In this two-part series we welcome back one of our favourites, Edward Chan, the Co-founder of Chan & Naylor Accountants. Ed is recognised as one of Australia’s foremost authorities on tax and property and is a regular keynote speaker in many property seminars around Australia. Joanna and Ed discuss how you can use joint ventures and merger to grow your business and look at why a corporate model is better than a partnership model.
- The difference between a merger and joint venture
- Why a corporate model is better than a partnership model
- Be clear of whose responsible for what
- Joint ventures in their variations
- Chan and Naylor’s experience inJoint Venture Partnerships
- Finding a cultural fit
Welcome to another great chat with Edward Chan, Co-founder of Chan & Naylor and co-author of 4 best-selling books covering Reducing Tax, Creating Wealth, Buying Property and running a successful Small Business. In this episode, we look at the distinction between mergers and joint ventures and Ed provides an exclusive on how he uses Joint Venture Partnerships to grow his practice. Ed talks of how Chan&Naylor’s handled their first-ever joint venture compared to how they handle them now, decades on, and we discuss how a corporate model could be better than a partnership model.
Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to see or scan what kind of information that might be relevant to you if you are the kind of person that likes a transcript.
Joanna: Hi, it’s Joanna Oakey here and welcome back to The Deal Room Podcast. A podcast proudly brought to by our commercial legal practice Aspect Legal. Now, today, we have back our serial guest, Edward Chan, who is co-founder of Chan & Naylor Accountants and Wizementoring for accountants. Now, Ed has been on the show a few times in the past, talking all about elements relating to how to grow a business, including an accounting practice but it’s absolutely as relevant to anyone who’s looking to grow a business. He’s also talked in many instances about how he has used mergers and acquisitions to grow his practices over time. Ed is also a regular keynote speaker on many property seminars around Australia, and he’s recognized as one of Australia’s foremost authorities on tax and property. He’s also co-authored four best-selling books but today, we’re not necessarily here to talk about anything that’s specifically in those books.
We’re really here to continue the conversations that we’ve had with it in the past about acquisitions as a growth strategy in business but in this two-part series, we’re talking specifically about how you can use mergers and joint ventures to grow a business. Now, in these two parts of this two-part series, we talk about the difference between a merger and a joint venture, which is quite interesting. It’s an interesting distinction that we’re looking at here but has some really relevant business insights.
We look specifically at how Ed used JVPs that’s what he calls JVPs Joint Venture Partnerships to grow his practice over the last many decades. And we look at other nuances, we look at why a corporate model is better than a partnership model and we look at what they actually both mean. We look at some tips and tricks if you’re looking at undergoing a joint venture relationship, we talk about Chan & Naylor’s first JV experience and the differences between the way they conduct JVs now versus how they did right in the beginning. But in that discussion, we give some really good insights into how you can start off with approaching things from a JV perspective if you don’t have a massive amount of money on your side starting off for acquisitions. We look at problems in consolidations. We look at how to bring value to the relationship of the Joint Venture and we also look at the differences between a JV model and a franchise model. And finally, for all of those accountants out there, we have a bit of a discussion about its involvement now in Wizementoring and some of the lessons that he’s learned that are particularly relevant to accounting practices but I actually think are really generally relevant to all businesses that are looking for growth.
So we have all of this and much, much more in this two-part series. So sit back and relax and let’s chat to Ed.
Ed, thank you so much for coming back and joining us on The Deal Room Podcast
Ed: You’re most welcome. It’s always great fun to join you.
Joanna: It is always so much fun to have you on the show Ed. I absolutely love chatting to you. I love the discussions we have on the podcast and otherwise as well.
So we’re going to cover some really interesting topics today, as always but where do we start? So anyone who has been listening to the podcast has probably heard your background a few times. I guess we don’t need to start there today. The only thing that I will say is if you missed the last episode with Ed and me, you missed how to grow a practice through organic growth, product monetization and acquisition. So today we’re moving on to the topic of using mergers and joint ventures to grow a practice. And in fact, we’re taking a really individual look with you, Ed. I’m looking to dig right into the topic of how you use mergers and joint ventures to grow your business. So why don’t we start off first with a little bit of the more technical side? What do you see as the difference between a merger and a joint venture?
The difference between a merger and joint venture
Ed: There is quite a difference in the sense that, I guess the biggest difference is between an acquisition and a merger or a joint venture. An acquisition just for those who don’t understand is when you buy a practice out completely and there might be a little bit of a transition period and then eventually, you know, you take over, you’re the boss, you run that the way you want to run it and you try to transition the clients over and there are some hiccups, but in the main, there are not too many hiccups. A merger is two firms coming together and trying to work together. So you’re going to have more problems in the sense that there’s going to be change management issues.
Ed: There would be personality issues.
Joanna: Control issues? The way we do things. I mean, that’s a big decision, isn’t it? Who’s way do we adopt? Because when you’re acquiring, you’ve got the power as the acquirer because everything you know, you call the shots, it all comes under your banner. That has to be some sort of, I guess, a higher degree of agreement and meeting of the minds. When we’re talking about how we filter through a merger.
Ed: Correct, and of course, in the first couple of years of an acquisition, it’s you can put up with the differences. It’s just that when it becomes a longer-term basis, then your differences become less tolerable. The merger, it’s two practices coming together in like a partnership and, you know, unless the two officers share what I call a cultural fit, then it’s difficult. People have heard me say often that I didn’t think partnerships worked.
You should run it under a corporate model, not a partnership model. I’ll just explain that to you right now. As a partner, you’re both an owner and an operator. You know, in a corporate structure, we separate out the operational with your occupation to your shareholding. So the reason why I argue the partnership doesn’t work is that just because your partner doesn’t necessarily mean that you’re qualified to do everything in your organization. So in a partnership model, it’s often thought that once you become a partner, you’re an expert in everything and then you having a say in everything. The partnerships that I’ve seen around the place gets into a very hostile environment where nothing gets done. There’s a lot of ego, a lot of pride, and there’s a lot of pushback. And everybody wants a say and everything when often they’re not experienced or qualified in those particular areas. So if you take a tenancy practice, it’s one thing to know how to prepare a tax return and prepare a financial asset accounts. But it doesn’t necessarily mean that you’re a good business person or you’re a good marketer or you’re a good salesperson. And often a partner wants to have a say in all those areas, even though they may not have the experience or the expertise in those areas in the decision-making process becomes very, quite problematic. Often times, you know, there are lots of arguments going on with nothing happens and in situations where, you know, the full partners on four hundred dollars an hour spend five hours arguing, you know, what kind of chair the receptionist should sit on.
Joanna: Yeah, wow. It’s a very good illustration of the issue.
Why a corporate model is better than a partnership model
Ed: In the corporate model. We separate out the occupation to the shareholding so that you’re accountable to your occupation. So if you’re the marketing manager, you’re accountable for marketing. If you’re the operations manager, you’ll, you know, accountable for operations and in your shareholdings, a separate issue. So as long as you know the firm is making money, then you’ll benefit as a shareholder in the dividend. But in the meantime, you’re held accountable to your area of expertise. And that that works a lot better.
Joanna: Yeah. That’s a really good point, because, of course, when most people, you know, and accountants and lawyers as a whole, when we think about the partnership model versus the corporate model, we do we just sort of thinking, oh, okay, well, how is it structured? Are you structure it as partners or is structured in a company and shares? But what you’re talking about here is way more fundamental. It’s like you are defining and separating out different roles for each person so they can hold accountability in a particular area, so one person has accountability for each particular area.
Ed: Yes. You’re quite right. I wasn’t referring to the legal structure, I was referring to the management structure. Now we separate out ownership to your occupation and your responsibility and ultimately, you know, what you’re responsible for like the KPIs for that area of expertise.
Joanna: I’ve had a saying I can’t remember. I’ll quote this very badly, but work with me and I think you’ll get the idea. It was … “One name, one response”. I can’t remember now, it was like one head will fall right? So you’d need one person who’s responsible for each area. Otherwise, there is no such thing as accountability.
Be clear of whose responsible for what
Ed: Correct. There’s no accountability unless there is one person responsible. That’s why when we run our team structures, we don’t have a flat structure. So often firms run on a very flat structure. We have a narrow and deep structure. So there’s one person accountable. And you know, the people that are underneath that person reports to that person, and that’s one person accountable. So to give you an example, we don’t share staff because if you shared staff, then nobody takes responsibility for that staff. Each manager thinks the other manager is going to take responsibility for him. There’s no accountability. And it creates confusion and it’s quite confusing. There’s a domino effect that gets created all down the line but we didn’t come together to talk about that though.
Joanna: Isn’t it amazing what tangents we end up on, Ed but I think I think that’s really interesting. OK. So we talked about the differences between mergers and acquisitions. We talked about it sort of like the management model being this partnership, i.e. we were all doing the same sort of thing. It’s interesting, we’re talking about accounting practices but this is just as applicable to many, many other industries. And I mean, you know, the legal industry is rife with these partnership model per se, which is everyone’s the lawyer, you know, rather than the corporate management model that you’re talking about here. But even to businesses that aren’t in professional services like accounting and legal, you know, certainly, I think there is the issue of businesses coming together and particularly in this environment where you’re talking about a merger, where you come together, you’ve got a number of people who were doing the same sort of role within their previous organizations, I guess effectively.
Now, you have to make these distinctions in a merger about who’s going to take the lead in each of those roles, because inherent in what you’re saying here is it doesn’t work if there’s two people who have accountability. So, therefore, in each merger, we have this difficulty. You have to work through the process of making sure you’ve chosen someone from a role. Am I putting words in your mouth or is that you know, is that correct?
Ed: That’s correct. You have to be very clear as to who’s responsible for what. I find that sharing responsibilities don’t work is the thing unless the two parties are very, very innate understanding of each other. I find that generally doesn’t work as well. So there’s always going to be a role and it’s not of hierarchy as such, but it’s more of a role that we’re responsible for and tasks that you’re responsible for and that can be outlined in the job description basis can be outlined in, you know, in a particular, you know, organization chart. It can be clearly defined but as long as it’s clearly defined, then that should minimise any confusion.
Joanna: Great. Okay. So merger I’m hearing here one of the tips for merger is one of the risks is perhaps you’ve got multiple people who were doing the same role. The tip is you need to allocate separate roles for each person and just make sure you’re really clear about the accountabilities that connect to those in the KPIs and all of those things. So then where is a JV different? Where are we moving to if we’re looking at JVs as an alternative to mergers?
Joint ventures in their variations
Ed: There are various different variations of joint ventures. So I can talk about a lot of different types of joint ventures. There’s like a franchise franchisee joint venture where there’s a sharing of the brand and the sharing of intellectual property. But effectively, you know, they’re in the joint venture together because one party has signed an agreement to use the intellectual property of another party. But effectively, there are separate parties, they’re not together as such they are separate organizations so the franchisor is not the same as the franchisee, although the branding might be the same, you know, they’ve been paying a royalty for the use of the intellectual property, but they are a separate entities. So if you were to sue one of those entities, you’d have to sue them separately if you would like because they are independent organizations and then you can go from that kind of a joint venture to a joint venture like ours, like Chan & Naylor, where we do have a sharing of revenue in that the head joint venture owns an equity interest in the next level down entity so that our offices, for example, share the same brand, contribute towards a marketing expenditure because it’s very expensive to run your marketing and as a standalone office, it’s quite expensive to try and do it yourself.
Joanna: I understand it. I do.
Ed: I’m teaching to the converted. In our modern-day instead of one office having to pay for the website, the social media, the marketing manager, the three levels of marketing. There’s the strategy level is one. And then there’s the management level as the second and then the third level is that people to do the work and at the grinder level, there’s a different level of expertise. This is a specialist that does SEO and there is a specialist that does graphics, and there is a specialist that does PPC – Pay Per Clicks like Facebook advertising and Google advertising, there is a specialist that does that. There are different areas and then there is remarketing and you know, it’s such a specialized area of digital marketing in today’s age and in a lot of those grinder levels, a specialist and then above that, you need a manager to pull that together. And then, of course, above the managers, is the strategists to strategise.
So a stand-alone firm cannot afford all of that is quite expensive to run that kind of an organized marketing team. In Chan & Naylor we share that because it’s shared amongst eleven or twelve offices so it comes out as a lot more economical to do so in our joint venture. That’s just an example but there are many different types of joint ventures. And at the end of the day that the two separate organizations, which is a joint venture compared merger when you’re working together in one organization.
Chan and Naylor’s experience inJoint Venture Partnerships
Joanna: Yeah. Okay. So let’s use some of your experiences before in your own practice to drill into what this actually can look like as a joint venture. And you call your joint ventures JVPs don’t you? What does the P stand for again? I have forgotten the P.
Ed: Joint Venture Partners.
Joanna: Partners. Right. Okay. All right. So the partners in the JVs. Love it. So you use JVPs. Okay. So the first question, let’s step right back to your very first merger acquisition or JV arrangement, which was that you started in. What was the first one?
Ed: The very first one really was we started in Parramatta. It was in this office and then Clive came in and took over running that practice or with several up and put all the systems in and he came in and I guess that wasn’t the first one, because that was effectively a partnership, because he popped in that office then he allowed us at that stage to go and start Pimble and Pimble started from scratch. And it’s grown into a significant size practice but because of the Chan & Naylor’s background and so forth and the marketing that we’re doing, we would generate quite a lot of new leads from clients and they were coming in from all over Australia and so we ended up then opening up our next office, which was in Perth. And that was our first true joint venture.
Joanna: ] So up until this point. It’s been almost a branch model. You had equity arrangements, but effectively with a branch model because they were similar underlying ownership. So then Perth, now you’ve said, okay, let’s try this JV approach. And so how did you do that? How did you set Perth up?
Ed: So when Perth joined us, she was looking at getting out. Actually, she had enough and she wanted to leave and I remember talking to her and saying, I think you’re too small at this stage because it’s very hard if you’re below around five hundred thousand to run the can see practice. So you’re trying to do everything yourself and you work very long hours. There’s a critical mass that each industry needs to get to before it becomes easier before you got the resources around you to for it to become easier in accounting, it’s around six to seven to eight hundred thousand by the time you get to that level then it’s pretty hard and lot of long hours. And, you know, you’re very vulnerable because you might only have one or two staff and if they left and you know, your left to handle the work yourself. Whereas you’ve got you know, you’ve got once you get bigger, you’ve got clock managers and you’ve got accountants. And if one letft then doesn’t hurt you as much because the others take on the extra work, do you find somebody else? So that critical mass is important. So I said to her, look, you know, if I could double your turnover and got you bigger, we’ll go 50/50 on it. And she agreed and, you know, we grew it and we doubled it in one year and then we continue to double it and doubled and that’s how that evolved because we were getting so many clients coming to us from right around Australia and we couldn’t service them all from Sydney so it made more sense if we had a local office and then there was a large number of clients coming from Perth. It was a natural sort of figure was a win for her and it was a win for us. It has to be a win win, otherwise, it won’t work.
Joanna: And so how did you find these accounting practicing that particular exact one, do you recall?
Ed: Well, with Perth, I just met her at a seminar, really? And I was talking and she mentioned that she was going to leave and I mentioned to her that at the moment she’s going to work to prepare a tax return. That’s not that exciting but if you were to build a business that prepared the tax return, that’s much more exciting. In the end, she agreed and so we focussed on building the business that prepared the tax return rather than hurt preparing the tax return and became a more different and exciting game. After that, she’s been with us since. It has been about fifteen years now, I think and she’s still there.
Joanna: That’s a great story.
Ed: Yes. So. So that was our first one. And then we then sort of went from there to Melbourne and we started Melbourne with a firm that was quite small who you couldn’t grow and I had a lot of trouble growing. We went into the same deal with them. Once we doubled the turnover, we’ll go 50/50. And again, we did that in twelve months.
Joanna: And so sorry, are you putting any cash into these practices? Are you paying for equity here? In those early days, were you funding the marketing? Is that is that what the cash was?
You don’t have to say if you don’t want to Ed.
Ed: In the early days we were funding it with our brand and the new clients we were bringing in.
Joanna: ] Got it. OK.
Ed: Our contribution was you might call it “sweat equity” or “brand equity”.
Joanna: And the reason I ask is because I think many businesses who were listening to this might say, wow, that’s great, but I don’t have a ton of cash. Maybe, you know, to go in throwing to acquiring a practice. And then that’s just the reason I wanted to tease it out because I think it’s a really good point, because there can be value that you contribute over and above just cash. I mean, cash is one way to do it, right? You could go and buy 50% of the practice with cash. But the point is where you started was here is something that you had of value that someone else didn’t have and the meeting of the minds, it’s just the perfect element, isn’t it? In terms of growth of a business, that you contribute something of value that they don’t have, that they value more than cash because together you can grow something bigger. And it’s not just about cash, but it’s also an opportunity for people who don’t necessarily have the access to cash or don’t want to use cash at this point to look at it from a more creative viewpoint because there’s other things you might be able to use.
Ed: Yes, and a lot of start-ups work on that basis where other start-ups don’t have cash so they offer equity and often they target talent. But instead of giving the talent or the employees a big wage, they give them a smaller wage but then they give them equity in the business so they sacrificing, you know, in return for the equity in the business. There are different ways that you contribute and at the end of the day, it just depends on the two parties that are involved as to whether they see any value in it. And obviously, in our situation, you know, the respective parties saw value in each of each other’s contribution and it worked.
And in addition to that, you know, I’ve learned a lot now, you know, Joanna, they say that unless you spent 10000 hours in doing a particular thing, that you’re not an expert.
Joanna: Yeah, yeah, yeah. I heard that one.
Finding a cultural fit
Ed: I spent 10000 hours, I think, in this area. So you know what I found over the years, you know, looking back on, I think it’s about 15 years now. Looking at the success and we’ve had many successes and also the failures. And it came down to one thing really. Looking back on it and you will say it was because the cultural fit wasn’t right. I don’t do that anymore, Joanna. When we first started, there was no money in the bank for this joint venture business. We start with nothing and, you know, I used to take people on just because they put their hand up. I always just wanted people to join because then they helped contribute towards the overheads instead of me carrying all the overheads myself but if the cultural fit isn’t there, it might last fruit for one year, two years, three years, but then you eventually fall apart and cause more damage to the practice that’s coming in and also your own business. And I prefer not to do that anymore. Now we’re in a very mature level. We don’t need the revenue to survive anymore, so I do it slightly differently now. I work with the firm for twelve months initially and to see if there is a really good cultural fit and then at the end of that time, then if there is a good cultural fit, if it’s going to be a win for the incoming firm and it’s a win for us, then we’ll mutually agree to do it, if not, then there’s no hard feelings. In the meantime, they’ve had the benefit of my input so I help them run the business better, putting all the systems, the team structures, you know, or the flow, the managing the traffic flow helping them do all that and at the end of 12 months if there was no light to join up and they walk away with a much better-running business that they can take with them and that’s a benefit to them as well. So it’s a win-win for both.
Joanna: Wow. That’s a really good point Ed.
That’s it for part one of our two-part series with Ed Chan talking all about joint venture relationships and how they can be seen as a different way of going around and achieving a merger or acquisition. We’ve covered a lot of information in this episode and we’ll be back in part two next week, in part two of this two-part series where we finish off the discussion all about these joint venture relationships, how you can set them up and the tips and tricks that you should be aware of along the way. We really dig into some important nuances in the second part of this two-part series so I hope you can join us again. And until then, if you’d like more information about this topic or you’d like to work out how you can contact Ed Chan either at Chan & Naylor or at Wizementoring, then simply check out the show notes or head over to our website at www.thedealroompodcast.com. Now there you’ll also be able to find details of how you can contact our legal eagles at Aspect Legal if you or your clients would like to discuss any legal aspects of sales or acquisitions. Well, thanks again for listening in. We hope to have you back next week for the second part of this two-part series. You’ve been listening to Joanna Oakey and The Deal Room Podcast, a podcast proudly brought to by our commercial legal practice Aspect Legal. See you next time.
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