How can you quantify the impact of high-quality startup advisory on business outcomes? My firm, Kruze Consulting, identified one method — startups with high-quality CPA firm advice are twice as likely to get acquired than the average startup.
One of the most important outcomes that startup founders, and their venture investors, want is to sell their startups and achieve an "exit." Founders turn to boutique consulting firms to provide them with the advice, systems and metrics they need to manage their growing businesses. But one major benefit that the best accounting firms provide is critical advice when it's time to sell the startup. And our data shows that founders do benefit from this CPA advice!
Carta, the largest startup-focused capitalization software vendor, regularly publishes helpful analysis designed to help startup founders and VCs. Recently, they published data on the outcomes of 3,067 startups incorporated in 2018. Only 161 of these were eventually acquired: 5.2%. Kruze Consulting provides accounting and CFO services for more than 800 venture-funded US startups, and when comparing their clients incorporated in 2018 Kruze found that more than 11% were acquired.
So what's driving that difference?
We think it's at least partly our high quality accounting!
Accountants offer critical advice during exits
When a small company is acquired by a major public corporation, like many of our clients have been (Apple, JP Morgan Chase, Cisco, etc.), the due diligence is intense. Large acquirers have teams dedicated to M&A, including accounting, tax and finance diligence groups. Making it through this difficult diligence process is not easy, and having organized financial statements, tax returns and financial metrics is just the first step. For business owners, having CPAs as advisors, who know the business and who can jump on the phone to answer technical diligence questions, is not only invaluable, but a major stress-reliever in a very challenging moment.
Outsourced accountants keep companies ready
We've also found that many startup acquisition offers appear suddenly. Partnership discussions turn into acquisition discussions; the public company's major competitor makes an acquisition and they must respond. If the startup wasn't using a high-quality accounting firm, the time it takes to retroactively catch up diligence materials can derail and deal. For the acquirer, buying a startup that has all of these up to date, organized and ready for diligence inspires confidence in the deal.
Solid accounting metrics makes companies more successful
Of course, it's not just about getting a deal done. Startups with solid, reliable, constantly updated metrics are able to make better decisions across the board — whether it's hiring, new products, new markets, etc. I believe (and have seen for myself) that founders with the ability to make informed decisions swiftly will out compete the market and outlast the competition. Solid accounting makes companies run better, from more clearly understanding how to manage cash flow, strategizing for growth and hiring the right people at the right times.
Most acquisitions happen when a company is small enough to still use an outsourced accounting provider
Most startup acquisitions happen before Series B funding — according to Carta, 93% of the companies in the sample set that got acquired were pre-seed through Series A stage startups. At the early stages, many startups don't prioritize accounting operations - favoring product and growth over the operations side. For Founders in those early stages, this oversight often feels correct. Afterall, Founders are often stretched thin, wearing many hats and their startups must grow to survive and raise future capital. However, failing to allocate proper time and resources to the accounting stack can diminish all of the hard work chasing growth and developing solid products. This is where outsourced accounting partners really benefit startups, being there to take the work off of their plate and letting them continue to focus on growing their business.
The vital role of accountants in clients' success
As trusted advisors to startup founders, we as accountants play a crucial role in guiding our clients through some of their most stressful moments — the challenges of growth and the complexities of the acquisition process. Our data pretty definitively shows that startups working with access to high-quality accountants achieve better outcomes.
This is a legacy accountants can be proud of, and is a strong reason for us to have chosen this awesome profession.
It's a mistake to assume that founders only rely on accountants for compliance. In reality, founders look to us for strategic guidance, data-driven insights, and expert advice on navigating the financial aspects of running a business. By providing accurate, timely financial information and proactive recommendations, we enable our startup clients to make informed decisions that position them for success.
Our value as accountants shines brightest during the high-stakes moments business founders face. As our clients' trusted advisors, we play a vital role in ensuring that their companies are diligence-ready, with clean financials and well-organized records - whenever they are needed. Our deep understanding of their businesses and ability to provide prompt, knowledgeable responses to due diligence inquiries can be the difference between a smooth transaction and a derailed deal. And for those of us who have advised on many companies' exits, the steady-hand of experience is a value our clients will never forget.
At times, the work we do may feel routine or mundane, because let's be honest, it can be sometimes. But we shouldn't forget the profound impact we have on our clients' lives at their most stressful moments. Our expertise, guidance, and unwavering support are the foundation upon which founders build their dreams.
As accountants, we are more than just number crunchers. We are essential partners who provide stability and guidance to our clients as they navigate the complex business challenges that they will ever face. Our work, though sometimes tedious, is a testament to our dedication and the vital role we play in shaping the future of business.
So, to my fellow accountants, take pride in the value you bring to your clients! Embrace the challenges and the opportunities that come with being a trusted advisor. Remember, your impact extends far beyond the numbers on a spreadsheet. You are the backbone of the startup ecosystem, and your contributions are essential to the success of the businesses you serve.
