Excellent article that gets to the heart of what investing is, buying a future stream of cash flows (so you better make sure you know what profits and cash flow belongs to you!) ! Thank you for the top notch investor education content!
Hey! This articles are really helpful, thanks a lot! I've been ready for 4 years about similar topics (my background is away from finances, though I thrive reading about it) and going through Berkshire letters and so on. What book would you recommend me for developing my practical skepticism about accounting? I've gone through Valuation McKinsey as well, but they never dig really into the details. Or you are doing it by reasoning yourself? For instance, the IFRS and GAAP differences in the equity stakes. Thank you in advance :) Carlos
Hey Carlos! Thanks a lot—really glad you’re finding the articles useful!
Some ideas:
Financial Shenanigans by Howard Schilit, and tow old but gold: Quality of Earnings by Thornton O'Glove and Accounting for Growth by Terry Smith (written in the early '90s, so yes, some accounting standards have changed since (especially IFRS)
Your article thoughtfully examines consolidation accounting, and I appreciate your analysis of Kelly Partners. While consolidation can be complex, I respectfully challenge the notion that it confuses investors or obscures the company’s value.
In my Substack, “Kelly Partners Group: The Ultimate Quality Compounding Machine” (June 5, 2024 - https://compoundandfire.substack.com/p/kelly-partners-group-the-ultimate]), I highlight Kelly Partners’ outstanding revenue CAGR, driven by strategic acquisitions and 4% organic growth. Consolidating acquired firms is standard for serial acquirers, fostering scale and efficiency. Investors familiar with this model recognize its value, contrary to the suggestion of misunderstanding. The company’s ~AUD 45M parent-level debt, with conservative leverage (net debt/EBITDA < 2x), further supports sustainable growth, a point your article overlooks.
Kelly Partners’ long runway is fueled by numerous small accountancy firms seeking succession, ideal targets for its acquisition strategy. By integrating AI into practices—streamlining tax preparation and analytics—Kelly Partners enhances efficiency, bolstering its competitive edge. Investors who focus solely on accounting nuances risk missing a remarkable opportunity in a company poised for continued growth.
How do you balance consolidation’s complexities with Kelly Partners’ proven compounding ability? Highlighting its growth trajectory and innovation could better inform investors.
Thank you for this engaging discussion! Best regards, Arnold - Compound & Fire (shareholder and a proven working history in finance and accounting).
Hi Arnold – thanks for the thoughtful and well-argued comment!
I completely agree that Kelly Partners has been successful at executing a roll-up model in a space where succession is a real opportunity, and your Substack article makes a strong case for the business’s strategic merits. My intention wasn’t to criticize the model itself, nor to deny that consolidation is standard for acquirers—just to highlight how reported numbers can give a misleading sense of what’s really attributable to shareholders if you don’t read the fine print.
You're absolutely right: sophisticated investors know how to look past consolidation. But as I see it, many don’t—or worse, they stop at EBITDA multiples and assume it’s all “theirs.” The point isn’t that consolidation is bad—it’s that valuation metrics built on 100% of EBITDA and cash flows, when you own just over 50%, can give you a very different picture. And that matters, especially when gearing up for multiple expansion or downside protection.
On the debt side: yes, the parent-level net debt is "only" AUD 45M—but what do you make of the fact that the reported EBITDA used to calculate leverage includes cash that belongs to minority partners? If FCF attributable to shareholders is around AUD 5–7M, that changes the comfort level a bit, no?
I also think we’re probably on the same side in the end—I admire the transparency Kelly offers on metrics like FCF to parent and net debt per partner. That’s actually what makes it a great example: they’re doing many things right, but it still takes real work to get to the numbers that matter. And I’d argue that’s what should be normalized: voluntary, useful disclosures.
Happy to agree to disagree on how widespread the confusion is—but always glad to have a proper accounting conversation. Appreciate you joining the discussion and sharing your lens.
Excellent article that gets to the heart of what investing is, buying a future stream of cash flows (so you better make sure you know what profits and cash flow belongs to you!) ! Thank you for the top notch investor education content!
Hey! This articles are really helpful, thanks a lot! I've been ready for 4 years about similar topics (my background is away from finances, though I thrive reading about it) and going through Berkshire letters and so on. What book would you recommend me for developing my practical skepticism about accounting? I've gone through Valuation McKinsey as well, but they never dig really into the details. Or you are doing it by reasoning yourself? For instance, the IFRS and GAAP differences in the equity stakes. Thank you in advance :) Carlos
Hey Carlos! Thanks a lot—really glad you’re finding the articles useful!
Some ideas:
Financial Shenanigans by Howard Schilit, and tow old but gold: Quality of Earnings by Thornton O'Glove and Accounting for Growth by Terry Smith (written in the early '90s, so yes, some accounting standards have changed since (especially IFRS)
And never forget the GPTs ;)
Fantastic article. Well explained.
Very instructive! Thanks for sharing! Looking forward to the next part in this series.
Dear Javier Pérez,
Your article thoughtfully examines consolidation accounting, and I appreciate your analysis of Kelly Partners. While consolidation can be complex, I respectfully challenge the notion that it confuses investors or obscures the company’s value.
In my Substack, “Kelly Partners Group: The Ultimate Quality Compounding Machine” (June 5, 2024 - https://compoundandfire.substack.com/p/kelly-partners-group-the-ultimate]), I highlight Kelly Partners’ outstanding revenue CAGR, driven by strategic acquisitions and 4% organic growth. Consolidating acquired firms is standard for serial acquirers, fostering scale and efficiency. Investors familiar with this model recognize its value, contrary to the suggestion of misunderstanding. The company’s ~AUD 45M parent-level debt, with conservative leverage (net debt/EBITDA < 2x), further supports sustainable growth, a point your article overlooks.
Kelly Partners’ long runway is fueled by numerous small accountancy firms seeking succession, ideal targets for its acquisition strategy. By integrating AI into practices—streamlining tax preparation and analytics—Kelly Partners enhances efficiency, bolstering its competitive edge. Investors who focus solely on accounting nuances risk missing a remarkable opportunity in a company poised for continued growth.
How do you balance consolidation’s complexities with Kelly Partners’ proven compounding ability? Highlighting its growth trajectory and innovation could better inform investors.
Thank you for this engaging discussion! Best regards, Arnold - Compound & Fire (shareholder and a proven working history in finance and accounting).
Hi Arnold – thanks for the thoughtful and well-argued comment!
I completely agree that Kelly Partners has been successful at executing a roll-up model in a space where succession is a real opportunity, and your Substack article makes a strong case for the business’s strategic merits. My intention wasn’t to criticize the model itself, nor to deny that consolidation is standard for acquirers—just to highlight how reported numbers can give a misleading sense of what’s really attributable to shareholders if you don’t read the fine print.
You're absolutely right: sophisticated investors know how to look past consolidation. But as I see it, many don’t—or worse, they stop at EBITDA multiples and assume it’s all “theirs.” The point isn’t that consolidation is bad—it’s that valuation metrics built on 100% of EBITDA and cash flows, when you own just over 50%, can give you a very different picture. And that matters, especially when gearing up for multiple expansion or downside protection.
On the debt side: yes, the parent-level net debt is "only" AUD 45M—but what do you make of the fact that the reported EBITDA used to calculate leverage includes cash that belongs to minority partners? If FCF attributable to shareholders is around AUD 5–7M, that changes the comfort level a bit, no?
I also think we’re probably on the same side in the end—I admire the transparency Kelly offers on metrics like FCF to parent and net debt per partner. That’s actually what makes it a great example: they’re doing many things right, but it still takes real work to get to the numbers that matter. And I’d argue that’s what should be normalized: voluntary, useful disclosures.
Happy to agree to disagree on how widespread the confusion is—but always glad to have a proper accounting conversation. Appreciate you joining the discussion and sharing your lens.
Best,
Javier