Kelly Partners Group & Accountancy Roll-Ups

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Richard, can you share some context to back when you first joined Stockford, many years ago?

I was a Group Executive for St George Bank, in their investment services business. One part of that was a company called Silcorp which was one of Australia’s first and leading master trust in ancillary services. As part of their strategy, they were looking at how they would build an ecosystem and Stockford was about to go through an IPO at that stage. We got a very good price to go into Stockford, pre-IPO, and they were going to form an alliance with St George, to back up one part of their strategy, which was to build out wealth management and offer that through all of their rolled up accounting practices.

We did that investment and I was the responsible executive for that area, so I went onto their board, and that’s how I got involved in Stockford.

What was Stockford’s strategy?

They thought there was an opportunity to create an accounting practice of scale, by rolling up and creating a branded offering in the marketplace, around accounting practices. They were acquiring practices for somewhere between 0.9 times revenue up to about 1.2 times revenue, depending on the type of revenue. They were looking at how they rolled up those practices and they thought there was a significant arbitrage between what public markets would reward and what they could acquire that revenue and those businesses for.

They had a focus on small business. They also had a focus on the entrepreneurial side of it and then on the larger private clients. In that sense, it is a bit like Kelly+Partners.

So focusing on SMEs but also trying to cross-sell wealth management business?

Pretty much, but behind every small business is a small business owner and so it’s the wealth management around that entrepreneurial area; that was where the focus was.

Is that where all of these businesses eventually head? Is that where the money really is, in the long run, in terms of getting hold of those assets and managing them for the clients? Stockford, Kelly, WHK and these other businesses all seem to gravitate towards getting access to wealth management business.

That was clearly WHK, right from the get go. They did a far better job at integrating the wealth management practices into the accounting firms. It expressed an interest in understanding why the central costs, within Stockford, were so high. They wanted to create value for the group by doing wealth management out of the central practice and then do a revenue share, back to each of the practices. All of those costs for marketing the wealth management practice and some of the related infrastructure for the wealth management were borne by Stockford central office and they would be distributing some of the profits back to the practices that had been rolled up.

That never really occurred so the costs were never really fully recouped. Whereas in WHK, the IFAs were put out into each of the practices, to the best of my knowledge.

So Stockford actually had all those IFAs at a centralized cost base?

Yes. In retrospect, I’m not sure it was ever agreed what those revenue splits would be and that created a degree of contention. The wealth practices never really got to any critical mass, through Stockford.

I guess that was also because the incentives weren’t completely aligned at the practice level?

In fact, I think that goes to the heart of the questions I always have around why do you roll up and why professional services? Rolling up is all about incentives. Are the incentives aligned? What are the benefits to the practices, to roll up? If it is purely succession planning and allowing people who have built a professional services practice to cash out and to keep running their business for a while, then I think it’s fraught. There needs to be some benefit to the roll up and I think those benefits really come from scale. There has got to be scale benefits and that can come from needing capital. I think that is probably the biggest distinguisher between that and the dentistry roll ups. Dentistry is, implicitly, a capital-intensive business and if you can provide the capital through the public markets, at a lower cost, you are benefiting everyone in your network.

But if you don’t need the capital – and pure professional services only need working capital – that capital benefit is not there. Then there is purchasing scale. I think you can scale on the cost side, how you scale up and grow. If you think about Steadfast, OAMPS and the other roll ups in the insurance market, they were based firmly on their supply arrangements. The bigger they were, the better deal they got from their insurance backers and the more they could then deploy capital into providing insurance agency and other related business. All of that just added a lot of benefit to it. If you also need to invest in systems, you need to disperse or defray that across a large revenue stream, so that’s another example of a scale benefit.

Apart from that, the other one is really cost of acquisition benefits, in terms of customer acquisition. That relies on practices needing growth and I’m not so sure that pure professional services businesses rely on growth. They are basically lifestyle businesses for the founders, but once they get to a certain size, they don’t really want to work that much harder, so more business is not really a major driver.

I think pure professional services, without either scale or acquisition benefits, doesn’t work particularly well. Whereas in other areas, where roll ups work, those benefits come through pretty strongly.

If you look at Kelly+Partners, for example, around 50% of the cost base is labor?