The market for certified public accounting (CPA) practice acquisitions remains active. Strategic buyers, regional firms, and private-equity-backed platforms continue to pursue accounting firms that offer recurring revenue, strong client relationships, and attractive growth opportunities. For CPA owners considering a sale, that is good news. But a strong market does not guarantee a favorable deal.

CPA deals are unique. This is primarily because buyers generally need seller CPAs to remain invested in their practice post-closing so that client relationships will endure the transition from seller to buyer. While this concern is present to a certain degree in almost every M&A deal, it is uniquely the case for CPAs where clients are often loyal to the professional more than to the firm itself. As a result, buyers rely on a variety of tools to incentivize sellers to remain dedicated to the business after receiving substantial post-closing proceeds. Without competent legal counsel involved, sellers can inadvertently find themselves unnecessarily disadvantaged in the deal.

In many transactions, sellers spend months discussing valuation and succession planning before speaking with legal counsel. By then, they may have already given away leverage or accepted deal terms that have significant adverse effects on the ultimate value of the transaction.

While every deal is different, we routinely see three recurring mistakes in CPA practice sales that proper planning and legal counsel can help avoid. Below, we address each of these three mistakes and suggest practical steps sellers can take to protect their interests.

Mistake #1: Signing a Letter of Intent without fully understanding the economics

Many sellers view the letter of intent (LOI) as a preliminary document that can be cleaned up later in the purchase agreement. However, the most important business terms are often (and typically should be) established at the LOI stage, regardless of whether the LOI is “non-binding.”

The purchase price may dominate the initial discussions, but sellers should also focus on how and when they will be paid. Is a portion of the consideration contingent on future performance? Is there seller financing? Are there revenue-based earnouts? Are there purchase price adjustments that could reduce the amount ultimately received? How do these considerations uniquely affect CPA practice sales?

Experience shows that sellers who involve counsel before signing an LOI have more negotiating leverage than sellers who call after the parties have already settled the basic economics and other deal terms. By the time definitive documents are being drafted, buyers often treat the major business points as settled. That can make it much harder for sellers to renegotiate provisions they should have addressed at the beginning of the process.

The lesson is straightforward: Legal counsel should be involved before an LOI is signed, particularly to identify deal terms whose significance may not be immediately apparent.

Mistake #2: Focusing on purchase price instead of payment certainty

Many CPA practice owners understandably focus on achieving the highest valuation possible. But the highest stated purchase price does not always produce the best result. For example, one buyer may offer a larger headline number but require substantial earnout payments tied to client retention or future revenue performance. Another buyer may offer a lower purchase price but provide significantly more cash at closing and fewer contingencies.

The practical question is simple: How much money is likely to end up in the seller’s pocket, including after taxes?

CPA practice acquisitions frequently include provisions that shift risk back to the seller more than in a standard M&A transaction. Earnouts, indemnification obligations, holdbacks, and other contingent payment structures can have a meaningful impact on the value ultimately realized.

Most post-closing disputes are not caused by bad intentions. They are caused by agreements that leave too much room for interpretation regarding performance metrics, client retention calculations, and payment obligations.

Sellers should carefully evaluate not only the amount being offered, but also what will be required of them and the likelihood of receiving the full consideration.

Mistake #3: Not understanding rollover equity

One of the most significant developments in today’s CPA practice M&A market is the increasing use of rollover equity to retain seller owners. In many transactions, particularly those involving private-equity-backed buyers, sellers are asked to accept a portion of the purchase price in the form of equity in the acquiring platform (or purchaser) rather than cash.

Rollover equity can be attractive. It may provide sellers with a second opportunity to participate in future growth and potentially benefit from a later liquidity event. However, not all rollover equity is created equal, and in our experience, CPA buyers are generally aggressive (that is, not seller-friendly) in the terms of the rollover equity offered.

Many sellers spend considerable time negotiating purchase price while devoting little attention to the terms governing their rollover equity investment, in some cases assuming, incorrectly, that the buyer can’t or won’t negotiate. That can be a costly mistake.

We have seen rollover equity be subject to outright forfeiture if the sellers are no longer employed for a certain number of years post-closing. In other cases, distributions on rollover equity fall so far down the waterfall that payment (even to recoup the agreed-upon value in the sellers’ practice that was rolled over in lieu of cash) is unlikely. While every transaction is different, completely unreasonable provisions must often remain when agreed to in the LOI (often before seller legal counsel was engaged) for the deal to close.

Sellers should evaluate rollover equity with the same level of scrutiny they apply to the cash purchase price. Questions regarding vesting, forfeiture, dilution, transfer restrictions, governance rights, liquidity rights, and exit opportunities can materially affect the value of the equity being received. Seller legal counsel should advise before these terms are agreed to by the parties.

Takeaway: A successful sale starts before the deal is signed

For many CPA firm owners, selling a practice represents the largest financial event of their professional careers. The difference between a good deal and a great deal often has less to do with valuation and more to do with understanding the various details that drive economic outcomes.

Owners who seek experienced M&A counsel early in the process are generally better positioned to evaluate competing offers, identify hidden risks, and negotiate terms that protect the value that owners have spent years building.

Before committing to a buyer, signing an LOI, or accepting rollover equity, sellers should ensure they fully understand the transaction. The earlier those conversations occur, the more options are typically available.

For more information regarding the sale, merger, or succession planning of a CPA practice, contact John Miles and Jessica Lazur at Procopio.