An accounting practice can appear diversified while a material share of its fees depends on the seller’s family, controlled entities, a corporate group or one influential introducer. A buyer should map those connections, reconcile them to client-level fees and test whether the relationships, commercial terms and referral flow are likely to continue after ownership changes.

Do not treat every large client or introducer as a formal “related party”. AASB 124 is a financial-reporting standard with defined control, influence and family tests; it expressly says that economic dependence on a high-volume customer, supplier or agent does not by itself make that party related. Acquisition diligence should use a broader commercial-dependence map while keeping the formal accounting label accurate (AASB).

Define the relationships before measuring them

Classify each connection instead of putting everything in one concentration schedule:

  • ownership or control links: clients controlled, jointly controlled or materially influenced by the seller, another owner or their entities;
  • family and personal links: clients whose retention may depend on a close personal relationship, even if they do not meet a technical reporting definition;
  • economic groups: separate client entities whose fees move together because one parent, decision-maker or finance team appoints the adviser;
  • referral channels: lawyers, bankers, financial advisers, brokers, industry groups, existing clients or digital partners that introduce work;
  • reciprocal or paid arrangements: fee sharing, commissions, preferred-provider status, mutual referrals, bundled services or informal expectations; and
  • seller-led relationships: introductions recorded under the firm but maintained principally through the seller’s reputation or private network.

AASB 124 requires attention to substance over legal form and says related-party relationships can affect an entity even when no transaction occurs. It also cautions that arm’s-length terms should be described as such only when they can be substantiated (AASB). Those principles are useful diligence prompts, but the buyer’s commercial map should also capture dependencies outside the standard’s scope.

Build an evidence-backed revenue map

Request a client-level fee ledger for at least three completed financial years and the current year to date. Include client and group identifiers, service lines, billings, write-offs, collections, partner or manager, first engagement date, referral source and last material contact. Reconcile totals to the general ledger, tax invoices, debtor records and bank receipts.

Then obtain:

  • the seller’s signed declaration of ownership, family, employment and business connections;
  • a legal-entity chart for the practice, its owners and entities associated with major clients;
  • CRM source fields, lead notes, onboarding forms and referral-partner records;
  • engagement letters and pricing history for connected or referred clients;
  • referral, commission, alliance, licence, sponsorship and revenue-sharing agreements;
  • payments to and from introducers, including general-ledger accounts and tax invoices;
  • conflict registers, client disclosures, consent records and internal safeguards; and
  • correspondence showing who controls appointment, pricing and continuation across client groups.

Public searches are corroboration, not a substitute for seller disclosure. ASIC says current or historical company extracts can include directors, members and address information, while business-name records identify the holder (ASIC). Compare those records with the seller’s chart, but ask advisers about trusts, beneficial interests, private agreements and influence that a public extract may not reveal.

Test referral concentration and durability

Measure both client fees and originating channels. For each year, calculate the share of gross fees, recurring fees, contribution after direct delivery cost and new-client wins attributable to each connected group and referral source. Group common-control entities together. A dozen companies appointed by one family office are one commercial decision point, not twelve independent relationships.

Track referrals by cohort: introductions, conversion, first-year fees, recurring fees, losses and time since the last referral. Investigate concentration hidden by inconsistent source names, such as one law firm recorded under several partners. Separate referrals generated by a written firm-to-firm relationship from those following the seller personally.

Ask each major introducer, through a seller-approved process, why they refer, who owns the relationship and whether ownership change affects it. Do not assume a friendly meeting equals commitment. Confirm assignment, termination, exclusivity, service standards, commission, privacy and communication terms in the underlying agreement.

Examine conflicts and professional boundaries

A commercial connection is not automatically improper, but it may create duties that affect how the acquired practice can operate. The Tax Practitioners Board says registered tax practitioners must have adequate arrangements to manage actual and potential conflicts. Its examples include a practitioner receiving a referral fee or software commission; disclosure may be part of the response, while some conflicts must be avoided or controlled (TPB).

For members to whom it applies, APES 110 sets fundamental principles including integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Its independence standards apply specifically to audit, review and other assurance engagements, so “independence” should not be used as a blanket label for every accounting relationship (APESB). Have the buyer’s professional-practice adviser determine which memberships, registrations, services and safeguards apply.

Review whether conflicts are identified at onboarding, refreshed when relationships change and recorded at client-group level. Test a sample of referrals against commission payments and disclosures. An unsigned policy or a generic engagement clause is weaker evidence than a consistent register, client-specific communication and documented response.

Normalise revenue and model retention

Do not automatically remove every connected-client dollar. Instead, assign evidence-based scenarios:

Revenue category Base-case treatment Downside test
Seller-controlled or family client Include only where need, pricing, payment and transition evidence support continuation Remove or sharply reduce after seller exit
Group under one appointment decision Treat as one concentration and one retention event Model loss of the whole group, not one entity
Contracted referral channel Reflect enforceable term, economics and change-of-control position Assume termination, reduced flow or higher acquisition cost
Informal seller-led referrals Credit only demonstrated, transferable pipeline Assume no new referrals after handover
Broad independent client referrals Test repeatability by cohort and responsible staff Reduce conversion and referral frequency

Normalise non-market pricing, free work, reciprocal purchases, commission income and costs required to maintain a channel. Compare revenue before and after the seller reduced day-to-day contact. The purpose is not to produce one optimistic retention percentage; it is to show which cash flows survive different relationship outcomes.

Translate findings into transaction decisions

Uncertainty should remain visible in the deal structure. Ask legal and transaction advisers whether the agreement should address:

  • complete disclosure schedules for connected clients, entities and referral arrangements;
  • warranties about ownership links, side agreements, commissions and source data;
  • conditions for third-party consent or confirmation where genuinely required;
  • seller introduction and handover obligations with named relationships and dates;
  • retention-based adjustments using precise client-group attribution and measurement rules;
  • access to records for verification and a process for disputes; and
  • lawful, proportionate protections concerning solicitation and interference.

Mechanisms such as deferred consideration or retention adjustments allocate risk; they do not repair weak evidence or guarantee that clients stay. The buyer’s lawyer should draft the provisions, an accountant should test the fee data and tax treatment, and a valuation adviser should determine how concentration and uncertainty affect value. Professional-standards and regulatory specialists should assess conflicts, disclosures and service-specific obligations.

Questions that should have clear answers

  • Which clients are linked by ownership, control, family, group decision-making or seller relationship?
  • What percentage of sustainable fees depends on each connected group and each introducer?
  • Are prices, payment behaviour and service scope commercial and documented?
  • Who can end or redirect the relationship after completion?
  • Are referral payments, reciprocal arrangements and conflicts completely recorded and managed?
  • What happens to earnings if the largest group leaves and the leading introducer stops referring?

If the evidence cannot answer those questions, the revenue is not yet proven independent merely because it appears across many client codes.

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.