Apohan has interacted with around 900 small and medium enterprises (SMEs) in India for understanding their various problems and aspirations. Apohan has found that they have done a commendable work even as the first generation (or occasionally second generation) entrepreneurs basically from a technical background. They have excellent knowledge of their products and their applications. They have a detailed know-how of the various manufacturing technologies. They know how to commission a new project successfully and how to make strategic technical changes. They know how the entire value chain works. They know how to take care of manufacturing or process operations. They have the necessary marketing & sales skills required to sell their products. They are aware of domestic and international competition. They have a strong network among the clients, suppliers, workers and various other stakeholders. They also know how to produce & sell a product profitably. Also, they know how to manage typical internal and external problem events. Isn’t all this praiseworthy for a person who has started from zero? Yes, definitely it is. But the overall story is not as happy as it should be.
These small and medium enterprises can be divided into two types:
The first type is those who know they are capable of it & want to ride on the opportunities in the market, grow to an enviable level of success and wish if they had all the money to do all this – to operate at 100% capacity, to operate in 3 shifts, to refurbish the plant with minor investments, to replace old plant & machinery of new technology, to undertake new greenfield projects, to do digitization & modernization, to hire high-quality manpower for growth beyond inflexion point, to explore new products, new geographies, new market segments, to forge new business alliances, to undertake exports, to have an international business presence, to acquire synergetic companies, to diversify & protect the business from sector risk, to rationalize capital structure to increase the investor returns in long-term, etc.
The second type, again of highly capable & potent businesspersons, is those who are suffering from declining revenues, poor profitability, poor return on investment, shortage of capital even to operate at break-even operating capacity, a deficit of running expenses, fluctuations of cash flows, defaults of operational creditor obligations, defaults of financial creditor obligations, recovery actions by private lenders, banks, NBFCs, other institutional investors, ARCs & similar bodies, from loss of value created in business for so many years, from personal stress due to fear of auction of personal property, court cases for business-related reasons, from disputes between shareholders, disputes between directors & other stakeholders.
It is very rare to find a business which has neither a financial problem nor a growth aspiration.
The root cause of these business problems (or of lack of fulfillment of business dreams or stagnation) is not technical incompetence, operational incompetence, or marketing incompetence or even developments in the market in most of the cases unlike what is popularly perceived about medium & mid-size businesses (or SMBs). No, these aren’t the reasons for stagnation or failure!
The reasons are no systematic action or no action at all on the following four fronts by the SMBs: Business strategy, corporate management, financial (and especially financing) strategy, contracts (or legal) strategy and strategic transactions (such as equity funding or mergers and acquisitions).
Business Strategy Deficit: The businesses don’t have a documented business strategy. Decision making even for very serious matters is done in a haphazard and impromptu manner. There is no business plan. Everything is undesirably fluid. Top management, which is already very lean, gives all-time on routine work & compliances.
Corporate Management Deficit: The structure of business group & legal nature of entities is not appropriate. Further, the roles, responsibilities, rights, obligations, awards and incentives are not written through clear stakeholder agreements.
Financial Management Deficit: The requirement of financial resources is not projected accurately considering foreseeable or unforeseen circumstances and there is no arrangement made for the same. No capacity is developed to avail complex types of fund sources based on merit than security. No measurement of financial performance is done, forget ways to improve the same. The word finance, especially businessman’s finance which is the easiest, is treated as psychological & taxing enemy for no reason.
Contract Management Deficit: No contracts are made even though many complex commercial relationships are established. If at all contracts are prepared, they of very poor quality & don’t incorporate treatment of what has been agreed & what will be the principle of treatment of something that may unfold.
Transaction Management Deficits: SMBs are not expected to know strategic transaction & their nuisances, as the infrastructure is not there with even many big companies. But, unfortunately, SMBs lack even the basic know-how about identifying company’s strategic problems, knowing the corresponding scope of work, knowing the name of the type of consultant who does that work, knowing how to engage them, knowing what are their deliverables & how to review them. In the other cases, it is the deficit of capacity; in case of strategic transactions (equity funding, M&A, share transfer, corporate transaction, JVs, restructuring, & 10 more) it is even absence of capability get served to pay consultants!!!
Technocrat promoters always focus on building the technical capacity of a company when they have money & time. They completely ignore the above areas & wonder for life why there are not growing into bigger companies despite having so many technical & operational merits over many big companies they know!!!
Typically a small and medium enterprise has a very lean top management, typically one or two executive directors and 2-3 middle managers. But they are not exempted from any business functions that the large companies have to carry out. They have to look after: Promoters’ matters, shareholder relations, board of directors matters, investor/banker relations, strategic management, risk management, business alliances, corporate management, industry memberships, corporate governance, project planning, project development, project management, certifications, permits & approvals, supplier development, procurement, supply chain management, operations, production, manufacturing, maintenance, marketing, business development, sales, distribution channel, research & development, administration, human resources, IT – HW, SW, funding, financial management, investment, legal issues, compliances, public relations, charity, CSR, etc. The list of activities that a businessperson has to carry out is unending. Each of these activities is essential in one way or other to stay afloat or to grow. The limited resources at the top cannot complete all these activities satisfactorily and in time. The case becomes even more difficult for the companies run by only one top-level person without any middle management to support him which is the case of a lot of SMEs. That is why many SME companies typically do not undertake growth-related activities which require even more time as the top management does not have sufficient bandwidth to get involved in these high investments, high risk, critical activities where owners have no past experience, no network of experienced professionals, no clarity of purpose & process.
Banks as institutional lenders don’t understand the merit or the potential of a company. They go by their rulebook. They require security for margin money. The number of funds they sanction are unrelated to the actual requirement of the company. Banks are good weather friends as it becomes difficult to get additional loans from banks if the condition of the company is not good. The opportunities in the market pass by and the businessperson cannot tap them because of lack of funds. Banks are very particular about the recovery of their funds especially in terms of timely repayment of the interest and the principal amount. They are apathetic to the seasonal nature of the business and unfortunate events in the market. Banks don’t interfere in the day-to-day operations but they take the complete control of the company if the account becomes a non-performing asset (NPA). They need personal assets as security and personal guarantees. In unfortunate times, this leads to personal financial misery of the businessman. The terms and conditions of bank loans are almost non-negotiable for all the practical purposes. Apohan has observed that banks even don’t appreciate that their timely consideration or enhanced credit or relaxation to their client can prevent their own NPA. The situation from other lending institutions is not very different. For example, it might be relatively easy to avail a loan from NBFC, but they come at a higher cost and with the same implications as the banks.
Due to the absence of funds, companies cannot increase the scale of operation and avail benefits of economies of scale. They can’t build marketing infrastructure & brand, can’t enter new markets and new products. They cannot modernize existing plants, invest in technology or R&D. They cannot revamp the capacity, undertake new Greenfield and brownfield projects. They cannot settle the sundry liabilities in a timely manner. They operate at a lower capacity due to the shortfall of working capital. They cannot avail the bulk buying advantage. They don’t become eligible for bidding many tenders. They have to make the bank payments in time, and hence, due to market fluctuations, they cannot pay the suppliers or employees or the lenders themselves.
Equity funding is a complete contrast to bank loans. It is available based on the merit and potential of the business and not the current financial situation on ownership sharing basis. It is available in as much quantity and for as much term as needed. There is no requirement of any security or guarantee. There is no guaranteed return like interest to be paid the investor. There is no need to pay the initial investment back. The entire risk of business is taken by the investor as much by the original shareholders. If the business fails, there is no punishment to original shareholders or directors in financial terms or otherwise from the investor. Equity investors are much better than banks in understanding a business but they still cannot run a business the way a technocrat promoter can run. However, the financial, corporate & strategic experience of an equity investor can come handy for a business. This looks simply amazing! Isn’t it? Let’s see why it is relatively so uncommon.
The main reason for the lower popularity of equity funding is the absence of organised market and any exchange platform. At least as of now, mostly the deals take place through personal networks. These networks are many a time blocked by the deal brokers who expect use share of success fee for virtually no scope of work in place of a finder fee. Secondly, equity funding comes with a lot of, a hell lot of, due diligence at the entry stage ( It is good as well). The investors make an investment only after they assure themselves that they are going to make good fortunes from the equity investment opportunity. Also, an investor requires that a business is ethical and transparent. The process of equity investment is very rigorous, time-consuming, and costly. Equity investors are not interested in run-of-the-mill companies. They want only high potential companies or strategic companies. Also, the process involves many kinds of professionals such as company secretaries, chartered accountants, business lawyers, valuation experts, technical experts, market experts, forensic experts, etc. It is like the Grand Indian marriage! Unlike banks, it takes 6 to 9 months to close equity investment deal. The cost of raising equity funds is also much higher than the processing cost in the banks.
Now, let’s look at the SME businessman side. When it comes to the SME businessmen, it has been observed that there is a tendency of aversion for equity partnerships. Stories of failures of equity partnerships in the industry do the role. Apohan has observed that the SME businessmen are aware of only the accidents and just don’t know the underlying traffic volume. Lack of awareness & absence of skills in financial communications is a fundamental problem with SME business leaders. Inability and unwillingness to provide business documentation is another reason. Dilution of control or interference in the management is one main reason for an autocratic or closely held management. The requirement of sharing of profits & fortunes is another reason. The unreasonable expectation of valuation during deal negotiations is also a major reason. Inability to & uncertainty of managing business partnerships is also a major reason.
Investors look for the companies which are systematically organised & professionally run. They look for a clear business strategy to achieve growth, generate wealth & manage risks. They look for professional corporate management in terms of legal form, constitutional documents, stakeholder agreements, etc. They also look financing strategy to maximize returns of investment. Equity investors need a lot of documentation to assess the authenticity and the potential of growth which SMEs fail to provide as the documentation is absent in first place or they cannot compile it. This documentation in M&A is many times the one required by the banks.
Also, SMEs mistake poorly connected brokers for M&A consultants or investment banks. They fail to bring onboard any serious investor. This creates a doubt about the very possibility of getting funds in the minds of SME businessmen and stop making effort.
The journey of a business can be very rewarding, enriching, thrilling self-satisfying. Many businesses have reached such enviable coveted destination. An optimistic humble start, initial traction, fluctuating conditions, steep learning curve, break-even, normal operations, steady growth, full capacity utilization, cash-rich operations, capacity augmentation, business alliances, exports, new greenfield projects, geographical expansion, lateral expansion into similar products, backward & forward integration to play a larger role in the value chain, awards & recognitions, brand building, IPO, acquisitions, international business, diversification, conglomeration!! Why can’t you aspire for such a wonderful journey?
Why are that businesses don’t grow despite being led by highly competent and motivated entrepreneurs? Why are that businesses fail despite many precautions being taken by the promoters? The reason is that they do not tap one of the major resources and recourses, i.e. Mergers and acquisitions for equity funding.
This is where Apohan comes to your assistance with its end-to-end, customised equity funding advisory and implementation services.
We are very choosy when we select a business for equity funding services as otherwise, investors will not make an investment wasting everyone’s resources. We help the businesses where the management has a record of financial integrity; the company has sound competence in its technology, products, services, markets & competition & the trends in them; where there is a priced demand for the products that can create sustainable and handsome profits, where there is marketing capability & marketing infrastructure in place. There should be the readiness to undergo the rigorous M&A process. The overall business proposition must be viable with of returns on investment in the proportion of risks taken by the investors, where they offer for an equity stake to be made to an investor is reasonable and rational. The focus of the business should be availing adequate equity funding to achieve a conclusive turnaround or completion of growth initiative with secondary regard for retention of control.
We present these investment-worthy businesses of medium sizes (with past peak revenue or net worth or assets of more than Rs. 25 Crore and investment requirement of more than Rs. 10 Cr) in the market to the investors who want to make an investment in a private business.
Similarly, we identify the right kind of investors for each SME that aspires to get equity funding. Apohan’s preparation of exhaustive company documentation, financial models & M&A contracts reduces the risk perception of the investors.
Apohan prevents financial failures through long-term strategic equity infusion advisory & assists the stagnant businesses to realize their growth dreams through equity partnership!!!
Join us & make your future!