Building an Income versus Building a Business

Amar Pandit , CFA , CFP

Amar Pandit

A respected entrepreneur with 25+ years of Experience, Amar Pandit is the Founder of several companies that are making a Happy difference in the lives of people. He is currently the Founder of Happyness Factory, a world-class online investment & goal-based financial planning platform through which he aims to help every Indian family save and invest wisely. He is very passionate about spreading financial literacy and is the author of 4 bestselling books (+ 2 more to release in 2020), 8 Sketch Books, Board Game and 700 + columns.

In response to last Tuesday’s post “The Hidden Iceberg”, I received an interesting email from Girish Vaidya, a mutual fund distributor from Pune. He wrote “Amar, Thank you for your wonderful insights and thoughts. I look forward to your posts every week and read each one of them. This week though, I was puzzled by a remark you made.

You wrote the following lines – We even refuse to believe there is an iceberg hidden right in our business. The iceberg that’s causing our business value to erode. In both the above cases, the founder(s) have built a good book of business, but they have missed an opportunity to build an actual business (and therefore reducing the real value of their business). And there is an iceberg right below their feet now (and it’s not the upcoming TER Cut).

While I understood what you meant by the hidden iceberg, I didn’t understand the difference between a book of business and business and more importantly how a book of business reduced the real value of my business. Can you kindly explain this?

As I read Girish’s question, I realized many of you too might be left wondering about the same question. Because to be honest, I had not connected the dots and made it clear. Did you have this question too?

Even if you did not, you will certainly benefit from understanding a very important concept – the difference between building an income and building a business, and how either of the two impacts the value of the business. But first, some basic definitions.

Book of Business is another name for an account list or a relationship list. Basically, it represents a list of clients you manage as part of a business. In our industry, we also measure it in terms of a number – Assets Under Management (AUM). A business on the other hand is something else. A business refers to an enterprising organization of people, processes, and systems that engages in a commercial or professional activity.

A book of business allows you to build a solid income for yourself. Let me give you the example of this gentleman with a Rs.600 Crore Book (and 2000 clients). The name is not important here. Now this person has built a solid income for himself. With this income and diligent saving, he has also built a solid portfolio of investments. Kudos to him. But what about his business? What about the value of his business? As investment professionals, we know that a person and her/his business are two separate entities. Each has a life of its own.

And we all have a choice – to build our income or to build our business. Why not build both, you might wonder. Absolutely smart…I left that one out on purpose. That’s possible too (and is likely the best option), provided you first invest in your business. However, the situation in this gentleman’s case (and that of the majority of professionals in our industry) is this… Wait, hang on, are you still wondering who this is…Let’s call him Rajaram for the sake of this post.

Rajaram has an excellent roster of accounts (not deep relationships). As I mentioned, he has built a solid personal income and a sizable portfolio. In his business though, there is nothing. There are no people except for 1-2 back-office boys. There are no processes. There are no systems except for reporting and accounting software. There are no assets. There are no investments made. Everything is taken out as personal income except for the negligible monthly business expense that needs to be paid out. Therefore, there is no business value created. All that is left in the business are future cash flows (which by the way are under threat too…not from TER Cuts…but from the other competitors who also serve his clients today). Everything revolves around Rajaram. Should something happen to Rajaram today, what do you think will happen to his 2000 accounts? Is there a backup that he has? No… Is there some form of continuity? No…Is there some form of succession? No …

But in most of his accounts, there are competitors, who will happily take over. Thus, his clients are not unduly worried as there are other professionals who will likely take over.

And Rajaram’s business might be over in the blink of an eye. While this is an extreme scenario and we pray that this does not happen to him or to anyone, it’s disheartening to see people letting the value of all their hard work and effort erode to nothing.

All is not lost though. He still has time. Girish still has time. You still have time. It’s not too late to understand the difference between building an income and building a business. It’s not too late to transform a book of business to a business. And the best part is that you don’t have to invest aggressively. You can use the power of collaboration to work for you. You can partner with the right people (people who have other valuable and different skill sets than the ones you possess, namely – client experience, processes, systems, people, growth, marketing, technology, and building a futuristic firm) to help you protect the value of the work and effort you have put in, and to help you build a valuable business.

There is an Emma Goldman quote that comes to mind here– ‘What I believe is a process rather than a finality.
In simple words, what you really require today is a change in what you believe to be true.