STAGE 2 -
INITIAL INFORMATION
Do you have enough information to assess the opportunity properly?
WHAT SHOULD YOU FOCUS ON AT THIS STAGE?
You have decided that the practice is worth investigating further.
Stage 2 is about moving from general interest to structured information gathering. The objective is not to complete due diligence yet. It is to obtain enough information to understand the practice in greater detail, identify what is missing and prepare for the next parts of the acquisition process.
You may not receive everything at once. That is normal.
What matters is understanding what has been provided, what it tells you and what still needs to be requested.
The core question you are trying to answer is:
Do I have enough information to properly assess this opportunity and decide how to progress?"
1. Start with the Information Memorandum
A business broker or vendor may provide an Information Memorandum (IM) or a similar document.
(The business owner, vendor and seller may be the same person, but the terms emphasise different roles: the owner owns the business, while the vendor/seller is the person or entity offering it for sale.)
The Information Memorandum can be useful for understanding:
-
the history of the practice;
-
services provided;
-
headline revenue and earnings;
-
staff structure;
-
client profile;
-
premises;
-
reason for sale;
-
asking price; and
-
proposed transaction.
But an Information Memorandum is generally prepared to describe and market the opportunity.
It should be treated as a starting point for investigation, not as proof that every statement or figure has been verified.
As you progress, the information in the IM should be compared with the underlying records.
SUGGESTED DEEP DIVE ARTICLE >
What Should an Information Memorandum Tell You When Buying an Accounting Practice?
2. Obtain the financial history
The financial statements help you move beyond headline figures.
Depending on what is available, request:
-
profit and loss statements;
-
balance sheets;
-
tax returns where relevant;
-
the latest year-to-date accounts; and
-
supporting information for significant adjustments being made to reported earnings.
Ideally, you want to understand performance across multiple periods rather than relying on one year's result.
Look initially for:
-
revenue trends;
-
profitability trends;
-
major expense movements;
-
significant adjustments;
-
unusual one-off items; and
-
whether the latest trading position differs materially from previous years.
At Stage 2, you are not trying to complete the financial due diligence yourself. You are establishing whether the underlying information is available for proper assessment.
SUGGESTED DEEP DIVE ARTICLE >
What Financial Information Should You Request When Buying an Accounting Practice?
3. Ask for useful client revenue information
For many accounting-practice acquisitions, the client base is central to what is being purchased.
Headline revenue alone does not show how that revenue is distributed.
Useful information may include:
-
revenue by client;
-
concentration of revenue among larger clients;
-
recurring versus non-recurring work;
-
types of services provided;
-
client industries;
-
length of client relationships;
-
recent client gains or losses; and
-
which clients are primarily managed by the vendor or key staff.
Detailed client information may initially be provided on a de-identified basis, particularly before the transaction has progressed sufficiently.
At this stage, the aim is to understand the shape and quality of the client base without unnecessarily obtaining confidential client information.
SUGGESTED DEEP DIVE ARTICLE >
What Client Information Should You Request When Buying an Accounting Practice?
4. Understand the staff structure
A practice does not operate on financial statements alone.
Ask for enough information to understand who actually performs the work and manages the client relationships.
Useful information may include:
-
number of employees;
-
roles and responsibilities;
-
full-time, part-time and contractor arrangements;
-
length of service;
-
remuneration;
-
key client responsibilities;
-
seniority and qualifications; and
-
whether staff are expected to remain after settlement.
You are looking for an early answer to questions such as:
-
Who is important to the operation of this practice?
-
What would happen if a key person did not remain after the acquisition?
Later, you can conduct detailed employment and entitlement checks in the due-diligence process.
SUGGESTED DEEP DIVE ARTICLE >
What Should You Look for in the Staff Structure of an Accounting Practice?
5. Understand what the owner actually does
The practice owner/vendor's role can materially affect how the practice operates after settlement.
At this stage, try to understand what the practice owner actually does in terms of:
-
hours worked;
-
responsibilities;
-
client relationships;
-
business development;
-
staff management;
-
technical work performed;
-
administrative responsibilities; and
-
the proposed handover period.
The profit level may look different if the replacement owner or manager must perform substantial work that the practice owner/vendor currently undertakes.
At this stage, you are trying to understand the operating reality behind the financial results.
SUGGESTED DEEP DIVE ARTICLE >
Owner Dependence: What Happens When the Vendor Leaves an Accounting Practice?
6. Understand debtors and work in progress
Accounting practices can have meaningful amounts of:
-
Debtors - fees already billed but not yet collected.
-
Work in progress (WIP) - work performed but not yet billed.
Try to ascertain:
-
the approximate debtor balance;
-
debtor ageing;
-
historical write-offs;
-
the approximate WIP balance;
-
aged WIP;
-
how frequently clients are billed; and
-
whether debtors and WIP are included in the proposed sale.
You do not need to resolve every adjustment at this stage. But you should understand whether these amounts are significant and how the vendor proposes to deal with them.
SUGGESTED DEEP DIVE ARTICLE >
Debtors and WIP When Buying an Accounting Practice: What Should You Ask?
7. Understand vendor confidentiality before requesting more information
As the information becomes more detailed, the business owner/vendor may require a Confidentiality Agreement or Non-Disclosure Agreement (NDA).
This is normal in many business-sale processes.
Before receiving sensitive information, try to understand or ascertain:
-
what information you are permitted to receive;
-
how it can be used;
-
who you can share it with;
-
whether your solicitor, accountant and finance adviser can receive it;
-
how client information will be de-identified; and
-
what must happen to the information if the acquisition does not proceed.
A confidentiality agreement protects information. It does not necessarily reserve the practice for you or give you exclusivity. Those are separate issues.
SUGGESTED DEEP DIVE ARTICLE >
NDA vs Exclusivity When Buying an Accounting Practice: What's the Difference?
8. Keep track of what's missing
One of the most useful things you can do at this stage is maintain a simple information-gap list.
For example:
Received
-
Information Memorandum
-
FY2024 financial statements
-
FY2025 financial statements
Still required
-
Current YTD accounts
-
Client revenue analysis
-
Staff summary
-
Debtors ageing
-
WIP information
-
Vendor role summary
This prevents the acquisition process from becoming a chain of disconnected emails and documents.
Missing information does not automatically mean there is a problem.
But persistent gaps, inconsistent figures or vendor reluctance to provide reasonable information may deserve further explanation.
STAGE 2
RESOURCES
1. Vendor / Broker Document Request List >
This is a structured list of the information you may want to request.
2. Initial Information Checklist >
Use this checklist to organise the financial, client, staff and transaction information received from the vendor or business broker.
3. Email Template: Document Request >
Use this email template when requesting additional information from the business broker or vendor.
KEEP IN MIND
1. An Information Memorandum is a starting point
Use the IM to understand the opportunity, but expect important statements and figures to be tested against underlying records as the acquisition progresses.
2. More information may require more confidentiality
As the seller provides increasingly detailed client, staff and financial information, make sure you understand any confidentiality obligations and who the information can be shared with.
3. Don't collect sensitive information unnecessarily
At an early stage, detailed personally identifiable client information is often unnecessary. De-identified summaries may be sufficient until there is a legitimate reason for more detailed access.
IMPORTANT INFORMATION: This guide provides general educational information for accountants considering the acquisition of an accounting practice. It is not legal, tax, accounting, valuation, investment or credit advice and is not a complete due-diligence checklist. The information appropriate to request will depend on the transaction, the stage of negotiations and the advice of your professional advisers. Obtain appropriate advice before making commitments or relying on information supplied by a vendor or business broker.