations: If many firms are citing your patent, it is usually because they are developing technologies related to your patented invention. Number of citations can be an indicator that people are interested in your technology and could become potential licensees.

Number of Patent Families: If your patent belongs to a large family, this means you have invested time and money in protecting your invention in many countries. This indicates that your patent holds high valuation and could help in negotiating a higher-value acquisition deal in future.

Patent Renewal and Abandon Rates: A patent portfolio with a high abandonment rate could signal a low return on investment (ROI) or value to investors and potential buyers or acquirers. But a portfolio full of renewed patents shows a desire to protect technology still considered valuable. This makes your company appear more attractive and sweetens the deal.

Monetisation Of Intellectual Property

A company needs to develop an intellectual property strategy in order to commercialise and monetise it. The first phase of building an intellectual property strategy is to focus on intellectual property administration. Intellectual property administration also covers the creation of intellectual property assets. It takes innovation from research and product development, and turns it into intellectual property through applications, prosecution and maintenance.

The second phase is intellectual property management. This involves taking a portfolio of intellectual property assets and creating economic benefits through portfolio management, integration of intellectual property into business strategy and maximising the value of intellectual property. A basic consideration of any intellectual property strategy is to balance the short-term gain against the potential long-term pain, along with the company’s business goals.

Since it is typically proprietary technology, intellectual property is worth protecting in the same ways as other valuable corporate assets. It can be used to generate another source of revenue to strengthen overall profits and diversify risks. Intellectual property and other intangible assets are often developed as part of the overall productivity and growth of a company. Although these assets underwrite to the company’s main economic asset, supplementary monetisation means may be implemented to generate other means of revenue.

For instance, it is common for ancillary intangible assets to become by-products of a company’s main business activity. Instead of being pushed to the sideline such assets may be used to generate revenue. In another example, the monetisation of main intangible assets may generate multiple revenue streams instead of the traditional single revenue stream. Earlier, patents were only considered as tools that provide rights for exclusion and prohibition. However, they are now increasingly gaining significance as intangible assets. Intellectual property monetisation means deriving monetary value from intellectual property development.

Developing Intellectual Property Strategy

The possibilities are endless and the need to think very seriously about having an intellectual property strategy is indeed compelling. This is despite the fact of which sector or stage of growth you belong in. As we all are transitioning to our new reality of living in an intangible economy, all entrepreneurs across the country should consider developing an intellectual property strategy, starting from this year.

There is a huge unexplored intellectual capital (internal information and employees’ brain) that goes to waste in most technology companies. And this is due to the lack of culture or bliss ignorance of the importance of converting intellectual capital into the intellectual property by senior management. This can also be inexistent or bad internal practices to capture intellectual capital and turn it into intellectual property. There can also be a lack of budget devoted to intellectual property or budget exhausted on the wrong intellectual property assets such as non-core patents or all of the above.

On the other end, some companies believe they have an intellectual property strategy because they filed a few patents during the process. In most cases, those filings were not made as part of a strategic plan and may end up being of little value to its owner. A renowned author puts it in this way: “Filing a patent before having a global strategy in place is like shooting without aiming first!” According to a report, less than 10 per cent of patents filed around the world are actually used by their owner. It also revealed that half of all patents issued end up being abandoned after 10 years. And this rate goes up to two-third during the life of the patents.

Advantages of Protecting Intellectual Property

Intellectual property rights don’t protect ideas or concepts. They protect genuine business assets that can be vital to your products or services. They also protect the success and profitability of your business. There are many advantages to securing your intellectual property rights:

Enhance the market value of your business: Intellectual property can generate income for your business through licensing, sale or commercialisation of protected products or services. In turn, this can improve your market share or raise your profits. In case of sale, merger or acquisition, having registered and protected intellectual property assets can raise the value of your business.

Turn ideas into profit-making assets: Ideas on their own have little value. However, intellectual property can help you to turn ideas into commercially successful products and services. Licensing your patents or copyright can lead a company to a steady stream of royalties and additional income. And that can boost your business’ profit or bottom line.

Market your business’ products & services: Intellectual property is essential in creating a clear picture of your business. Trademarks, logos or the design of your products give a new identity to your business. Intellectual property can help you differentiate your products and services in the market and promote them to your customers.

Access or raise finance for your business: You can monetise your intellectual property assets through sale, licensing or using them as collateral for debt financing. As well as this, you can use your intellectual property as an advantage when applying for public or government funding, for example, grants, subsidies or loans.

Enhance export opportunities for your business: Intellectual property can increase your competitiveness in export markets. You can use brands and designs to market goods and services globally, seek franchising agreements with overseas companies, or export your patented products.

The post How can Intellectual Property Monetisation be an Opportunity During Exiting a Business? appeared first on Dutch Uncles.

Make Exiting by Liquidation a Rewarding Experience

Joseph Varughese — Tue, 16 Mar 2021 10:35:05 +0000

The IBM Institute for Business Value and Oxford Economics conducted a study called ‘Entrepreneurial India’ which found out that 90% of Indian start-ups will fail in the first five years of their establishment.

The study included interviews of 600 start-up entrepreneurs of which 300 were Indian; 100 government leaders along with 100 venture capitalists, 1500 leaders of established companies, and 22 educational institutions.

The scope of this article is not to discuss the ‘why’ of the failures but about one of the exit strategies that can be classified as the last resort exit route though not necessarily so always; liquidation.

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Liquidation is an exit strategy where you close the business and sell all of your assets - typically at a lower cost than the market price or book value.

What is an Exit Strategy in business?

Before we get into the topic of liquidation, let us explore various exit strategies available to start-ups. An exit strategy is a plan to exit a situation in the event of certain circumstances at a certain point in time. In business, exit strategy is about exiting the business or investment. The difference between these two is that in the first case it is the strategy to close or sell the company and the second case of exiting investment is of diluting the investment of the owners keeping the business alive. Many of the start-ups have an exit strategy as part of their business plan at the conceptual stage itself.

However, there arise situations where exit becomes inevitable though not planned for or at a point in time that was not foreseen to happen. This cannot be strictly called an exit strategy since there is no strategy or plan involved here. It is a decision forced to be taken out of the prevailing circumstances. Such situations normally emerge due to failure thanks to poor management, lack of expertise, negative cash flow, investor disinterest, bad or untested ideas, non-delegation of responsibilities, market conditions, recession, pandemic, adverse tax laws etc. It can also be because the owner believes that she or he has reached the expected and required target or made the required money out of the venture or the product life cycle has reached the end.

What are the common types of exit strategies?

We have heard of different routes to exit and let us briefly discuss a few of the most common of them here.

Merger & Acquisition (M&A): This very common route means merging of your business with another entity or being bought or acquired by another company. This is normally merging with a similar company, or being bought by a larger company, mostly larger company in similar or related business. This is an exit strategy to liquidate the investments of the struggling company and for the company on the other side it may be a growth driver. Such companies acquire other businesses for inorganic growth or economies of scale or cost efficiency or skill set of employees or strategic synergy because setting up a similar business from scratch takes lots of effort and time.

Initial Public Offering (IPO): IPO is about going to the public with an offer of sale of its shares and consequently getting listed on stock exchanges. This may not be an easy option for small and early start-ups as this involves complying with many regulations of SEBI, Companies Act, income Tax, RBI in certain cases etc. which specify stringent rules and regulations for companies going with IPO. In addition, it is not easy for the IPO to get subscribed by the public without good review, visibility and financial metrics in its favour. As far as the start-ups are concerned, this is usually a strategy enforced by non-promoter investors to exit their investment and take advantage of the premium valuation that might come through IPO which is exactly why they invest in the first place. This is not a common feasible route for struggling companies. This works for companies on the growth path looking for funds.

Dilution of equity: This is a common option most start-ups resort to. This is about diluting the promoter investment in the form of equity or capital by allotting shares to new investors against the fund they bring in, based on the valuation of the business as of then. This is not to be confused with an IPO. This may not be mostly a full exit as normally promoters remain in the company with majority or minority shareholding.

Sell to friends or relatives: This is not an M&A or liquidation route. The company does not close down or merge with another company. Yet it’s a great way to “cash out” so you can pay investors, pay yourself, take some time off, or venture into another business. The ideal buyer is someone you know well who has more skills and interest on the operational side of the business, and is confident of scaling it.

Close and Liquidate: This is our topic of discussion in this article. There are many reasons why business owners or investors decide to close down and liquidate their business. One reason can be the decision of the owner that enough is enough. Another can be the plan to exit the current business and try out something else or different. Mostly it is the companies struggling to survive which opt for this route in the form of voluntary liquidation. Other reasons may be that the idea was not tested properly before venturing into it resulting in failure or legal heirs or successors don’t want to continue the business. It can also be forced liquidation initiated by creditors who have not been paid their dues for long, to recover their money.

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In business, exit strategy is about exiting the business or investment. The difference between these two is that in the first case it is the strategy to close or sell the company and the second case of exiting investment is of diluting the investment of the owners keeping the business alive.

So, what is Liquidation?

Liquidation is an exit strategy where you close the business and sell all of your assets – typically at a lower cost than the market price or book value. Do not see this as a bad option, this is a recommended strategy when the time has come to simply move on and/or you have run out of all other options to sustain. If you choose this route, just know that the process is to sell off the assets, use the cash obtained thus to pay off creditors and distribute whatever, if any, remains to the investors and shareholders including the founder owner, based on the contract in palace or share of stake as per the relevant laws.

As discussed elsewhere in this article, one of main reasons why start-ups fail is because the founders did not go through the much-needed procedure of testing the idea before venturing into implementing it. In such eventuality, if you have any protected IP, you must try to monetise it if some other entrepreneur has a better plan, skills and management resources to use your failed idea or IP and run it successfully. You can also consider the royalty route.

Coming back to liquidation, this route is normally selected when all other options like M&A, IPO, Sell-out don’t work out to the benefit of the business owner or become very complex and cumbersome for the owner to manage those routes without bringing in more resources and funds.

It may look like that the more beneficial way to exit a struggling or failed business is to sell it to potential buyers. This is, however, easier said than done especially if it is a struggling business. Hence the feasible and plausible option that will be available to a business owner who wants to exit the struggling business is to close and liquidate the business.

What are the liquidation processes?

This part is discussed here with reference to liquidation processes relevant to India under its applicable statues.

Insolvency and Bankruptcy code, 2016 is a consolidated enactment of various codes like Companies Act, 2013, Sick Industrial Companies (Special Provisions) Repeal Act, 2013, Limited Liability Partnership Act, 2008, Secularization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Recovery of Debts Due to Banks and Financial Institutions Act, 1993. IBC, as it is commonly known, applies to the following entities.

Any company incorporated under the Companies Act, 2013 or any other previous law.

Any other company which is governed by any Special Act like government companies, government corporations

Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008

Partnership firm whether registered or not under the Partnership Act, 1932

Any Individual Person

In a bid to ease recovery of dues from start-ups and enable faster exit, the Central Government in 2017 notified the provisions of the ‘Fast Track Insolvency Resolution Process’ under the Insolvency and Bankruptcy Code, 2016 labelled the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017. This has come as a solace to start-ups which have been struggling all along and therefore want to exit in a smooth and fast mode.

The Regulations and the Fast-Track Resolution process are applicable to the following categories of corporate debtors meaning entities that want to liquidate the business:

a small company as defined under the Companies Act, 2013;

a Start-up (other than the partnership firm) as defined above; or

an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding rupees one crore.

The fast-track resolution is meant to expedite the insolvency resolution process of start-ups and small companies by cutting down the time taken to complete an insolvency resolution in a faster mode. The Fast-Track code stipulates that the fast-track process is required to be completed within a period of ninety (90) days, as against one-eighty (180) days in other cases, though can be extended by another 45 days for once under certain circumstances and conditions.

The fast-track process can be initiated by the creditors meaning those to whom business owes dues to pay or by the corporate debtor itself by filing an application to the IBC Adjudicating Authority.

The Regulations as a whole provide for the resolution process from the initiation of the insolvency resolution of the corporate debtors till its conclusion with approval of the resolution plan by the adjudicating authority within the set timelines thereby ensuring a speedy disposal of any application under the fast-track process.

Is Liquidation a rewarding experience?

The answer depends on various factors like whether this route was selected without trying out other exit strategies or it is a voluntary liquidation or one initiated by creditors. Other than in cases where the owners want to call it a day because they or their successors don’t want to pursue this business, owners take to the liquidation route as a last resort after undergoing a long period of struggle and trauma to keep the business alive and running. They are most probably in a mental state to exit the business as fast and smooth as possible. Going through another series of pain in the liquidation process may be something that they want to avoid at that point in time.

The prevailing statutes and codes under IBC ensure that this is avoided as far as possible. It also makes sure that all the stakeholders like creditors, employees, shareholders and investors have a win-win situation.

The liquidation strategy under current Indian laws provides companies particularly start-ups the best way to exit. This helps them by way of not wasting lots of time and effort so that they can pursue other endeavours. This also may provide them some money by way of funds remaining after settling the creditors.

In certain circumstances, that is the best option or only option available to the business owner, especially of failed or struggling start-ups.

The post Make Exiting by Liquidation a Rewarding Experience appeared first on Dutch Uncles.

Why 47% of Start-ups Consider IPO as a Good Exit Strategy

Aakash Sharma — Mon, 22 Feb 2021 12:35:05 +0000

There comes a time for mature and established start-ups when it is no longer possible to raise more capital from VCs or private equity firms. And they start weighing their options on the street. Well, according to a recent survey, nearly fifty percent of start-ups think going public, i.e., IPO, is a good exit strategy for start-ups.

What is an IPO?

An initial public offering or an IPO occurs when a start-up offers a certain number of its shares for public sale. Following a valuation process, the stakes are listed on the stock exchange at a price determined by the start-up. Once the shares enter the market at the trading price, they are traded freely on the stock exchange.

The listing decision means that the market determines the shares’ price, and the founders and investors holding the shares lose direct control over the initial value. If successful, the company will have significant capital and liquidity. In the event of failure of the IPO, the paid-up capital account or additional paid-up capital will not increase above the face value.

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Improving the finance unit and talent management seems to be a priority for start-ups in the future.

Why are start-ups going for IPO?

The start-up ecosystem is emerging with an exciting trend as more and more companies are launching IPOs. This is a direct result of a large amount of capital in the start-up market by entrepreneurs, private companies and other investment institutions.

With the pandemic underscoring the power of the public market and the importance of a healthy single economy, start-ups are seeing IPOs as a potentially profitable product for their investors.

47% of start-up founders, surveyed by InnoVen Capital as part of their founders’ annual review, stated that the IPO is a realistic exit scenario for them, compared with 43% in the previous year and 39% in 2019.

Pandemic changed the IPO game

The financial architecture of many start-ups improved during the first period of the COVID-19 setback. But for this trend to grow upwards, the sentiment of public procurement and India’s markets will have to be favourable for high growth, comparatively low-profit companies.

In the InnoVen Capital survey, respondents from the logistics industry were the fastest to hold an IPO in India, with almost 83% saying they preferred the route. Zomato, Nykaa, PolicyBazaar, Delhivery, Freshworks and others are some advanced Indian technology companies considering an IPO in India or abroad over the next two to three years.

As growth and customer demand continue to be at the heart of Indian start-ups, more and more companies are shifting their focus on breaking even. With more focused on profitability, they are running on the right track to make earnings and assets profitable in the future.

Improving the finance unit and talent management seems to be a priority for start-ups in the future. They have also experienced a significant recovery after the nationwide shutdown due to COVID-19. While most companies in e-commerce, logistics, B2B platforms, enterprise software and D2C segments are coming out on top and attaining their pre-COVID business, many are still catching up.

But one thing that seems to be on a high note is that IPO is looking like one of the favourite exit options for many start-ups, old and new alike.

The post Why 47% of Start-ups Consider IPO as a Good Exit Strategy appeared first on Dutch Uncles.

Know the Basics of Liquidation if You Are Closing Your Business

DU Desk — Mon, 22 Feb 2021 10:35:05 +0000

India’s rank in the World Bank’s Doing Business list was 142 in 2014. In a matter of just five years, it moved up to 63, and the introduction of a modern insolvency regime has a lot to do with it. For one, it worked as a comprehensive strategy to reform corporate law and helped in increasing the number of reorganizations. And as a result, the World Bank says, the overall recovery rate for creditors has jumped from 26.5 to 71.6 cents on the dollar. Simply put, liquidation is the process that companies follow as they are winding up their businesses. It includes the course that a company is required to take in collecting its assets, payment of its debts, the surplus amount, if any, is distributed amongst the company members. India has a number of laws to deal with insolvencies. Apart from the Insolvency and Bankruptcy Code, India has the Reserve Bank of India (RBI) Prudential Framework, SARFAESI Act and section 230 of Companies Act 2013. The term “winding up”, in the Indian law, was introduced in the Indian Companies Act, 2013 Section 2(94A). It said “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable”.

This begs the question; why do businesses end up being unviable in the first place? As businesses grow in size, they have a risk of poor management, bad business judgement or plain fraud and may end up being unviable. In such a scenario, liquidation may help run the company better and provides it with a more capable managerial talent in many cases.

With effect from April 01, 2017, voluntary winding up a company is governed by the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process), Regulations, 2017. A company is required to pass a special resolution for its voluntary winding up. Also, if a company owes any debt to any person, creditors representing two-thirds in value of the debt shall also be required to approve the resolution. The liquidation proceedings shall be deemed to have been commenced from the date of passing of the resolution by the company. The company shall from the liquidation commencement date cease to carry on its business.

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Simply put, liquidation is the process that companies follow as they are winding up their businesses. It includes the course that a company is required to take in collecting its assets, payment of its debts, the surplus amount, if any, is distributed amongst the company members.

The liquidator is also required to make a public announcement inviting submission of claims against the company. Within 45 days of the commencement of the winding up proceedings, the liquidator shall submit its preliminary report detailing the estimates of its assets and liabilities as on the liquidation commencement date based on the books of the company. The liquidator shall try to complete the liquidation process within a period of twelve months from its initiation date. Then, the liquidator has to send a final report to Registrar and the Board, and it shall make an application to the Tribunal for dissolution of the company.

Insolvency

World over, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones. An effective insolvency system works as a key element of financial system stability. It is important that a sound framework is provided for restructuring and rehabilitation of companies along with a framework for winding up and liquidation.

Any corporate entity can initiate a voluntary liquidation proceeding. However, there are certain conditions under which it’s eligible to do so. The first one being that the entity must not have committed any default. It is also required that a majority of the directors or designated partners give a declaration verified by an affidavit that:

the corporate entity has no debt or can pay its debts in full from the sales of the assets under the proposed liquidation
liquidation is not to defraud any person

It will take around four weeks after such a declaration to pass a special resolution by the contributories to liquidate the corporate entity and appoint an insolvency professional as a liquidator. Once the winding up process is done and the assets of the corporate entity fully liquidated, only then the liquidator can apply to the National Company Law Tribunal for its dissolution.

A liquidator can:

verify the claims of all creditors
sell the assets of the corporate debtor
conduct the corporate debtor’s business until liquidation
investigate the financial affairs of the corporate debtor
institute any suits or legal proceedings

Dissolution

Winding up and dissolution are not the same things. Winding up of the Company does not necessarily mean that the legal existence of the company has ended. It continues to exist as a legal corporate entity and remain on the Register of Companies. Its legal existence ends only when the Court orders dissolution of the Company, which more often than not, is initiated after the winding up process is done with. The process of dissolution of a company is purely administrative function while its winding up is purely a judicial function. In dissolution, liquidator does not have any significant role to play but he/she plays a very important role in the winding up of the company.

Once the assets of the company have been fully liquidated, the liquidator is required to file an application with the NCLT which shall order dissolution of the debtor from the date of the said order. Within 7 days, copy of said order shall be sent to the authority with which the debtor is registered for appropriate action (Section 54 of the Code). This brings an end to the entire process and resolution of a debt-ridden corporate debtor.

In theory, a company is said to be dissolved when it is ceased to be exist as a corporate entity. After dissolution, the company’s is taken off from the Registrar from the Register of Companies. A liquidator is appointed who takes the control of the entire company in his hands and the owner of the company is required to publish about the dissolution of the company in an official gazette.

This is the last stage in process of the closure of a company. It can be concluded by a merger, reconstruction, and amalgamation. The dissolution often takes place voluntarily by the shareholders. The assets of the company are realized while its liabilities get paid off, and the surplus gets distributed to the members of the company in accordance with their rights.

Section 248 of the Companies Act, 2013 read with Companies (Removal of Name of Companies from the Register of Companies) Rules, 2016 lays down the procedure and instances where the name of a company can be struck off from the Register of Companies. This can be done in 2 ways:

By the Registrar on suo-motu basis in case where (i) a company has failed to commence its business within one year of its incorporation; or; (ii) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company; or;
By a company upon filing an application with the Registrar on all or any of the grounds mentioned in clause (a) here in above.

Restructuring

Just like start-ups, businesses also need efficient and speedy procedures for exit. This helps in rechanneling the human and economic resources of a country which in turn increases the overall productivity of the economy. According to a report by the government of India, a limited standstill period is essential to provide an opportunity to genuine business to explore re-structuring. “The law should, therefore, impose a prohibition on the unauthorized disposition of the Debtors’ assets and suspension of actions by Creditors to enforce their rights or remedies against the Debtor on the assets for a limited prescribed period to preserve and protect assets besides maximizing its value. This will facilitate unobstructed conduct of Insolvency process by the Tribunal without having to deal with complexities of multiple creditor actions in Debt Recovery Tribunals. This will also encourage creditors to participate in the Insolvency process besides achieving fair and orderly administration and upholding fundamental objectives and policy of the Insolvency Law,” the report said.

The aim of restructuring is to create a recovery mechanism for the creditors in which the defaulting debtor is assessed whether it is capable or not of repaying its debt. Failing this, the debtor is either restructured or liquidated and finally dissolved.

Here are the steps that company need to follow under the Indian Insolvency and Bankruptcy law:

Operational Creditor needs to issue and deliver a demand Notice [Form 3 – Rule 5 of the Insolvency and Bankruptcy Rules, 2016] to the debtor demanding payment of the unpaid debt.
Within 10 days of receipt of demand notice, the debtor needs to bring to the notice of the Operational Creditor of the debt being disputed.
If the payment is not received within 10 days from the date of delivery of demand notice, Operational Creditor has to file an application under Section 9 of the Code (prescribed Form 5 – Rule No.6) before NCLT along with a proposal for appointment of Interim Resolution Professional, if required. It needs to have a copy of the invoice / demand notice, copies of documents referred to in this application, copy of the relevant bank accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor, if available, an affidavit in support of the application, written consent from the proposed insolvency professional and proof of application fee paid.
Within 14 days of receipt of the application, NCLT is required to pass an order admitting or rejecting the application.
Within 7 days of constitution, the Committee of Creditors by a majority vote (of not less than 66% of vote share) are required to either confirm the interim resolution professional as a “Resolution Professional” or appoint a fresh “Resolution Professional” who then takes over the reins of the Corporate debtor from the interim resolution professional.
Then, the resolution applicant, which is appointed by the Resolution Professional, is required to prepare a resolution plan. This needs to cover the management of affairs of the Corporate Debtor post approval of the resolution plan along with provision for payment of insolvency resolution process costs in priority to other debts of the corporate debtor as well as payment of debts of operational debtors (Section 30(2)(b) of the Code).
The resolution plan, then, needs to be approved by the Committee of Creditors and to be accepted by at least 66% of voting share of the financial creditors. The resolution plan will now be needed to be approved by the NCLT.
Then, NCLT appoints a liquidator (Section 34 of the Code) who is required to verify and consolidate claims of all creditors (Section 38 of the Code), to take into its custody all assets of the debtor and settle claims of all the creditors and distribute the proceeds in the order of preference specified under Section 53 of the Code (Section 35 of the Code).
This is followed by the distribution of assets. Secured Creditor can realize it dues either in full or in part from the security in its favour (Section 52 of the Code). Rest of the creditors will receive their dues in the order of preference as stated in Section 53 of the Code.
The last step is the dissolution of corporate debtor. Once the assets have been completely liquidated, NCLT-upon application by the liquidator- shall order dissolution of the debtor from the date of the said order. Within 7 days, the copy of said order shall be sent to the authority with which the debtor is registered for appropriate action (Section 54 of the Code).

This is what successfully brings an end to the entire process and resolution of a debt-ridden corporate debtor.

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Time It Right: When You Should Exit and Why

DU Desk — Wed, 10 Feb 2021 10:35:03 +0000

During the fag end of 2020, Swiggy gave up on one of its important pillars of business. It stopped the service of deliveries of groceries, fruits and vegetables and other products in about 100 cities in India. It was a typical cost to benefit ratio call which Swiggy took and shut the service. Period. As start-ups traverse the journey of establishing itself and then growing, there are many hard decisions to be made. The hardest is to let go of a division or worse, exit the business itself. It is not an easy decision and it is a highly emotional process. But entrepreneurs should not be swayed with emotions and must pull out when the odds are severely stacked against them.

According to NASSCOM, a good 90 per cent of the start-ups are facing revenue declines, 70 per cent have reserves to last less than three months and 30-40 per cent are in the process of shutting down temporarily or permanently. The bane, as with every bubble, lies in the fact that the business models were baffling (lack of profits and high cash burn), many investors had the herd mentality to investing, and start-ups played the valuations game, looking for quick exits, said the report.

The failure rate of new businesses in the traditional and conventional businesses is much lesser when compared with start-ups. Of course, these rates are higher in the early-stage startups. Figuratively, the failure rate of Indian start-ups is around 90% in the first year of inception according to various studies.

Technically, the start-ups have distinct characteristics like an innovative approach and an agile business model. Though it sounds of a sure shot way to success, it is a bumpy ride to go further and the data is proof. The data and a look at the narrative of entrepreneur ventures in any industry gives a fair bit of idea that failures sometimes are inevitable. Certainly, no entrepreneur wants to be in this situation and exit the business but ignoring the warning signs is another faulty step taken by many business owners.

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Figuratively, the failure rate of Indian start-ups is around 90% in the first year of inception according to various studies.

Causes Which Lead to Exit the Business

There can be numerous reasons for the downfall of a business, some of the reasons are common, some rare, but regardless, they might be detrimental to the business. Entrepreneurs with prior knowledge of the causes of business distress can sail through better than those who are ignorant.

A viable business plan is the core of a successful venture. Long term planning, as well as short term planning, is crucial for businesses and lack of a plan can be specifically damaging for small businesses. Additionally, a lack of experience and leadership skills can result in a directionless organization which leads to a failure of every aspect of a business.

Sometimes, businesses are not able to grow beyond a single-digit growth rate, which could be because they have not understood their customer’s underlying needs. This leads to little revenue and few customers. The customer is at the helm of it all, whether you are in B2B or B2C, keeping an eye on customer needs, and changes in the pattern of consumption are essential. Detailed market research concerning product/service is a requisite when one is planning to launch a business. Apart from knowing one’s customer’s well, knowing competitors is also mandatory. It is vital to know who the major competitors are, and what competitive advantage your business has over them.

There are some organizations, especially startups, which reach the stage of scaling too soon, which again can be a cause of concern. Huge investment too soon in marketing, human capital, and infrastructure can put pressure on the health of the organization.
For an entrepreneur, the business is an incredible idea and original but in reality, it could be a run-of-the-mill. A faulty business model or a lack of an innovative business model is a common cause of failure. A business model in today’s world should not be only viable, but agile as well.

Mismanagement of finance has been cited as a usual reason why businesses shut down so early in their life cycle. The entrepreneur needs to know the capital requirement at the inception and the capital required before attaining the breakeven point. A business owner should be well acquainted with the basics of finance to be successful. In addition to financial knowledge, it is a necessity that an entrepreneur should be adept with legal issues like rules and regulations, any licensing requirements, Intellectual Property Rightsand the various policy changes.

Businesses are not run single-handedly, but by the excellent and dedicated team, an entrepreneur builds over a period of time. When entrepreneurs fail to build a skilled team around them, they risk damaging their business. Problems faced by the employees like lack of payment, conducive work environment, no training, and proper delegation of work are reasons of worry and should be dealt with earnestly by the business owners. Poor recruitment policies can result in incompetent and unsuitable employees in the organization which further increases the chances of failure.

Once in a while, the macroeconomic environment is unfavorable for the businesses to survive. Isolated occurrences like recession and a pandemic like COVID-19 can invariably disrupt the business ecosystem.

Gauging the signs of distress

The trouble in the organization due to any of the reason manifests into symptoms. However, the business owner’s involvement with the businesses causes them to ignore these danger signs. If they make a conscious decision to not let biases obstruct rational thinking, these signs can come in handy in the identification of distress promptly.
Distress signs can range from finance-related indicators to employee-related issues. Certainly, these signs interact with each other and are coupled with macroeconomic factors resulting in the companies to shut their doors. Undoubtedly, keeping a track of these 10 symptoms can help the entrepreneurs decide firmly and wisely.

Shrinking Margins

Businesses exist for various reasons. Undeniably, one of the top priority of businesses, both big and small, is profit. Though it should not always be the only reason of existence, it is a critical objective for survival as well as growth. When a business experiences a shrink in the profit margins, it points to that everything is not all right with the health of the business and indicates problems within the organization.

Plunging Sales

It is no brainer that plunging sales over a period of time, either a decrease from the previous quarter or the projected sales number of the current quarter. It is not a positive sign and an indication of trouble. Of course, a consideration of the industry environment is crucial in anticipating if the problem is internal for the organization or an external factor impacting almost the whole industry. Regardless of the cause of decline, it requires a proactive approach from the owner to analyze what can be done immediately to revive the numbers.

Cash Flow Struggles

Another giveaway sign is declining or even negative cash-flow. A steady cash flow is like a blood flow for the organization. Irrespective of an organization’s potential to generate revenue, if the organization has inadequate working capital to keep them going, even the feasible companies fail. Reduced cash flow, can lead to increase in outstanding account payable, not able to follow debt maturities schedule, and likely large liabilities as well. High receivables or big overheads could be the reasons of liquidity crunch and should be investigated thoroughly.
However, having money at one’s disposal is not always a solution, when a business owner is constantly asking for loans from family, friends, requesting for repeated bank amendments or higher loan limits to keep the business going. There is a possibility that there is something deeply wrong with the business fundamentally instead of just lack of funds.

Negative Net Asset Ratio

Liabilities are obligations which a company has to fulfil in the stipulated time, either a short term or a long term and usually net assets are appraised to estimate the total assets available with the business owner to meet total liabilities. A negative net asset value is a strong indication that the business is facing a critical situation financially.

Declining Capital Investments

Investments in new technology, equipment is extremely beneficial for organizations. When a business owner is not able to invest in the new advancements, it increases the production cost due to decrease in efficiency. When the organization is forced to reduce its capital investment programs it can be a sign of distress.

Creditors in Doubt

The market senses the future of a business even before the owner can. Once the creditors have put a condition of cash on delivery for a business, it could mean that the lender has some serious doubts regarding the organization’s ability to pay at a later point of time. This is a signal that the business is losing its reputation and indicates low ability of the business to raise funds.
Apart from the private lenders when related parties like shareholders, banks and other sources are reluctant to injecting funds, it could demonstrate that these parties are not confident about the prospects of the business.

Business is Not Buzzing

Good financial performance is a must, but market performance of a business is not secondary. Customers should be aware of a business and willing to recommend it in their social circle. For small businesses word of mouth marketing is significant. In today’s world admiration at the social media platform is a must for an organization. Customers should be talking about the business along with giving reviews and feedbacks. If a business is not buzzing it can be problematic.

Increase in Customer Complaints

A drastic increase in customer complaints is another indication of distress. It could be the result of declining quality. Due to pressures of cost cutting and, in an attempt, to increase the profit margins the organizations resort to cutting corners. Most of the times, the businesses compromise on the quality which not only deteriorates revenue in the long run but can be damaging for the credibility of the business in the market.

Low Employee Retention

A sudden high employee turnover rate is never a good sign. Employees leaving a business either for a reason of non-payment of salaries or just because they do not believe in the venture anymore are early warning signs of trouble in an organization. Recruitment processes are long and costly along with the cost of training a new employee, all add to the burden. And when the organization is not able to compensate the employees it gives rise to a vicious circle where key staff resigns,or are not getting paid and in turn the organization has to put in resources for new recruitments.

No Longer Passionate

Of course, financial indicators are an evidence backed signs which can tell the company is not doing well, and if the condition worsens it can lead to complete shutdown. However, these are not the only way a business owner can recognize the trouble in the business. An entrepreneur always starts a business with strong passion and if the venture is no longer run by the same passion, it is a good time to step back and think of the future of the venture, as without a motivated leader the business cannot become successful.

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A faulty business model or a lack of an innovative business model is a common cause of failure. A business model in today's world should not be only viable, but agile as well.

Why is it so difficult to see these symptoms and to exit the business if required?

Many factors are involved, from a fear of losing one’s credibility as a successful entrepreneur to psychological biases. The entrepreneur is emotionally invested in the organization and had built business merely from an idea, which then causes the entrepreneur to refrain from readjusting goals or to contemplate an exit plan. The entrepreneur starts looking for information to ascertain their argument to hold on to the venture which in turn makes them invest additional sources to a pool of unrecoverable cost.

How to Exit the Business?

If a business faces multiple trigger points both financial or market-based metrics, it is essential to consider it as crisis and work on it urgently. Start with having a deep look at the business plan adopted. Changes both in the external and internal business environment can make previously feasible plans, obsolete. A turnaround is possible by concentrating on the main pain point like cash. A self-analysis of the investments, and their performance done to reveal the cause of declining cash flow can be undertaken. Improving operational processes and making a business lean and agile can also help in cash flow issues.

A turnaround is a great option for a business owner. The incubator ecosystem, advice and support from the experts help the organizations to sail through difficult times and in progressive direction. Entrepreneurs’ should seek advice from the professionals and not risk their businesses.

But at times, the only solution in sight for a business owner is to let go resources. When and how to exit the business is a very emotional process for an entrepreneur, it is also difficult to make such decisions. However, an apt exit strategy should be chosen depending on various factors. There are many exit strategies available for a business owner; Mergers and Acquisitions (M&A), selling the business, or liquidation.

M&A is a good option as the company gets valued appropriately. Is the company saleable? If the answer is yes, then selling a business to someone trustworthy, family or trusted partners or key employees is a viable exit strategy. However, there are times when the business owner does not see any reason for continuing the business and can decide to liquidate by selling all the assets.

Facing the prospect of exiting a business is not an easy decision to take but it can be an informed decision if it is to be taken. Staying too long with a losing business will not only be emotionally draining for the business owner but can also result in reduction in the valuation of the venture in the market.

The post Time It Right: When You Should Exit and Why appeared first on Dutch Uncles.

Has the exit scene in India evolved? What were the top 10 corporate exits of 2020?

Preeti Verma — Tue, 09 Feb 2021 10:35:02 +0000

Poet Thomas Stearns Eliot OM once famously quotes: “What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.”

Blame the year for the start of the coronavirus, or the economic slump due to the pandemic, 2020 was one of the tragic years for many reasons. The Covid-19 has been affecting many business houses, which triggered a shortage of raw material, hit consumption and impacted pre-agreed deadlines. Leading to this situation, many companies and marquees have been exploring different routes to move ahead.

Taking an exit route would surely be a nightmare to any entrepreneur or business leader. When an entrepreneur starts a business, he or she never dreams to exit the market unless something sudden happens. There are surely unavoidable situations in life when you are bound to bend yourself to get things right. To avoid such bumpy rides, it is always better to start the business with an open mind or should have plan B in mind to take things smoothly.

According to a data, the year 2020 witnessed over 70 per cent of upstart tech companies failed. This was mainly around 20 months after they first raised around $1.3 million in total funding or couldn’t go beyond seed or series A funding. Generally, exits happen at an initial stage for small, undisclosed sums. Similarly, for consumer hardware startups, the stats are even brutal. Around 97 per cent of seed or crowdfunded companies are eventually dying or becoming zombies. Also last year, India registered a sharp 44.4 per cent decline in the total number of tech start-ups being founded at 3,061, compared to 5,509 in 2019.

Last year, the Covid-19 pandemic and global lockdown took a toll on the hospitality industry. Several short-term rental and travel startups were forced to wind down their operations. Fashion and media companies also lost customers and cash as consumer spending pulled back and investor appetite waned. However, some of these failed companies were already in their death bed, from over-promised software to stiff competition to shady business practices. For shutting down of most of the companies, the pandemic and the lockdown proved the final nail in the coffin.

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Blame the year for the start of the coronavirus, or the economic slump due to the pandemic, 2020 was one of the tragic years for many reasons.

Failure is an inevitable part of success. Even Bill Gates, who is one of the most successful businessmen in history, didn’t rocket straight to the top with Microsoft. It’s not a well-known fact that his first company was a bust wasn’t a roaring success. Rather it was seminal in preparing him to make Microsoft’s first product a couple of years later. If an entrepreneur is unable to build a business as a standalone profitable organization or he is unable to generate the kind of funding needed for a business, then there is no disgrace in exploring other options such as mergers, acquisitions, stake sale, or sell-off. Sometimes a small company can prove a stepping stone in the big organization, and benefit all the shareholders.

In startup, there are a number of visionary milestones to look for. However, the last goal for startups is an exit strategy that benefits all who are associated with the company – the founders, investors, employees, advisers, and customers. Exits are important for the startup ecosystem because investors get returns and venture capital money can flow back to support new entrepreneurs. The Walmart-Flipkart deal did a lot in that, but mid-sized deals are just as crucial as outliers.

In May 2020, Indian startups have secured around 68 per cent and 33 per cent less funding, when compared to the year-ago period in 2019 and 2018, respectively. In a return, this has affected valuations and cash flow of startups of all sizes, thus pushing them to seek more harsh measures such as mass layoffs, pay cuts, freezing promotions, salary reduction, unpaid leave for indefinite period, shutting specific departments or branches and salary hikes. A survey conducted by the industry body’s NASSCOM showed that 70 per cent of startups have less than three months of cash runway due to the sudden outbreak of the pandemic. The survey also found that around 40 per cent of startups have either temporarily shut down operations or are in the process of shutting down.

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Exits are important for the startup ecosystem because investors get returns and venture capital money can flow back to support new entrepreneurs.

Layoff Due to The Pandemic

Due to the worsening situation, ride aggregator Ola laid off 1,400 employees by May 2020. Even its senior management had to take significant salary cuts to avoid such a situation. Curefit axed 300 trainers, mostly access staff, who were hired for future extension from smaller towns. The Bengaluru-based Foodtech firm Swiggy took steps towards growth and reducing cost at the same time. It laid off 1,100 employees. On the same side, Paisabazaar and BookMyShow reduced 1,500 and 1,450 jobs, respectively. Similarly, Udaan gave pink slip to over 3,000 contractual staff.

Not just startups, IT companies, banking, and retail sectors too witnessed a massive shake up due to the pandemic or in a move to restructuring the companies’ management. IT companies does restructure and laying off for the past two years in light of new technology that has emerged; more positions in the IT industry are being rendered useless due to automation. Similarly, retailer sector has been battling low sales due to an unprecedented pandemic that has severely hurt fashion brands. This triggered the downsizing process and reshuffling with the start of the Covid-19 pandemic.

But the worst came, when businesses started shutting down all over the country, and companies started losing their top brasses. With expenditures racing ahead of revenue and a complete lockdown plugging all access to liquidity also spelt the worst for micro, small and medium businesses and their low-salaried workers. Only by the year end, the hiring scenario improved. EdTech and fintech startups started hiring by the end of the year.

Corporate Exits in 2020

The year 2020 saw some of the significant corporate exits almost in all major sectors. Some shifted gear amid ugly corporate battles or business crises, while few made a swift exit move for better future possibilities. Here are the top 10 high profile corporate exits of 2020:

Ankit Jain

Ankit Jain, Co-founder, Ola Electric and one of the closest confidants of CEO Bhavish Aggarwal, resigned from his position. Jain is the second co-founder to quit Ola Electric after Anand Shah. Shah was the first one to quit in 2019, immediately after the fundraise from SoftBank. The fledgling electric-mobility division of Ola has been struggling with back-to-back CXO exits. Jain had joined Ola in early 2016 from McKinsey & Co and had previously served as VP and Head of Ola Play. Along with this exit, the nine high-profile departures the company witnessed in 2019.

Rahul Jaimini

Rahul Jaimini, along with Sriharsha Majety and Nandan Reddy, co-founded Swiggy in 2014 and served as the Chief Technology Officer of the company. Jaimini is leaving the company to join Pesto Tech, where he had invested earlier. While Jaimini will no longer be involved in day-to-day responsibilities the online food ordering firm, he will continue to be a board member and a shareholder at the company. Functions led by Jaimini included platform engineering, analytics, IT, and Swiggy Labs.

Pravin Jadhav

Pravin Jadhav, Managing Director and Chief Executive Officer of Paytm Money, resigned from the company after his clashes with the company. Differences over ESOPs, annual salary and remuneration had led to his departure from the company. Paytm’s wealth management platform had elevated Jadhav as MD and CEO in September 2019. Jadhav’s resignation was considered not a good sign for Paytm as the company had been facing exodus at the top level since 2019. Paytm Money is the wealth management subsidiary of Paytm, and Jadhav was the first team member on the board of directors. This came at a time when the company was looking to expand its market for Paytm Money with mutual fund services.

Rohan Mishra

Rohan Mishra, who was the India head of Helo, left the company in July to become the director of government relations and public advocacy at Coca-Cola. Nitin Saluja, ByteDance’s director of public policy until August, is now Amazon India’s senior manager, public policy. After the ban on both of ByteDance’s top apps, TikTok and Helo, a number of senior executives walked out of the door.

Karan Bajaj

Karan Bajaj, founder of coding edutech startup White Hat Jr, one day got a WhatsApp message from Byju’s co-founder Byju Raveendran saying that he really admires how Bajaj has built the company. They chatted and the very next day a $300-million deal was announced. Byju’s acquired Bajaj’s less than 18-month-old White Hat Jr for an all-cash deal. Bajaj being one of the major shareholders of the company made a sweet fortune, and the investors also got a great exit.

Uday Shankar

Uday Shankar, Chairman of Disney Star, made an exit from the company in September 2020. Around 40 employees from its film production business, Fox-Star Studio, also made the move the same day Shankar resigned. Similarly, other high-profile exits happened in the company’s sports business also. The Star Sports CEO Goutam Thakkar, marketing head Rajiv Mathrani, head of emerging sports Rupali Fernandes and business head of regional sports business Ashok Namboodiri, all resigned on the same day.

Ramkumar Ramamoorthy

After spending 22 years in the company, Ramkumar Ramamoorthy resigned from Cognizant Technology Solutions Corp. as Chairman and Managing Director. In September 2019, Ramamoorthy had been elevated to the position of CMD, and he also served as a director at the Cognizant Foundation, the CSR arm of the tech firm. Several other senior vice presidents and vice-presidents had also resigned in recent years including Jaideep Poondir, Rajesh Balaji, Vinayambika Kidiyur, Archana Ramanakumar, and Vikash Gaur. The reason for the exits was unknown, but industry sources believed the company wanted to refresh the top-heavy structure and make it more efficient.

Janne Einola

Janne Einola, India head of Hennes & Mauritz (H&M), exit the company five years after he launched the world’s second-largest fashion brand in India. Citing personal reasons to leave the company, Einola took a break before deciding on his next move. His departure comes at a challenging time when retailers in India are grappling low sales due to an unprecedented pandemic that has severely hurt fashion brands.

Ankhi Das

Ankhi Das resigned from the Facebook India’s policy head position last year after she was accused of not applying hate speech rules to posts by the Bharatiya Janata Party members. The troubles between Facebook India and Das mounted after the social media giant got involved in back-to-back controversies with the Central and Delhi governments.

Rajiv Lall

After five years IDFC First Bank got banking license, Rajiv Lall resigned from his position. The former founder managing director and chief executive officer of the bank cited personal reasons for his exit

The post Has the exit scene in India evolved? What were the top 10 corporate exits of 2020? appeared first on Dutch Uncles.

What is an Exit Strategy and why do you need one?

Preeti Verma — Mon, 08 Feb 2021 10:35:02 +0000

Everyone must have read or have watched Mahabharata once. So, after Arjuna, his son Abhimanyu was the only warrior who knew how to enter the Chakravyuh. The Chakravyuh or a circular maze was the military formation, initially tricked for Arjuna by the Kauravas in the Kurukshetra battle. But Abhimanyu imbibed only the entry part of it, and he missed the crucial part of escaping the Chakravyuh. As a result, he died at the battlefield. Had Abhimanyu been knowing the exit part, he would have survived the battle. Now or then, exit strategy is the crucial part of planning!

The future is uncertain and nobody knows what it holds for us tomorrow. So, preparing things in advance makes other things easy and smooth. Often in life, we wait until a change in circumstances to make a big decision. Similarly, entrepreneurs strive hard to launch their businesses. But one thing they often forget is that decisions made on day one can have huge consequences down the road. It is not just enough to build an empire; one should make sure to have an exit strategy ready, a way to get the money back out.

Exit planning is something many entrepreneurs delay for long. In business, the target is firmly on the here and now decisions, whether it is marketing, HR, inventory, or cash flow. One may doesn’t feel like there is the time or the motivation to create an exit strategy, especially when you don’t plan to sell soon.

When an architect designs a building, he makes sure that every building, floor, or structure, where people will be living or spending their amount of time, has at least two doors, preferably on opposite ends of the space. Why? Because, if tomorrow anything happens inside the building that requires the occupants to vacate the place quickly then there needs to be an adequate number of exits available.

If something like a fire or other natural calamities happen, which might make it impossible to get out one way, then there needs to be another exit available for the people to use. Now, picture yourself in that room or building, with multiple available exits is not just a matter of convenience, but it is a matter of safety and well planning, too.

Around 72 per cent of small business owners have no exit strategy at all, revealed a study. Of course, when you start a business you start it with a positive note. You don’t want to think anything negative like shutting it down or selling it off later. But trust me, it is always advisable to keep a backup plan for the future. The truth is it can take years to execute a successful exit, so the endgame needs to be in your mind from the start. The earlier you establish your exit strategy, the clearer the vision for you and your company becomes.

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Business owners or even investors can actually make a considerable profit if they make a successful exit strategy.

What is an Exit Strategy?

An exit strategy is a contingency plan to liquidate or dispose of a financial asset once the predetermined event or circumstance for the asset has been met by a business owner, or an investor. This planned approach will either maximise benefit or minimise damage. For entrepreneurs, this is a strategic planning on how to sell ownership to investors. Business owners or even investors can actually make a considerable profit if they make a successful exit strategy. You should always assess your personal and business goals to identify which exit strategy lines up with your future goals.

Now, it is most likely that an exit strategy is executed to close a non-performing asset. This will ensure that the losses associated with a particular underperforming asset are limited. However, an exit strategy can also be applied if the financial or business asset has already met the investment goal.

There can be many other reasons due to which an investor or business could execute an exit strategy. Depending on the slowdowns in the economy for other simple reasons, like the investor facing a liability lawsuit or wanting to retire or redeem his investments.

What Should Be Considered in the Strategy?

Different businesses will need different approaches in an exit strategy. There are different elements that can be helpful across the board. An effective exit strategy should be planned for every positive and negative possibility regardless of the type of trade, investment, or business venture one has. This planning should be an important part of allocating the risk associated with the investment, trade, or business venture.

A business exit strategy is an entrepreneur’s calculated move to sell its ownership in a company to sellers /investors or another company. A proper exit strategy gives a business owner a road map to reduce or liquidate its stake in a business venture. And, if a business is running successfully, then how to make a substantial profit.

Similarly, if the business is not running successfully, then an exit strategy or an ‘exit plan’ can be of a big help to enable the entrepreneur to control the losses. An exit strategy can also be used by an investor such as a venture capitalist to prepare for a cash-out of an investment.

Exit strategies and other money management methods can significantly improve dealers and investors’ trading business by eliminating emotion and reducing risk. Before entering into a trade, an investor is advised to set out points at which s/he will sell the business for a loss and a point at which they will sell for a gain.

Managing money is one of the most important aspects of business. Many traders, for instance, enter a trade without an exit strategy and are often more likely to take premature profits or, worse, run losses. Traders should understand the exits that are available to them and create an exit strategy that can minimise losses and maximise profits.

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Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

Why Do You Need an Exit Strategy?

Gives Right Direction to the Business

Outlining your exit strategy, above everything else, gives you a clear blueprint for the future and gives a right direction to your business. It gives you a target to achieve for, acts as a measure of your success and clears your vision for life beyond the business.

It also helps you imagine your business with the other person at the helm. Whether you are planning to pass on your business to generation next, sell to a buyer that your merger and acquisition (M&A) team has identified, or liquidate your assets and shut the doors, your exit strategy will guide the direction of your company. Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

After defining an exit strategy, every business decision is tuned accordingly. An exit plan can also be proved as a boon if an unexpected event happens. Let’s say, if you meet a severe accident or illness that forces you to leave early, you can easily ensure the exit strategy is activated without causing the business to lose value.

Estimates Your Company’s Value; Attracts Investors

It may be an obvious question, but have you actually realised how much your business is estimated? And will it secure your rest of the future? Determining this is more complex than you would expect. It is a tiring process of creating a detailed record of your recast financials, identifying your intangible and tangible assets, and gauge the condition of the market. You will also need an ideal buyer, who can pay a premium for your company based on a strategic fit with theirs.

A thorough evaluation will inform you of your company’s value, but only by combining this with the ambitions laid out in your exit strategy will make you understand if you are on the right track with your financial goals, or if changes are required to realise your expectations or needs.

For entrepreneurs looking for investors, having an exit plan is especially important. Any investor can ask you what your exit strategy is before they can put in their money into your business. The answer you give them can make or break the possibility of getting an investment. In reality, investors shy away from betting big on businesses that don’t have an exit plan. As they believe it might be an indicator that the entrepreneur is more interested in building a lifestyle business rather than building a potential high-growth venture.

To an investor, an exit plan is an assurance that they will get a return of whatever they are investing. This is especially when an investor is buying the equity in a business, and not giving as a loan. Equity in a business has no market value until the company goes public, sold, or merged with another company. If you have no exit plan, investors get worried that you might be reluctant to buy them out or provide the return on investment they’re looking for. Investors also ask founders about their exit strategy to gauge their flexibility and ability to make hard decisions when thinking about risk and return. They want to know if you are capable of imagining possible scenarios and have a grasp of the business landscape.

Gives Clear Picture When to Sell; Attracts Buyers

Your exit strategy will help you to determine an end point for your venture. This could be five years, ten years, or more but it will give you a timeline to work within, allowing you to prepare it for a buyer ready. Simultaneously, you can update your exit plan and make strategic business decisions according to the growth of your venture. This will help in upgrading your company’s value.

On the same side, an exit strategy also makes your business more attractive to buyers, which is crucial if you decide to sell your venture. Buyers want a company that has a clear vision and a proper exit plan. An exit plan also shows how much a buyer is committed to sell his business. Your exit plan will also help you in identifying the ideal time frame for selling your company with the maximum returns. This will psychologically prepare you for your future activities, have a thorough evaluation of your business’ market value, and negotiate a best deal for your business. So, it’s not about securing your financial future, but adding your appeal to prospective buyers. It also shows you are a committed seller.

Relieves Stress and Helps Handling Unwanted Offers

An exit plan gives you a firm grip and framework of your expected business lifecycle. This makes decision making much easier for you whenever you hit a roadblock or feel overwhelmed by the daily stress of business operation.

Having an exit strategy also helps business owners to renounce control and delegate tasks that they don’t like or aren’t skilled at. Similarly, exit planning focuses on developing a next-level management team that can take the control over the helm when needed. This gives the owner time to focus on the parts of business operations they like to expand.

An exit plan will help you respond to unwanted offers. Did you know that, according to research by the National Center for the Middle Market, 45 per cent of all sales are opportunistic for the buyers? It can be a risk to accept an offer in this manner. But with an exit strategy, you can address this type of offer.

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The IPO Essentials: Purpose and Performance

DU Desk — Sat, 06 Feb 2021 10:35:02 +0000

2020 was a great year for Initial Public Offering (IPO) debuts. It saw the likes of Mrs Bector, Burger King, Happiest Minds in the Indian stock markets leading to a great amount of confidence building in the Indian start-up scene. If the buzz in Silicon Valley is to be believed, then at least 10 Indian start-ups like Zomato, Delhivery, Policybazaar, Freshworks, Flipkart, Nykaa, BYJU’S, etc could go public in the next 2-3 years. For most start-ups, IPO seems to be their de facto objective.

The Indian government is in the process of easing overseas listing norms for domestic companies. India’s market regulator Securities and Exchange Board of India (SEBI) has also set up an Innovators Growth Platform (IGP), and has introduced a consultation paper seeking feedback for new rules. This step is likely to encourage more and more start-ups to head for IPO. And more the number of IPOs being issued, better the signs of the stock market and the economy doing well.

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The more number of IPOs being issued, is an indicator of stock market and the economy doing well.

What is an Initial Public Offering?

Simply put, an Initial Public Offering (IPO) is the first time that the stock of a private company is offered to the public for purchase. More often than not, IPOs are issued by smaller companies seeking more capital and grow further. IPO is considered a way for small companies to generate the capital required to expand. Sometimes, they are also done by larger private firms looking for trading publicly. Whether it’s in order to expand for an established company or a nascent company trying to generate more revenue, the bottom line is that companies seek an IPO to raise money.

At Bengaluru Tech Summit 2020, even Sequoia Capital India’s managing director Rajan Anandan is known to have called 2020 a big year for start-ups in India. The best form of exit for the promoters and investors in start-ups is through the IPO route as the stock market will test the strength of these companies, he said. “However, the goal of the start-up is to create an enduring company which is also very valuable and interesting.”

Typically, a firm launches an IPO when it reaches a stage where it’s difficult for it to expand using private capital.

The Process and the Purpose of Initial Public Offering

The process of an IPO known as “going public” in common parlance. Due to a lack of historical data on whether a company will perform well or not, investing in an IPO can be full of risk for an investor. However, it’s an opportunity to become shareholders in the company and earn dividends if the company profits for an investor.

There are two key purposes for launching an IPO. The first one is to raise capital and the second one is to boost prior investors. When a firm goes public, it gets access to a host of investments possible. And that is almost always way more capital than what firms can get through private shareholding or venture capitalists.

IPOs are generally known to have volatile opening day returns. This can attract investors looking to benefit from the discounts available. But it’s a different picture in the long term. Over the long-term, an IPO’s price settles into a steady value.

An IPO requires a certain process to be undertaken by the issuing company with the help of an underwriting firm. The first step is to determine the type of security to issue, what is the best offering price, the number of shares to be issued, and the right time to bring it to the market. There are other nuances to be kept in mind for each of these steps. For example, IPOs are often under-priced to ensure that the issue is fully subscribed/oversubscribed by the public investors. The investors of an IPO expect a rise in share prices on the offer day in case it is under-priced. It increases the demand for the issue.

There are a number of metrics for judging a successful IPO process and its performance. An IPO is considered to be successful if the company’s market capitalisation is equal to or greater than the market capitalisation of its competitors in the industry within 30 days of the initial public offering. If this doesn’t happen, then the performance of the IPO is in question. Another way to determine whether an IPO is successful is to look at its market price. An IPO is considered to be successful if the difference between the offering price and the market capitalisation of the issuing company 30 days after the IPO is less than 20%.

Companies planning to go for an IPO also need to look at the criteria for listing, its advantages and disadvantages beforehand. According to Bombay Stock Exchange, the start-up platform will facilitate the listing of companies in sectors such as IT, ITES, biotechnology and life science, 3D printing, space technology, ecommerce, hi-tech defence, drones, nano-technologies, artificial intelligence, big data, virtual reality, e-gaming, exoskeleton, robotics, holographic technology, genetic engineering, variable computers inside body computer technology, and any other hi-tech company. Here are some of the key advantages and disadvantages that can help you decide better:

Advantages of going public

There are a host of reasons behind a company’s decision to go public. It could range from the company getting cheaper access to capital to improving the credibility of the company.

Raising capital

A private company finances its operations through private funds from its shareholders, investors, venture capitalists, etc. But it needs a constant infusion of capital to keep growing and scaling up and only private funds aren’t always enough. Banks are an obvious first choice but that also comes with a limit cap. Then, the only other option is to go public and it goes a long way in ensuring that the company has enough funds to keep going.

Helps gauge the market worth of the company

Listing your company’s stick on the exchanges can help access its market worth. There’s a simple way how this happens. When a stock is listed, it is worth what an investor agrees to pay for it. If the company has a good market worth, it can attract better investment which can in turn provide better opportunity for future acquisitions and/or mergers. Hence, an IPO can provide a great insight into the company’s market worth.

Makes the company look more credible

When a company is listed on stock exchanges, one can be assured of the fact that there will be transparency of financial data and this helps increase the credibility of the firm in the eyes of the company. Regulatory body SEBI mandates that all listed companies must report all financial data in a periodical manner. It is often observed that the company that’s listed follows better management practices and its credibility tends to improve once it’s listed.

More business opportunities

The primary reason why a company decides to go public is to raise capital easily and quickly by having access to a larger number of investors. This cash can further be used to scale-up your business and push it further by making significant investments in research and development, human resource, infrastructure, marketing, etc. It is also a way for lesser known and relatively newer entities to form a good public image. It can also help growth-stage companies to attract a fresh pool of talent by offering them perks in the form of stock options.

Mergers and acquisitions become easier

And IPO and also help with mergers and acquisitions. Whenever, a publicly-traded company enters into a merger or an acquisition, say, with a smaller competitor, the terms and conditions of that deal usually include its shares as well. This helps in making the process of cash flow more effective, smooth and uncomplicated.

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The primary reason why a company decides to go public is to raise capital easily and quickly by having access to a larger number of investors.

Disadvantages of going public

Listing on stock exchanges is not a cakewalk. When a company decides to go public, it’s hardly a box of roses. There are a huge number of downsides as well.

Upfront costs

There is a huge amount of initial cost involved while launching an IPO. These include underwriting charges, registration fees, advertising costs, legal fees, accounting costs, etc. to name a few. There’s also an extra cost of manpower. The company needs a special resource that is an expert in the IPO process. This adds to the overall cost of launching an IPO which is already pretty high. Not just that, there’s a significant legal, accounting, and marketing cost that arise and are not one-time but an ongoing affair.

More compliance

One of the major drawbacks of turning into a public-listed company is that it is now required to follow certain standards mandated by a regulatory body and this increases its compliance requirements. Some of these compliance requirements include things like conducting audits regularly and publishing financial reports every quarter. This not only leads to increased auditing costs and hiring a specialised workforce but also ensures that all regulatory requirements are met and this process can prove cumbersome. There is also an increased risk of legal or regulatory issues, for example, private securities class action lawsuits.

Less autonomy

A fundamental difference between a private company and a publicly-listed company is control. The shareholders of a private company have more autonomous power and control over the operations of the business whereas, that control is lost as soon as the company goes public. Even if the majority shareholding is within the company, the minority shareholders can also influence a lot of decisions.

Counter-productive in the long-term

Why do investors buy shares of a company? The obvious answer is that they want it to perform well and make money off them. More often than not, this leads to them wanting a good return on investment keeping a short-term view of profit in mind. This can prove to be counter productive when it comes to the long-term view of the performance of the company. The company is forced to look at its short-term growth and if it fails to do so, then it could drive the stock prices down which may also impact overall sales and revenue.

Helps competition

While an IPO can let you be more transparent, it can also help your competition gain an insightful knowledge about your operations and finances. Since the company is mandated by a regulatory body to disclose information related to finances, taxation, accounting, etc., it may also sometimes end up revealing trade secrets and business methods that could help completion study your company and change their business plans accordingly.

Stock price of a company may or may not be reflective of its real financial results of the company. Hence, the fluctuation in the prices of a company’s share can prove to be a major distraction for the company and its shareholders. It is important to maintain that distinction by the management once the IPO goes through. In conclusion, there are many advantages and disadvantages of going for an IPO. It depends on the company’s long-term goal and vision of what it wants to go for. Whenever a company is going for an IPO, it’s management should realise that it’s not an easy investment of time and money. Generally, an IPO can take anywhere from 6-9 months and even longer. The management also needs to make sure that other areas of the business don’t suffer when it’s focussed on the IPO. The management also needs to be comfortable with the fact that shareholders gain a significant ownership stake in a company once a company goes public and they may also sometimes override decisions taken by the management.

An initial public offering can also be a significant exit opportunity for stakeholders, which can allow them to get cash in return. At the very least, they would be able to liquefy the capital that is tied up in the company. An IPO may or may not be the right trajectory for the company. It is imperative to measure all advantages and disadvantages before taking a final call on considering an IPO.

The post The IPO Essentials: Purpose and Performance appeared first on Dutch Uncles.

What is an Exit? When Should a Small Business Owner or a Start-up Think of Exit?

Roopali Kotwal — Fri, 05 Feb 2021 10:35:02 +0000

Introduction – The ‘Charkravyuha’

If you loved reading Indian literature, your keen interest in the subject would have made you scroll through books or at least made you watch the classic series of the ancient Indian epic called ‘Mahabharata’. If you did, you for sure would remember the character named ‘Abhimanyu’ who was one of the greatest archers in the world and a great warrior. Abhimanyu was born to Arjuna (3rd Pandava) and Subhadra (sister of Sri Krishna). It is said that Abhimanyu was in his mother’s womb, when Arjuna was narrating an interesting story of how to break into a ‘Chakravyuh’ formation in a battle. While, Subhadra heard the first part of the story i.e., entering/breaking the ‘Chakravyuh’ but she fell asleep just before she could hear the remaining part of the story which explained the strategy to exit the ‘Chakravyuh’ alive and unharmed. Thus, Abhimanyu knew how to enter the ‘Chakravyuh’ but was not aware, how to exit the same as he did not gain complete knowledge. Well, if you had immersed yourself in this story let’s come back in modern times and see around. How is the story of Prince Abhimanyu knowing the fact to enter the “Chakravyuh “and not knowing the exit policy is relevant now?

We will find this out in the subsequent section along with the meaning of ‘Exit’.

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If you have a unique selling point, you may survive the competition but if being competitive throughout isn’t something which keeps you going or your long-term goal, you should start thinking about what and how to exit as per the plan/strategy built in the early stages of the business.

Meaning of ‘Exit’

Exit is a ‘way out’. An exit occurs when an owner or founder decides to reduce or end his/her involvement with the business. An exit is a strategic plan to sell the ownership to investors or another company irrespective of the fact that the company is making a profit or a loss in the business. In case, the business is successful, the owner may earn a good amount of profit or the exit may help him/her to limit the losses depending on the actual scenario.

Exit does not mean closure at all times. Exit can be in the form of a merger, acquisition, Initial Public Offerings (IPOs) which simply means going public or shutting down business so start a new one as per market demand and relevance. It is a part of contingency planning and it may give an opportunity to the business owners to maximize their profits while they are still dominating the market with their product or services.

Reasons for ‘Exit’

I understand you would be keen to know by now ‘when’ is the right time to exit the business – Should it be done immediately when you start the business or when you are half way through the journey? But, ‘why’ is just as important a question to ask yourself irrespective of the fact that you are running a small business or a startup.

What are the trigger points to consider to start looking for a way out/exit in the business and when should you do it? Let’s us take a look at some of the reasons below to find an answer to this:

You are satisfied with the profit; you are currently making and do not aspire to expand your business any further

You are emotionally attached to your family business and wish to keep it within the family. Therefore, as per your succession plan and to avoid any conflict at any later stage of the business, you want to hand over the reign to your family member

You not interested in the current line of business and looking up for a new challenge due to obsolete market (poor sales due to low demand) for the product so you decide to sell it off and start a new venture which has less competition

A family member may or may not have the right skills but your business is the source of living for them. Hence, you decide to groom the next generation to ensure your legacy also lives on and source of living continues for them

You are uncomfortable with the growing competition and find it difficult to survive

You have the negative cash-flow and selling the business is the only way out to pay off the rising debt

Cash Inflow is an issue. You lack funds or unable to meet the quality

You do not wish to work actively in the organization but still want to keep the equity share so after giving it a considerable amount of though you decide to hire someone externally to run the management

You wish to work under a brand or as per calculation self-marketing and branding cost would be huge

If you are running in losses and are too old to run the business, thinking of a way out then by selling your business may not work well for you.

Business plan failure, merger, acquisition or liquidation maybe some of the other reasons.

‘When’ to plan for the exit?

The above-listed points which primarily focus on ‘why’ should trigger the thinking in you to decide if it is time to ‘exit’. You will definitely be able to rationalize if it is time to look for a ‘way out’.

This means, the right time will be when your small business still earns you profits, it appears as a shining silver lining to others (looking and aspiring for it) or very few rounds of investment or money are funded in your startup and the growth curve is still not flattened. Hence, returns for the business owner and investor are much better.

Also, if you have a unique selling point, you may survive the competition but if being competitive throughout isn’t something which keeps you going or your long-term goal, you should start thinking about what and how to exit as per the plan/strategy built in the early stages of the business.

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You start the business with your savings and angel investments but soon you need more funding for marketing and provide the services in the market.

‘Why’ planning an exit and planning it ‘early’ is important?

In an ideal scenario, an entrepreneur shall develop a comprehensive exit strategy/plan in their initial/original plan before launching their startup. Planning exit at the early stages of a business is important so starting early is the key.

It will build the trust and confidence of investors in your business plan as they help you raise funds especially post the seed funding round for further expansion of the business. They will be more interested in listening to your plan and strategy to ramp up the business because of the vision you have for your company even if you are never going to execute the exit plan. But it will definitely build goodwill.

Planning exit will also help the external investors to make a realistic calculation of the timeline and rate of return on their investments.

As per economic survey delay in the exit or lack of exit may incur more cost. It creates at least three types of costs to the business in fiscal, economic or opportunity and political terms.

Fiscal Costs – Exit is hindered through government support in the form of explicit subsidies (for instance, bailouts) or implicit ones (tariffs, loans from state banks)- which represents a cost to the economy

Economic Cost – When the resources and factors of production are not employed in their most productive way, it results in losses. In a capital scarce country like India, misallocation (a situation where capital and labour are poorly distributed) of resources can have a significant cost. Another cost stems from the overhang of stressed assets (non-performing assets) on corporate and bank balance sheets. It reflects the difficulty of sharing costs of past mistakes between equity holders, creditors, taxpayers and consumers.

Political Cost – The lack of exit can have considerable political cost for the government which is attempting to reform the economy. The benefits of delayed exit may flow to the rich and influential in the form of support for “sick” firms. Thus, it may give the impression that the government favour large corporates which politically limits the ability to undertake measures that will benefit the economy but may be seen as a further benefiting business. Fertilizer is a classic example of these three costs which leaks abroad or to non-agricultural uses and goes to inefficient producers

Starting with a small business or start-up isn’t easy as it seems just like the exit from the market. Let’s take an example that you want to set up a high end/fine-dining restaurant. What all would you need for that?

In the hospitality industry, the bars and restaurant sector are an important source of employment and growth in the world. Because of its nature, this sector faces a high frequency of starting new businesses and shutting down the old ones. As per economic survey 2019-2020, the number of licenses required to open a restaurant in India are significantly more than elsewhere. While Singapore and China require 4 licenses, India requires around 12-16 mandatory licenses like Food safety, Health/trade, Fire NOC, Music License, Employees Safety, Environment Clearance for Gen Sets (Air Pollution Act) and so on) to start the business.

And, you can obtain these licenses and permissions from respective authorities from government portal only unlike New Zealand. The website of Auckland Council (operated by a private third-party agency) has all detailed guides and stepwise procedures about permissions, fees and timeline to open a restaurant in New Zealand.

Now, you start the business with your savings and angel investments but soon you need more funding for marketing and provide the services in the market.

This is just an example to start with the business. However, the closure or selling off the stake, change of ownership or if you no longer wish to be involved in the business or you wish to start a new chain of business, the hassle to do the same will be more. Hence, comes the plan for exit in such scenarios.

How to decide if it is the right time to exit?

Let us understand this with the help of an example where a start-up gets an offer to get acquired by a big brand –

Scenario 1.

You have recently launched your product and it is dominating the market. You are growing exponentially and you are offered a deal to sell off the business to this bigger brand/company. At this point, you must evaluate:

If accepting the offer would make you the amount of profit you were expecting to make?

Will it provide a good Return on Investment (ROI) to Investors?

And If your employees’ interest is also being taken care of by the brand

In case, you visualised that at some point, you will get an offer to get acquired by a big brand and if it meets your above expectation as well, you may think of going ahead with the option to sell off the start-up.

Scenario 2.

Currently, your business performance is really good. You believe you can run independently and make much more money/profit in the coming years than what you are being offered now, you may choose to turn down the offer.

Barriers to Exit

Any obstacle which stops an organisation to take the decision to exit from a market as the company considers that they need to disengage from is a barrier. If you have specialized assets which are not easily saleable.

Conclusion – It’s better to be safe than sorry!

Having an exit plan in place does not mean you are looking for a way out right away, but, it’s a part of the contingency.

We all have seen ‘Emergency Exit’ boards in a high-rise building and the contingency planning is done while the building is under construction. The emergency exit is not used as an entry and exit point every-day but is used and is the only way-out in crisis.

By looking at the balance sheet, one would know if their business Is doing well or not, so any business owner knows what is the right time but not planning for it can spoil the game here.

As per the economic survey (2015-2016), it was clearly quoted that the Chakravyuha Challenge is more of a feature of traditional sectors of the economy but is not restricted to the public sector-indeed, delay in exit in the private sector is becoming a major challenge.

After you decide on how you will go about the exit from the market (selling of the business, change in successor etc.), remember to communicate effectively to your investors, employees and customers as Internal and external communication both are critical in entrepreneurship.

The post What is an Exit? When Should a Small Business Owner or a Start-up Think of Exit? appeared first on Dutch Uncles.

When should closure happen in a small business and when you should start thinking about it?

Preeti Verma — Wed, 03 Feb 2021 10:35:02 +0000

Starting a business is tough, but shutting a business is even tougher. And this goes without saying the the idea to close a business can be even an emotional and heart-breaking decision for all. But then letting things go beautifully in life is an art. Building something from scratches and then it falls like a house of cards, nobody surely dreams of that!

But knowing when to end the game can not only save you from further heartbreak but from draining a huge amount of money. On the other hand, there is no dearth of advice people tend to give when you are facing personal or professional crisis. But then how to bounce back from a failure business, and how to learn from it? Leaders or founders must use soft hands as well as hard hands to be successful. Yes, they must be pivotal but you can’t shy away from making the call to close or shrink an operation. It is always better to call a spade a spade!

Insufficient capital and unexpected growth are the two main reasons that contribute to the closure of the business. Not getting the expected results can also be an indicator that the business is not doing well and it is time to close a business. Also, the struggling, the grind and the lack of capital are the reasons why many entrepreneurs decide to call it off. Also, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives can take a plunge in the game. There can be many reasons behind this, but poor decisions and lack of research about the market are the main.

So, if you are not sure about your decisions and if it does involve some serious risks, then it is best to close your business. Deciding to give it a rest is one of the hardest decisions that any entrepreneurs could make. You will feel attached to the business since it was a result of long hours of hardships, sleepless nights and personal sacrifices.

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Insufficient capital and unexpected growth are the two main reasons that contribute to the closure of the business

Ineffective Business Planning

To start a new thing, planning is crucial. Prior to making a start, small businesses often overlook the importance of effective business planning. Entrepreneurs, who fail to address the needs of the business through a well-researched plan, are setting up their companies for serious challenges. Similarly, there is also a need for regularly reviewing your initial business plan to meet insurmountable obstacles throughout the course of its lifetime. To avoid pitfalls associated with business plans, entrepreneurs should have a solid understanding of their industry and competition before starting a company. A company’s specific business model and infrastructure should be established long before products or services are offered to customers, and potential revenue streams should be realistically projected well in advance. Creating and maintaining a business plan is key to running a successful company for the long term.

Missed Annual Revenue Targets? Check if it’s time to close a business

Three years after kick starting your business, it is advisable to check your company’s financial status. If your balance sheet doesn’t reflect profit and you are still out of money, then this does not mean that it’s time for you to take a loan. Taking a loan will not serve the purpose rather it would put you further into debt. This is the time, when you should seriously consider cutting your losses so that you don’t wind up in personal financial trouble. After all, the whole idea of incorporating, or having limited liability is to keep your business and personal finances separately. It is advisable to establish a time frame and try to learn the growth of your company, against that time frame. If you find that your company has not even reached the minimum point for profit, especially after this time frame, then it is time for closing the business.

Personal Funding

Always consider using your personal finances the last option to repay the business loan. This is considered as one of the biggest red flags where business owners personally put money into the business. This is a big blunder if owners are using their credit card to do so. If this happens more often than its time to take a call. At that point, even if the business has real potential, still it is perhaps better to put a brake. Taking on that debt by using your personal assets will not only hurt your bottom line but will distress your family and health. Take a break, regroup and start again. Accept that you have learned a lot of great lessons in the process. Learning is a subtle profit when you close a business.

Losing the Purpose: A sign to close a business

Think of the purpose that motivated you to start the venture or the business! This may happen negatively when your business starts fading and you become almost unrecognizable. This can happen because, to save your business, you unintentionally start toiling hard. As a result, you fail to consider your social obligations. This makes you socially maladroit and causes problems in your personal life.

Hard to Handle

You are subjected to stress and pressure when your business is failing. This can be extremely tough on people, who have no prior experience in handling pressure or are inexperienced in damage control. Also, for striving a business, you need regular planning and strategies to cater to the present and future markets. Time to time, it is necessary to expand your team as your business grows to handle the growing competition, handle stress and pressure. Don’t think twice about taking the decision so that you can deliver smoothly. Do not try to take orders or requests that are taxing for you and your team as it can cause a huge loss for the company. The helplessness to generate sufficient business profits is one of the common reasons to close a business. Business owners spend money on inventory, production overhead and general business expenses when operating a company. But spending too much money in an attempt to generate revenues can result in low profits. Dip in profits mean that business owners are unable to receive a sufficient personal income. Rather than suffering through low or negative profits, business owners should consider closing their company.

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Think of the purpose that motivated you to start the venture or the business.

Personal Health Takes A Spin

Health is wealth. There is an old saying: “If you lose your wealth, you have lost nothing, but if you lose your health, you have lost something.” If you find yourself becoming unhealthy, through weight gain, weight loss, fatigue, or heightened anxiety, then you should gauge whether your business is worth a decline in your physical and mental health. The dreadful feeling that you used to get in the pit of your stomach before walking into your 9-to-5 regular job. The feeling that forced you to quit your regular job and start your business in the first place. Have you started getting that same feeling again while walking through your office lane? If yes then this might be a serious sign to reconsider at least the direction of your business.

This can be seriously true, when you feel like running from your own business. These are the early signs that a person tends to avoid because it is about his/her business. But dragging this will make things awful. The worst part is this will not only self-destruct but hurt your family and deteriorate your relationship at the same time. Heed them early enough to save your company. End result, the emotional and financial hardship of your failed business will destroy you.

Your Mission Loses Its Shine

Have you started forgetting why you started the business? It could mean one of the two things. First, your mission was unclear, and it is still not clear. If vital checkpoints like purposes and a clear targeted customer are missing, then you could be spinning your wheels, spending unnecessary money and still not feeling fulfilled. Second, it could mean that you have lost your passion for your mission, one of the biggest drivers when times get tough. Without this drive, who or what else will push the business forward? And at the end, both things usually lead to the same unfortunate outcome. This is definitely a clear indication that your company is heading toward the danger zone. There is no denying that what was once an absolute passion can convert into a sheer burden.

You Love Your Product. But Do Your Customers?

Is your company providing a solution that your customers are actually looking for? Or is your company centred on something you care about and really, really want others to care about, too? If it is the latter, and you are not seeing positive feedback in your balance sheets, then it might be time to pull the plug. That’s a key sign to close a business. Sometimes the entrepreneur is so obsessed with his own product that he thinks he has the best product in the world. And everyone would fall head over heels in love with it. However, the exact opposite happens, and the short-lived honeymoon of starting up fizzle fast.

When Key Employees Shift Gears, it’s time to close a business

This can be really depressing, when your key employees and strategists leave you to join something else. Don’t get disheartened, rather take it as a caution. When your expert team starts dispersing and resigning from your company, try to scrutinize yourself with a few questions. Why are your employees leaving? Have your employees tried to tell you something, and you simply didn’t listen? Have you taken care of your employees properly? Are you paying them enough money? Try to learn from your mistakes and rectify them if you want to save your company. Make the connection with your employees. Make them realise that they are an integral part of your business. Include them in decision making activities. Ask for suggestions. Always boost their morale and treat them like partners rather than employees. But if it is beyond your fix and correction, then put the shutter down.

How Competition Analysis says it’s time to close a business

Competition represents the number of companies in the market competing for consumers. Small businesses can face tough competition in an attempt to maintain sufficient market share. This is highly likely that the owner closes his business if competitors continuously produce products at a cheaper rate. Owners unable to compete with larger competitors can suffer from decreases in market share. Large competitors can also offer new products that the small businesses are unable to compete with.

Try to see if your products and services still have the market? In this technological advanced age, the market strategies and assumptions that you made at the time of the launch of your product may not be working anymore. You should try to incorporate the latest trends that are happening in the market. Study the needs of the customer so that you can upgrade your products and services accordingly and make them available. But if you can’t upgrade according to the market, then you will be left behind. And as a result, you will never be able to pick up.

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