Many accounting firm transactions appear settled at the agreed price stage — only to shift during Due Diligence (DD). Buyers may renegotiate, introduce additional conditions, or in some cases withdraw altogether.
The reason is straightforward.
Due diligence is not a routine financial cross-check. It is a structured commercial review of whether the firm’s earnings are genuinely maintainable.
In practice, buyers are testing four fundamental questions:
- Are the earnings sustainable post-transition?
- Will clients remain after the principal exits?
- Is professional registration secure and transferable?
- Can the team, systems, and operations continue without disruption?
If these questions cannot be answered with clarity, the valuation will be recalibrated, often through an earnings recast or a multiple adjustment.
1. The Core Objective: Verifying Maintainable Earnings
At its core, DD is about confirming whether reported profits can continue under new ownership.
Client Structure and Retention Risk
Client retention is the most valuation-sensitive component in an accounting practice sale.
Buyers typically assess:
- Client concentration – Over-reliance on a small number of clients increases risk exposure.
- Relationship dependency – Are clients loyal to the firm, or primarily to the principal?
- Engagement documentation – Are formal service agreements in place?
- Deal structure implications – Will a retention adjustment, deferred consideration, or earn-out mechanism be required?
Where client relationships are highly principal-driven, buyers commonly mitigate risk through staged payments or performance-linked consideration.
Professional Registration and Licence Continuity
Professional registration is fundamental to transaction viability.
Buyers will review:
- The Principal’s compliance history;
- Any prior disciplinary or regulatory matters;
- Whether registration can continue uninterrupted if the key practitioner departs;
- The presence of a documented succession or transition plan.
A lack of clarity around licence continuity often results in structural changes to the deal or downward pressure on valuation
2. Identifying Hidden Liabilities
Beyond revenue stability, buyers re-evaluate both financial integrity and operational sustainability.
Earnings Recast and Add-backs Review
Normalised earnings calculations frequently include add-backs. However, buyers will independently validate each adjustment.
Common scrutiny areas include:
- Whether the principal’s remuneration is below market level;
- Adjustments involving related-party wages;
- Personal or discretionary expenses embedded in operating costs.
If compensation assumptions are unrealistic, buyers will recast earnings using market benchmarks — directly impacting the effective earnings base and valuation multiple.
Team Stability and Human Capital Risk
In professional service firms, employees represent both enterprise value and transition risk.
Buyers consider:
- Market competitiveness of remuneration;
- Dependence on key managers or senior accountants;
- Non-compete or retention arrangements;
- Cultural and operational transferability.
Where team stability is uncertain, buyers typically price in additional risk through multiple compression.
IT Systems and Data Integrity
The value of an accounting practice is closely tied to its systems and client data.
Due diligence will assess:
- Transferability of Xero, MYOB, and other software licences;
- Completeness and organisation of client records;
- Data compliance and cybersecurity exposure.
Non-transferable licences or disorganised data environments can materially disrupt transition and, in some cases, jeopardise the transaction.
3. Seller Strategy: Conducting Pre-Due Diligence
Experienced sellers do not wait for buyers to identify weaknesses.
A structured pre-due diligence review prior to going to market typically includes:
- Analysing and reducing client concentration risk;
- Recasting financials using realistic compensation benchmarks;
- Preparing a comprehensive DD documentation package;
- Establishing a clear registration transition plan.
The objective is not cosmetic improvement. It is to preserve price certainty and negotiating leverage.
When risks are identified and addressed in advance, buyers are less likely to seek valuation adjustments during final negotiations.
Conclusion
Due diligence does not create risk — it exposes it.
In accounting firm transactions, valuation ultimately hinges on sustainability and transferability.
Revenue scale alone does not determine price stability.
Clean earnings, diversified clients, licence continuity, and a stable team structure do.
Where these foundations are solid, valuation tends to hold.
Where they are not, DD becomes the mechanism through which price is re-set.
In practice sales, multiple compression rarely comes as a surprise. It is usually the result of issues that could have been identified earlier.
