Tax preparation practice due diligence

Diligence on a tax preparation practice is largely about testing whether the client relationship the seller describes is as durable as it sounds. Because the business has few hard assets and no professional licence tying it to a regulator, the real risk sits in the client file itself — whether clients actually come back, whether the work the practice claims to do is really the work it does, and whether anything from a prior season is quietly waiting to become the new owner’s problem. A buyer who confirms these things independently, rather than relying on the seller’s own summary, is in a materially stronger position heading into the first season under new ownership.

Return rates need multiple years, not one

Ask for client-level return data across several consecutive filing seasons, not a single year’s client count, and look specifically at whether the rate has been trending up, flat or down. A single strong season tells you very little about what happens under new ownership, while a multi-year pattern shows whether the loyalty in the numbers is tied to the practice’s systems and reputation or is more fragile than it first appears. Where the data can be segmented, look separately at long-tenured clients versus recent additions, since a practice adding new clients quickly but losing older ones just as fast tells a very different story than the net client count alone suggests.

Trace what actually gets prepared in-house versus referred out

Request a breakdown of return complexity handled directly by the practice against work that was referred to an outside accountant or specialist, since a practice that looks fully capable in its marketing may in fact be narrower in what it can actually deliver. This matters directly to revenue quality: fees earned on referred-out work are not the same asset as fees earned on work the practice’s own staff complete, and a buyer underwriting future capacity needs to know which is which. It also matters to your own staffing plan, since taking on work the outgoing owner never actually prepared personally may require hiring or training you had not budgeted for.

Check for correspondence and reassessment history with the CRA

Ask the seller directly, and where possible have the seller authorize a review, whether any prior-prepared returns triggered a Canada Revenue Agency reassessment, audit or dispute, and whether any pattern of preparer error shows up across multiple clients rather than as an isolated incident. A pattern here is more informative than any single case, since it points to a systemic quality issue in how returns are prepared rather than one unusual file, and a systemic issue is one the new owner inherits the reputational cost of even without having prepared the original return.

Confirm what is actually recurring in the off-season revenue

Where a practice reports meaningful off-season revenue from bookkeeping, corporate filings or client representation work, verify that it is genuinely recurring client work rather than one-time engagements that happened to land in the period under review. Overstated off-season revenue is one of the more common ways a practice’s value gets inflated, because it makes a seasonal business look more stable across the year than it actually is.

Verify the franchise relationship independently of the seller’s summary

Where the practice operates under a franchise agreement, request the agreement itself rather than a summary of its terms, and confirm directly with the franchisor whether the practice is in good standing, what the resale-approval process actually requires, and whether any territory or renewal issue is pending that the seller has not disclosed. A franchisor that confirms good standing in writing is worth far more at this stage than a seller’s verbal assurance that everything is in order.

Confirm the software, subscriptions and equipment are actually transferring

A tax preparation practice depends on tax-preparation software licences, client-management tools and, often, a handful of workstations and a photocopier for a walk-in office, and none of it is guaranteed to transfer automatically just because the practice is changing hands. Confirm which subscriptions are held in the business’s name versus the seller’s personal name, whether any are mid-term and non-transferable, and what it would cost and how long it would take to stand up replacements if a given tool cannot move with the sale.

• Client-level return-rate data across several consecutive filing seasons, segmented by client tenure where possible
• A breakdown of work completed in-house versus referred to outside preparers or accountants
• Any Canada Revenue Agency correspondence, reassessment or dispute history tied to prior-prepared returns
• Verification that reported off-season revenue is genuinely recurring, not one-time project work
• Franchise agreement terms governing assignment, territory and any resale-approval process, confirmed directly with the franchisor
• Staffing arrangements for the coming filing season, including whether key seasonal preparers are expected to return