Building Income versus Building a Business
Did the headline mean anything to you? Do you see any difference between the two or are they one and the same?
While you are thinking about it, here is a situation for you. This situation is actually a hint to the first two questions of this post. Is your head spinning already? If not, let us power on.
Let us say you have the choice to invest in either one of these two firms in our industry.
1. Firm A run by an individual who has 2 support team members and an AUM of 800 Crore spread across thousand plus clients. Now please don’t ask who this is. Not important or relevant.
2. Firm B with a team of 20 people with a few professionals responsible for business development. This firm has an AUM of 600 Crore and has 400 clients. This firm has lower revenue, and far lower profits than Firm A.
Which firm do you think is more valuable? Which one would you invest in?
If you are like many, the first one seems more enticing because it has higher AUM, higher revenue and higher profits. At the same time, if you were the owner of business A, you would think that your business is more valuable than firm B. You might even start comparing yourself to Prudent (because it’s a listed entity) and think “Even I should get this multiple for my business”.
But that would be a critical mistake. This post explores the reasons why and what you need to do (briefly) to correct this.
Before I explain the mistake with a few lines, there are a few things that the founder of Firm A should think about.
How fast has Firm A grown versus Firm B? or What are the growth rates of both the firms of the last 3-5 years?
Thus, what is the potential growth rate of both these firms?
Additionally, there are things such as the value proposition of both the firms, the process of growth of both the firms, who has more potential for growth within the current client base, what would it take to tap this growth and hundreds of other things.
While Firm A has built a good income, the founder has not built a business. He has built a good income for himself. In fact, a great income for himself. So, a big pat on his back for this accomplishment. And there is a but coming soon.
But he has not built a business.
There is a difference between a good income (or lifestyle) and a good business. Let us not confuse a good income with a good business.
Many in our industry have created a great job for themselves. But is this really a business?
Many have built a good book of business (assets). But is this really a business?
Many have created fantastic incomes and lifestyles for themselves. But is this really a business?
Ask yourself these questions?
The answer to all the questions is a clear and amplified NO.
A job is one that stops when you stop working. Now just because you get income even when you do not work does not mean this is a business. It is simply the nature of our revenue model. There are many who continue to get incomes even when they have not invested in their firm. But the writing is on the wall. The growth will stagnate and eventually decline. You will lose clients to competition and unknowingly you would have destroyed the value of your firm.
On the other hand, a real business is one that can continue to flourish beyond you…or even in your absence. Now there are various formats here such as a partnership firm, a multi professional firm, an enterprise (with a professional management team) and so on. I am not getting into the nuances of these formats but rather keeping it simple. There are pros and cons of each but that is the topic for some other day.
A great business is one that has people, systems, processes, technology and client experience and it continues to acquire clients in your absence. In fact, it grows without you. A great business is one when there is a clear succession path in place. This means that you have at least identified the next generation of leaders. You have built not only the technical capability but more importantly the business development capability (and the client acquisition discipline).
A business that can do that is far more valuable than just cash flows and client assets. Needless to say, Firm B is far more valuable than Firm A.
And thus, it is common business sense to invest in building a business with this perspective in mind. An investment in people, systems, processes, technology and client experience can enhance the value of your firm substantially.
A firm that is growing is valuable for everyone.
You can hire great people. There are career paths for everyone in the firm.
And you can create great value for yourself and your team.
The question however that you need to ask is – How can the firm become a self-sustaining business beyond me?
Have you asked this question to yourself?
If you have done this hard task in your busy life, another pat on the back for you.
What is the answer?
Fill in the blanks…
And what is it going to take to build one…
Finally, I am not saying that one route is better for you than the other. It is your choice. It is your life and it is your preference. The answer to which option is best for you clearly depends on what you really want.
If all you want is a great income, keep costs low and continue doing what you are doing now. Because clearly your focus is not on building a business (or amazing value) that prospective buyers would love to pay for. And do not be under the illusion that you have built a good business. But if you want to build a real business, it is going to take a lot more than just building your income (and obsessing about costs).