MYOB generates a healthy profit margin of about 23 per cent. Whilst there are large up-front costs to develop its software, expenses are largely fixed – once covered, almost all of each additional sale falls to the bottom line. With a 60 per cent market share MYOB also dominates the Australian market for small-business accounting software. In fact accountants are key to MYOB's business strategy. When they're happy with their own practice software, also supplied by MYOB, they're more likely to recommend MYOB's retail products. This is a growing business, too. Since 2011, customers have increased by 10 per cent a year whilst revenue has increased about 8 per cent a year. But it is in the difference between those two figures where the story starts to sour. The company's prospectus notes that "an increasing proportion of new and existing MYOB users have adopted lower-price-point products".

Desktop decline MYOB's traditional business of installing software on desktop computers is in decline. Customer growth during the past few years has come from software delivered over the internet, known as "cloud" products. Cloud registrations have grown from 15 per cent in 2012 to 80 per cent today, and are expected to hit nearly 100 per cent by the end of the year. These are lower-margin products. If MYOB can successfully convert its half a million existing customers to cloud-based services it should do well. But there's a big question mark over that. Customers have many more options today than they did five years ago. MYOB was slow to shift its products to the cloud and has lost ground to rival Xero.

In 2014, MYOB added 60,000 paying cloud users but Xero added about 150,000. Xero now has almost four times as many cloud users as MYOB. To make matters worse, MYOB may be losing its most important sales channel – the accountants. About 20 per cent of MYOB's small-business customers leave the product each year. Many are going to Xero and those that do not are going to Intuit. Deep pockets Two years ago, US-based Intuit (maker of Quicken and QuickBooks) entered the Australian market by purchasing Fifo, a maker of cloud-based accounting practice management software. Intuit is 10 times larger than MYOB, with an 80 per cent share of the US market. It has deep pockets, plenty of engineering talent, and its practice management software is free. MYOB's customers haven't rushed for the exits but the practice management division has barely grown since Intuit's arrival. MYOB may eventually be forced to lower prices or lose customers.

Revenue could quickly fall and the same operating leverage that supercharges profit growth in good times could just as quickly amplify any contraction. To top things off, Bain has loaded MYOB with $435 million of debt. Operating earnings are about seven times the expected interest expense for 2015 so it's not an immediate worry. But there's enough to pose a refinancing risk should credit markets seize up, as they did in 2009, or the company's earnings deteriorate. How much are investors being asked to pay to wear these risks? A lot. MYOB's offer price is expected to be $3 to $4 a share. Even at the low end, MYOB is priced at 20 times its 2014 operating earnings and a PER of 27. Two rounds of private equity ownership, growing competition, loads of debt and a premium price tell you all you need know about this float. AVOID.

Nathan Bell is research director of Intelligent Investor Share Advisor. This article contains general investment advice only (under AFSL 282288). Authorised by Nathan Bell. To unlock Share Advisor's stock research and buy recommendations, take out a 15-day free membership