5 Key Considerations
Poe Group Advisors has sold quite a few cloud-based accounting firms over the past few years. Some of the insights we’ve gained as a result of working with these firms have surprised us a bit, while others just bear repeating. Whether you are thinking of building or buying a cloud-based accounting firm, these five key considerations are worth noting.
- It’s still an accounting firm.
Meaning…it’s “techy” but it’s not a tech firm. Technology is great, but it has limitations. Cloud-based accounting firms can offer: greater convenience and potentially a higher value proposition for clients, flexibility for remote teams, and greater efficiency and faster growth for the firm.
That said, technology can only take you so far. The fundamentals of accounting practice management still matter more than your tech stack. Maybe one day, AI could help with these issues, but for now, old school business practices still rely on leadership. For example, if you hire the wrong people, you will still have efficiency and management problems that accompany those decisions. If you don’t focus your offerings, you will still find your talent spread too thin. If you accept the wrong clients, your profit margins will suffer. The list goes on. The point is, buyers still need to assess the basic business practices when evaluating cloud-based accounting firms for sale.
- Valuations are higher.
Demand is higher, so the multiples are higher. We once had a prospective client who owned a cloud firm that wanted to sell for a 2.5 multiple of revenue. If the profitability justified it, who knows, it might have sold for that multiple. However, it’s still an accounting firm! (He ended up deciding to keep the firm to work on profitability). We are keeping a close eye on valuations for virtual firms, but we are seeing two major factors at play:
- A lot of firms are converting to the cloud, so the future supply of firms could impact valuations. (check out one of our podcasts about converting to the cloud.)
- Financing for acquisitions is still based on profitability. Banks generally require the same debt to earnings ratios on an accounting firm that’s cloud-based that they do on a traditional CPA firm. There are buyers in the marketplace that have private-equity backing and don’t need banks for financing so sellers could get lucky. These are savvy buyers, and they look at cash-flow to owner too! I hold that profitability is largely determined by the fundamentals of practice management, as discussed above.
(To see our pricing history of cloud firms, go to https://poegroupadvisors.com/buying/practice-search/?location=269)
- Most of the founders have been very good at sales/business development.
I’m not exactly sure why this has been the case, but my theory is that the cloud firm owners that have sold so far were the early adopters. Early adopters are the entrepreneurs and “movers and shakers” of the industry. Our clients tended to be more charismatic and drawn to business development. As a group, entrepreneurs get bored more quickly and many choose to move on once the start-up phase is over. Many of our sellers have been quite young and grew quickly, but weren’t able to maintain a strong operational focus as their revenue increased.
Along with the rapid growth came increasing complexity. Several of our clients expressed that they weren’t the best person to lead operations, and for a variety of reasons, their margins began to decline as they grew. Starting a business and scaling one require different mindsets and capabilities. Essentially, they were not great managers. In several of our transactions, a larger, more experienced buyer ended up buying who had separate team members to both build the business and manage it efficiently.
- Niche rhymes with Rich.
This is one of the biggest advantages of a cloud-based accounting practice. The firm can develop deep industry focus because geography matters less and less in this environment. We’ve run across numerous firms that focus heavily on a single industry. For example, there’s a practice that specializes in franchised restaurants with clients across the U.S. They’ve grown their team to over 100 people in under a decade.
- Traditional “transitions” work best.
Accounting is still a relationship business regardless of how the service is delivered. In fact, during transition when the buyer is developing and nurturing early relationships with staff and clients, the less cloud-based you can make your communications the better! If you can go see new clients and new team members – even if it means extensive travel – do it. Humans still like face-to-face interaction. Remember, it’s still an accounting firm.
Also- Here are a few ways we might be able to help you write your next chapter: