Well yes, I am old school both by age and approach, I guess. Sticky recurring income is as I remembered it back in private practice 40 years ago was the traditional client who returned year in year out for accounting and tax work. The annual revenue formed the basis of what the goodwill/selling price of the practice might be as it was a multiple of that. Special assignment work such as a once off acting as investigative accountant in a public listing was not included.

I recollect back then, I could roughly ascertain profits weekly by knowing just three figures (a) gross revenue from timesheets from which I deducted 5% (b) gross wages to which I added 20% for on costs and (c) my pre worked out weekly costs of ‘doing business’. It was amazingly accurate.

I am specifically interested in the professional businesses because of the ease of business model and the protection from macro events. In tough times you don’t buy that diamond ring but you reluctantly get your tax done because it is a compulsory obligation.

My only concerns are change of law reducing that obligation, impact of AI (look at how it has hollowed out property valuers and say, surveyors - and - as you have alluded to in Australian Family Law, greed in rewarding directors for their wages content.

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Interesting concept and a brilliant track record. Almost unbeatable for those on the inside, maybe not so for the run of mill investor because of the (a) lack of recurring revenue and over reliance on large one off projects (b) lack of transparency via off Balance partnerships and (c) persistent & significant dilution.

Might I assume that a 20% NPAT/REVENUE is the ultimate dream for the average professional consultancy firm. What then is deemed average?

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Thanks for reading Damien,

a) Perhaps, albeit recurring revenue is not required per se in every business. I would pose the question, what is recurring? There is no doubt recurring revenue in parts of this business where clients are on engagements with fee retainers. That would most definitely be recurring in nature.

b) You will have to clarify exactly what you mean here as I don't understand the way you've worded it.

c) dilution is not a problem in of itself. As I've mentioned in the post equity comp is a big part of this business. If this incentivises staff I see no particular issue. You are still seeing significant per share earnings growth and minimal leverage.

20% margins is great. I wouldn't say it is the "ultimate dream" though, rather it is only telling a part of the story. You can get great margins if you step out your capital cycle, and similarly bad margins if you demand upfront payments. The more relevant figure I would compare firms on is a return on capital metric, but using gross profits, as you're taking into account both margins AND lockup. Comparing this to Accenture for example below.

ELIX 35 Lockup days + 33% GPM = ~340% GP ROIC

ACN 42 Lockup Days + 32% GPM = ~280% GP ROIC

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more goodwill than revenue?

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