Episode 92: How to Achieve Your Business Ideal Income

In this week's episode of The Wize Guys Podcast,  Brenton Ward, Jamie Johns, and Ed Chan offer their insights on the importance of conducting a discovery session for every accounting practice.

Ed, having experienced numerous challenges while growing his accounting business, understands the struggles many of us face. Often, we enter the world of entrepreneurship with the hopes of increasing our income and gaining more time and freedom, only to discover that our reality is quite the opposite. We end up working longer hours than ever before and sacrificing precious time with our families. When we assess the money we earn relative to the time we invest, the returns are minimal, and the investment seems unwise.

To break free from this cycle and ensure that your business doesn't imprison you, Ed and Jamie will provide a comprehensive roadmap for either designing a new business or redefining your existing one. They will show you how to align your business goals with your desired return on investment, giving you a clearer path toward success.

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3. Book a 1:1 Wize Discovery Session – Spend 30mins with our Wize CEO, Jamie Johns, a $7M firm owner who is ready to give you his entire business plan to build a firm that can run without you – Find out more here

Chapters

• 0:00 Intro
• 1:30 How to determine the pains and challenges in your practice?
• 3:26 The power of retirement investments
• 5:12 Why you should start to invest in businesses?
• 5:51 Why is it that Warren Buffett invests in a direct business and what his 4 criteria are for investing?
• 8:33 Comparing the ROI of your business vs the share market vs property investment
• 11:46 How to identify your capital value, passive income, and ROI?

Transcript

Wize Mentoring: 0:02

From Wize Mentoring is The Wize Guys Podcast, a show about accounting and bookkeeping practice owners and the many stories, lessons, and tips from their experience of transitioning from a time-poor practice to a business that runs without them. I hope you enjoy and subscribe!

Brenton Ward: 0:24

Hi everyone and welcome to step one of the Wize Mentoring framework. My name is Brenton Ward and I've got with me our two Wize Guys. We've got Ed Chan and Jamie Johns. How are you gents? Good day, Brenton, and good day Jamie.

Ed Chan: 0:39

Hi Ed and hi Brenton, welcome back.

Brenton Ward: 0:42

So, everyone, welcome to the very first step of our Wize Mentoring journey, how better to begin than starting with a discovery session? Now, Ed, when we're coming up with this framework for our Wize Mentoring journey, you said we need to start with basically understanding and discovering where the firm is and where they're at in their current business. Jamie, you've been through this process, so in this video, which will be about half an hour or so, I'd love for, Ed, if you could set the scene as to why you do discovery sessions with firms that you mentor, and, Jamie, if you can sort of intertwine your experience of what you did throughout your discovery session with Ed and how you got to the outcomes of that discovery session. So, Ed, we'll start with you. Can you explain to us why a need for a discovery session and what it actually is?

Ed Chan: 1:38

Yes, thanks, Brenton. I've just gone through the journey myself in terms of the pain and where I wanted to get to, and I know that most of the firms out there will have the same challenge. They'll want to know where they're going in the right direction. They generally work very long hours. They don't have much of a lifestyle. They don't see their families, or the hours they work, when you divide it by the income they earn, it's very little in terms of the return on investment, and everybody's pretty much in the same boat. So when I sit down with an accounting firm, I ask them what their challenges are and it's pretty much all of that. I don't see my kids, you know, work very long hours. I'm consumed by the clients. I'm a prisoner in my business. This business I was supposed to give me life is taking a life from me. So I say to them that we've got to start with the end in mind. Let's design your life and not let it take you wherever it will take you. Let's design your life. So I started by saying that most accounting firms develop their business in this way. They feel that they've got something to offer, they hang up their shingle and they say that I'm in business. So through word of mouth you know they build their business up and for many, many years they work really long hours and some of them make good money and some of them don't make such good money. But eventually in the end when they retire, they sell the business because they've built the business up. So they know that if they stepped away from that business, the business would just not go as well if they stepped out of it. The attitude is that I'll flog it for as much as I can get and then I'll retire.

Ed Chan: 3:25

But then what are you going to do with your money? So you can only invest it in several places. You can invest it into the stock market and if you invest it into the stock market you'll get a 5% dividend yield. So if you sold your practice for a million dollars, you invested a million dollars into the stock market you'll get $50,000 a year to live on. If you bought a property with it, the return on a property is about 3% net. So you'll get about $30,000 a year to live on.

Ed Chan: 3:54

Now. Currently, if you look at your practice and I do everything as a return on investment currently if you're doing a million dollars after your wages you should be earning around $250,000. That's a 25% return on your investment. So your million dollars today is earning you around 25% return. Some are less, some are more. Some firms earn around 36% to 38%. Other firms earn around 15%. But whether it's 15% or 38%, there's a lot more than a 5% dividend in the stock market or a 3% return on the property. However, the problem with that is that you've built this business around yourself and if you stepped out of this business, it's not going to go very well, so you have to sell it. The alternative is that during the lifetime of this business, you're earning reasonable money and you take this profit and you pay tax on it, because you end up paying quite a lot of tax on it, and whatever you're left with you then invest it into some shares or into some property for your retirement. And again, it's a very slow way of doing it because you lose half of it in tax and what you're left with then you go and invest it.

Ed Chan: 5:12

Now, when I listen to Warren Buffett, who runs Berkshire Hathaway, the majority of the portfolio of Berkshire Hathaway is invested in direct businesses and a smaller portion is in direct shares. Now, the reason why he's invested directly into businesses is because the businesses give a return of around 25 to 30%, whereas the investments from his share portfolio give him a dividend of around 5% or 6%. So Berkshire Hathaway has been showing an average return of around 29% since the day he started for decades and decades. And he said that when he looks for a business, he has four things that he looks for. The business has to sell a product that the mum and dad out there need. So he's picked businesses that mum and dad out there need tax returns. Everyone needs to do a tax return.

Ed Chan: 6:10

He said that he had to understand the product. So for many years, he didn't go into IT because he didn't understand IT. He understood insurance and he understood it or the other products businesses that he went into. So we understand our business. The other thing was that he said he had to have really good management, and I believe we have really good management. And then the last thing he said was that he needed control over it. So that's why he buys a business that is out 100%.

Ed Chan: 6:41

And then the period of ownership Warren Buffett says is the period of ownership is forever. So the guy is pretty clever and when I looked at our business and it ticked all those boxes, I said to myself well, why do I want to sell it? Put it into the stock market and drop my return on investment from 25%, which it is today, down to 5%, and lose control of it. And when the GFC comes around, you run the risk of losing half of it. When, during the GFC, we didn't lose anything, we kept growing. And during the GFC, a lot of the companies stopped paying dividends, whereas Channanale continued to pay the dividends.

Ed Chan: 7:25

So when I looked back and looked at that model, why would I want to sell it? But I understood that if I built the business around myself and I call that catching butterflies with a butterfly net, you get out there and you catch these butterflies with a butterfly net. The problem with that model is. That's the partnership model, and a lot of accounting firms have a partnership model where they'll only invite you to join them if you're a finder. If you're a grinder or a minder, you wouldn't get invited to join them as a partner. So their growth model is based on partners being finders. But the problem with that model is that if you take that finder out of there, that's the end of your business and that's not a very sustainable model. In fact, a lot of these very large accounting firms you actually don't buy in, and when you leave, you don't get anything out of it either. So I thought that was rather silly.

Ed Chan: 8:18

So it's much better to build a garden that attracts butterflies to you. That requires you not to build the business around yourself, but to build the business to work without you, and that requires investments. So let's talk about investments. When you invest back into your own business, it's tax deductible. When you take money out as profits, you lose half of it in tax before you're left with the other 50% to invest in assets. So by investing the money back into my own business, not only is it tax deductible, but it's allowing me to fast track my time at money, if you like, in a much quicker way, because everything I put back into a business is tax deductible. So building this garden that attracts butterflies to us, so that it's not dependent on me, allows me to go from a self-employed person to a business, then to an investment, and it's the fastest way to get there because you don't pay any tax on it. You actually get it as a tax deduction every time you invest back into your business, like systems and hiring people and so forth, and that made more sense to me.

Ed Chan: 9:33

And listening to what Warren Buffett said, all came together. So what I say in a discovery is first I ask what challenges are, but the challenges are all pretty much the same. Then I start with the end in mind. Then I say what would you like your life to look like on your 65 or 70? And how much income would you like to earn at that point? And everybody's different. I understand that. For me, it was about giving me more choices in my life so that I could choose whether I wanted to work or not. But then to achieve that you have to create passive income and you can either choose it from outside investments or you chose it by turning your own business into an investment, and I chose to do that.

Ed Chan: 10:17

So I sit down with people and I say okay, if you say to me when you're retired, you want to earn 100 grand a year passively, if you're going to do that in the stock market, you need around $2 million. A 5% return gives you $100,000 a year. So you need to build your business up from zero to $2 million. Then you sell it and hopefully, you'll get a lot of that, putting aside capital gains tax and so forth. And then you go and you invest that in the stock market. So with most accountancy firms if you value them at a dollar per dollar, then you can very easily identify what the capital value is. So, assuming you're doing a million dollars turnover and that means at a dollar per dollar it's worth a million dollars, then after your wages, a lot of accounting firms do a net return of around $250,000. So $250,000 on your million- dollar capital is a 25% return. Now if you then were to sell that and take your million dollars and put it into the stock market, you'd only get a 5% return, which is around $50,000. So obviously earning $250,000 off the same million dollars is a lot better.

Ed Chan: 11:31

But you've got to set your business up in such a way that it can run without you and not because of you. And in the discovery session, we work out what it is. We start with the end in mind. We work out what income you want. So, for example, you may say to me I need an income of $200,000 a year Now at a 25% return.

Ed Chan: 11:53

Your turnover then would need to be $800,000 because generally your cost of goods sold is we'll set it at around 40% and that leaves you with overheads of around 35%, and then that leaves you with a 25% net or 200 grand. Your wages are on top of that, but we're just talking about passive income. If you then sold that $800,000 and put it in the stock market, you'd only earn $40,000 from it. So how do we turn that business into an investment? So we then work backward and we work out turnover of $800,000, how many staff do you need, what are the systems that you need to put that in the place, and what kind of staff do you need? Because you need a combination of grinders and miners working in teams. And then we put in place a marketing, a growth strategy to help you get there.

Brenton Ward: 12:48

So is it fair to say, as part of this discovery session, it's really getting business owners to get into that frame of mind of considering their business and investment rather than being in the thick of things and taking whatever comes out at the end of the day? It's really spinning that on its head and it's going well. Let's turn this into an investment and see what we want to get as a return from it.

Ed Chan: 13:10

Absolutely so. Instead of going to work to prepare a tax return or to go to work to do a job, you're going to work to build something. So you're going to work, in that example, to build an $800,000 turnover business, yes, which will then pay you a 25% return, and that's your superannuation fund. And in that process, you need the right people in the right seat and the right bus with the right kind of systems, and so forth. Bye.

Wize Mentoring: 13:41

Thanks for tuning in. If you liked this episode, please remember to subscribe and leave us a five- star review For more practical, Wize tips on how to build a business that runs without you, head over to wizementoring. com/ podcast to download a free copy of The Accountants 20-H our Workweek Playbook. We've included a link in the show notes below. See you in the next episode!