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The threshold levels of going from sole proprietorship to a private limited company (partnership is not necessary) may depend on your need to raise capital. As a sole proprietor, your risks are also very high while in a private company, it is limited to the exposure in the company. Partnership makes sense only in the initial stage when two or more get together to start a business.

A private limited company becomes important when you need external stakeholders involved in your company. Whether it be financing, in terms of working capital or venture capital financing, one must have a private limited company.

The ways to go public varies in different markets, market situations and economic cycles. One should have the need to go public, which means you have the need and intent—because public money is expensive. Unless you have a good need and requirement for the money and you get the valuation you think you deserve, this is the time you should look at an IPO.

Earlier we’d say if your company has a turnover of Rs.100 crore, it is a good time to go public. These days we say it is not a good idea to go for an IPO with a turnover of less than Rs.200 crore. A thumb rule that we use is that for a Rs.200 crore IPO, the cost can be as high as two to three percent and a large amount of the cost is fixed, so your expenses will not come down if the issue size is halved. One should ensure that there is no idle capital. The challenge that they face is recognizing the fact that their business is growing beyond themselves and they need functional expertise.

You may soon need someone for marketing or finance. Finance is one area which is very little understood and as you grow to the next level, you may also need someone for human resources, someone who is a professional in her/his field. As a company grows, entrepreneurs must accept that it is time to hand over functionary areas to specialists. Many entrepreneurs are not able to scale when they are not able to cross over this glass barrier because they are unable to recognize and gauge the fact that they need to take a step back.

One has to realize that his efforts and expertise can bring the company to a certain level and to scale up, he needs professionals to come in. Entrepreneurs, when they make their business plans, talk of how their business will grow, expand into markets, how they will look at pricing strategy, how to add product or service lines. But when you look at the salary breakup, you find there is no provision for a CFO, head of HR, marketing head and other professionals.

The next set of problem is on how to scale up. Do you take a business model, take a small location or take one service or product line and make sure everything works like clockwork and then replicate this model in other areas? Or do you take a very small piece of product or service line and then take it national?

Another challenge is attracting talent. Even when you move from a startup phase to an early growth phase, you would probably need resources which larger companies have but you will not get the same kind of talent.

You need to have innovative remuneration structures to incentivize them. This can be in the form of ESOPs, equity participation and share in profits; then you hope that it will incentivize them enough in an incremental basis as you go along, so that when you scale to different levels, they are with you.

Finally when you get equals and almost equals in your organization, you will need to be able to share control. For example, if you get a partner, his objective and your objective must be similar and one needs to be accommodating.

KALPANA JAIN is Senior Director, Deloitte India.

©Entrepreneur May 2010

Tags:
partnership, private limited, proprietorship, sales, scale up