Scak Textiles: The Way Forward for Next-generation Entrepreneurs
(7 pages of text)
In January 2020, the chief executive officer of the family-run business Scak Textiles LLP (Scak), based in India, was thinking about how the company could achieve a new milestone of ₹500 million in revenue by 2025. He wondered why the company, after coming so far, could not achieve that number with a sustainable margin. What else could he do to help Scak reached this target, and how could he solve the bottleneck of resource constraints?
The bright next-generation entrepreneurs of the family were taking an active interest in the business and had strategic plans for enhancing the effectiveness of both business and revenue models while navigating the ever-changing business ecosystem. The promoters of Scak wanted an outline of the entrepreneurs’ recommendations with adequate assumptions and a business valuation. The promoters would expect a 15 per cent return on additional capital invested; the corporate tax rate would be 30 per cent. The next-generation family members saw three possible options: add manufacturing operations, establish e-commerce platforms for business-to-business and business-to-consumer businesses, or enter the business of exporting. Could they take up all three options, or should they maintain the status quo? The value and future of Scak would depend on their decision.
The case can be used in undergraduate- and graduate-level finance and accounting courses such as corporate finance, business valuation, financial modelling, financial statement analysis, entrepreneurship, and family business. The case highlights the challenges and dilemmas facing the original owners and next-generation entrepreneurs of a three-decades-old family business. Their dilemma is focused on how and in what direction the business should grow and how they can resolve the issues surrounding the need for an equity injection in the future. Students can deliberate on how to de-risk the business model and on what sources should be used to provide opportunities for growth while limiting the dilution of the ownership share of the family members. After working through this case and assignment questions, students will be able to
- perform a relational analysis of financial variables and assess the profit-earning abilities, financial strength, and stability of a firm;
- create and analyze growth strategies in a family business—including the evaluation of various strategic options for growth that follow the existing business model and take advantage of new opportunities;
- assess future cash flows from new business or revenue models and establish the dependability and reliability of these models for the future;
- evaluate and decide on cost-efficient options for the sourcing of funds, such as equity in cash and from promoters, private equity firms, high-net-worth individuals, and loans from banks; and
- determine the value of a business at both the pre-money and the new-business plan stages, using the discounted cash flow model, relative valuation methods, or a combination of these.
India, Small, 2020
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