Kelly+Partners: The 51/49 split

20 min read
2 July 2024


Intelligent Investor's Alan Kohler speaks with the CEO and Founder of Kelly+Partners Accountants, Brett Kelly, about the company's unique business model, its growth through acquisition and its future plans.


About the podcast

Brett Kelly shares insights into his innovative business model that has revolutionised the accounting industry

From challenging traditional partnership structures to pioneering a 51-49 ownership model, Brett Kelly discusses how Kelly+Partners integrates and grows a network of 22 accounting firms. Join us as we delve into their unique approach to acquisition, leadership dynamics, financial strategies, and navigating through challenging times like the recent economic downturn. This conversation offers a deep dive into the principles and practices driving Kelly+Partners' success and shaping the future of professional services.

Show notes:



Brett, could you just tell us how your business model works? You’ve got what’s called a network of 22 operating accounting businesses, Chartered Accountants, what’s your relationship with those 22?

Alan, we started Kelly+Partners Chartered Accountants in June 2006 and I’d been working in Chartered since I was 18. What I’d noticed was that partnerships in professional services firms often don’t work very well because you typically have a number of people all with equal interests and the negative group typically governed by saying no. I designed, based on what I’d seen globally and other industries, a 51-49 structure that meant that the whole code out was me initially by myself had a 51 per cent interest, the operating partners in the location had a 49 per cent interest and we had a pre-set strategy and an agreement in terms of how to attack the market and what the services were we were going to offer clients and how we were going to deliver those services.

Let’s just back up a bit. Your experience and your view was that accounting firms or partnerships in general didn’t really work because everyone had an equal interest. That meant, you’re saying that the no-sayers, the people who were saying no, tended to dominate, is that right?

Yes, Alan, equality’s a great idea in the sense that everyone’s equal in dignity, but most people aren’t the same height, the same width, the same strength, the same smarts, they don’t have the same talents and so when you sort of start at this position that everyone’s equal, it’s true they’re equal in dignity, but they don’t have the same gifts and talents. When you put a team together, you want diversity, genuine diversity. You want half-backs and wingers and full-forwards and centre-half-forwards.

The typical professional services setup was to pretend everyone was equal and then what you got was a bunch of politicking, generally by the insecure people who knew they weren’t equal, and what I’d experienced since I was 18, working through five different firms, was just rabid dysfunction. And so, our industry in accounting – and I think it’s similar in law and other professions – these are shiny veneers, but the insides of these partnerships are often utterly horrible and not good for the teams that work there and certainly not good for the partners.


Your idea back in 2006 was to basically have someone in control?

Yeah, in the sense that you have a CEO in a company typically. Somebody’s at least been entrusted with the strategic direction of the firm and given the role to lead. As you’d understand, leadership is something that’s given to you, it’s not something that anyone could take. And so when I started my very first business, one of my mates said to me, “Hey Brett, you know how to do this, this and this, I know how to do this, this and that. Why don’t you do this and lead the thing and I’ll do that and manage the thing and that would be great?” That worked very well and then the group has rapidly grown because of our ability to move very quickly in an industry that’s not known to be particularly dynamic, forward-thinking or interesting in any way.

Kelly+Partners, the group, the company that’s listed, I note that you own 51 per cent of that and what you’re saying is that company owns 51 per cent of 22 other firms, is that the way it works?

Yes, that’s right.


You acquire other firms all the time, right? I don’t know how this works, but you acquired someone via a ‘marquee’ process and then another one called the ‘tuck-in’, so you had ‘marquee’ and ‘tuck-in’, what does that mean?

Alan, in any business there’s really only two ways to grow in our view. You’ve got to grow organically which is, I think, a must; and there’s, in particular in professional services, an opportunity to grow via acquisition. Many firms don’t do that and they don’t do that well and I identified that if we could build a system to continually acquire firms, I knew that the baby boomers that owned accounting firms would be looking to sell those firms in great numbers in the years ahead when I started in 2006 and I thought that if we could build a reputation for being very expert at acquiring those businesses and integrating them into our group, then there would be an outsized opportunity in the market.

I’d seen Austbrokers and then later Steadfast, do similar things in the insurance broking industry and it’s been a way to grow, I think, for all time in other industries, it just wasn’t done well certainly by small firms in our industry. But there’s never been a significant Chartered Accounting group globally that hasn’t grown through acquisition. We’ve grown 50 per cent of our size organically and generally, we’ve grown it five to six times the rate of the industry and we’ve also grown via acquisitions, more than 23 firms so far.

Do you always just buy 51 per cent of a firm when you take it over or do you sometimes buy 100 per cent and then give 49 per cent to someone else?

Yes, that’s right, Alan. What’s interesting is, in accounting firms accountants don’t really do deals and so, if we can bring some deal making nous and say, “Look, we’ll buy 100 per cent if we need to and help the younger guys in the firm acquire their interest…” then we basically marriage broke many of these transactions where often there’s even an internal candidate for succession but the older generally gentlemen can’t work out a deal, and so we’ll get in between, eye out the retiring partners or partner and help the younger guys to take equity in the business.

I note that in your first half results it says you’ve got 42 equity partners. They own the 49 per cent, is that right?

Yes, that’s right.


You’re quoting revenue per equity partner of $1.1 million dollars, take us through how that works? Presumably, the revenue in the firm is 100 per cent, but they’ve all got 49 per cent, those equity firms?

Yes, that’s right. The operating partners, they run their locations and they own 49 per cent of each location. On average, our partners are billing at the moment, about $1.1 million each and we have a centralised back office that runs the accounts and all of the finance function, all of the HR function including recruitment, all of the marketing operations and risk and legals; and that is what we call a central services team, it allows us to centralise all the sort of administrative functions of a firm and basically it means that we can half the cost of operating a firm and generally, when we acquire a firm we can double its profits and reduce the working capital required to operate that firm by about two-thirds. It means that the partners that own 49 per cent actually earn more than they would if they owned 100 per cent of their firms.


You’re quoting return on equity of above 40 per cent, which is remarkably good obviously, down a bit from last year, but still. Take us through how the equity works because you’ve got a line of equity called, ‘Lock-up, debtors plus work in progress’, and then there’s net debt and total equity as well. Which equity is the 40 per cent return on?

The return on equity is calculated on 100 per cent of the equity invested in the business. The businesses are very capital light in that the only thing we need to fund is the working capital, that’s work in progress plus debtors, and we keep that number at about 55 days. That’s the lowest in the industry by about 50 per cent, generally. The industry runs somewhere between 90 and 150 days typically. The only other equity we require is a small amount of fit-out and that’s about it. When we acquire a firm, we’re acquiring with a payment upfront and then a payment after a retention period, generally two or three years. We can typically acquire a firm without putting any equity into a deal or very little equity into a deal.

Alan, the best way to understand what we do is that basically, micro-miniature leveraged buy-outs where the vendor is taking some risk with us to do the succession of their firm and we are providing the expertise and the succession team to allow that firm to continue for the benefit of its clients and its team.

But do the vendors get cashed out or not?

They do, they get some cash up front and they get the rest of their cash after two years, so it’s effectively a partially vendor financed transaction and we can borrow down effectively a special purpose vehicle or subsidiary to fund the upfront payment.

And what does the lock-up mean? You’ve got, ‘Days lock-up of 62.8 days…’

Yes, that’s the work in progress.

That’s your work in progress?

The days of work in progress, plus the days of debtors. And so if you collect well by engaging largely on fixed fees and you manage your work in progress so you don’t start jobs that you can’t finish, many firms spend a lot of time picking jobs up and putting them down. We don’t do that. Effectively, that lock-up is your working capital. The thing that kills professional services terms is partners not billing their WIP and not collecting their debtors, such that their profits are locked up in the business.

Is the key to the success of your business, the key to the business working well, the revenue per equity partner at $1.1 million – that’s what they’re billing – is that the kind of engine room of the business?

I think, Alan, the engine room of the business is – there’s a great documentary and it’s on Warren Buffett and Bill Gates, and they ask both of them while they’re sitting together on a couch, “What is it that made you pair so successful in business.” And almost in unison, they reply, “Focus.” And so the engine of our business is the unusual focus of the business. Because we started with a clear idea of what we wanted to do, and that is a clear mission to help private business owners, ones that we call people that want to go somewhere. And then we had clear values which is to help other people to do what we say, so a focus on others, not ourselves, that’s quite unusual in professional services, technical skills. Then we built an operating model for the firm and for the client service process, such that when you get that sort of focus, you get an operating model that works in the business and a client service model that works. There’s just nothing that we do that we haven’t deeply thought about, we’ve got 40-plus partners thinking about it every day in terms of how to do it better. It’s actually the focus. And then, sure, revenue per partner, but we believe if you get your people right, then you get your processes right, you’re serving the right client in the right way, your financials will sort themselves out if you’ve got a clear model.

So it’s actually the focus of one type of client, just Sydney originally and now Melbourne. It’s really focus layered upon focus layered upon focus that I think gets above economic returns. Our return on equity is 2X the industry, our profit margins are 2X the industry, our lockup is half the industry. You can do things two times better than your competitors if everything you touch you try and do two times better than your competitors.


Do you have a standardised billing model across the network or do you…?

Absolutely, same partner charge-out rates, same team charge-out rates, same price for virtually everything we do. There’s a huge amount of standardisation because, what you’ve got at the moment with the crisis, people are calling it a ‘Black Swan’ event. I like to say that there’s not that many black swans out there. Swans live in lakes and lakes have got mud and often the white swans hang around in the mud, people look at it and say, “That’s a black swan.” It’s actually a white swan with some mud on it. Most things are 80 per cent going to happen, you know that the things are going to happen over the multi generations of a private business owning family, are able to be understood.

We took US Census data, the biggest dataset in the world, we designed it based on the lifecycle of business owning family, the services that they would require and then we documented them knowing that 80 per cent of what any service requires is able to be understood up front. It’s not a bespoke suit, front cover of a set of accounts or the back cover or the disclaimer or whatever. And so most professionals are making out when you turn out that what they do is completely bespoke, but it just isn’t. When you come as a private business owner and say to me, “What’s the value of my business?” I should already have an 80 per cent built template for how to value a business in your industry if I claim to be an expert in helping people in your industry. That’s what we’ve done, Alan, we’ve sort of very much systemised much of what a client would need and gives them time to add value.


Speaking of the black swan, you’ve put out an announcement the other day, a response to the coronavirus trading conditions. You’ve said that you’re taking a pay cut of 20 per cent and your senior execs are doing that. You’ve reduced headcount by 11 per cent, you cut expenses by about $4.5 million dollars. Is that reduction in expenses more or less than your reduction in revenue?

At the moment, Alan, we don’t see a reduction in revenue, but we can’t say that there can’t be or that there won’t be a reduction in revenue. I moved very early on in our business to ensure that we would survive a crisis. One of my business heroes is Bernard Arnault, the Founder of Louis Vuitton Moet Hennessey and he says, “Be pessimistic in the short-term and optimistic in the long-term.” When a crisis like this occurs, we move very aggressively to protect the short-term, knowing that if we work hard the long-term will look after itself.

What we did was reviewed every business unit, took the opportunity to redeploy the bottom 10 per cent of our people to our competitors and looked at every line, zero-base budget every part of the business. Not because we have experienced a revenue reduction because at the moment we haven’t, but we don’t think we’re immune to what might happen in the world. I just don’t have the view that this sort of bounce back, V-shaped recovery is likely in that, I’m not sure that the world is just going to return to what it was 12 weeks ago automatically. I just want to be humble enough to say that I’m not sure what will happen and so plan for the worst and work hard to make it the best.

I suppose the cost cutting you’ve been doing shows the advantages of having control, 51 per cent.

Absolutely. Alan, this is to the partnership and leadership – when I was asked by a private equity group, “Brett, why is it that your businesses are twice as profitable as the industry?” I said I used to go into book shops in the business section which I love to read and once I realised that 80 per cent of the books in the book section are on leadership and I couldn’t understand why. But then later when I was looking at what is it that really drives performance, it’s leadership, so if you can get your structure to allow someone to lead – it doesn’t have to be you or me, but whoever – and to me, leadership is about making decisions. In our industry, we’re not doing brain surgery, so it’s not like we can chop the wrong part of the brain, you just need to make a decision and acknowledge if you haven’t got it right and change it, and change quickly.

Our structure allows us to get agreement and move quickly, and so that’s a huge advantage obviously in a crisis situation like this where we were able to meet as a partnership group, all of us together, say, “This is what we think we should do.” We were able to get agreement quickly and execute, I think, faster than any comparable business.

In that statement on April the 8th about coronavirus trading conditions, you didn’t mention dividends and you paid three dividends in the past 12 months. What are you going to do about dividends?

Alan, we pay quarterly dividends and our aim when we listed in June 2017, was to grow dividends by 10 per cent every year, which we’ve been doing. We haven’t announced that we won’t pay a dividend, it’s my intention to pay a dividend. I’m pretty old fashioned, I’m generally a capitalist and I believe that the people that have capital at risk should get a return, and so it is our intention to continue to pay dividends. You can never say what happens in the future, but certainly, we don’t have any other intention than to continue to pay dividends and grow them at 10 per cent every year.

We did grow the firm by three times during the GFC – this is obviously different to the GFC, but we typically take a crisis as a challenge and we want to see if we can, with our model, grow and really thrive and take market share from businesses in our industry we know are not as fit as our business during this situation. We do see an opportunity right now and we’ve really tripled down with what we’re doing and working very hard to advantage our clients, which means that they’re bringing their friends. That’s been successful in the past and we hope it will continue to be.

You say that you’re the 24th largest accounting firm in the country. Is anyone above you on that list got the same sort of model as you?

No. Our model, Alan, is completely unique in our industry and certainly in Australia. It’s not unique globally, it is unique globally to our knowledge in accounting but not in other industries. We think that essentially, our model does a number of things particularly well. One is that the young men and women that want to become partners in Chartered Accounting firms don’t have the capital to take out 100 per cent of the older partners, largely baby boomers, who want to retire. And so while they know that they can run the firm, often they don’t have the capital to buy the whole firm. By us taking a 51 per cent interest, it halves the succession problem financially. But what we bring is real management expertise and leadership of these businesses. A lot of the younger men and women partners say, “Look, Brett, I really know how to run my client base, but I’m not sure that I know how to run a whole firm.” And the other one, Alan, that’s very interesting, is that there are real changing work patterns in professional services. There’s at least 50 per cent of women who are now graduates in accounting and the way that women and men work now and run their families is different to how it once was. Once upon a time, there was a male partnership, the men went to work at 7, they stayed until 7, worked on Saturdays… That’s not a pattern of work that most people want now or most couples find acceptable. If we can take, what we estimate is about 40 per cent of the administrative time out of the life of a partner in a Chartered firm, then that means that they’ve got time to speak to their partner and their children and maybe have a hobby or two, and so it typically also delivers the sort of life balance that people now want.

By halving the succession problem financially and certainly giving a better work-life balance and bringing a huge amount of management and leadership expertise, it is a model that I think has a very strong future in our industry and in professional services generally.

But they’re only getting, of the $1.1 million on average that they’re billing, they’re only getting 49 per cent, right?

That’s right, but if our margins are twice the industry, which they are, then they actually earn as much as they would in a comparable firm. And because our cash flow’s nearly three times better, you’ll note that we’ve got more than 100 per cent cash conversion in the period. Because our cash flow’s much better than a comparable firm, they actually get paid every month rather than hanging around, waiting for some of their money to come out of the lock-up in the business.

But do they feel like they’re in a straight-jacket, they’ve got to do everything that you say?

No, because the system’s largely been developed by the partners. Most people when you say to them, “What’s the great tension in life?” It’s the tension between who they know they could be and who they know that they are. As a professional, every professional would agree, our profit margin should be this, our lock-up should be that, our attentiveness to our clients should be this, our way we treat our people should be that, our processes should be much better, etcetera… They all know what they should be, healthy, wealthy and wise, and how to be a great professional. Knowledge is not a mystery anymore, it’s certainly not power, execution is power.

Every professional in our industry knows exactly what they should be doing but ‘should’ doesn’t get you anywhere. You need a structure and a clear strategy that actually helps you close the gap between the person that you said you’d be when you grew up and the person that your clients deserve, and in fact what you’re delivering. The fact is, in our industry the level of fraud on the client, which is the gap between what firms promise and what they deliver, that’s what disgusted me as a young person and what actually drove me to start a firm.

You’re calling that fraud?

Absolutely – to sit with partners who would say, “Oh yes, we can help you with that. Oh yes, we can help you with this…” And these people have no expertise in what they were talking about, they had no system or process or track record in delivering that. I thought then and I think now that it was complete BS. I said, “I don’t want to live like that, I don’t want to be this shiny guy who says one thing and does another.” I wanted to actually know that if you’re our client and we say that we can deliver something, that we can 100 per cent dead-set not only deliver it, but that we’ve done it many times before and that the collective wisdom of the partnership group could be delivered to you as a client and sort of inculcated in the systems and processes and knowledge management of the firm so that when you turned up as a client you actually got what these firms are advertising, which is the full collective power of the partnership. Rather than, what a client typically receives is an individual sitting in a silo just delivering their own version of events. ‘I’m an Insider’, Alan, is a great book I read many years ago by Forbes on who becomes a billionaire and it’s typically an insider, it’s someone like Rupert Murdoch that understood the insides, it’s someone like John Simons that understood the inside, someone like Richard Branson that understood the inside of an industry, but decided not to be a comfortable insider. It’s really challenging the status quo that I think brings differentiation and a better outcome for your people and your partners and your clients.

How do your billing rates compare with your competitors, are you undercutting on price?

Because of the level of efficiency in the business, Alan – and we love to say we give great advice though we don’t have any marble, so we call it ‘great advice, no marble’. Our firms are extremely lean and very focused on client outcomes and what that delivers is an ability to compete on price should we choose to. You will generally get a first class and world class service from us but we won’t be overpriced in the way that we see many professional services firms simply with pricing that reflects how much marble and wasted floor space they have in their business.


You’re one year into a five-year plan, where do you expect to be, where do you want to be in four years from now? And is that five-year plan still on track given what’s going on at the moment?

That’s a great question, Alan. We’re in our 15th year of business and we’ve published publicly a five-year plan to double the firm in the five years. We’ve actually doubled our firm on average, every three years, four times in a row since inception. This time, we’re saying that we think it’ll take about five years to double the firm. We’re on track – when we published that our revenues were about $40m, we think we’re on track to do somewhere between $40 million, $48 million and $52 million as a run rate, depending on the impact of the virus. We think that there will be an impact on our clients and impact on our firm, but we haven’t stepped away from having a goal. We think if we’ve got a goal it inspires us and means that we can get a meaningful economic size, then that inspires our partners and our people and makes us quite likely to get there.

Doubling in five years get you to what, $100 million in revenue?

Yeah, it gets us to around $100 million. When we published that, we were at $40 million of revenue, we were aiming to get to $80 million. If we can get to between $80 million and $100 million that would be great and that means the 100 per cent group will have around $40 million of earnings. Head co have half of that and we consider that quite a good business. I’m really trying to build the firm that I wanted to work for when I was a young person. I wanted to work with a group of partners who wanted the best for other people, that weren’t self-centred and full of their own importance, so we say, “Take the work seriously, don’t take yourself seriously.” I wanted to work with people that if they said they’d do something, would actually do it; and I wanted to work with people that believed a team was more powerful than an individual.

That’s what I’ve gone about building for the people that we really identify with, which is private business owners that take risks, start a business – often they’ve got their houses, personal guarantees on the line, they employ 70 per cent of all Australians and they’re the people who are really passionate about helping, they are who we are in our own business. That’s the journey and that’s what’s really exciting.

You’re making a net profit margin of what, 23 per cent?

In the last results, it’s about 30 at the head co, 32.6 at the subs, so about 30 per cent.

If you do succeed in getting $100 million revenue, you’ll be making your current market cap roughly in net profit.

That’s right. We know that there’s been a number of listed accounting groups that haven’t been successful as public companies – would be a gentle way to put it – and so, we found that the sentiment in the public markets for what we’re doing is cautious, but we’re very much value investors by mindset. We’re looking to grow the business conservatively, reduce the number of shares on issue, pay dividends, growing income stream... And we believe ultimately that death and taxes are certainties and that it’s unlikely that at any stage the Government will wind up the tax system. We think that in a world that’s uncertain, I have the view that this is a relatively defensive place to play.

I’d said at the time that we listed, Alan, that tax rates would have to continually go up because there’s no consensus for governments to stop spending. Given that the government’s just spent another $320 billion, I think my argument that rates over time, certainly over the next 20 years will go up, not down, and that the Tax Office will more and more aggressively seek to take money off people, means that the demand for excellent tax advice, which is our specialty, is likely to grow and probably grow above trend.

We’ll have to leave it there, we’ve been going for a long time. It was good to talk to you, Brett, thank you very much.

I appreciate it, Alan.

That was Brett Kelly, the CEO and Founder of Kelly+Partners.