Client concentration is not automatically a reason to reject an accounting practice. It is a reason to understand how much revenue, cash flow, contribution and workload depend on a small number of client groups—and whether those relationships are genuinely transferable to the buyer.

Measure concentration on more than invoiced fees. Group related entities, reconcile the schedule to source records, identify who owns each relationship and model the effect of losing or repricing the largest groups. A diversified client count can still conceal dependence on one family group, referrer, industry or selling partner.

Define the client before calculating concentration

The invoice addressee is not always the economic client. One family or corporate group may generate separate bills across companies, trusts, superannuation funds and individuals. Treating each entity as independent can understate the effect of one decision-maker moving the whole group.

Build a stable, anonymised client-group identifier and record the entities, beneficial or controlling relationship where known, principal contact, referrer, relationship owner and services supplied. Document the grouping rule. Also keep genuinely independent engagements separate; combining unrelated clients can exaggerate concentration.

There is no universal percentage that makes a practice acceptably diversified. The buyer should assess the amount exposed, the quality of the relationship, the cost of serving it and the practice’s ability to absorb a departure. A material client with documented engagements, several staff contacts and transferable systems may present a different risk from a similarly sized client attached only to the seller.

Measure more than one concentration ratio

Calculate the top one, top five and top ten client groups across at least these views:

  • invoiced fees: what proportion of reported revenue came from each group;
  • cash receipts: whether large invoices were actually collected in the period;
  • gross contribution: fees less identifiable delivery costs, including contractors or outsourced work;
  • workload: hours, jobs, deadlines and senior review absorbed by each group;
  • work in progress and debtors: whether exposure is also concentrated in unbilled or unpaid balances; and
  • forward scope: services expected in the next complete cycle under current engagements.

Run the analysis by financial year and rolling 12-month period. Show acquisitions, new wins, losses, price changes and one-off projects separately so that movements are not hidden by a single closing figure. Australian Government guidance recommends independently checking three to five years of financial information, including tax returns, BAS, receivables, cash flow and sales records (business.gov.au). Reconcile the concentration schedule to those records rather than relying on a seller-prepared client list.

Look for concentration behind the client list

Client-group concentration is only the first layer. Segment the same fees by:

  • selling partner or relationship manager;
  • referral source or alliance;
  • industry, geography and common economic exposure;
  • service line, software platform and specialist skill;
  • billing month and lodgement peak; and
  • common ownership, lender, franchisor or other shared dependency.

This identifies correlated risk. Twenty legally separate clients referred by one adviser may leave together if that channel changes. A broad client base in one industry may experience the same downturn. Several profitable groups may all require a specialist employee who does not intend to transfer.

Compare engagement records with actual practice. APES 305 requires members in public practice to document and communicate engagement terms and provides guidance on scope, responsibilities, fees, billing and recurring engagements (APESB). For each material group, inspect whether the named client, current services, pricing basis, responsibilities and termination arrangements align with what is being billed.

Request evidence without over-collecting personal information

Start with a de-identified client concentration file. For each material group, request tenure, services, three to five years of invoices and receipts, credits and write-offs, margin or effort measures, last fee increase, current engagement date, relationship owner, staff contacts, complaints and known departure signals.

Use a staged access protocol for engagement files and identifiable records. The OAIC says vendors should consider de-identification, generally avoid supplying customer names and identifiers during due diligence, and maintain control over personal information provided to a prospective purchaser (OAIC). The TPB likewise says a seller of a tax or BAS practice must not disclose client information to the buyer without client consent or a legal duty, while relevant client and proof-of-identity records are expected to transfer appropriately when ownership changes (TPB). The parties’ lawyers should determine the lawful disclosure and consent process.

Test whether the largest relationships can transfer

For each material client group, ask:

  1. Who initiates contact, resolves difficult matters and approves pricing?
  2. How many team members have meaningful contact with the client?
  3. Is knowledge held in the file and workflow, or mainly in the seller’s memory?
  4. Does the engagement continue, require consent or permit termination on a change?
  5. Which service promises, discounts or unpaid extras are informal?
  6. Has the client been told about the proposed transition, and what is the permitted communication sequence?
  7. What systems, registrations and authorities must be established before work can continue?

For entities covered by client-to-agent linking, the ATO says a client engaging a new registered agent must make the nomination and the agent generally has 28 days to add the client (ATO). That operational step is not proof of retention, but it should appear in the transition plan rather than being assumed to happen automatically.

Apply a downside case, not just a ratio

Hypothetical example: a practice reports $1 million of annual fees. Its largest client group contributes $180,000, but requires $70,000 of identifiable staff and contractor cost, $20,000 of seller time not reflected in payroll, and significant work during the same peak as other major clients. Losing it would remove fees, release some capacity and leave some fixed overhead. The relevant downside is therefore not simply an 18% reduction in revenue.

Model the loss, partial retention and repricing of the largest groups. Trace the effects on cash receipts, recoverable capacity, fixed costs, working capital, service mix and required senior expertise. Then distinguish:

  • risks supported by adverse evidence;
  • gaps where evidence is missing;
  • dependencies that can be addressed through a handover plan; and
  • residual exposure that should influence valuation, structure or the decision to proceed.

Legal, accounting, tax and valuation advisers should assess any proposed retention mechanism, deferred consideration, warranty or other transaction protection. A concentration calculation informs those discussions; it does not prescribe the contract or price.

Frequently asked questions

Is a large client always a bad sign?

No. A large client may be profitable, well documented and served by a broad team. The issue is the consequence and likelihood of departure, not size alone.

Group them for dependency analysis when a common decision-maker or economic relationship could move the engagements together. Preserve entity-level detail for billing, scope and legal review.

Can a seller guarantee that clients will stay?

Client behaviour cannot be treated as certain. Test the evidence, communication plan and downside case, then ask transaction advisers which protections are appropriate and enforceable.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.