Why We Structure CPA Practice Acquisitions on a Percentage of Collections

We’ve purchased five businesses. Four of them were structured the same way: instead of a lump sum at closing, the purchase price is paid over time as a percentage of what the acquired clients actually pay going forward.

For service businesses, and especially for traditional CPA firms, we think this is close to the only structure that makes sense for both sides right now. Here’s why.

The problem with a lump-sum sale of a service business

A service business doesn’t have much in the way of hard assets. What you’re really buying is a set of client relationships, and those relationships are only as durable as the trust the seller built with them, which doesn’t automatically transfer to a new owner on closing day. This becomes a bigger risk when the seller wants to exit in a very short time period. How do you transfer years, or decades, of a interactions in to one to two meetings?

That creates a real mismatch of risk. If a buyer pays a lump sum upfront based on last year’s revenue, and a meaningful share of clients leave once they realize their familiar accountant is gone, the buyer has paid full price for a client list that no longer exists. We’ve seen this happen. It’s the single biggest risk in buying any service business, and it’s larger in accounting than in most.

Why this risk is worse for traditional CPA firms specifically

Two things make this risk particularly sharp for CPA firms that are still primarily doing tax preparation and filing, rather than advisory work.

• Price is a bigger factor in client retention than most sellers want to admit. Tax preparation has become increasingly commoditized. A client who’s paying a certain price for a return is often price-sensitive enough to shop around if anything about the relationship changes, especially a new owner. And when you take into account most firms selling are below marking pricing on their fees, this becomes even larger.
• AI is changing what tax preparation and filing actually require. As software and AI tools take over more of the mechanical work of preparing and filing returns, the value a traditional, compliance-only firm provides is getting thinner. A firm that’s purely transactional, “send us your documents, we file your return,” is more exposed to this shift than one offering advisory services a client can’t get from software.

Put those together, and a lump-sum purchase of a traditional, tax-only CPA practice is a bet that the clients stay and that the firm’s basic service model stays valuable. We’re not comfortable making that bet with a check written on day one, and frankly, we don’t think many buyers should be. In fact, we don't believe any money up front is a good idea for a tax heavy firm, and the data supports this.

How a percentage-of-collections structure fixes this

Instead of a lump sum, the purchase price is paid out over an agreed period, as a percentage of what the transferred clients actually pay once they’re our clients. A few things follow from that:

• The seller stays genuinely involved. Because the seller’s full purchase price depends on client retention, they’re motivated to help with the transition, introductions, reassurance, a warm handoff, rather than disappearing the day after closing with a check already cashed. This also helps the seller stay up on their clients, whom they often have a personal relationship with above just doing their taxes.
• The buyer isn’t exposed to paying for a client base that doesn’t materialize. If clients leave despite a good-faith transition, the buyer isn’t out the money for relationships that never transferred. The price paid actually reflects the value received.
• It isn’t one-sided. This is worth being honest about: this structure shifts real risk onto the seller, who no longer gets a guaranteed number at closing. A seller who wants certainty and a clean break will reasonably prefer a lump sum, even at a lower total price. Too often, the seller has been waiting and is at a position where selling is their only option at the last minute instead of finding a transition years earlier. We think the trade-off is usually still better for sellers than it looks, because a seller confident in their client relationships will generally collect more over time under this structure than they’d get from a discounted lump sum priced to account for the same risk. But it’s a real trade-off, not a free lunch for either side.
• The old valuation method left the building several years ago. The traditional valuation method for a tax/accounting firm was 1.00-1.25x gross revenue for decades. The reason was simple, taxes aren't going away and the industry doesn't really change. Then, overnight, the industry changed to profitability, Seller Discretionary Earnings and more. Firms under $500,000 in gross revenue have seen their value drop to nothing because google ads and more can pickup those clients for less. Now it's around 1.4x-4.0x what the owner takes home, and that number is dependent on gross revenue. The more you gross, the higher your multiple based on what you actually paid yourself. 

Why this turns buyer and seller into a team, not adversaries

Here’s a detail that doesn’t get talked about enough: percentage-of-collections deals change what a buyer is incentivized to do with bad news.

Say the largest client in the practice being sold has quietly mentioned they’re thinking about scaling back services, maybe moving some work in-house, maybe shopping for a cheaper option. Under a lump-sum deal, that’s information a buyer has every incentive to either not dig for or not act on until after closing, since surfacing it might mean renegotiating the price downward, especially if there is a look-back period. Which there ALWAYS should be. The seller, meanwhile, has every incentive to not volunteer it. The buyer might find out, and then not mention it to try and get concessions in other areas, knowing the look-back will protect them.

Under a percentage-of-collections structure, that incentive flips. If that client’s business shrinks, the buyer’s actual payments shrink with it, so the buyer wants to know about the risk as early as possible, not after the money’s already changed hands. And the seller, whose remaining payments depend on the same client relationships, has every reason to help find a way to keep that client rather than stay quiet and hope it doesn’t surface until they’re already paid.

Both sides end up pointed at the same problem instead of at each other. That’s not a minor side benefit, it’s one of the more valuable things this structure does: it makes honesty the profitable move for both parties, instead of something that only benefits one side at the other’s expense.

What this means if you’re thinking about an eventual sale

If you’re a CPA or EA weighing retirement or a transition in the next several years, a serious buyer will likely propose a structure like this one. If you’re approached with a lump-sum offer well above what collections-based deals are paying, it’s worth asking why, and what assumption about client retention is baked into that number.

To go with this, if you are expecting a lump-sum offer or fixed price, you need to ask yourself what it is that you offer to justify this to someone who doesn't know you or your clients?

We’re doing this kind of acquisition ourselves, and we’re also glad to talk with any CPA or EA in the Fort Wayne area thinking about what a transition might look like, whether that conversation leads anywhere with us specifically or not.

Schedule a conversation if you’d like to talk through what this could look like for your practice.

Michael Hunsche, CPA, is the founder of HCG CPA + Advisory in Fort Wayne and has personally acquired five businesses, four under a percentage-of-collections structure.