Transcript
You know how in the movies the CEO goes to his team and says hey I need a full report on the competition by the end of day today? Imagine if you had your own team of researchers in your back pocket to basically deep dive into any topic you're interested in or surface up the things that you would need to make a decision on, whether it's buying a business, whether it's selecting a vendor, whatever the use case could be. AI models these days are getting to the place where they could replace an entire team.
I've talked a little bit about Gemini recently and a lot of things they've been coming out with, and I want to run through a use case of leveraging one of Gemini's more recent models which is what they call Deep Research, leveraging their 1.5 model, and how you can actually use this as your own personal research assistant on any type of topic you could imagine.
Seems like everybody these days on YouTube and the internet are talking about buying businesses, and so I thought it'd be cool to try that out and see if I could deeply explore what it would look like to buy a business I know nothing about. One of the business types I've heard a lot about is CPA firms, and so we're going to leverage this model to actually do the research for us and we're going to see if it can give us the information we need to be able to make a decision on making such a significant purchase with very little information. So let's go ahead and jump into it and I'm going to do this real time for the first time and we're going to see how it goes.
So I'm going to pull up Gemini Advanced here and if you go to this dropdown you'll see a number of the models that they have. So their latest model is 2.0, they have their flash model which is apparently their fast one, and then they have the advanced model. We're going to take a look at 1.5 Pro with Deep Research from Gemini Advanced. I do have the subscription so I think it's I don't know 20 bucks a month and you get access to the full suite here. And I'm just going to freestyle this.
Okay so this is what we're going to say. We're going to say I'm interested in buying a CPA firm for the cash flow in the southeastern part of the US. Give me a comprehensive overview of the market, key considerations, and how I should price and value the company. Also walk me through the considerations during the transition of the company and how best to protect the downside. So that's going to be our prompt and let's see what it gives us.
Now what it should do is it's actually going to put together a sort of research plan and present that to us. At that stage we should be able to edit, refine, and see if we agree with the strategy that it's going to take to actually execute this. Let's see what it says here. It's going to research websites using this prompt, it's going to find some more information on the current market for CPA firms, it's going to find considerations in buying, going to find information on how to price and value, find information on the transition process, information to protect the downside. So it's essentially decomposing exactly what I asked it and this is the plan it's going to take.
And notice it says research websites. So this is actually -- again it's Gemini, it's a Google product, and I've talked about this before, how deeply integrated Google already is. And so despite maybe them being a little late to the game, the fact that they're deeply embedded in everything we do and the fact that they are able to leverage the vast amount of data they have, they have a huge leg up on that. And so what it's actually going to do is actually go to websites and pull publicly available information to actually conduct the research on our behalf, which is massive because you don't actually have to seed the data, find the data yourself. And this fills a huge gap that other models aren't able to do.
Once it gets through all that it's going to analyze the results, it's going to create a report, and I would expect this is going to take something like 5 to 10 minutes because it is actually going to pull all those things. So we'll sit here for a minute. You can see that it's kicking off its job and what we should start to see here, it's actually going to start populating all the websites that it's actually crawling to actually do this research.
From what I've heard so far this is a heavy computational cost for them to actually be able to do this. My guess is they're probably losing money on this at the moment because look at this -- they're going through 21 websites, 50 sites, they're scanning through all of these sites to build out the report and do essentially the homework for you. It's even pulling from YouTube which is really incredible. The vast amount of RAG that it's able to do, it's actually pulling from SBA and looking up specifics on accounting firms. This is going to pull as many sites as it feels relevant. I think I've seen it go up to 100 on other examples that I've seen of this.
Now this does take anywhere from 5 to 10 minutes. I'm going to go ahead and cut to this as soon as this is done loading. All right and we're back so it has prepared the report for us and it is titled "Buying a CPA Firm for Cash Flow in the Southeastern US." So I'm not going to read through all of this but let's just scan really quick.
You can see pretty comprehensive and it lists all the sources that it cited. Let's go ahead and just skim through this to see what it is highlighting for us. So it actually calls out a couple states where you're seeing some big growth. You can see it's actually highlighting some of the top companies in the area. And you can actually see it's actually giving you some sources for where to find out some more information about some of the top firms in the area.
So it talks a little bit about the trends, technological advancements, talks about staffing challenges -- so key consideration, obviously that makes sense, it's human capital intensive for the most part. Honestly this I think could be a good area for potential disruption with AI. I don't want to get too far ahead of myself but definitely interesting concept on bridging the gap between technology and the staffing challenges that the industry faces.
It talks a little about shifting client needs, obviously changing tax codes is always something to consider, so that makes a lot of sense. Talks a little bit about pros and cons -- so client base, immediate revenue streams, recurring, obviously startup costs, growth potential, compliance issues, experience staff is key. So it looks like you know main consideration here is you're buying a team. Long hours, right, a lot of these folks especially during peak season, it's probably very seasonal so maybe that is not ideal. Competition makes sense. Management integration, client retention risk, staffing challenges -- so all some really good things to consider throughout this.
Then it starts to get into key considerations. So it talks about due diligence, operational due diligence, legal due diligence, client satisfaction, reputation -- all really good things to be digging into as you would actually consider making this sort of purchase.
Now it gets into pricing valuation. So this is actually pretty interesting -- typically ranges from 0.5x to 1.5x times revenue and can be higher depending on factors such as profitability, growth, client retention. So that's interesting and that is I'm assuming that's gross revenue. Oh yeah, multiple of gross revenue, multiple of net cash flow. Okay so let's see what it says about here. Couple different variations and tactics there. Asset-based -- probably not too many assets. Cost approach -- yeah, not suitable for valuing, which also would make sense. Look at growth rate, client-based, team quality, and technology. All of that makes a lot of sense.
And it starts to get into the other question I had on transition process. A lot about relationships, client retention, staff integration, information handover, technology integration. All of those make a ton of sense. And then starts getting into downsides -- so due diligence, legal agreements, risk mitigation strategies, which also makes a ton of sense. I guess that'd be one thing, the main thing you'd be worried about is your clients walking away and maybe competing with you if the former owners were off to start their own firm, for example. Financing options -- okay SBA loans, I think that's probably the likely case. Seller financing, that makes a lot of sense as well. Then it gets into the conclusion and then actually cites the 57 websites that it actually researched.
But the nice thing here is you can actually open this in a Google Doc and you essentially have your full report there. And what we're actually going to try now is actually ask it a little bit more and let's see if we can't get it to tell us a little bit more about the valuation of the business and how to actually think about that. So we're going to say walk me through in more detail how to price and evaluate the business based on the current gross revenues and seller discretionary earnings, which is essentially like your EBITDA. And so I want to see if it's able to give a comprehensive model of how to evaluate the balance sheets and income statement on what to look for. This is probably going to take a bit of time again and so I'll probably go ahead and cut to this as soon as it is finished loading.
Okay it's starting to load a response here and it says when evaluating a CPA firm for acquisition there's two metrics that are often used and it talks about the ones I cited, because I have done a little bit of homework on this. Looks like it is considering a couple different factors -- profitability, client base, location, growth, etc. And it's actually going to give us an example.
Okay so a CPA firm with a million dollars in gross revenue and strong profit margin in a metropolitan area might be at 1.2x gross revenue, resulting in a valuation of 1.2 million. Then it talks a little bit about the SDE approach. So let's see what it says about this -- discretionary earnings, etc. Method factors 1.8x to 3.25x. Okay so that's an interesting insight. So basically you're paying like 2x to 3x or maybe a little bit more depending. SDE margins generally fall between 25% and 75% of revenue. And then it talks a little bit about growth rate, team quality. A CPA firm with 300K in SDE might be at 2.8x, resulting in an $840,000 valuation.
So that is actually a really good starting point. Oftentimes when you're looking at these businesses, and in the couple I've looked at so far, this is generally what's reflected on the CIM -- or the, I don't even know what that stands for -- confidential information memorandum I think -- where you can then start to price in or box in whether the pricing is in line with market. So this is actually really helpful to evaluate that.
So this is just a quick example where I literally gave it two questions and it gave an entire comprehensive lens into how to think about this, the things to focus on, and then more specifically on you know how you might structure your due diligence process or the things to be looking out for. And any of these particular areas you can double-click into and ask more questions about to come up with a really robust game plan for whatever research you're trying to explore further or just simply better understand.
So again I just wanted to share, as these models are coming out, how much more powerful they're becoming and maybe just some example use cases how you can leverage this on a day-to-day. This Deep Research in particular I think is really valuable when you got to conduct a lot of research, aggregate a lot of information, and then compile that into a report that is refined down to the key points. At a minimum this is a good jumping-off point to conduct all that research that you would need to do for your report to begin with.
Every day I'm amazed at what these models are able to do and so again I would encourage you to explore these, pay the 20 bucks to get the pro access, and start to play around with these and see how you can embed them into your day-to-day workflow. It's all I got for now. Till next time.