Stage 5: Due Diligence When Buying an Accounting Practice

STAGE 5 -
DUE DILIGENCE

Does the accounting practice support the assumptions behind the purchase?

Turn due diligence into a decision process rather than a collection of documents.

Due diligence is where you verify the acquisition opportunity.

By this stage, you may have reviewed the initial information, explored a funding pathway and discussed the commercial terms.

Those discussions will have relied on assumptions: that the fees will continue, the clients will stay, the team can deliver the work and the earnings will support your ownership plans.

Due diligence is where you test those assumptions against the underlying records and the way the practice actually operates.

For an accounting-practice acquisition, this means looking beyond the financial statements. Client relationships, staff capability, principal involvement, systems and handover arrangements can all affect what you are buying.

The objective is to understand what supports the acquisition, what could change after settlement and what needs to be addressed before you commit further.

By the end of your review, you should be able to explain:

What supports the revenue and earnings being presented.
Which clients, people and systems the practice depends on.
What it will cost to operate under your ownership.
What the vendor needs to do to support a successful transition.
Which findings change your purchase assumptions.
What needs further investigation, negotiation or professional advice.

For each material issue, ask these three questions:

What evidence supports the explanation?
What would the issue mean under my ownership?
What needs to happen before I proceed?

This helps turn due diligence into a decision process rather than a collection of documents.

1. Understand the quality of the revenue

Headline revenue does not establish how dependable, profitable or collectable that revenue is.

Hence you will need to review:

Revenue over recent financial years and the current period.
Revenue by client and service type.
Recurring work compared with one-off assignments.
Significant increases, declines or unusual items.
Major clients gained or lost.
Discounts, credit notes, write-offs and disputed fees.
The relationship between work performed, invoices raised and cash received.

Test the revenue summaries against underlying records. Where figures differ between the Information Memorandum, financial statements and billing reports, seek to understand the underlying reasons.

Also consider the timing. A strong recent period may reflect work brought forward, a one-off assignment or a billing catch-up. You are testing whether the historical revenue provides a reasonable foundation for the acquisition assumptions.

2. Understand how recurring the fees really are

Annual compliance work, quarterly reporting and monthly service packages may create repeat business. However, repeat billing does not guarantee that clients will remain after a change of ownership.

Hence, you will need to explore:

Which services recur monthly, quarterly or annually.
Whether the same clients have returned consistently.
The scope and currency of engagement arrangements.
Whether clients have accepted previous fee increases.
Recent departures or reductions in work.
Relationships that depend heavily on the vendor.
Whether the services will remain relevant to the client base.

Look at several periods where available. Separate active recurring clients from occasional clients and inactive database records.

A current engagement letter helps explain the relationship, but you still need to assess how it may respond to a transition of new ownership.

You are testing why the fees recur and what could interrupt them after settlement.

3. Review client concentration

An accounting practice may have hundreds of client records while relying on a much smaller number of economic relationships.

You should review client concentration by understanding:

The largest clients by annual fees.
The revenue represented by the top 5, 10 and 20 clients.
Related companies, trusts, individuals and other entities within the same client group.
Concentration within particular industries.
Dependence on a small number of referral sources.
Who manages the significant relationships.
Any indications that major clients may leave or reduce their work.

Use a consistent revenue period and group related entities appropriately. Counting each entity separately can understate the importance of one relationship.

Next, consider a downside scenario where a major client group left, what revenue would disappear, which costs would remain and how quickly could the practice respond?

Effectively, you are testing how exposed earnings and cash flow are to a small number of client decisions.

4. Look at client retention risk

Historical client retention is useful information, but the acquisition introduces a new consideration for the client:

A change in ownership and potentially in service delivery.

Explore retention risks through the lens of:

Historical client departures and the fees lost.
Reasons clients have left.
Significant reductions in work from continuing clients.
Whether relationships sit with the firm, the vendor, referral partners or particular staff.
Client expectations about pricing, responsiveness and personal contact.
Complaints, overdue work and unresolved service issues.
The proposed introduction and communication process.
The vendor’s role in maintaining continuity.

Review both client numbers and revenue retained. A stable client count can conceal the loss of larger clients.

If the purchase includes retention payments or clawback arrangements, have your solicitor review how they work, including measurement periods, exclusions and dispute processes.

Essentially, you are trying to understand which relationships are most vulnerable and what practical steps could support retention.

5. Understand Principal dependency

The principal/vendor/business owner's contribution may extend well beyond the role described in the sale information.

They may manage major clients, review technical work, supervise staff, generate referrals, approve pricing and resolve difficult matters.

Hence, you should establish:

Their actual working hours, including peak periods.
The functions they perform.
Which clients rely on them personally.
Their technical and supervisory responsibilities.
Knowledge and processes that remain undocumented.
What you can realistically take on yourself.
What existing staff can absorb.
What additional resources would be required.

If you intend to replace the vendor personally, consider your capacity alongside your existing responsibilities.

You'd want to know if the principal/vendor/owner's contribution in the business can be transferred or replaced, at a cost and workload you can sustain.

6. Review key-person risk and staff dependency

An accounting practice may depend heavily on a senior accountant, practice manager, specialist or long-serving employee.

Hence, review:

Roles, responsibilities and qualifications.
Employment or contractor arrangements.
Remuneration and entitlements.
Length of service and turnover history.
Client relationships held by particular people.
Workload, capacity and supervision requirements.
Reliance on external or offshore service providers.
Recruitment difficulty and replacement costs.

Statements that staff are expected to stay should be explored through an agreed process. Discuss with the vendor when staff can be approached and how confidentiality will be protected.

Consider the effect of your proposed changes. Relocation, new systems or different working arrangements may affect retention.

What you'd like to know is whether the team can continue delivering the work, including if a key person leaves.

7. Test the practice's sustainable earnings

Reported profit, adjusted profit and the cash available to you after acquisition are different measures/metrics.

Review each proposed earnings adjustment and ask whether it is supported and appropriate for your operating model.

You might need to consider:

Vendor remuneration and the work it covers.
The cost of replacing the vendor’s functions.
Personal or discretionary expenditure.
One-off expenses and unusual revenue.
Related-party charges and whether replacement costs differ.
Rent, staffing, software and other ongoing expenses.
Revenue at risk during transition.
Costs required to maintain service quality.

Avoid double counting. If vendor remuneration is added back, allow appropriately for the work that must still be performed.

Assess anticipated improvements separately. Future fee increases, staff efficiencies and integration savings should have their own assumptions and implementation plans.

Also distinguish ongoing operating earnings from:

One-off transition and integration expenditure.
Working capital requirements.
Loan repayments.
Tax payments.
Your personal income requirements.

Normalised EBITDA may help compare operating performance, but it is not the same as cash available to meet all those commitments.

Ultimately, you want to understand whether the earnings remain credible after allowing for how you will actually own and operate the practice.

8. Review WIP and Debtors

Recorded WIP and debtor balances do not automatically represent recoverable cash.

(WIP means “Work in Progress”. In an accounting practice, it generally refers to work already performed for clients that has not yet been invoiced.

For the business debtors, take a look at:

Ageing and collection history.
Long-outstanding or disputed invoices.
Subsequent receipts.
Credit notes and write-offs.
Whether the balances are included in the purchase.

For WIP, review:

How balances are recorded and valued.
Ageing, completion status and likely recoverability.
Whether work falls within fixed-fee arrangements.
Work that may require correction or additional effort.
The timing and responsibility for billing.

Also identify fees received in advance for work still to be completed.

Clarify who will complete outstanding work, issue invoices, collect payments and handle disputes. The agreed treatment should be reflected in the transaction documents.

You are trying to understand which balances and work obligations you will acquire, and their effect on settlement and cash flow.

9. Review pricing and fee practices

A substantial fee base can contain work that is consistently underpriced.

Hence, review:

When fees were last reviewed.
Pricing differences between comparable clients.
Legacy discounts and informal arrangements.
Fixed-fee scope and profitability.
Time spent compared with fees recovered.
Scope changes, write-offs and unbilled work.
Billing frequency and payment terms.

Underpricing may create an opportunity, but the benefit depends on clients accepting changes.

If your acquisition forecast assumes higher fees, identify which clients would be affected, when increases could occur and what retention risk they may create.

As new ownership represents changes, you'd want to know whether current pricing supports the intended service model, and how much of your forecast relies on changes yet to be achieved.

10. Understand the tech

The systems supporting the practice need to keep working through settlement and any later integration.

Technology is becoming increasingly important as AI changes how accounting work is performed. Differences in adoption may affect efficiency, staff capability and the investment needed after acquisition.

Review the applications used for practice management, tax, accounting, workflow, document storage, billing, payroll and client communication.

You might want to ask these questions and establish:

Who holds the subscriptions, licences and administrator access.
Whether transfer, replacement or supplier approval is required.
Contract terms and ongoing costs.
Important integrations and dependencies.
Legacy systems and unsupported processes.
Data export and migration options.
Training needs and implementation costs.

Separate what is essential for day-one continuity from what you intend to change later. A rapid migration may create disruption during an already sensitive transition.

What you are testing: Whether the practice can operate from settlement and what system changes will require.

11. Understand the data you are acquiring

Client records are essential to service delivery, so you'd need to examine their completeness, security and transfer arrangements.

Understand:

Where records are stored.
Whether files are complete and accessible.
Access controls and administrator permissions.
Backup arrangements and recovery capability.
Known security incidents and unresolved concerns.
Dependence on personal devices or accounts.
Records held by external providers.
The proposed transfer and access process.

During due diligence, use de-identified or aggregated information where practical. This helps protect client confidentiality while allowing you to assess the practice. Agree on the process before identifiable information is disclosed. A confidentiality agreement alone should not be treated as automatic permission to share client data.

Thereafter, have your legal and technology advisers assess the relevant access, privacy and transfer requirements.

You'd want to know whether the records can support ongoing work and be transferred securely through the appropriate permissions and controls.

12. Review the premises

The current premises may support client access, staff retention and local relationships. They may also create commitments that extend beyond your preferred operating plan.

Ascertain and understand:

Whether the premises are leased or owned.
Remaining lease term and options.
Rent, outgoings and scheduled increases.
Assignment requirements and landlord consent.
Guarantees, security deposits and make-good obligations.
Space requirements and suitability.
Relocation costs and timing.

If you intend to move or combine offices, you'd also need to assess the effect on staff travel, client access and staff/client retention. Your solicitor should review the lease and any proposed transfer arrangements.

The lease and premise commitments should fit your acquisition plan, and you should understand whether changes will create additional costs or transition risk.

13. Examine the proposed vendor handover

A general promise that the principal/vendor/business owner will “help with the transition” is likely to leave many important questions unanswered.

Hence, ask the vendor what the handover will entail, and clarify:

Duration, hours and availability.
Introductions to major clients and referral partners.
Transfer of technical knowledge and operating procedures.
Support for staff and unresolved work.
Responsibilities during busy periods.
Whether assistance is included in the price or separately paid.
What happens if the vendor becomes unavailable.
How the arrangement will be documented.

The handover should reflect the dependencies identified during your review. A practice built around the vendor’s relationships (key person risk) may require a different transition from one managed largely by an established team.

Also, discuss restraints and other legal protections with your solicitor.

The objective is to understand whether the proposed handover addresses what the buyer actually needs to take control of the accounting practice successfully.

14. Assess whether the practice can operate remotely

If you intend to acquire the practice and manage it from another location, treat remote operation as a key assumption to test during due diligence.

You might want to consider:

How clients currently communicate and receive services.
Their expectations about face-to-face access.
Tasks that require an on-site presence.
Staff capability and working preferences.
Local supervision and management requirements.
Secure access to systems and records.
Paper-based workflows and document handling.
Travel requirements and associated costs.
Dependence on the vendor’s local presence.

Cloud software and technology can support remote work, but successful remote operation also depends on client relationships, team management and consistent service delivery.

If the practice is not currently operated remotely, your plan introduces an additional change (risk) alongside the ownership transition. Assess how clients and staff may respond, what local support will be needed and whether the proposed model can be tested before settlement.

The question you'd need to answer satisfactorily is whether remote operation is practical for this practice, rather than merely technically possible.

Agree who is reviewing what

There are many moving parts to a due diligence review on an accounting practice to be acquired. Thus you will need to assign responsibility to different advisors, so important areas are covered and findings can be brought together.

Buyer
You should assess the commercial fit, operating model, client relationships, management demands and whether the acquisition supports your objectives.

Financial due-diligence adviser
Review financial performance, earnings adjustments, cash flow and other agreed financial matters. As an accountant buying a practice, consider where an independent review would help test your own assumptions.

Solicitor
Review the transaction structure, contract, liabilities, employment matters, lease, warranties, restraints and other relevant legal issues.

Technology or other specialist advisers
Assess systems, cybersecurity, data migration, valuation or specialist matters where the transaction requires that expertise.

Acquisition finance adviser
Consider how material findings affect the funding requirement, proposed structure and information presented to lenders.

For each advisor, agree on the scope and responsibilities early.

Turn findings into decisions

As due diligence progresses, each material finding needs a considered response.

Depending on what emerges, you may need to:

Obtain further evidence.
Revise the earnings or cash-flow forecast.
Allow for additional staffing, working capital or transition costs.
Renegotiate the price or payment structure.
Strengthen the handover plan.
Have your solicitor address the matter in the transaction documents.
Reconsider whether to proceed.

However, you should be clear about what has been verified, what remains uncertain and what risk you are prepared to accept. You should not assume because the transaction is progressing.

A missing answer should remain visible on your radar and track them through to a resolution, or an informed decision to accept the risk.

Review your funding position

Your due-diligence findings may change the funding requirement, the proposed finance structure or how a lender assesses the acquisition.

For example:

Lower sustainable earnings may affect the lender’s assessment of repayment capacity.
Client concentration or retention concerns may require further explanation or supporting evidence.
Staff changes may alter ongoing operating costs.
Additional working capital may increase the total funding required.
A revised purchase price may change the amount to be financed.
Vendor finance, deferred payments or retention arrangements may change the funding structure.
A revised settlement date may affect the finance application timetable.

Keep your acquisition finance adviser informed of material findings and transaction changes as they arise. This allows their implications to be assessed early and helps ensure the finance application reflects the transaction you intend to complete.

STAGE 5
RESOURCES

1. Accounting Practice Due-Diligence Questions >

A structured set of questions covering the financial, client, staffing, operational and transition areas of an accounting-practice acquisition.

2. Client Concentration Review Worksheet >

Review revenue by major client and related client group.

3. Due-Diligence Tracker >

Keep requests, responses, findings and follow-up actions together. Use it to record who is reviewing each issue, what evidence supports the conclusion and what remains outstanding before the next decision or deadline.

KEEP IN MIND

1. Verify the Information

Ask for supporting records to confirm important claims in the vendor’s documents and explanations.

2. Allow for changes under your ownership

Past performance may depend on the vendor, key staff or existing arrangements. Consider how your acquisition could affect revenue, client and staff retention, costs and day-to-day operations.

3. Follow up on important findings

Keep unanswered questions on your list. If findings affect the price, terms or finance, discuss them with your advisers before proceeding.

Are you ready to move to Stage 6?

IMPORTANT INFORMATION: This guide is general educational information for accountants considering an accounting-practice acquisition. It is not legal, tax, accounting, valuation, investment or credit advice, a loan offer or an indication of approval. Funding options and lender requirements depend on the buyer, practice, transaction and available evidence. Obtain appropriate professional advice and formal lender approval before making commitments.