Principal Dependency When Buying an Accounting Practice
Updated: Oct 24
GUEST AUTHOR | Blackhall & Co
Today’s guest post is by Blackhall & Co. Blackhall & Co helps buyers find businesses worth owning. Opinions expressed by guest authors are their own and do not necessarily reflect the views of Fairlane Finance.
Principal Dependency When Buying an Accounting Practice means understanding how the owner's work, knowledge and relationships will continue when the person holding them together steps away.
The vendor may describe a well-run practice with loyal clients and experienced staff.
Yet the person selling it might still be the first call when a client is worried, a file becomes complicated or the team needs a decision. That contribution can be difficult to see in financial statements.
Stage 5 due diligence brings those responsibilities into view. For you as the buyer, the question is whether they can be transferred or replaced at a cost and workload you can sustain.
The short answer
Understand the vendor's actual responsibilities, including work outside billable hours.
Compare their explanation with records and agreed discussions.
Consider both the skills and time available in your proposed team.
Allow for replacement costs and a purposeful handover.
Keep unresolved dependencies visible when deciding whether to proceed.
What does Principal Dependency When Buying an Accounting Practice really mean?
Principal dependency arises when important parts of the practice rely on the owner personally.
It may involve technical expertise, client confidence, staff supervision or the small commercial decisions that keep work moving. One principal can carry several of these responsibilities at once.
This does not necessarily make the practice unsuitable. A strong owner may have built a valuable business.
The acquisition question is how much of that contribution belongs to the firm already, and how much still needs to be passed on.
The earlier owner-dependence article introduces the issue during initial review. Due diligence takes the next step: establishing what the vendor does and whether your proposed operating model can carry it.
Look beyond the principal's job title
A description such as 'three days a week, mainly client work' leaves room for interpretation. Those days might include complex reviews, mentoring, fee discussions and calls from longstanding clients. Some responsibilities may happen informally, without appearing in a timesheet.
A conversation about a recent week can be more revealing than a broad estimate. You might ask which matters needed the vendor's involvement, why nobody else handled them and what happened next.
The answers help distinguish routine work from responsibilities that require particular experience or authority.
Client relationships deserve the same attention.
A client may work comfortably with the team throughout the year but still rely on the principal for an annual planning discussion. Losing that contact could matter even if the principal performs little recorded production work.
How can you establish the real workload?
The vendor's explanation is a useful starting point. Available calendars, workflow allocations, review records and time entries can then help you understand how it fits the practice's daily operation.
An absence of time entries does not, by itself, mean an absence of work.
It is also worth considering busy periods and holidays. When the principal takes leave, does the team continue comfortably, or do difficult files wait for their return? A backlog may reveal a responsibility that needs a successor, rather than simply a temporary inconvenience.
You and the vendor should agree how selected staff or client discussions will occur, with appropriate confidentiality and information-access arrangements. A useful review brings together the records, the explanation and any unanswered questions, rather than treating one source as conclusive.
Can you and the team take over?
Your experience may make you an obvious successor for some responsibilities.
Even so, having the skills is different from having the time. Existing clients, management duties and the work of integrating the acquisition all compete for your attention.
The same distinction applies to staff. A senior accountant might be capable of reviewing complex files but already have a full workload.
Taking on staff supervision and major client contact as well could require a change in responsibilities, additional support or another appointment.
The staff-structure review helps explain who does what today. Your due-diligence discussions should then explore what each person could realistically take on, including peak periods. Part-time hours do not automatically represent capacity available to you.
This is also a test of your own ownership plans. business.gov.au's acquisition guidance encourages prospective buyers to consider their skills and the time required to run a business. An attractive practice still needs to fit the role you intend to perform.
What happens to earnings when the owner leaves?
The cost of replacing the principal can change how you interpret the earnings presented for sale.
If vendor remuneration has been added back, you need to understand which work remains and how it will be performed under your ownership.
You may take on some work personally, recruit someone or use specialist support. Each choice has implications for operating costs and your available time. Providing the work yourself does not remove your need for a realistic income and workload plan.
Ongoing replacement costs should be considered separately from recruitment, training and paid vendor overlap. The normalised EBITDA guide explains why earnings adjustments need to reflect the proposed operating model. Your financial due-diligence adviser can help you avoid counting the same cost twice.
An illustrative example: the missing day
Suppose a vendor describes three days of client work each week. During your review, you identify another day spent supervising staff and resolving technical matters.
You can absorb the client work, but the practice manager is already fully occupied.
The uncovered supervisory work becomes the important finding. You might explore reallocating responsibilities, providing additional support or recruiting.
The resulting cost and timing belong in the forecast and transition plan before you rely on the earlier earnings assumption. This example is hypothetical, as actual workloads and costs vary.
A handover should transfer responsibility
A promise that the vendor will remain available sounds reassuring, but it leaves the practical work open. For each dependency, you as the buyer should understand who will take over and how the vendor can help that person become ready.
For instance, introductions may help you build confidence with longstanding clients. Technical walkthroughs, staff coaching and documented procedures may help transfer knowledge that currently sits with the principal. The assistance should respond to the gaps you have actually identified.
A joint client meeting, for example, gives you an opportunity to hear the relationship history and agree how future contact will work, while the vendor can provide context and reassurance.
The arrangement also needs clear responsibilities, availability, payment and a response if the vendor becomes unavailable. Your solicitor should review the proposed documentation and relevant restraints.
A longer handover only helps if it moves the practice towards operating successfully without the departing owner.
What still needs an answer?
Which important functions have no capable successor with enough time?
Which client or referral relationships still depend on the vendor personally?
What knowledge needs to be documented or demonstrated?
Are replacement and overlap costs supported in the forecast?
Do the findings require further evidence, different terms or adviser review?
Business Queensland's due-diligence guidance supports investigating the business and involving advisers. Where your findings materially change costs, earnings or transaction structure, your acquisition finance adviser also needs the revised picture.
Frequently asked questions
Is principal dependency a reason not to buy?
Not automatically. The decision depends on whether the responsibilities can be transferred or replaced through a credible plan, with supported costs and remaining risks you understand.
Can I add back the owner's entire salary?
The adjustment needs to reflect the work that continues under your ownership. Your financial due-diligence adviser can assess the remuneration and replacement assumptions.
Does a long handover solve the problem?
Duration alone is insufficient. Specific assistance, an available vendor and successors with the skills and time to take over are all relevant.
Does loan approval confirm I can replace the vendor?
No. Lender assessment and buyer due diligence serve different purposes. You still need to assess the practical transition and your operating capacity.
Can the practice continue under your ownership?
A successful review gives you a supported explanation of how the vendor's contribution will continue. Where a gap remains, the next decision becomes clearer: investigate, resource it, revise the proposal or reconsider proceeding.
Sources and further reading
Contributor disclaimer: This article is contributed by Blackhall & Co and published on the Fairlane Finance website. The views, opinions and conclusions expressed are those of the contributor alone, not statements of Fairlane Finance’s position. Publication does not constitute Fairlane Finance’s endorsement of the contributor’s views, services or any proposed acquisition.
The material is general information only. It is not financial, credit, investment, legal, tax, accounting, compliance or valuation advice, and does not take account of your objectives, financial position or circumstances. Do not rely on it as a substitute for independent investigation and advice from appropriately qualified professionals. You are responsible for assessing its accuracy, currency and suitability. Any reliance on it or action taken is at your own risk. To the maximum extent permitted by law, Fairlane Finance disclaims liability for loss or damage arising from reliance on this contributor content. Nothing in this disclaimer excludes or limits rights or liabilities that cannot lawfully be excluded or limited.
