The best business transaction starts with your client engagement letter

Written Chris Sheedy of The Hard Word

The easiest firm transactions begin years earlier, before the owner ever decides to sell, with client engagement letters.

Accounting firm owners spend decades building a loyal client base before they consider a sale or merger. By then, attention naturally turns to valuations, potential buyers and transition plans.

But according to Daniel Albert, principal of Albert Legal, some of the most important work should have been done long ago.

Often, Albert says, the legal and commercial foundations that support a successful sale are laid when a client signs an engagement letter.

“The main point is really around accountants setting up the groundwork for a sale right from client engagement,” he says. “Obviously, this involves their engagement letters or their engagement contracts.”

That preparation doesn’t assume a sale is imminent. Rather, it’s about building a practice that is organised, compliant and capable of changing hands with minimal disruption whenever the time comes.

As transaction advisor Kev Ryan from SELLERS says, “Firms that attract the strongest buyer interest are rarely the ones that start their prep when they decide to sell. They’re the ones that have quietly built the right systems, including the right types of client relationships, over many years.”

You’re not selling clients

One of the greatest misconceptions around accounting firm transactions is that clients themselves are being bought and sold. In reality, of course, clients can leave whenever they choose.

“Every contract for the sale of an accounting practice talks about the clients as though they were stock on a shelf: itemised, valued, handed over on settlement day,” Albert says. “They’re not.”

What actually changes hands, he explains, is the goodwill of the practice. That includes its systems, its reputation, the knowledge and skills of remaining staff, any intellectual property and recurring revenue.

These all combine to create the specific and positive conditions that make it likely for client relationships to continue under new ownership.

“Ultimately, you need clients to opt in to that transition of ownership,” he says.

That concept is vital to understand. It changes how owners should think about preparing their businesses for a future transaction.

Rather than focusing only on maximising fees or finding the right buyer, owners should also ask a simple question – “How can a buyer be confident that my clients will stay?”

Engagement: To the letter

Client engagement letters often come into deep focus during a buyer’s due diligence process.

A well-drafted engagement letter, Albert says, is not designed around selling the practice. That would be an immediate turn-off for a client.

But it should reflect good professional practice by documenting how the relationship operates, how information is handled and potentially shared and what could happen if circumstances change.

“APES 305 Terms of Engagement, the mandatory standard from the Accounting Professional and Ethical Standards Board, requires members in public practice to document and communicate the terms of engagement with each client, covering scope of services and ownership of documents produced during the engagement,” Albert says.

“If your letters are inconsistent, years out of date, or missing across a slice of the client base, that isn't only a compliance gap. It becomes a valuation problem, because a buyer cannot rely on what it cannot verify.”

So, disclosure provisions sit quite naturally alongside the firm’s broader professional obligations.

“It should cover the client consenting to third-party disclosure in circumstances where such disclosure is protected under a some sort of confidentiality agreement,” Albert says.

Four things worth building into a standard engagement letter, Albert says, are:

Third-party disclosure and consent that states whether client information may be passed to third parties and how informed consent will be obtained.
Continuity on a change of ownership, which notes that the engagement may continue under a different principal, entity or successor practice.
File and record ownership that makes it clear who owns working papers as opposed to client-supplied records and how they will be handed over.
TASA disclosure obligations: The Tax Agent Services (Code of Professional Conduct) Determination 2024 requires registered tax practitioners to disclose specified information to clients, including registration status, complaints pathways and matters affecting suitability, through the engagement letter, the practice website or direct communication.

Having these provisions established well before any sale removes unnecessary uncertainty when the practice eventually enters the market.

How preparation creates value

Preparation is about far more than keeping lawyers comfortable. Leaving client issues unresolved until sale negotiations begin can create significant commercial problems.

“From the seller’s side, it might mean you then have to do a lot more work because you’ll have to obtain consents from clients and disclose certain things,” Albert says.

If this is the case, that additional work is probably arriving at exactly the wrong time.

“You might be having to do it at the time a buyer is being introduced, which obviously would delay the sale process,” he says. “It creates a lot of extra work for you at the time of potential sale.”

“It also introduces a ton of uncertainty on the buyer side of things, particularly uncertainty about whether clients are going to stick around. That could mean that the valuation method changes.”

Rather than paying a larger amount upfront, for example, buyers might seek to reduce their immediate risk via a larger retention payment, under which part of the purchase price depends on clients remaining after settlement.

For this reason, owners should view preparation as an investment rather than an administrative exercise, Ryan says.

“Buyers place a premium on certainty, for obvious reasons,” Ryan says. “Every system that’s documented, every engagement that’s current and every process that’s well managed helps demonstrate the goodwill they’re buying is likely to stay with the firm after settlement.”

The strongest firm transactions rarely start when the decision is made to sell or merge. They begin years and sometimes decades earlier, with careful attention to client relationships, strong documentation and systems that make the potential transition feel like a natural next chapter, rather than a frightening leap into the unknown.