Business software provider Reckon Limited (ASX: RKN) has been a steady performer over the years. The company has three core divisions. The first of these is the Business division which provides accounting software for SMEs and competes directly with XERO FPO NZX (ASX: XRO) and Myob Group Ltd (ASX: MYO).

Reckon is in the process of transitioning from a desktop product to a cloud based solution called Reckon One. This change significantly improves the economics of the business because customers will now pay a monthly fee rather than a one-off license.

Prices for Reckon One start at just $5 per month, with users able to pay extra for additional functionality as required. This differs from Myob and Xero whose products typically start at a much higher price point, but include complete functionality and so Reckon One could be attractive to price conscious small businesses.

However, Reckon One currently lags Xero and Myob in terms of the number of add-ons it offers. Add-ons are valued by customers because they automate other non-accounting time-consuming administration tasks through direct integration with the accounting system and often address specific industry issues.

Xero has recently stated that they will soon be able to automate invoice coding and bank reconciliations for their customers. These are time consuming tasks that possibly cost more to complete than the incremental price differential between Reckon One and Xero. I am doubtful that Reckon will be able to replicate these features any time soon since they require large historical data sets and Reckon has 36,000 online customers versus 862,000 for Xero.

Reckon’s other divisions are Document Management and Practice Management. Document Management is growing quickly, but currently makes a small profit contribution to the group whereas Practice Management generates over half of Reckon’s profits.

I think Practice Management may struggle in future years because other providers like Xero are offering similar products for free. In doing so these companies encourage accountants to switch their clients over to their accounting software. These small business customers are worth far more to them than selling a single practice software license.

Is it a buy?

On the surface Reckon looks cheap given it has guided for $34 million to $36 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2016 and has a market capitalisation of $180 million.

However, it has over $50 million in debt and capitalises its software development spend which is expected to be $23 million to $25 million this year. Personally, I would be more comfortable putting my money in the loss making Xero than Reckon today.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.