In the past year and a few months, we have marketed 3 “pure” cloud-based accounting firms and a few others that might be considered hybrids. Our sample size at this point is not statistically significant, but based on our observations we think are well worth sharing. We like the modern model, think the market is rapidly heading this way, and if we can nudge it more in that direction, then that’s a good thing.
Insights from the first wave of cloud-based accounting firm sales:
Below is a list of our biggest takeaways:
- Overall, the demand for these CPA firms was much higher than average. (On one firm, we had just over 100 buyer inquiries). Accordingly, these accounting firms also sold for a much larger multiple of revenue and cash flow than would have been achievable for a more traditional accounting firm.
- The growth rates were impressive. The ability to scale quickly was a common denominator. Growth is expensive and the biggest challenge seemed to be onboarding new staff in order to keep service quality consistent while growing the client base.
- Cash flow to owner was below average. However, that had much less of an impact on the eventual sales price than they would have had with a traditional accounting practice. Most of this is attributable to the high cost of growth – adding staff before adding revenue and the associated management learning curve.
- Client satisfaction reported by the sellers seemed to exceed that of traditional CPA firms. Most clients appreciated the ability to correspond virtually.
- None were absolutely 100% virtual. We are not sure such a firm exists. Some local clients received in-person meetings. Some staff were not remote. (As a side note, in 2016, according to the AICPA© Private Practice Section, 11% of firms with between $200,000 and $1.5 million in revenue use write-up or bookkeeping software that is a cloud-only or pure software-as-a-service offering.)
- A funny and unexpected observation – Poe Group Advisors is a cloud-based firm too! We work remotely with our clients and staff and utilize cloud-based tools and have done so for some time.
Insights from the first wave of purchases by cloud-based accounting firms:
Not only are we seeing sell-side clients in this space, but we are beginning to work with the early adopters on the buy-side too. We are running into some really creative, smart CPAs who not only have figured out this business model, but they are figuring out how to buy and then transition a traditional firm to the model. Buyers who can manage change at the right pace so that clients and staff adapt positively have a tremendous opportunity!
Is technology really disruptive or are we still in the hype phase?
There has been a lot of hype about this topic for some time. This is pretty normal in a sense. In the early days of the internet there were a lot of bold predictions that didn’t materialize for a very long time. Twenty years later and the start-up companies like Amazon are making those predictions a reality. It’s probably going to be that way for blockchain technology, autonomous vehicles and AI. It will take a while, but eventually it will come to pass. In the accounting space, a series of incremental improvements have been developed over time. Now, the tools exist to create a lot of disruption in the industry. The tools that help accounting firms work remotely with clients and staff are user-friendly, cost-effective and readily available now. So, the answer is that this is not hype. Disruption is already occurring. Granted, we are now in the early stages. The technology that’s here today is getting serious traction.
What’s the impact of the new technology?
Firms that fully embrace it will prosper. There are already firms that are growing extremely rapidly with almost no geographic limitations. You are no longer just competing with the CPAs in your city. Potentially, firms from all over the country could serve clients anywhere. This will further drive specialization. Firms of the future will be very focused by industry. With the assistance of technology, they are be able to provide much better forward guidance, in contrast to historical data that will be valuable to clients. Routine work will get further automated and commoditized. CPAs that only provide traditional compliance work will struggle. If you’d like to hear more about this topic, listen to our podcast with Danetha Doe about the future of accounting.
What about the importance of relationships?
Relationships will be important for sure and there are certain clients that either won’t change or will be very slow to change. However, face to face relationships will not be as important if the service gap gets wider…and the service gap will get wider. Forward guidance is incredibly valuable for business clients. Add the convenience factor, and the scales start to tip more rapidly. Remote client relationships are perfectly acceptable to many business owners already. I predict this will only increase over time. Cloud-based firms that can master good communication skills and account-based management will be incredibly successful.
What should we do to adapt?
Get started. It’s not an all-or-nothing proposition. Firms can make steady incremental progress in the direction of becoming a more modern firm. Start by educating yourself. Pick one new technology and implement…then another.