Why was KashFlow acquired? / Should you care?

Den Howlett for Diginomica writes: I am currently in Las Vegas so missed the news that KashFlow was acquired by IRIS earlier today (my time.)

As someone who has followed the cloud accounting market since its early days back on 2005 I have had good access to much of the activity in this space so it is interesting to see the speculation surrounding this transaction.

From the blurbs republished by MicroScope:

Phill Robinson, CEO of IRIS Software Group, said that as a combined entity it would be aiming at the thousands of small businesses in the UK that were struggling with bookkeeping, payroll and accountancy issues.

“KashFlow’s superb cloud services are the perfect fit with our existing suite of products and I am confident that this will enable IRIS to strengthen its leading position in cloud software for UK SMEs and accountancy firms,” he said.

Duane Jackson, CEO KashFlow has his own spin:

It’s easy to think that the answer is “money”, but it’s not. Money is easy to come by when you’re growing as quickly as we are, more so in a rapidly growing market. But money is just an enabler; it takes time to successfully turn hard cash into real benefits. Instead, I tried to work out what we’d be trying to achieve with a cash injection….

We have a unique product for accountants that, in addition to helping them manage their clients, also helps us to access more SMEs. Being able to access a large slice of the accountants in the UK would really accelerate our growth.

Yes Duane – I’m sure it’s not about the money 

Next, let’s review what others are thinking. At AccountingWeb, ‘redman7 ‘offers this perspective:

I got the impression Iris were closely tied in with FreeAgent so this seems a little odd…

It sounds like going forwards Kashflow will be more of a priority to Iris than FreeAgent. I don’t know how bothered I am by this as I am happy to deal with FreeAgent directly - Iris’s customer support of their OpenBooks product is shockingly bad compared to the direct customer support provided by FreeAgent (which is awesome). It’s only the cheaper prices I can get through Iris OpenBooks vs directly with FreeAgent which helps.

I’ve never used Kashflow as I’m happy with FreeAgent for simple clients and Xero for more complicated ones.

Platform opines:

I’d definitely agree with that statement and wouldn’t be surprised if either a) Iris cooled their interest in FA over time or b) Kashflow was taken in a very different direction.  As for the cheaper prices, i’m sure Iris will again offer a OpenBooks style discount once the integration’s underway.

So much from the peanut gallery and good insights into ‘on the ground’ experience. Over at FreeAgent, the company announced FreeAgent Friendly for accountants. CEO Ed Molyneux says:

From today, we’ll be directly providing our award-winning cloud software to accountancy practices, and increasing investment to extend our world-class support to accountants as well as their clients.

What’s the reality?

FreeAgent has been through several rounds of funding. IRIS took an early substantial but minority stake which, as far as I am aware, it still holds. Part of that deal provided IRIS with exclusive distribution rights to the accounting market. In essence, FreeAgent took money in exchange for a restricted end user market position.

Most recently, my understanding is that FreeAgent was considering a fresh funding round which could have involved IRIS’s ultimate holding company. I am not privy to the terms of any deal but the IRIS deal was not bringing in the kind of numbers that were originally thought possible. This does not surprise me because the bag carriers for IRIS were not motivated to sell a SaaS solution. That left both sides in an awkward position.

The acquisition of KashFlow solves that problem for IRIS because KashFlow already has a good number of accounting practitioners under its belt. Now it has IRIS’s financial muscle to put its foot on the gas in that market.

From KashFlow’s perspective, it had already established a baseline valuation since Jackson had made a small divestment earlier in the year. KashFlow’s original financier, Lord Young is elderly. It would therefore make sense for him to achieve an exit around about now.

KashFlow only has a small clutch of shareholders all of whom were sitting on potentially huge gains so when Jackson says money isn’t an issue you can be sure he’s talking nonsense. There’s also the small matter of positioning.

KashFlow has been losing its early lead for some time. FreeAgent’s wholly organic growth and loyal following has served it well. Xero, which recently took $150 million in fresh funding looks like it will steal the top slot in the next couple of years. That left the number two slot up for grabs. Add in the fact that Jackson has been publicly hinting for some time that he’d like to do other things and you can see a perfect storm.

In short – the FreeAgent /IRIS arrangement wasn’t working out. Xero was becoming a major threat, KashFlow was on the block and voila. A deal was in the wind.

What does it mean?

If IRIS plays this well then it can use KashFlow as the vehicle to fuel a much needed replacement market. At one level, KashFlow is a much simpler product than its immediate competitors but make no mistake – it is competitive. IRIS will have to accelerate development to make it a truly compelling offering for professionals acting for very small businesses.

Xero is unaffected. It already has a solid play with the new breed of accountant that wants to do things differently. That’s paying off in spades and with a massive war chest behind it, can out gun the competition should the company so choose.

FreeAgent remains a potent force but it now has to build the professional channel from scratch. That’s a different market to the one that Xero goes after and the one to which IRIS aspires. FreeAgent has the advantage of some capabilities like payroll and tax calculation that make it a very compelling solution for a target group that is sufficiently large for it to command a strong position in the market.  It is also far more innovative in the way it develops features than its competitors and that in turn may prove highly attractive to innovative professionals.

In other words – with the exception of Xero, the next slot is up for grabs and while it is unclear which of KashFlow and FreeAgent can win that slot, both can do very well. As always, I will be watching this with interest. One thing I can say for certain – IRIS wins whichever way because it already has gains it can tap out of its FreeAgent investment but will not wish to see those wither as it promotes KashFlow.  Quite how IRIS explains this in the market is another matter.

Disclosure: I was an early investor in FreeAgent. My wife is an investor in FreeAgent. I have no current knowledge of that investment value.