Boldstart Ventures 的 Shomik Ghosh 谈 Kelly Partners（$KPG.AX）独特的会计师事务所滚动并购策略

With me today, I’m happy to have on, I believe for the second time, one of the first podcast guests. What was it, 3 or 4 years ago? Coming up for the second show. How’s it going?

Good, good. Thanks for having me on, Andrew. It’s funny because back in, I think it was 2020, maybe even before 2020, we were talking about Shopify. It was a great time. Obviously, that has gone on to be quite a win. I’ve held on to some of the shares for some time, then unfortunately, at other points, I haven’t caught that upside. Hopefully, other listeners did.

It’s still a pretty magical business. It’s always funny when you talk about your secular stocks, whether it’s on a podcast or something you’ve owned. You’ll hear someone say, “I heard you mention it,” or “I heard about it and held it the whole time.” Sometimes that’s really bad, but a lot of times, when they say they held it the whole time, it’s, “Oh, the chart kind of J-curved up, and you sold it on the first little dip of the J before it went exponential.”

I’m super excited about the company we’re going to talk about today. Before we get started, nothing on this podcast is investing advice. Please do your own work and consult a financial adviser. That’s always true, but particularly true today because we’re talking about an international company, which carries extra risks, including extra tax risks. People will understand why that’s funny in a second. Just remember extra due diligence, not financial advice, all that. The reason I say it’s extra funny is because we’re talking about Kelly Partners Group. This is a tax-focused Australian, let’s call it a rollup. I’d love to turn it over to you and just give an overview of who Kelly Partners is, why they’re interesting, and in particular why a VC like you is invested in an Australian accounting rollup.

Kelly Partners was started by Brett Kelly. He is about 50 years old. He started the business in 2006. Brett grew up in Australia. When he was 18 or 19, he reached out to a bunch of top Australian business leaders and government officials, met with them, and wrote a book about it. No publisher would publish it because he was so young, so he bankrolled it with his own capital and some debt. It did well, and since then he’s written, I think, a book every 7 years or so, exploring people’s wisdom and trying to learn from the best operators.

He started as a chartered accountant and worked at a firm. He hit all the goals the firm had set for him, but they didn’t make him a partner. He got approached by a friend to start an accounting business, realized he could do it much better, and that’s where it all started.

Kelly Partners acquires accounting and tax firms all over the world. Right now, the main focus is Australia, the U.S., the U.K., and Canada. It’s an accounting rollup, and there’s a lot we can dig into about how they do it and the secret sauce, but that’s the gist of it.

I’m really glad you recommended it. When you have something that fits pretty clearly into the compounder mold, and they’re quoting Mark Leonard and Constellation Software as frequently as they do, that gets around the small-cap investor world. I just hadn’t looked at it. It was a fascinating half-day or three-quarter-day of research. The market is a competitive place. What are you seeing that the market is missing? Even if you have a great management team, all of that is usually priced in. What are you seeing that makes this an alpha-adjusted opportunity?

I think this goes back to a concept that we talked about in the Shopify episode all the way back then. There are 2 types of valuation approaches: relative valuation and absolute valuation.

On an absolute valuation basis, I haven’t looked today, but the company is probably around a $530 million Australian-dollar market capitalization. In U.S. dollars, that’s around $300-something million. From a venture-capital perspective, you look at how big the business could become, how many accounting firms there are, where they’re targeting, and how large the target market is. That’s what enables me to say the market is missing something. I wouldn’t say it’s completely missing the company, because I think it’s paying a fair relative valuation right now, but the absolute valuation is still attractive to me because I think there’s massive growth ahead.

One of the biggest competitors in the accounting-rollup space is CBIZ, which I believe trades under the ticker CBZ. It has an enterprise value of about $4.8 billion today and more than $1 billion in revenue. It’s an accounting rollup. That’s an indication of how large this could become.

The question, of course, is whether private-equity firms are already doing this. There are even venture-capital funds, such as Thrive Capital and General Catalyst, that have started to do it. Why does Kelly Partners have a right to win? They have a really unique model.

They buy 51% of the businesses they acquire. That’s important because, say you’re Bob and you’ve owned an accounting firm your whole life. You’ve grown this business, and you’re now thinking about succession. Kelly Partners can say, “We’re going to buy majority ownership, but you’re still going to have 49% of the business. We’re also going to promise you that, by coming into the Kelly Partners ecosystem, you’ll make more money than you did on a standalone basis. On top of that, we’ll help you with succession and with phasing you out of the business in the way you want.”

Maybe you still want to work, but you don’t want to work the hours you used to. That allows them to buy these businesses at really attractive multiples. I think they have a 20% hurdle rate, and it’s typically around 4 to 5 times EBITDA. They hold the businesses for the long term.

That’s where it becomes really attractive: this unique model is targeting businesses that are generally between $1 million and $10 million in revenue. Think about a private-equity rollup. There are certain private-equity firms for which this might be useful, but most are trying to acquire larger businesses. CBIZ, with more than $1 billion in revenue, is also looking for larger businesses to buy.

Kelly Partners is focused on the people servicing you and me. It’s not the firm servicing Coca-Cola. That’s unique because the market is more fragmented.

I’m really glad you recommended it. When you have something that fits pretty clearly into the compounder mold, and they’re quoting Mark Leonard and Constellation Software as frequently as they do, that gets around the small-cap investor world. I just hadn’t looked at it.

It was a fascinating half-day or three-quarter-day of research. Let me start with the question I like to ask everyone. One of the tough things with rollups is that you can buy almost anything if you come with enough money. At some point, somebody will say yes. But you mentioned what they call the secret sauce.

On their third-quarter earnings call, they talked about buying firms with mid-single-digit margins and taking them to 30% margins. What is the secret sauce that allows them to take a firm that you and I own 100% of, perhaps with 9% margins, and increase those margins so dramatically?

Brett Kelly even said they have a huge margin of safety because if they buy something at 5 to 6 times EBITDA and triple the margins, it becomes a 2-times EBITDA acquisition. If they pay 8 times, it effectively becomes a 3-times acquisition. What is the secret sauce that creates that much margin expansion?

Let’s take a couple of aspects. From the business perspective, one important thing to notice about these accounting firms is that the likelihood of customer churn is very low.

My accountant, for example, works with a number of venture capitalists. He understands the business and knows how to file extensions, how carried interest works, and all of the other things that come with it. I don’t have to think about it because he knows the business. If he raises his prices by 5% to 10%, it would take a lot for me to say, “He already knows everything about all of my assets, and now I have to teach that to somebody else to save a couple of dollars.” It’s not worth the audit risk or the brain damage.

Retention for these businesses is very high. On top of that, they have pricing power. Those are 2 levers.

I agree with both of those points, but that brings me to the other side of the question. I’ve seen these models work really well and really poorly in different industries.

Private equity has struggled in the dental industry. You buy a dentist’s practice, and suddenly the dentist doesn’t own 100% of the equity anymore; they own 49%. Maybe they don’t work as hard because they don’t get the direct fruits of their labor, or they open a competing practice across town after their noncompete expires. Everything you said makes sense, but the accountant controls that. They can either price it into the sale to Kelly Partners, work less hard because they have less direct ownership, or go create a competitor.

They pay a third of the purchase price up front and, I believe, two-thirds in year 2. That creates a dynamic where you have to keep working for at least 2 years. But during those 2 years, they can show you the Kelly Partners business system.

Brett talks about Danaher, the Danaher business model, and those kinds of concepts. What he has built is a system in which 9% of the revenue from acquired companies is put into KPG’s centralized functions. There’s a technology team, an HR team, a marketing team, a sales team, and everything else that has been built out.

They call it a business system, but it’s essentially a services group that can immediately start improving the acquired business. My accountant, for example, does not have the most sophisticated back-end billing system. His accounts receivable are pretty bad because he literally sends me a letter and asks me to send him a check.

Kelly Partners’ accountants use Venmo. They send a message saying, “I did your accounting this year. You owe me $200. Whenever you get a chance, here’s my Venmo.” An accountant should not be managing accounts receivable that way. Kelly Partners can standardize and automate that process, which immediately improves the cash-conversion cycle.

There are also the customer-retention dynamics we discussed. Once Kelly Partners has data from more than 80 acquisitions, it can determine whether pricing can be increased and how that flows through to earnings.

Then there’s sales and marketing. Most accountants acquire customers through word of mouth, which is great because it means customer-acquisition costs are low. But customers come in drip by drip. If you put real marketing behind the business and say, “We are the best venture-capital accountant,” you can grow that revenue stream in a way that the existing partner either couldn’t or didn’t want to.

The accountant I work with is not taking on any more clients, but that doesn’t mean the business couldn’t take on more work by hiring additional people. That’s where Kelly Partners can show the owners how it increases their earnings.

It sounds great. An accountant might charge $200 an hour, and they may not realize that their business systems are terrible. They may be spending 10 hours a week on management and phone calls. Kelly Partners can hire an office manager, pay that person $40 an hour, and give the accountant 10 hours back. The accountant can work 5 of those hours, generating $2,500 in revenue, and take the other 5 hours off. The accountant is happier, and the practice is more profitable.

The only thing that seems a little disappointing is that private equity has done a lot with physician offices. One reason those rollups work is that billing is difficult. If you and I have a physician practice, it’s difficult to negotiate with insurance companies. But if a private-equity firm rolls up 20 physician offices in a state, it can negotiate directly with insurance companies. When it acquires the 21st office, it can say, “You’ll get all the back-office synergies, and you’ll get access to our negotiated insurance rates.”

It sounds as if Kelly Partners falls somewhere in the middle. Please correct me if I’m wrong.

I would say we’re talking about different markets. If you’re serving individuals and small and medium-sized businesses, there’s a different customer need and a different back-end system than if you’re serving the middle market. CBIZ is focused on the middle market.

Could a private-equity firm do the same thing? Yes. But these are accountants who know the business cold. They can share best practices across all of the other accountants in the group.

The owners of these businesses are also incentivized to become owners of Kelly Partners as a group. That’s where the Constellation Software aspect comes in. Lawrence Cunningham is a board member of Kelly Partners. His only other 2 board positions are Marel, which is sometimes described as “baby Berkshire,” and Constellation Software.

Lawrence read a shareholder letter that was sent to him by a random person, called Brett Kelly, and said, “This is super interesting. I bought some shares. Can I speak with you?” He eventually joined the board. Marel is a multibillion-dollar business, and Constellation Software is one of the best software rollups of all time. Then you have this roughly $300 million market-cap business where Lawrence is also involved.

That’s where the decentralized scouting comes in. You acquire an accountant and incentivize that person to own shares in Kelly Partners. They become a decentralized scout who can go out into their local market and talk to other accountants.

Suppose you make an acquisition in Florida. You’re targeting venture capitalists, but you know someone who specializes in working with athletes. You can say, “I just joined Kelly Partners, and it’s pretty good. Would you like to come over? We could share best practices.” That is how you begin acquiring more businesses.

The owners are shared owners in the larger practice, they enjoy being part of it, and they go out and do this decentralized scouting. Private equity has to cold-call and do all of this itself.

I believe they’ve said they looked at roughly 1,400 or 1,700 companies and acquired about one-twelfth of them. That sounds about right because their Owner’s Manual mentions an 8% hit rate. Eight percent of 1,700 is about 136.

Let me ask about the decentralized scouting method. The thing that gets shareholders excited is that Kelly Partners started in Australia, and I believe it recently cracked the top 10 accounting firms in Australia, excluding the Big 4.

They’ve started moving into the United States, initially in California, and they’ve added Florida. There may have been another market as well. I can understand how, if I’m a dentist in Texas, I know the best dentists in Texas and perhaps the best dentists in the Southeast. But it’s harder to see how an Australian accounting firm, even one that has done a great job and has great scouts in Australia, would know the best local accountants in Florida or California.

Maybe they pay a fair price for the first 5 acquisitions and then develop the scouting network. But because it’s a people business rather than a software business, I worry about whether the strategy works in the United States. The international expansion is what shareholders get most excited about, so I wanted to ask about that.

That’s a great question and a concern anytime you see a business expand internationally. The only thing I would tweak is that they’re not simply saying, “We’re going into California and buying a bunch of businesses.”

They started in Los Angeles, and even more specifically, I believe they started in Burbank or somewhere similar. They targeted areas with the highest density of Australian expatriates. The firms they’re acquiring are not initially servicing people like you and me. They’re servicing Australians who moved to the United States.

That’s how they’re building out the network. They’re focusing on the density of expatriates, along with specific markets such as Florida, North Carolina, and Texas. In the United Kingdom and Canada, they’re also being very specific about where they operate.

Over time, you could get natural expansion. The friend of an Australian expatriate who runs an accounting firm might be an American who grew up locally and has a good business. That’s how Kelly Partners could expand beyond the expatriate community.

They’re not going into international markets willy-nilly. They’re being thoughtful about maintaining the Australian culture and playing to their strengths.

I’ll turn this into a softball question. I first looked at Constellation Software in 2016, and I had the exact same question then that I do now. Constellation has gone up something like 12 times since then, so I’ll frame this as a softball.

You mentioned a company with a roughly $300 million market capitalization. A lot of the valuation is not because it trades at 10 times earnings. It’s pricing in a lot of creative growth. They’re targeting accounting practices with $1 million to $10 million of revenue. The market is obviously huge, but it’s fair to ask whether there are enough businesses for Kelly Partners to make enough accretive acquisitions over the next 5 or 10 years to grow into the valuation.

It takes a lot of $3 million acquisitions to move the needle at this size and at the valuation the stock is implying.

That’s where the Constellation method comes into play. Everyone wondered whether Constellation would be able to keep making acquisitions and how long the runway would last. The decentralized aspect is important.

If Kelly Partners can’t figure out how to decentralize the mergers-and-acquisitions process, the value collapses because it won’t be able to make the future acquisitions needed to compound indefinitely. That’s a huge risk.

To be clear, if you go into KPG, I believe it says around 17 times EBITDA or something similar. But because Kelly Partners buys 51% of the businesses, it’s effectively trading at roughly 34 or 35 times EBITDA. It is not cheap by any metric.

Let’s look at CBIZ. It trades at roughly 20 times EBITDA, so Kelly Partners is more expensive on a relative basis. But the question is whether the team is focused on the right things, given the enormous market opportunity and all of the risks we’ve discussed. For me, the answer is yes.

I think this could be a 10-times-type bagger, but there are many risks, and it’s never going to be cheap. Maybe you can buy it on a hiccup at some point, but I doubt it. Once it lists on a U.S. stock exchange—which could happen in the near-term future—there will be many more eyes on the business. The valuation could get bid up even higher.

For anyone listening, Kelly Partners had an investor day in November 2024. The accounting is complicated because of the noncontrolling-interest issues, but they do a great job of backing out the numbers. They’re essentially spoon-feeding you how to look through all the complexity.

Let me ask you about the plan to relist from Australia in the United States. Every investor loves a U.S. listing, although I don’t think Australian multiples are particularly cheap. Australia has superannuation funds, which create a permanent bid for stocks. If Kelly Partners were listed in the United Kingdom, it would probably be a party.

This is a team that seems focused on long-term value creation. They talk about buying back shares when the stock is cheap, and I think they bought back shares in the second half of 2024. They even discuss dividend-discount models. That suggests they believe the stock trades too cheaply.

Why relist from Australia to the United States? They’re not really issuing equity, and they’re the kind of shareholders who would want to buy back stock when it’s cheap. Most managers I know would prefer to be in a less efficient market with fewer compliance requirements and fewer eyes on the company. The move to the United States sounds more like something a short-term-focused company would do, particularly one planning to issue equity.

I’m not harshly criticizing it, but it doesn’t strike me as the kind of move this team would make. It sounds like the type of thing that could create a short-term pop.

We’re speculating about whether there will be a pop. I think there probably would be, but who knows?

What does a U.S. listing actually do? First, it brings more exposure to the brand. The U.S. stock market is still the most dominant market. Does an accounting rollup necessarily need exposure through the stock market? No. But does it help an accountant in California who says, “I’m selling my business, and the company buying it is listed in the United States”? Yes.

It helps explain to the accountant’s spouse why they’re selling the business. It’s easier to say, “I’m buying publicly traded stock listed in the United States,” than to explain an Australian listing or an ADR.

That’s a great point. If part of the sale consideration is stock, having a U.S.-listed stock answers that question.

There’s another aspect we haven’t covered. When Kelly Partners acquires these businesses, it’s trying to use as little equity as possible. Each acquisition has debt attached to the acquired entity.

If it buys Rangely Capital LLC or whatever the entity is, the debt is attached to that business. Nothing is coming to the parent company. It’s a little complicated, but you can think of each acquired company as having its own debt.

Listing in the United States helps because then the company has access to U.S. regulations, the U.S. Securities and Exchange Commission, and U.S. banks. The banks involved would no longer just be Commonwealth Bank of Australia or another Australian bank. They could be JPMorgan, which could help with these kinds of deals.

The risk is that they obtain access to JPMorgan financing and then say, “We’re pretty good at this. Why don’t we acquire a business with $100 million in revenue?” That would scare me because it would take away much of the moat I currently see in the business: the ability to service mom-and-pop and small-business accounting firms better than anybody else.

I agree. For those listening, go look at the investor-day slides. Let me ask one more question. With the physician-rollup example, the benefit is that if you’re first and roll up 20 offices, you have the scale to negotiate better rates with insurance companies. When you acquire the 21st office, you have the billing and insurance infrastructure that a smaller startup or midsized rollup doesn’t have.

It’s important to think about the difference between the businesses we’re discussing. With a dental rollup, customer churn is higher. If you get audited by the IRS, you could lose your house, your car, and many other things. You could destabilize your life.

If you get a cavity, it’s not the worst thing in the world. You can deal with it. If you have a heart attack, that’s the worst thing in the world, which is why people don’t switch physicians very often. Dentist churn is higher than physician churn, and both are higher than accountant churn.

An accounting relationship is more like a physician relationship. The risk associated with losing the knowledge and context that the accountant has is high. If you switch accountants and that knowledge isn’t transferred properly, you could get audited. That’s a meaningful risk.

That’s a great point. You mentioned the audit risk, and my heart rate picked up a little bit. Let me back up and ask about Kelly+Partners’ move into adjacent businesses.

Most accounting firms eventually end up with a wealth-management business. Unless they’re completely corporate-focused, they’ll have clients dealing with wealth transfers, and the synergies are natural. Kelly+Partners clearly wants to move into other areas. How do you think about that? Is it net present value positive, or is it mostly risk?

It’s both a risk and net present value positive. The risk is that you lose focus. The software analogy is probably the easiest one to make. Whenever a company moves outside its core product and adds a new product, it has to create a new go-to-market motion, new marketing materials, a new team, and new economics. There are many challenges.

At the same time, no successful compounding business has reached massive scale without moving into multiple products and going outside its comfort zone. It has never happened. No company has become massive by remaining a one-product business forever.

Did you see the quote attributed to Masayoshi Son? It said something like, “Bill Gates and Mark Zuckerberg are one-trick ponies. I’m over here building an empire.” As the founder of the Yet Another Value empire, I respected it.

I thought, “You’re really saying Zuckerberg is a one-trick pony?” He bought WhatsApp, made almost every pivot perfectly, and you’re calling him a one-trick pony while you’re building an empire?

I didn’t see that quote, but Masayoshi Son is awesome. He’s having his moment again. The guy has 9 lives. It’s incredible.

Multi-product execution is really difficult. But if you pull it off, it’s the only way to become a massive business. I think Kelly+Partners has been thoughtful about it. Estate planning makes a lot of sense because the company is already managing clients’ financial estates.

Wealth planning is another logical extension. Insurance is more of a stretch. Every financial company seems to attach an insurance business, then 10 years later detach it. That’s more of a risk.

One thing I will say is that Kelly+Partners is testing these adjacent businesses thoughtfully. It’s focusing on Australia with these ancillary businesses. If they work in Australia, the company can gradually move them into the United States, the United Kingdom, and Canada.

We haven’t seen it do that yet. Right now, it’s still putting boots on the ground, making accounting acquisitions, building the playbook, and building the decentralized scout network. I think Brett is thoughtful about reaching some level of density before layering on adjacent products and new geographies.

Let me ask about a tail risk. Betting against the complexity of the U.S. tax code has been a losing bet forever. But there have been efforts to simplify tax returns for people making less than $50,000 a year. If the government wanted to, it could probably simplify tax returns for almost everyone except the very highest earners.

The other side is that tax returns are exposed to artificial intelligence. They’re essentially systems of rules. You could plug in the equivalent of a W-2, and AI could produce a tax return that’s 98% correct. Then you could hand it to an accountant to review, or review it yourself.

You’re a venture capitalist involved in AI, and you’ve probably talked more about DeepSeek in the past day than I have in my entire life. How do you think about the risk that, 3 years from now, AI is so good that accountants are completely displaced?

It could also go the other way. Two years ago, I heard a lot of people say lawyers were going to be displaced by AI. Now I hear that lawyers are benefiting because AI does the grunt work, allowing them to spend more time on creative work, client sourcing, and relationship management.

Technology has almost never completely eliminated jobs. People said typewriters would eliminate editors and copywriters, but we still have editors and copywriters. People said secretaries would be eliminated by automation. Now we have calendar tools, but that has just resulted in more meetings being booked, which creates more need for people to manage them.

The same thing applies to accounting. First, let’s address tax complexity. H&R Block and other companies spend a lot of money lobbying to make sure that tax simplification doesn’t happen. It’s terrible, but it has been that way for a very long time, and I don’t think it’s going to change.

The people making less than $50,000 a year generally aren’t using the accounting services of the firms Kelly+Partners is acquiring. The company is serving higher-net-worth individuals and small and medium-sized businesses.

Technology is an enablement shift rather than a platform shift. I’ve used ChatGPT for stock research, and it’s the best tool I’ve ever used. The other day, I asked why Regeneron was trading where it was. ChatGPT gave me a bunch of reasons, then came up with this IRA thing. I asked what that was, and I could continue down the rabbit hole using ChatGPT, Perplexity, or whatever answer engine I wanted.

Someone could say that AI is so good at research that it could buy and short stocks. But investing is a system of people buying together. Adobe gets shorted because people say it’s an AI loser, while someone else may have a variant perception and say, “Given all of that, we’re actually going to make it a higher position because we don’t believe that’s the case.”

That is difficult for AI because it involves behavioral tendencies, the zeitgeist, culture, tweets, and who is tweeting what. You could create a model that takes all of that into account, but how do you gauge nuance? The tuning and weighting would be difficult.

Typically, these paradigm shifts augment the people doing the work. Margins go up and people become more productive. Eventually, everyone else becomes more productive as well, and the margin gains get competed away. You end up back where you were.

In the near term, though—call it the next 3 to 5 years—there should be a tailwind as people adopt these tools. That could be a margin tailwind for Kelly+Partners and other rollups if they’re able to leverage AI.

I want to push back from a different angle. You said margins go up and then get competed away. I wonder whether what happens instead is that the lower-tier players get competed away, while the best players can do more work.

Think about lawyers in the 1980s. What would a highly paid lawyer make—$1 million? Today, there are lawyers who make 20 times that. They probably aren’t dramatically better at practicing law than the best lawyers 20 years ago, but they can use AI and other tools to do more work. Because the world is more competitive, they can earn much more.

I think that’s a fair point.

Let me move to another red flag. I’m a value investor, so when I read the owner’s manual, it speaks to me. Brett quotes Charlie Munger, mentions Good to Great, Built to Last, and talks about listening to a Danaher podcast. Unfortunately, he didn’t mention listening to the Yet Another Value Podcast. Hopefully, the next earnings call will say, “Go listen to it if you want to be a shareholder.”

But my history with CEOs who mention Good to Great is mixed. There’s something about Good to Great that causes people to mention it when there’s a problem. There have also been CEOs who said they read The Outsiders and were going to run the company using an Outsiders playbook. Some did it well, and some saw the stock go to zero.

When I read Brett’s materials and see Lawrence Cunningham on the board, it sounds great. But it also sounds like the kind of thing a low-margin business might use to create a retail cult, generate a high stock price, and then rug-pull shareholders.

I don’t know what the rug pull would be here because Brett owns roughly 50% of the stock. But sometimes the things that look like green lights are actually red flags. I’ve accumulated some gray hairs over the years, and I’ve been hurt before.

That has been the biggest pushback from people who look at the stock. Brett is active on Twitter, appears on podcasts, and Kelly+Partners has its own podcast. People ask, “What is this guy doing? Why is he talking about these books all the time?”

As venture capitalists, we study human nature, and one thing we look for is consistency. Good to Great is not something Brett mentions once and then moves on from. He mentions it in every conversation. It’s ingrained in him. It’s how he thinks about businesses.

If he suddenly switched from Charlie Munger to Bill Ackman because Ackman was doing well, that would scare me. But the consistency in his messaging is encouraging.

I also encourage anyone considering becoming a shareholder to read the owner’s manual. It provides an extraordinary level of detail—not only about the accounting, but also about Brett’s shares and ownership. It shows what he sold each year.

He says he owns roughly 48% right now and expects to own more than 35% over time. That could happen through share issuance or through him selling shares, but he’s telling you that he won’t remain a 90% shareholder. I find that refreshing.

If someone is concerned that he’s overly promotional, they should identify the key performance indicators they think are important and see whether those are reported consistently. If the KPIs change every time, that’s a warning signal. If Brett sells 5% of his stake tomorrow, I would expect him to report it and explain why. If that didn’t happen, it would be a warning signal to sell.

But I don’t think that’s the case. He’s 50 years old, he just moved to the United States, and his son is about to go to college. He’s still in the prime of building this business. He could have stayed in Australia, become very wealthy, and relaxed. He moved to the United States because he wants to build the company there.

I agree. When I say red flag, I’m thinking about where the rug pull would come from. In the examples I’ve seen, the company is usually issuing stock constantly, the CEO is being paid in stock, or the CEO is selling stock constantly.

Here, Brett owns around 50% of the business. His ownership has come down a little over time, but he isn’t selling huge amounts of stock or receiving huge amounts of additional stock. It’s difficult to see the rug pull.

The actions suggest there isn’t one, and that gives me confidence.

I have one last question before we get to final thoughts. Kelly Partners is not a franchise business, but it’s similar in some ways. Anyone studying franchises will study McDonald’s, and Kelly Partners talks about McDonald’s quite a bit.

They mention entering California and Florida, which are 2 of McDonald’s largest markets. I think they mentioned going to a McDonald’s franchisee symposium in France last year, although I don’t remember for sure. Was there anything more to why they focus so much on McDonald’s?

Brett has been a student of businesses. He talks about other companies as well—Costco, Berkshire Hathaway, and others—but people will ask whether Kelly Partners is trying to be like Berkshire. He’ll say he loves studying McDonald’s.

Part of that is the franchise model, but it’s also the geographic expansion, owning the customer relationship, and thinking about real estate. Kelly Partners also has an investment office in which the partners and others buy stocks, private companies, or land. Brett is thinking about those different aspects.

That creates a risk. If he decided to become a real-estate landlord and started buying up properties, that would be a concern. But he’s very transparent—almost to a fault. He talks about everything and shows everything.

If he failed to disclose something and it later emerged, that would be an obvious red flag because he would have violated the trust. But that isn’t who Brett is, and it isn’t how he has operated.

He started this business in 2006, so he has been operating it for a long time. He could own 100% of the business, be a very wealthy person living in Australia, and have a good life. Instead, he wants to build a large, compelling, long-standing business.

He has also appointed a successor whom the board knows. He has trained many other people beneath him in case something happens. He’s not thinking, “I’m Brett, the company is named Kelly Partners, and everything depends on me.” He’s already thinking about how to pass the business to others and keep compounding it over time.

He wants this to be a generational company. He has said that, right now, he’s the point person and the front man, but when the time comes, he wants to be like Mark Leonard: grow a giant beard, become a recluse, and let other people run the company.

This has been a lot of fun. I’ve really enjoyed learning about the company. Given the stock performance and how interesting the business is, I’m kicking myself for not looking at it earlier.

I just want to go back to what we went through between the physician, the dentist, and the accountant. These are not AI factors; they’re human factors. Think about the risk associated with an audit and the risk associated with losing your financial being because of these sorts of things. Think about your own personal situation: Do you want to handle all this tax complexity on your own, or would you rather use somebody whose job it is to do it? What sort of pricing power does that person have over you? Those dynamics help you think about this being a good business: high gross retention, the ability to charge more and earn more margin, the ability to increase revenue over time, and low customer-acquisition cost both in acquiring customers like me and you and potentially through a localized network effect. If you start in Florida, can you then acquire firms in nearby markets because the owners are friends and go to the same CPA meetups? That gives you low customer-acquisition and M&A costs embedded throughout what the business does. It’s compelling because it parallels what I see in the security and infrastructure companies we invest in: leveraging distribution, going multiproduct, leveraging low CAC, and leveraging network effects.

If we’re sitting here 5 years from now and something has gone wrong, the stock could be down substantially. It wouldn’t take much for that to happen because the stock has a lot of growth premium for future accretive acquisitions. If the acquisitions stopped for any reason, the stock could fall.

What do you think would cause that miss?

The company could lose focus. It could become too excited and either move upmarket too soon, acquiring a $50 million or $100 million-revenue business, or move aggressively into wealth management and lose the core of the business.

That’s the biggest risk. You can monitor it by studying the key performance indicators and the acquisitions. The company is transparent about what it reports and what it acquires. You have to maintain a list and stay on top of it.

One final question. Brett talks about buying back shares when they’re undervalued and about his dividend-discount model. How do you think about fair value?

The hard part is that if they were going to make $500 million in accretive acquisitions next year, the shares would be worth thousands of times where they are today. You have to pace out the acquisition opportunity.

Fair value is the hardest part of this equation. It’s why I passed on Constellation Software for more than 10 years. I kept looking at it and thinking, “The multiple is high. I don’t know how they’ll continue to make these accretive acquisitions.” I should have bought it, gone to the beach, and stopped thinking about it.

That’s the hardest part about buying compounders. You’re paying a compounder premium, so you have to assess how much of that premium you’re paying.

To be clear, Kelly Partners is not trading at 17 times EBITDA or whatever the headline figure says. It’s closer to 35 times EBITDA. But you have to look at the EBITDA itself. The year-over-year growth number isn’t particularly high because the company has made so many acquisitions.

The acquisitions are still being made at lower EBITDA margins than the existing business. That creates an interesting dynamic: The more acquisitions they make, the more those acquisitions initially suppress EBITDA growth. You’re betting that the company can improve those margins and return them to historical norms.

Past performance doesn’t guarantee future success, but using past performance to judge whether they can do that gives me more comfort. On a relative basis, the stock is expensive, but it’s not quite as expensive as it appears because the acquired businesses are not yet optimized.

CBIZ is a $4 billion to $5 billion enterprise-value company that has compounded for a long time. If Kelly Partners is still early in its compounding story—and I think it is, given that it only recently began expanding in the United States, United Kingdom, and Canada—then the runway could be very long. Australia itself also has room to grow.

For me, the high multiple is warranted. But it’s still a very high multiple on a relative basis, and people need to understand that.

I own Constellation Software, Topicus, and Mastercard. I’m comfortable owning those businesses. I’m less comfortable with the kinds of stocks you like, where it’s 5 times EBITDA on a trough business that is supposed to turn around. That’s not my game.

You mentioned a 5-times-EBITDA stock, and I’m not sure what you thought of.

A rat with cocaine, as someone described a shipping company once.

At some point, you need to look at Match Group. Match Group is the version of that for me right now. It’s a conversation for another day, but I think it’s really interesting.

My concern is that neither of us is the right person to evaluate it. We’re both married and have children. You’re in the thick of it with your first child, so we’re not the right people to judge the product.

Unless you’re actually using the dating apps, you’re relying on an analysis of the spreadsheet. Eight years ago, I owned Match Group and had a thesis because it was the hot thing among me and my friends. When I talk to my remaining single friends today, many say they don’t use online dating anymore. They’re going to run clubs or finding other ways to meet people. There was even a Wall Street Journal article about it.

I worry that the network effects make sense on paper and the valuation looks cheap, but the actual users are churning. It’s hard for married people to conduct proper due diligence.

When I was looking at it in 2016, I told my now-wife, “We’ve been dating for 9 months, but I need to download some dating apps for due diligence.” A few months later, she told me she had texted all her friends saying, “I have to break up with this guy. He’s definitely about to cheat on me.”

You can say you downloaded the apps and looked at them, but unless you’re actually using them, it’s difficult to understand the product.

The only thing I would push back on is that I think Match Group is an AI winner priced as an AI loser.

AI is very good at search, discovery, and surfacing insights that you weren’t able to see before. For people looking at dating profiles who want to understand more about someone, AI could enrich that experience.

A lot of dating profiles use Instagram filters and other tools. AI is only going to improve those capabilities. You’ll be able to make a photo the best and most attractive version of itself. AI could improve the way people present themselves on dating apps.

I wouldn’t necessarily call that an improvement, but the stock is currently priced as if it’s a declining, dead asset. I think it’s more likely to be a stable asset that can generate cash flow for a very long time, with potential growth if Hinge breaks out.

If you want to own that stock, you should hire 2 analysts who are 24 years old and tell them to sign up for all the dating apps. Ask them how they use the apps and how their friends use them.

That can be the edge. Stocks outside the Silicon Valley and New York City wheelhouse are often underpriced because investors don’t understand them. There can be a long runway in businesses that aren’t in that world.

This has been awesome. It’s been 4 years between podcast appearances, so we’ll have to make the gap between the second and third appearances shorter.

Thanks, Andrew. This was great. Talk soon.