The Wize Way

Episode 139: How to Design Your Life and Business to Success

• Wize Mentoring for Accountants and Bookkeepers • Season 2 • Episode 139

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In today's episode of The Wize Way Podcast for Accountants and Bookkeepers, Brenton Ward together with Ed Chan and Jamie Johns deep dive into the transformative process of discovery sessions for accounting business owners.

Many enter the business world seeking higher earnings, more freedom, and additional time, yet often find themselves working longer hours, earning less per hour, and spending precious little time with family. Ed describes this common plight as being a "prisoner in your own business."

From Ed and Jamie's extensive experience in building Chan & Naylor and Sky Accountants respectively, they emphasise the importance of beginning with the end in mind. They explore the necessity of designing—or often redesigning—your business to align with your ultimate goals, focusing keenly on the return on investment (ROI) your firm delivers.

Highlights from this episode: 

  • Why is it that Warren Buffett invests in direct business and what his criteria is for investing?  
  • Comparing the ROI of your business vs the share market vs property investment
  • The problems with a partnership model 
  • How to build a garden to attract butterflies 
  • The journey from self-employed > business > investment 
  • What would you like your life to look like when you are 65/70? 
  • Engineering your business to achieve your ideal income figure 

Join them as they share invaluable insights and practical advice on reshaping your accounting practice into a business that not only runs efficiently but enriches your life and secures your future!

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1. Take the Wize Accountants Scale Scorecard – Find out your potential to scale and the next steps you should follow – Start Your Scorecard

2. Download our famous Wize Freedom Strategy Map for FREE - Find out the 96 projects every firm owner must implement to build a $5M+ firm that can run without them - Download here

2. Need to Hire right now? Book a 1:1 FREE discovery call with our WizeTalent hiring coaches to help find your next team member the Wize Way – Click Here

4. 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

Brenton Ward:

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

Brenton Ward:

Hi everyone, 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?

Ed Chan:

G'day Brenton, g'day Jamie.

Jamie Johns:

Hi Ed and hi Brenton, welcome back.

Brenton Ward:

And how better to begin than starting with a discovery session? Now, Ed, when we were coming up with this framework, 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. 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.

Brenton Ward:

So, Ed, we'll start with you. Can you explain to us one why the need for a discovery session and what it actually is?

Ed Chan:

Yes, thanks, Brenton. I guess 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. You know where they're going is 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.

Ed Chan:

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, I 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 life from me, and so I say to them that we've got to start with the end in mind. So let's, let's design your life and not let it take you. You know, take you wherever it will take you. Let's design your life. So I start off 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 worked 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 won't you know, won't go as well if they stepped out of it. So their attitude is that I'll flog it for as much as I can get and then I'll retire.

Ed Chan:

But then what are you going So, you can only invest with your money? So in several places, you can invest it into the stock market and if you invest it into the stock market you'll get like a 5% dividend yield. And so if you sold your practice for a million dollars, you invested a million dollars into the stock market you'll get fifty thousand dollars 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 thirty thousand dollars a year to live on.

Ed Chan:

Now, currently, if you look at your practice and I do everything as a return on investment. Currently, if you're doing $1 million after your wages, you should be earning around $250,000. That's a 25% return on your investment. So your $1 million 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%, it's a lot more than a 5% dividend in the stock market or a 3% return on the property.

Ed Chan:

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. However, 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's been showing an average return of around 29 since the day he started for decades, decades and decades.

Ed Chan:

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 dads out there need tax returns. Everyone needs to do a tax return. 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 all the other products. He understood insurance and he understood all the other products, and 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 that he needed control over it. So that's why he buys the business out 100%. And then the period of ownership Warren Buffett says is the period of ownership is forever.

Ed Chan:

So the guy is pretty clever and when I looked at our business and he 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, Chan and Naylor didn't lose anything, we kept growing. And during the GFC, Chan and Naylor didn't lose anything, we kept growing. And during the GFC, a lot of the companies stopped paying dividends, whereas Chan and Naylor continued to pay the dividends. So when I sat back and looked at that model, why would I want to sell it?

Ed Chan:

But I understood that if I built the business around myself and I call that catching butterflies with a butterfly net so you get out there and you catch these butterflies with a butterfly net. The problem with that model is that 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:

So it's much better to build a garden that attracts butterflies to you. That requires you not to build a business around yourself, but to build the business to work without you, right? 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 retirement 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, right, allows me to go from a self-employed person to a business, then to an investment, right, 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, hiring people and so forth. And that made more sense to me. And listening to what Warren Buffett said, right, it all came together.

Ed Chan:

So what I say in a discovery is firstly, I ask what the challenges are, but the challenges are all pretty much the same. Then I start with the end in mind. Then I say, well, what would you like your life to look like when you're 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, I had to have a path. 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:

So I sit down with people and I say, okay if you're going to, if you say to me, when you're retired, you want to earn a hundred grand a year passively. If you're going to do that in property or sorry, if you're going to do that in the stock market you need around two million dollars. Right at a five per cent return gives you 100,000 a year. So you need to build your business up from $0 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 that means at a dollar per dollar it's worth a million dollars.

Ed Chan:

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. But you've got to set your business up in such a way that it can run without you and not because of you.

Ed Chan:

And in the discovery session, we work out what it is. We start with the Indian 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. Your turnover then would need to be $800,000 because generally your cost of goods sold will sit at around 40% and that leaves you with an overhead of around 35% and then that leaves you with a 25% net or $200,000. Now your wages are on top of that, but we're just talking about passive income.

Ed Chan:

If you then sold that hundred thousand dollars and put it in the stock market, you'll only earn 40 grand from it. So how do we turn that business into an investment? So we can we didn't work backwards and we work out the turnover of eight hundred thousand. 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 grind place. And what kind of staff do you need? Because you need a combination of grinders and minders working in teams.

Brenton Ward:

And then we put in the place marketing, a growth strategy to help you get there 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, you know, 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:

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 right. So you're going to work, in that example, to build an $800 million sorry, $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, in the right bus, with the right kind of systems and so forth.

Brenton Ward:

So, Jamie, when you started your discovery session with Ed, how were you viewing your business? And out the back of that discovery session, what sort of things were you enlightened upon?

Jamie Johns:

Yeah, first of all, it's really a mindset. So for me with working with Ed, first of all, it was the mindset that my business could be an investment. Because I think, you know there's a lot of business brokers out there and a lot of theory out there that you know you work in a business to there, that you know you work in a business to sell it. You know, you know there's a lot of business coaches out there, for example, in a particular franchise that I won't mention but they, you know, they all talk about. You know the one purpose of a business is to build it up and sell it. So when you start talking to Ed, it turns that theory on its head and says, okay, well, if, if, you can get a better return on your business and set up your business in a way that it can get a better return on investment than property or the share market. So Ed's argument is um, why do you sell it? And and, and it's purely focused on results.

Brenton Ward:

So that resonated with you, or were you questioning the fact, given that, at that point in time, your business was fairly heavily built around yourself, would you say?

Jamie Johns:

Well, it was like a lot of guys who start out like myself and like Ed did, it's all built around you. Ed talks about the butterfly catcher versus the garden that attracts the butterflies. So you know, in the early days we all grow our businesses just by sheer referrals and we do all the you know, we do all the grinding and the minding and the finding. And if you take the finder out of it, then you know you often don't have the referrals and you don't have the growth. So Ed really, in the discovery session, really turns a lot of traditional thinking on its head and solely focuses on really two factors One, can your business give you a good return on investment compared to other asset sources? And secondly, can your business, can you set up your business, to run without you?

Jamie Johns:

Now you know, if you don't have the right mindset to believe that your business can run without you, then you really need to get to stage one. You, you know stage one is, I think Dr. Stephen Covey talks about, you know, private victory and public victory, or there's two creations. So you've really it really mentors you to say, well, it can be done, you know, I've done it, this is how it's done and you've got to get it through your mind first. That's the first thing, but the second thing is purely focus on a business. Sense is let's get a good return on investment on this business and you go to work every day, as Ed said, to work on the balance sheet. A lot of us, including myself and other accountants, as soon as we have more staff, more systems, more procedures, we think of it as P&L. We think, oh, that's an expense, oh, that's just another expense. So you've really got to change your whole mindset around working on the business and building an investment over the longer term, not the short term.

Brenton Ward:

So yeah, so, Ed can you give anyone watching who would like to undertake their own discovery session with themselves now what the steps would be to really get that underway?

Ed Chan:

Absolutely. It's not that difficult. You've just got to ask yourself. You know, if it's a husband and wife team, just ask your wife and yourself. You know, what do you want your lifestyle to look like when you're 65? What income do you want to earn when you're 65? What amount of work do you want to do? And then, based on that, we work backwards from there. So, and then we then design that business instead of just letting the business take you wherever the wind blows, so to speak, that you actually design your life, you design your business and you design the kind of income that you want and the kind of lifestyle that you want. I mean, I personally wanted more choices in my life and I knew that the only way I could get more choices in my life is to have a passive income. T he best way and quickest way to build passive income is to invest it back into your own business and structure in such a way that it runs without you. And that's what I've done and it's achievable. We're in the right kind of business.

Ed Chan:

The problem is that there's been some very good marketers out there who've brainwashed us into thinking that compliance is dying and compliance isn't a very good product and people don't value it and so forth and so forth, but compliance is the only business that's growing. They're also saying that it's dying, but it's not dying, it's actually growing. It's growing because our population is growing by 250,000 to 300,000 a year and our immigration policy is quite healthy. So whenever skilled migrants come into this country, they all get a job and they all need to do tax returns. So the compliance pie is growing and I keep saying that's a great business model because that's the only business model that I know that the government drives business to your door because it's illegal not to do a tax return. It's recession proof and all you need to do is to or we need to do, is to manage it efficiently so that it's profitable and and we don't need to go chasing for new business.

Ed Chan:

The business reason it's pretty close to annuity in nature. So what better business can you have than the government drives it to your door and it's as near annuity as you can get and the pie is growing? And as long as there's tax in the country, there's always going to be tax changes. Whenever there are tax changes, you always need an accountant. So there's been a lot of confusion created by a lot of people out there and generally, they're picked from people who had a vested interest. They were either trying to sell you their products or sell you their services or something, and they misrepresent what our industry is and that's led a lot of accountants to believe that, you know, at the end of their working life they need to flog it off and get as much as they can and not retain an interest in it.

Ed Chan:

But naturally, if you don't have systems in place and if you've built the business around you, then you have to sell it. There is no other option. So what I'm saying is don't run it like a partnership, run it like a corporation, where we separate ownership from your labour, from your skill. You're an owner. You think you've got a say in everything, even though you may not have the skills or experience to get involved in certain aspects of your business. But because you're a partner and you're an owner, you have a say in everything. And it doesn't work.

Ed Chan:

And if you turn it into a corporation where you separate the skills out from the shareholding so some people are more CEO, some people are more COO, some people are more CTO or CFO and if we each stay in our flow, in our area of expertise and let each other run our areas and then hopefully together you'll produce a profit and then you pay a dividend based on your shareholding, that works much better and I've proven it and it works and it's much more effective than a partnership model. And I'm not talking about the structure, I'm not talking about the legal structure. I'm talking about the management, the way you run the business. Okay, the legal structure. I'm talking about the management, the way you run the business.

Brenton Ward:

Yeah, yeah, okay. So going through that process, Jamie, what were the highlight moments for you coming out the back end of that discovery session and what was your sort of realigned focus from that point?

Jamie Johns:

Yeah, the main thing to mention, Brenton is and I know this will resonate with you, know, hundreds of accountants is the realisation that you don't have to be the central person to run the firm. So it's almost a humbling process. You've got to realise that the firm um can run without you, that that that's the most important concept to realise, because um and ed shows you how that can be done um, that's a real choke point in the discovery session that he'll show you how that can be done. And the other thing is I think you know Ed mentioned once you realise how that can be done, then it's really important to get that feedback structure and foundation of teams and operational systems in place.

Jamie Johns:

One of the things you've always said is you know it's okay to, it's okay to scale, but get your foundations right first, because otherwise you're going to scale problems. So I'd been down that path. I'd try to scale and um, I tried to do this and tried to do that um in my own business and I was only scaling problems. So it's really, really important for the accountants and the and the and whoever's listening that you get those foundations right and, like Ed said, even though you're a small business, act like a big one, you know. So put systems and processes and people in place, even if you have to wear a lot of hats at the start. Make sure you get the foundations right, because if you don't do that and you go to scale, then you're only going to scale problems.

Brenton Ward:

So, if we talk about the discovery session, where we're at this stage because I know we're going to get into the foundations and the systems and the processes yeah, at this stage, I think we want to take an opportunity now to take stock of where they are and to really follow those steps that Ed outlined before is, really start to look at your business from an investment perspective. Where do you want to be when you're 65? What lifestyle do you want to be living at that stage of your life and how is your business going to provide for that? Can it provide for that? And, in its current form, is it going to be able to do it? If not, we need to start putting some numbers on that, that future position, and start working backwards from there to really kick this journey off. Is that fair to say, Ed? Absolutely.

Ed Chan:

You hit the nail on the head. You've just got to design your life and it's all there to be designed because of the industry we're in. It's a newity in nature. The government drives it to your door and we deal with accountants who are reasonably easy to deal with. They're educated and easy people to deal with and you know the systems are all there. We just got to put everything together and it's all quite achievable.

Brenton Ward:

Great. So this is your opportunity now to really take some time. So, whether you're going to do it straight away or you're going to lock it into your calendar now, take some time to go through those steps that Ed outlined just prior, just earlier, in terms of what you should be doing to really take yourself through this discovery process. But really, at this stage, spend some time understanding where you'd like your life to be when you're 65, and is your business in a position to get you there. If not, we need to recalculate some numbers and start working backwards from there. Ed, thank you so much for sharing that part of your journey and the journey that you started your firms on. I think it's a brilliant place to start and, Jamie, looking forward to hearing more about how you took Sky Accountants through this part of the journey as well.

Ed Chan:

Ed, yeah, thanks, and thanks for having me, Brenton. It's an absolute honour to share some of the things that I've experienced with everybody, and I look forward to continuing to do that.

Brenton Ward:

Ed, the pleasure is all ours. We look forward to hearing more of your learnings, but for now let's begin with the end of mind, or at least go through our discovery session and really understand where we want to take our business. So thanks, guys.

Jamie Johns:

Thanks, Brenton, bye.

Brenton Ward:

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 forward slash podcast to download a free copy of the Accountant's 20-Hour Workweek Playbook. We've included a link in the show notes below. See you in the next episode!