Remember Arjun’s teenage son Abhimanyu, who entered the chakravyuha, but could not exit?
Think of a ‘warrior’, who has fought hard to set up a small business and grow it to a good size and profit, but can’t exit from it now.
An example…
After managing sales in various corporates for many years, Sudhin started training youngsters to sell. He selects young men and women with mediocre academic credits, but likeable personalities and good communication skills.
Sudhin trains them for several months and presents them to multinational corporations (MNCs), who need salespeople. These MNCs prefer to choose from among these pre-selected and well-trained candidates, rather than do all the laborious recruitment and training. Obviously, they pay Sudhin a nice fee.
Sudhin’s company generates steady annual profits of over Rs1 crore. He employs a few trainers and operates from rented premises with very little capital equipment.
Now what?
Sudhin is 68 years old. Over 46 working years, he has made enough money. Time to relax, enjoy life, and do all the things he never had time to do.
But what about his business?
Sudhin is the key-man in his business. Yes, he does have staff, but they are trainers, not managers or accountants, neither do they have his reputation and relationships in the MNCs. If he leaves, the business will collapse.
Here is a sustainable business which has created value over the years. At even a 10 times multiple it is worth over Rs10 crore. Alas, it is worth but little if the key-man is missing.
Question – how does this key-man exit?
Sudhin has checked out some possibilities:
- Family. Unfortunately, his only child is not interested in his business – she has her own life.
- Investor. Sorry, no investor will put sizeable money into a small business which will need managing.
- Successor. Sudhin tried to delegate his work to others, but it did not work out because his people simply did not have his skills.
- Hire a manager. Problem – a person with the right skills, working full-time, would ask for a salary which would eat up most of the profit. Pointless!
Sudhin has three (unpalatable) choices:
- Keep on working and making money until he has to stop. What for? He does not need more money – he wants leisure and enjoyment.
- Close down the business in an orderly manner, pay off his employees and enjoy the money he has made already.
- Walk away, let the employees do what they can and allow the business to die slowly.
All three choices will destroy the value he has created with much time and effort.
Wait – he is not a lone example. I know of at least three people in a similar situation:
- An ex-banker (66), turned investment adviser, purely knowledge and skill-based work, a handful of employees.
- A building contractor (57), grew his business from scratch the hard way, has several supervisors managing contract workers.
- A manpower-supplier (61), provides people for grunt work, e.g., stock-taking, routine audit checks and data entry.
You must be aware of several such entrepreneurs too, or perhaps you are one such small and mid-size enterprise (SME)-owner yourself!
All the people cited above share some common traits:
- The owner has worked hard for decades, made ample money, now wants to leave and enjoy the fruits of his labour.
- The business has few physical assets, only brainpower, relationships and skills. Hence, it has value while it runs, but no residual value if it closes.
- The business does not need full-time attention. The owner needs to keep a finger on the pulse, attend office from time to time, handle the important deals and take the major decisions. But, he cannot disappear completely – he has to be around.
- Most importantly, the owner is the key-man and the business has little value without him.
The core problem is that when the founder-owner leaves the business, for whatever reason, the value of the business is destroyed. Our government encourages entrepreneurs to build businesses. How can it allow already established businesses to die?
Any solutions?
Perhaps, I may venture to suggest an outdated concept – the managing agent.
The managing agency system was widely prevalent in India for many decades before Independence, but died out soon thereafter. How it works is:
- A management company runs many small companies for a fee.
- These companies are good at their respective core businesses – tea garden, foundry, printing press, whatever. However, they lack expertise in management practices, data analysis, marketing, finance, and audit, but they cannot afford to hire experts in these fields.
- The managing agent (MA) has a team of highly experienced people with expertise in these matters. This team oversees the operation of many different businesses, each of which does need their expertise, but not on a full-time basis.
- The cost of these experts is spread over all the businesses, so that each business gets the skills it needs at a fraction of the cost.
In the SME scenario, a possible business model could be:
- The SME owner engages the MA to manage his business for a fee, based on a percentage of profits.
- For the first 6-12 months, the owner works with the MA team to smoothly induct the team members into the business, after which the team takes control.
- Ownership remains with the SME owner. However, he can sell his equity to an investor, who wants to buy a competently run business that generates steady profits. Until then, the SME owner keeps getting the profits from the business, less the management fee.
- If the MA does not perform, the SME-owner can terminate the arrangement and take back his business.
Apart from relieving the owner without destroying the business, the MA can add a lot of value:
- Install good management practices and governance.
- Handle finance better, e.g., efficient working capital and cash flow and cheaper banking facilities.
- Build modern information systems to improve control and efficiency.
- Implement good audit systems to prevent petty fraud.
etc.
Big question is: Where to find such a managing agent?
Well, we have so many bright young men and women with good education who are looking for something interesting and exciting to do rather than a humdrum job. Instead of a start-up (burns capital, fails 80% of the time) they risk less and learn more in running established businesses.
We also have an ample supply of very competent and experienced people who have had to retire due to age but are fully capable of providing guidance and expertise.
Put them together, and voila – you may have a management agent!
Any takers?
(
Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post-retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
I am not sure whether it has a legal validity or not, since of late, there is no such system of managing agency prevailing/practiced in India. May be the author can shed some light on this issue of legal validity of this kind of arrangement.
I think the problem has not been of talented Managing Agency operators but the general distrust of the "family" on handing over the management reins to an outsider. We have always been susceptible of the strategic road map intent and execution of an outsider, be it some Vishal Sikka of Infosys.
But this is a very interesting and nice road map for many small enterprises to take their business forward for generations.
This sounds very interesting to me, and if I want to pursue this, can I get mentorship/guidance on this - any pointers ?
Thanks,
Kamal