The Wize Way

Episode 146: Personal Exertion vs. Passive Income: What’s Your Firm Worth?

• Wize Mentoring for Accountants and Bookkeepers • Season 2 • Episode 146

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"If you don't find a way to make money while you sleep, you will work until you die" - Warren Buffett 

In this episode of The Wize Way Podcast for Accountants & Bookkeepers, Jamie walks through the transition of operating a personal exertion income firm as opposed to transitioning to a passive income firm. 

Most Accountants are trapped in their business and are stuck in the model of exerting their own time and energy to earn a good portion of the fees the firm generates. This model doesn't allow the owner to ever work ON the business, take time away from the business, or really scale the business in any significant way.  

So, the goal of this video is to get you in the mindset of starting to ask the questions you need to ask in relation to beginning the "withdrawal" process in your business. What do you need to do to start withdrawing from each role you currently fulfill in the business? 

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PS: Whenever you’re ready… here are the fastest 4 ways we can help you fix and grow your accounting firm:

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 from a time- poor practice to a business that runs without them. I hope you enjoy and subscribe.

Jamie Johns:

Hi, this is Jamie from Wize Mentoring. Welcome back to the next exercise of the discovery stage of this course. What we're going to be looking at in this video is the Wize EBITDA and value calculator. We're going to explore the concept of a personal exertion income firm versus a passive income firm. We're really going to have a look at the difference between both. boBefore we start delving into that, I just want to say that the wise mentors believe that the definition of a business is a business is a commercial profitable enterprise that runs without you, and I'll say that again. The definition of a business is a commercially profitable enterprise that runs without you, and I'll say that again. The definition of a business is a commercially profitable enterprise that runs without you. That's really what we're focusing on over the next couple of exercises, so let's start over this side here on the left, which is where most of us are and where I was at.

Jamie Johns:

A few years ago, I had a personal exertion income firm and I was always thinking short term. If we have a quick look at that, the revenue is generated by the owner or yourself of the general of the firm. Say, with 800,000 in fees, approximately 250,000 in fees are generated by the owner. Around 550,000 are generated by the team. On the other side, where you've got a passive income firm and someone who really thinks long term, all the fees 800,000, are generated by the team. So you can see the difference straight away in terms of the owner's or the partner's time.

Jamie Johns:

Moving down a little bit further, we look at the cost of goods sold With a personal exertion firm. Often we have the owner or the finder, if I can call that person. They're on a market salary of roughly $150,000, for example, and the rest of the cost of goods sold is the grinders or the people doing the work, and generally, the cost of goods sold is around 40%, which is $320,000. On the other side of a passive income firm, we just have a manager, if you like, a client manager or a minder. Their salary could be anywhere from 100 to 150. The rest of the team is there and again we've got 320. So in this case you can see here that we don't have the owner or the finder involved in the firm. Over the course of the next 18 modules, we'll talk a lot about finders, minders, and grinders and we'll go into depth about what their role is and what they should be doing.

Jamie Johns:

So if you move down here a little bit we'll get down to the gross profit, which is around 60% or $480,000. And then on the side of where we have a firm, a personal exertion firm, there's no salary for a practice manager because the owner, he's working full-time in the practice, in the business, he's managing all this, all the staff and managing the day-to-day operations, and therefore that's just made up of the rest of the overheads. On the alternative side, where we have a passive income firm, this firm has hired a practice manager of around $50,000 to help with the operations of the business and process all the administration, all the admin, and so the overheads in this case comes to $280,000 with the practice manager. The final result is, on both sides of the slide here We've got in a bidder which is earnings before interest, taxation, depreciation, amortization, or just purely cash flow of 25% of the 800,000. So that leaves us with 200,000 and we've got the same case over here, hundred thousand and we've got the same case over here. So over the course of the stages, we're really looking at the difference between these two types of firms.

Jamie Johns:

One firm is where the owner is working in the business. The other side is where the owner is working on the business, and in this case, here, for example, this chap. Here he's a slave to his business and what sort of outcomes do we have? This person in the business doesn't really have that much freedom, no choice, works in the business, doesn't have much time, doesn't have any time for a traveling lifestyle, and doesn't even have time to expand the business further. On this side, we have this chap who is very happy, this owner, and he's full of joy, you know, and he really comes to work and he says what do I want to do today? You know, he's got freedom of choice. He can work on the business, he can start other businesses, he can have lifestyle choices, including traveling, and he can decide to expand the business as well.

Jamie Johns:

In order to get from this side to this chap over here, it's really about time management, quadrants, and seven habits of highly successful people. Dr Stephen Covey mentions this and it's all about the distinction between what we call Quad 1 time management versus Quad 2. Quad 1- type activities are urgent and important. Quad 2 activities they're not urgent but they're important, and what we find is people who are slaves to their business, perhaps like this chap over here. They solely work in quad one and they're just working in the business. The key that we'll talk about in detail throughout the course is where we get a business owner or partner to work in quad Two, which is working on things that aren't are not urgent, but certainly are important. So we'll touch on that in a lot more detail as we go through the course.

Jamie Johns:

So really, a couple of questions here about a personal exertion firm versus a passive income firm that runs without the owner. So the question is if we removed you, the owner, from your business, would it continue as an owner? Are you working in the business? Are you working on the business? The answer to that really directly affects the value of your firm or practice, whether it's a bookkeeping business or an accounting business. And if we just have a look at this slide for a few moments, we can see this side. We've got the income type. It's passive income on this side versus personal exertion income. On this side, when we have passive income, generally the owner's role. He works on the business. On this side, they work in the business. If you have a look at the business risk where the owner doesn't work in the business is, and is not involved in the day-to-day operations, the risk is often lower to medium, whereas if we have someone who you know, an owner, who works in the business, then the business is really affected by the situation and the circumstances of the owner, so the risk is often higher.

Jamie Johns:

Now all this is associated with what they call return on investment, what they call a multiple, and I've just included in there too, for accounting practice and bookkeeping practices, what is widely known in the industry is a fee multiple. For example, in this business, if we've got, say $800,000 worth of fees, a lot of the time the valuation can be a dollar for dollar per fee. So you can see here in this example, that's a return on investment of 25%, a multiple of four, and a dollar for dollar. If it were to pay slightly higher than that, and because this business was less risky, less subject to the owners of the business, then, for example, we might pay, say, $1.25 per dollar of fees, which would value the practice at about a million dollars with $800,000 worth of fees. So the point here is the more that you can work on your business as the owner and remove yourself from it, the more likely that your business will be valued a great deal more versus where you're solely working in the business and the business is reliant on you.

Jamie Johns:

So the question begs how do we get, how do we move from a personal exertion business where you, as the owner, are working in the business, and how to? How do we move over to a business that can give us a passive income and the lifestyle that we deserve? What Ed taught me on this journey is what we've coined the wise journey, and what it really starts with. It starts with the owner withdrawing themselves from the business as the business grows so very quickly. We start by removing ourselves from the administration task. We remove ourselves from the production of tax returns, bookkeeping, and financial statements. We're left with managing our staff and our clients. Eventually, as we get big enough, we can put client managers and a team in place and, as the owner or the partner of the business, we can remove ourselves from the managing. That leaves us then with the responsibility of marketing and sales and being the CEO and really working on the business, and that's a great threshold to get to. Finally, the last three stages of being the executive chairman of your business as Ed Chan is the non-executive chairman and then finally, later on, we can decide to retire and we can decide to be a shareholder in our own business.

Jamie Johns:

In the next exercise slides, we will talk a bit more in- depth about whether should we sell our business versus keeping it as an investment, our business versus keeping it as an investment?

Jamie Johns:

The question now is how is this achieved. How do we move from a personal exertion business to one that's going to give us a passive income and the lifestyle that we require? The Wize Guys mentoring team, we've coined this KSE, and it's all about the knowledge and the strategy, and that's what we're going to supply to you. 95% of the work will be required by yourself, as the owner of your business. If you follow the slides and the detailed content, you will journey down this path, as I just explained here, but it's with the KSE, the knowledge, the strategy, and the execution that you'll get the results. So, yeah, hopefully, you're really at this stage, if that really makes it crystal clear around where you're at now and the vision of the firm or practice that you'd like to develop so that it can run without you. You know. The question is are you ready for that journey? So we here at Wiseguy certainly hope you are and we'll support you along the way with all the questions that we can answer for you. Thanks for that. Bye for now.

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/ 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.