Kelly Partners enters US market amid two decades of 'Berkshire-style' stealth growth

Kelly Partners enters US market amid two decades of 'Berkshire-style' stealth growth

Kelly Partners founder and CEO Brett Kelly

Sydney-based accounting group Kelly Partners (ASX: KPG) has pushed into the US market for the first time through an acquisition, in a move that company founder Brett Kelly says will tap into demand from up to 60,000 Australian companies operating in California.

The purchase of an unspecified accountancy firm is expected will add between US$1.2 million and $US1.7 million ($1.8 million to $2.5 million) in annual revenue to the group, with the entity to be renamed Kelly Partners Woodland Hills and form part of a strategy to target the inner ring of Los Angeles where Kelly Partners plans to grow the business further.

The Woodland Hills acquisition for an undisclosed sum is the ninth for Kelly Partners in FY23 which will add between $17 million and $23.2 million in annual revenue to the group. This represents an increase of between 26.1 and 35.7 per cent of FY22 revenue, delivering on the company’s strategy to grow an average of about 30 per cent a year.

Kelly Partners has been operating largely under the radar since it was founded by Kelly in 2006, acquiring 83 accounting firms in the past 17 years.

“That is by design because it doesn’t serve us to educate anyone in particular to what we are up to,” Kelly tells Business News Australia.

“We’ve got some of the world’s best investors in our business, and they’ve found us from the other side of the world,” he says.

Among them is Lawrence Cunningham, a corporate governance specialist who has authored dozens of books including The Essays of Warren Buffett.

Cunningham, a professor of law, joined the Kelly group board last year adding to his directorships of Canada’s Constellation Software, a US$37 billion company founded by reclusive billionaire Mark Leonard, and Markel Group, a US$17 billion US-based specialty insurer.

Kelly says he was first encouraged by Cunningham to venture into the US market after striking up a friendship with the vice chairman of Constellation Software before inviting him to join the Kelly Partners board.

“The US market is so much larger that it makes sense to look at it, while retaining our focus on the Australian market,” Kelly says, adding that North Queensland is also an area of interest for the group.

A frequent attendee at Berkshire Hathaway Inc. annual general meetings and an admirer of Leonard’s business acumen, Kelly has taken a leaf out of the Warren Buffet stylebook and is growing Kelly Partners with a minimum of fuss – avoiding what he sees as investors who are ‘typically looking for the next sexy thing’.

“I am really trying to build the next Berkshire/Constellation of the accounting industry and build Australia’s only global accounting firm for private business owners,” Kelly says.

“We’ve only really just told people this publicly because we don’t try to set difficult bars for ourselves to step over.

Doubling the business every 3.2 years

“We’ve grown at about 32 per cent per annum every year for 17 years in a row on average. We’ve doubled the business every 3.2 years six times in a row.”

Kelly says this has been achieved by acquiring ‘bite-sized businesses’ that are ‘not difficult to integrate’.

Kelly Partners posted a net profit of $13.3 million in FY22, up 21.8 per cent from a year earlier, as revenue rose 32.6 per cent to $64.9 million. FY23 half-year revenue was up 42.2 per cent to $44 million, although the statutory net profit was 20 per cent lower at $6.5 million.

However, Kelly’s key focus is on growing revenue which has helped the company maintain dividend growth in recent years. He applies the ‘pragmatic acquisition’ strategy which Kelly describes as ‘just doing the same kind of deal over and over again’.

“Constellation Software has done about 700 acquisitions at US$3 million to US$5 million in revenue, and they are a model of how we think about growing the business. Nothing individually is material, but when you add it up it is material and becomes significant.”

Kelly Group has grown from two greenfield offices in North Sydney and the Central Coast in 2006 to a group that comprises 35 operating businesses employing close to 500 people across 28 locations in Australia, Hong Kong and the US.

Kelly says the US, and especially California, are key to the company’s growth strategy.

“California is the fourth-largest economy in the world – Australia is the 13th largest – and there are 60,000 Australian businesses over there, but no Australian accounting firm to service them.

“As clients look to operate more globally, the question is: Can we help them? We’re aiming to do that.

“When an Australian business wants to sell into the US, they have to get an accountant to set up a structure, set up their compliance and make sure their local taxes are handled appropriately. The big US firms are very busy and not really interested in speaking to Australians who have these strange questions.”

The entrepreneur founded Kelly Partners in March 2006 after a friend asked him to assist with growing his accounting business. Kelly took a 75 per cent stake and the journey began.

“Often people see things in you that you don’t see in yourself,” he says.

Kelly, a professional accountant at the time with a skillset in interpersonal communications, had written several books and undertaken speaking engagements that were aimed at advising people on how to run a business. Kelly concedes he was jaded with the accounting industry and that was part of his reasoning to build the business.

The 'reluctant' startup

After successfully growing the startup, which led to other accountants seeking Kelly’s advice on creating their own accounting businesses, Kelly ‘very reluctantly’ decided to build a system that would fix the problems he saw in the industry.

“The problem was that I didn’t think that accounting firms were run intelligently as businesses. They weren’t run to help their people and they weren’t run to really help their clients. They were really a place where a technically minded person could impress themselves with their own technical skills. I thought we could do better.”

He then compiled a list of what he thought was wrong with accounting businesses and ‘did the opposite’.

“The history of the industry is to try and sell financial products to clients, but that’s not our business,” he says.

The Kelly Partners strategy involves professionally transitioning businesses which are typically acquired by the company on a 51-49 per cent split. Kelly says the system targets a ‘doubling the operating performance of those businesses and engaging the young partners in the partner-owner driver model - and just focusing on accounting and tax’.

“The businesses (we buy) are half as profitable as they should be,” Kelly says, adding that sometimes the problem rests with older partners who may be less inclined to grow their business than their younger partners.

“We have a services team, a specialist management team that works under the businesses; it just does the basic things that should be done very well in a business, so that the returns are appropriate for the partners.”

Kelly says when he set out in Sydney’s northern suburbs 17 years ago, he had ‘this plan to go around Sydney and grow Walmart style’.

“I had a 10-year plan to make it go public,” he says.

The businessman met that target, listing Kelly Partners on the ASX in 2017, and it was only then that the wider investment community could gauge the company’s growth and its acquisition strategy.

The shares, which were issued at $1 each, took more than three years to gain traction and hit a record high of $5.30 in February last year.

“We’ve built really good credibility as a quality counterparty,” Kelly says.

“We’ve done enough that I can’t keep up with the number of people contacting us and wanting to do things (with us), which is great.

“Now it’s about staying in our circle of confidence, as Warren Buffet would say, and staying focused on doing what we do and not getting distracted with anything exciting.

“While the US looks exciting, because it is, again we are targeting US$2 million to US$5 million turnover firms with two to five partners doing accounting and tax for private business owners. These are partners who have poured their blood sweat and tears into these firms, and they want to partner with us on a 51-49 basis and know we will look after their people and their clients.”

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