How evolving role of ‘compliance partner’ for MSMEs, startups will be critical in determining scale ahead

February 24, 2021 12:29 PM

Ease of Doing Business for MSMEs: The challenge with startups and MSMEs is the lack of general awareness of the regulatory landscape. Also, compliances are generally not considered as a part of core business processes.

delhi high courtIn the initial stages of starting a business, most founders are not structured.
  • By Alok Patnia

Ease of Doing Business for MSMEs: Over the last more than 30 years working with startups and MSMEs, I can safely say that more than 40 per cent of startups fail within the first four years. The contributing factors may be quite a few. The major ones, however, are cash flow issues and lack of structuring. Structuring may be in terms of an entity, related parties, or transactions (global + cross border). Managing tax and legal compliances are particularly important since these have a direct financial bearing on businesses. In these days of the new normal, with the ever-changing laws, this has assumed further importance. Startups and MSMEs need a professional tax and legal advisor in their team to ensure:

Effective planning of tax and legal compliances

The challenge with startups and MSMEs is the lack of general awareness of the regulatory landscape. Also, compliances are generally not considered as a part of core business processes. The availing quality professional advisory comes at a cost. In most cases, this cost is considered avoidable. This is a mistake. More so now since the laws are constantly changing. 7 out of 10 businesses end up paying unnecessary penalties and interest. Most of the new laws are layered and come with massive consequences for non-compliance. In some cases, these non-compliances may even lead to the shutting down of business and prosecution of the directors. Companies with global transactions are even more vulnerable since staying on top of national and international laws is a herculean task. Getting proper counsel on these issues can save startups/MSMEs from unnecessary stress and complications, save them from unsavory compliances and help them scale better.

Ease of Funding

A major factor in fundraising is compliance rating. A venture with pending compliances, weak internal controls, hidden non-compliances results in weaker ratings. Needless to say, a business with weak ratings is not an attractive proposition for investors. The investor’s due diligence is a much more stringent exercise and only the ventures with solid metrics and compliance health can get through. Apart from these, valuations and financial modeling require certain skills and industry experience. IB professionals make a living out of it. Founders are product specialists. A number game is something that is best left to a suitable professional. Having an advisor creates a bridge between the founders and investors. This bridge ensures a successful consummation of the founder-investor relationship.

Also read: Zomato now nearly $2B more valuable than Swiggy; valuation of India’s biggest foodtech startup up by $1.5B

Structuring of entity

In the initial stages of starting a business, most founders are not structured. The concept of shareholding/founder’s agreement, vesting and exit clauses, etc are alien to them. Sometimes even before starting the business, the founders are not clear on their objectives. Consequently, they end up starting with the wrong type of entity and structuring. Around 7 per cent of the deals that we closed had some or the other kind of structuring issues. This is where an advisor comes in. A global tax and legal advisor is likely to help startups in arriving at a proper structure, correcting and revamping structuring, and also global expansion.

Intellectual Property Protection

If your business is a product, service, or technology, then intellectual property protection is crucial. Failing to do this may result in infringement on intellectual property, with no legal remedy.  It is best for the interest of investors and founders to ensure that intellectual property is protected.

Focus on scaling up and profitability

Managing a growing business is like fighting a battle on all fronts – managing cash flow, nurturing human capital, managing the tax and legal compliances. All these while ensuring profitability and managing investor/stakeholder relations. The founding teams often struggle to meet these ends. This is again where a professional advisor can help. By taking accountability for major functions like compliances, investor relations, etc, they leave the founders free to concentrate on scaling their product, improve unit economics and ensure profitability.

To conclude, we will say that the need for a professional tax and legal advisor has always been there. What startups need to focus on is finding the right partner. Today, we live in a digital world and the doorways to global corridors are becoming more and more accessible, Startups and MSMEs do not just need a regular advisor. They need a technology-literate partner who will not only meet their compliances but will also be their partner in their scale-up journey, the role is multifaceted and is evolving every day. Ensuring that they have the right partner along is going to determine the success. They need a technology-literate partner who will not only meet their compliances but will also be their partner in their scale-up journey, the role is multifaceted and is evolving every day. Ensuring that they have the right partner along is going to determine the success.

Alok Patnia is the Managing Partner of TaxMantra Global. Views expressed are the author’s own.

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