Can I sell my CPA practice if I have customer concentration issues?
Customer concentration issues in a CPA or accounting practice purchase transaction follow many of the same tendencies, as do other business acquisitions. Customer concentration does bring an increased level of risk to any purchase transaction. The risk is usually identified in the upfront discussions and due diligence process. Most savvy buyers are aware enough to at least ask about concentration issues. This risk appears when the percentage of revenue and profit from one customer exceeds 10%. While 10% is certainly not set in stone it is commonly used to identify the risk.
The risk exists because if the seller transfers the business to the new buyer and that one customer decides to make a change, the revenue and profits will slide accordingly. Because so much revenue and profit is associated to this client, it can impact the profitability of the new company and in some cases can put the financial viability of the organization at risk.
In many industries, customer concentration issues are always present just because of the nature of the industry. The CPA and accounting industry is not one of them and concentration issues should be addressed to mitigate the risk.
There are multiple ways to mitigate but the most common is contractual whether it be an accounting firm or not. Tying the purchase contract to client specific performance can usually mitigate the risk effectively, which can be done by pulling out the individual client that has the concentration and treating payment for this client differently than the other clients. CPA’s and principals in accounting purchase transactions are already very familiar with this concept. Many purchase contracts have a retention component to them. For more information on how to structure a transaction to mitigate client concentration risk you can talk to an attorney or a business broker that specializes in accounting practice sales.