BSP illustrative Case Studies Business Sale Purchase Targeted

BSP illustrative Case Studies Business. Sale. Purchase

Targeted Customers of Network Partner ● Sole Proprietor & Family run business ● Traditional Business house which needs Consolidation & Expansion ● Business Houses without succession planning ● Retail Industry, Transportation/Travel Agency & small scale Business ●Hotel, Restaurants, Resorts ●Business with valuable underlying asset like a Property, Factory, Large Departmental Store etc ●Other SMEs 2

Diagnostics Centre ● There is a diagnostics centre run by a Sole Proprietor Mr. X with 2 testing centres. Owner, Mr. X, is ageing above 70 and does not have any succession plan. Neither can he put the required amount of energy and resources to scale up the business. Ø Industry: Diagnostics Centre Ø Revenue: ₹ 2 Crores/Annum Ø Net profit: ₹ 40 Lakhs/Annum Ø Valuation: ₹ 4 Crore (10 times the Net profit) 3

Proposed Plan of Action ● An experienced professional- Mr. Y from the diagnostic field contacts the owner and guides him to join hands with him to scale up the business in a professional manner. He proposes the following plan of action: ● Value of existing business of X = 4 Cr in FY 2016 ● Y will purchase 60% stake in the business for 2. 40 Cr ● Y will become the CEO of the business while X will also continue as a stakeholder. They convert the sole proprietorship into XYZ Pvt Ltd Company ● With the help of Y’s professional experience, funding capabilities, branding and marketing, the business scales to 8 Cr revenue within a year and earns net profit of 1. 20 Cr @ 15% even after deducting the funding cost and overheads for branding, marketing and packaging. ● To scale up the business add more products and services to its portfolio, XYZ Ltd. makes a business plan for expansion and further funding and approaches potential investors ●. The investors impressed with the results of the professional management and in view of the growth potential of the business, offer to extend further capital infusion of 6 Cr for a 25% stake valuing the business at 24 Cr. In FY 2018 4

Valuation Chart Title 6 7. 2 10. 8 5 X's Stake Y's Stake Investor's Stake (Figs. In Crore)

Valuation XYZ Pvt. Ltd. 7. 2 6 10. 8 X's Stake Y's Stake Investor's Stake 30% 25% 45% ( In Crore) X's Stake Y's Stake Investor's Stake 6

Journey of original owner-X X's Stake Valuation X’s Net Worth 8 12 9. 6 Cr. 10 2. 4 Cr. 8 7. 2 Cr. 6 4 7 4 60 4 Cr. 40 2 1 0 0 Stake Valuation 100 80 5 2 Pre Acquisition 7. 2 Cr. 6 3 4 Cr. 120 Post Acquisition Sale Proceeds 20 0 Pre Acquisition Stake Valuation Post Acquisition % Stake 7

Journey of Investor- Y Y's Stake Valuation 12 70. 00% 10. 8 Cr 10 50. 00% 8 40. 00% 6 30. 00% 4 2 60. 00% 20. 00% 10. 00% 2. 4 Cr 0 0. 00% Pre Dilution Stake Valuation Post Dilution % Stake 8

Visi cooler & Freezer Indian Manufacturer ● A Visi-cooler & freezer Indian manufacturer with a turnover of around ₹ 300 Cr. in 201314 and one of the largest supplier of Visi-coolers to Coke and Pepsi. ●Operated on very low EBITDA margin of low single digits with heavy working capital burden. ●Interest cost ate away most of the operating profit. ●Mostly in low margin wholesale business without clear focus & future strategy 9

Acquisition by Japanese Firm ● Japanese MNC acquired a majority stake from the promoters 4 years back ● Japanese MNC entry triggered massive upgrade in the Indian manufacturer in all respects like: a) Products portfolio expansion b) Penetration into new markets segments c) Building distribution network. d) New manufacturing facilities benchmarked to international standards. e) Better financial discipline and working capital management. f) Sales increased by 1. 5 X and EBITDA shot up by 4 X and EBITDA margins more than doubled. g) Started generating much higher operating cash flows vis-à-vis negative cash flows. h) As a result, value of the promoters remaining stake is far more than the original stake. 10

Acquisition by Japanese Firm Visi-Cooler Manufacturer In Cr. 600 611 500 400 300 580 491 424 300 200 100 0 25 92 24 2013 90 2014 Sales EBITDA 44 104 2015 Working capital days 99 87 63 2016 62 18. 00% 16. 00% 14. 00% 12. 00% 10. 00% 8. 00% 6. 00% 4. 00% 2. 00% 0. 00% 2017 EBITDA-% 11

Business transformation post acquisition 3 Y CAGR 60. 00% 53% 40. 00% 30. 00% 20. 00% 13% 0. 00% Sales EBITDA 3 Y-CAGR 12

Promoter’s journey pre and post acquisition 800 Promoter's Net Worth Promoter's Stake Valuation 600 700 Cr. 600 500 100. 00% 500 Cr 400 500 300 400 300 200 120. 00% 300 Cr 100 80. 00% 60. 00% 300 Cr. 200 40. 00% 100 20. 00% 0 0 Pre Acquisition X's Net Worth Post Acquisition 0. 00% Pre Acquisition Post Acquisition Stake Valuation % Stake 13

Japanese MNC’s investment & current valuation estimates 1200 Investor’s Stake Valuation 10. 8 Cr 1000 Cr. 800 600 400 2. 4 Cr 200 Cr. 0 2013 2018 Investor's Stake valuation 5 Y CAGR = 38% 14

Resort ● There is a resort at a good prominent location but badly run and managed by a doctor who does not possess the expertise and know how on how to position the resort and run it efficiently and profitably despite having a good property at a good location. The valuation of the resort is ₹ 300 cr. ●Resort has around 30 rooms with average occupancy of 40 -50% and making losses/break even at tariff of 2500. ●Doctor approaches an experienced professional in M&A field – Mr. A - to help him improve his resort, its footfalls, revenues and margins. 15

Proposed Plan of Action ● Mr. A proposes the following plan of action: ● Positioning of the resort to be done properly so that right target audience is attracted towards the resort. ● Transform the website as it is a critical part of the resort’s marketing and revenue generation. High Quality photos, videos, coverage of the resort, facilities, lawns, swimming pool must be put up on the website so as to attract the prospective customers. ●Improve branding and digital marketing ● Infuse some extra funds to improve the interiors, pool, furnishings, food and so on. Sometimes maintenance expense on badly managed shabbily kept property is much more than a properly managed property. ●Even with the infusion of funds, resort can easily recover the additional expense by doing the premium positioning, increasing occupancy by offering better facilities and so on. ●However it is not possible for the Doctor to do all these transformation by himself. Therefore he decides to sell the majority stake in the resort to an investor and retain some stake with him to benefit from the 16 improvement in the resort.

Proposed Plan of Action ● Resort’s market value is around 10 Cr and Investor offer the Doctor 5 Cr for 50% stake. ● Investor further infuses debt funding of 2 Cr to improve the resort’s positioning, branding/marketing, website, facilities and interiors etc. ● With the proper management, marketing and focus, Investor is able to increase the occupancy of the resort to 70 -80% with average tariff of 5000 per night. So the revenue improves: From: 2500 x 365 x 40% = 109, 50, 000 To: 5000 x 365 x 80% = 438, 000 Annual Increase = 328, 50, 000 Additional expenses= 50% of additional revenues Increase in expenses = 328, 50, 000 x 50% = 164, 25, 000 Net increase in margin = 164, 25, 000 Additional debt pay back time = 2/1. 64 x 12 = 15 months Annual earnings from the resort after full debt repayment after 15 months= 1. 64 Cr 17

Proposed Plan of Action ● Investor & Doctor get an offer of 15 Cr for a 50% stake due to Increase in resort’s market value due to re-positioning, improvement, branding and transformation. ●Both accept and get 7. 50 Cr each and sell 25% stake each to new investor. ●Investor cost of 25% = 2. 50 Cr (bought from the doctor), gain = 7. 50 Cr – 2. 50 Cr= 5 Cr or 200% ROI ●Doctor’s gain = 5 Cr (sold to investor-50%) + 7. 50 Cr (sold to new investor-25%) + 7. 50 Cr (value of his remaining 25% stake), Total = 20 Cr Vs the 10 Cr total value when he owned 100% and may be just breaking even or in a worse situation of incurring recurring losses. 18

25 Proprietor's Stake Valuation Proprietor's Net Worth 12 120 10 20 20 Cr. 15 8 10 Cr. 5 0 Pre Acquisition Post Acquisition Proprietor's Net Worth 100 80 7. 5 Cr. 6 10 7. 2 Cr. 60 4 40 2 20 0 0 Pre Acquisition Stake Valuation Post Acquisition % Stake 19

Investor’s net worth (incl sale proceeds) & stake journey 12 Investor's Stake Valuation Investor’s Net Worth 8 7 10 10 Cr. 8 5 Cr 4 7. 5 Cr 4 40. 00% 5 Cr. 30. 00% 3 5 Cr. 20. 00% 2 10. 00% 1 2 0 0 Pre Dilution 50. 00% 6 5 6 60. 00% Post Dilution Investor's Net Worth 0. 00% Pre Dilution Stake Valuation Post Dilution % Stake 20

Key takeaways from the case studies Large number of SME business need professional attention Current structure bottleneck in scaling-up, positioning, productivity, valuation & returns Due to lack of - competence, focus, management, succession planning, resources, marketing, interest, energy, imagination , funding etc Hence the need for professionals like CA (primary & trusted advisor) & platform like BSP (SME focused) CA Network Partners and BSP Platform can together create a winning combination to 21 address these gaps and benefit from such opportunities

Professional opportunities for BSP Network Partners- Huge Potential Pre-sale diligence Target Searching Valuation & LOI Multiple Revenue Streams from One Association Financial Advisory Post merger Legal Activity Legal/ Liasoning & SHA 22

Potential for- increase in Professional Standing, Learning & Skill-Set Enhancement Opportunity to enhance firm’s professional standing M&A is Untapped Potential for CAs in India Leverage on existing infrastructure, resources and upgrade Skill upgradation- M&A, valuation, packaging, marketing, diligence, negotiation Overall transformation potential is Huge 23

High Level Deal Flow thru Network Partners Business CA- BSP Network Partner BSP Platform M&A Deals Common EPlatform 24

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