CPA and Accounting Firm M&A: Deal Structures and Ownership Rules

The accounting profession has experienced significant consolidation activity since the early 2020s, driven by succession demographics, technology investment requirements, and the entry of private equity capital into the professional services sector. CPA firm transactions involve a set of constraints that have no equivalent in standard commercial M&A: state board ownership requirements that prevent non-CPAs from acquiring majority control of licensed entities, auditor independence rules that create immediate structural problems when an acquirer has financial relationships with the target firm's audit clients, and a professional culture built around partner-owned practices that makes compensation integration among the most sensitive aspects of any combination.

This sub-article is part of the Professional Services M&A: A Legal Guide for Law, Accounting, and Consulting Firm Transactions. It addresses the ownership rules, deal structures, regulatory constraints, and transaction mechanics that govern CPA and accounting firm acquisitions. Readers evaluating a law firm combination should review the companion sub-article on law firm merger and acquisition ethics and structure, which addresses the analogous professional rules framework for attorney-owned entities.

Nothing in this guide constitutes legal advice for a specific transaction. Accounting firm acquisitions require analysis of the applicable state board rules in each jurisdiction where the firm is licensed, the specific independence rules applicable to the firm's client base, and the detailed economics of the firm's partner compensation and capital structure. Acquisition Stars represents buyers and sellers in professional services transactions, including accounting firm combinations.

State Board of Accountancy Ownership Requirements

Every state that issues CPA firm licenses imposes ownership requirements as a condition of licensure. These requirements exist to ensure that licensed CPA firms remain under the professional control of individuals who are accountable to the state board's disciplinary authority and who have met the education, examination, and experience requirements for CPA licensure. The specific requirements vary meaningfully by state and must be analyzed for each jurisdiction in which the target firm holds a license.

Majority CPA Ownership: The Baseline Rule

The Uniform Accountancy Act (UAA), developed jointly by the AICPA and NASBA as a model statute for state adoption, requires that a majority of the ownership of a CPA firm - in terms of financial interests and voting rights - be held by individuals who are licensed CPAs. In most states that have adopted the UAA framework, this means more than 50 percent of the equity must be held by CPAs. Some states impose stricter requirements, requiring all owners to be CPAs, while others permit non-CPA ownership up to a defined minority threshold, often up to 49 percent. In states that permit minority non-CPA ownership, the non-CPA owners are typically subject to their own fitness requirements imposed by the state board.

Individual State Divergence and Multi-State Firms

Accounting firms licensed in multiple states must comply with the ownership requirements of each state where they hold a firm license. When states have different thresholds for permitted non-CPA ownership, the firm must comply with the most restrictive applicable rule, or it must structure its ownership differently for each state's licensed entity. For PE-backed accounting platforms that acquire firms across multiple states, this creates a complex compliance matrix that must be maintained as the platform grows. Failure to comply with state board ownership requirements can result in disciplinary proceedings against individual CPAs, revocation or suspension of the firm license, and the loss of the firm's ability to issue audit opinions and other attest reports in the affected jurisdiction.

Alternative Practice Structures: Attest Entity and Services Entity

The alternative practice structure (APS) is the primary mechanism through which non-CPA investors participate in the accounting profession without violating state board ownership requirements. The APS framework was formally recognized by the AICPA in 1999 and has been refined through subsequent guidance from state societies and state boards.

Structure of the Two-Entity Model

In a typical APS, the attest entity is the licensed CPA firm. It holds the firm's professional licenses, employs the CPAs who perform attest services, and issues all audit opinions, review reports, and compilation reports in the firm's name. The attest entity is owned by CPAs in compliance with applicable state board requirements. The services entity is a separate legal entity - typically a limited liability company or corporation - that provides non-attest services to clients, including tax preparation and planning, management consulting, advisory services, technology services, and business valuations. The services entity is owned by the PE firm or other non-CPA acquirer, which earns a return on its investment through the services entity's operations. The two entities are linked by a management services agreement under which the services entity provides back-office support to the attest entity in exchange for a management fee.

Legal Risks in APS Design

The APS structure works only if the management services agreement and governance arrangements genuinely preserve CPA control over professional decisions in the attest entity. State boards and the AICPA have articulated concerns about APS arrangements where the non-CPA investor exercises effective control over the attest entity's operations despite nominal CPA majority ownership. A management services agreement that gives the services entity control over hiring, firing, compensation, or professional standards in the attest entity risks being viewed as a prohibited arrangement. APS structures must also be designed to avoid revenue-sharing arrangements that could be characterized as the unlicensed practice of public accountancy by the services entity, which is a separate violation of state board rules. Counsel designing APS arrangements must review the applicable state board's formal positions and prior enforcement actions to understand where the regulatory line is drawn in each relevant jurisdiction.

Private Equity Roll-Ups in Accounting: The 2020s Consolidation Trend

Beginning around 2021 and accelerating through 2024 and 2025, private equity firms have pursued aggressive consolidation strategies in the accounting sector, acquiring regional and local CPA firms and integrating them into multi-firm platforms. This trend reflects several convergent factors: the approaching retirement of a large cohort of baby boomer partners who need succession solutions, the significant technology investment required to modernize accounting practice infrastructure, the recurring-revenue characteristics of audit and tax practices that are attractive to PE investors, and the scale advantages available in back-office functions across a multi-firm platform.

Economics of Accounting Roll-Ups

PE-backed accounting platforms typically pursue a buy-and-build strategy: acquiring a regional anchor firm with strong infrastructure, then adding smaller firms through a series of tuck-in acquisitions. Each tuck-in firm is integrated into the platform's back-office systems, benefits programs, and technology stack, which drives margin improvement through shared fixed cost elimination. The platform's revenue multiple typically improves over time as the combined firm's scale and diversification reduce risk. PE investors in accounting target hold periods of five to eight years, during which they seek to grow revenue through organic client expansion and additional acquisitions before selling the platform to a strategic buyer, a larger PE firm, or a public market.

Professional and Regulatory Tensions

The PE roll-up trend has generated significant discussion within the accounting profession about whether the short-term return orientation of PE investors is compatible with the profession's public interest obligations. Auditors are expected to maintain independence from the entities they audit and to prioritize the accuracy and reliability of financial reporting over commercial considerations. Critics of PE ownership argue that a PE firm with a defined investment horizon and return targets is structurally misaligned with these obligations. Supporters argue that PE capital enables technology investment and talent retention that benefit the profession. The AICPA, NASBA, and several state societies have each issued guidance or initiated regulatory reviews in response to the roll-up trend, and individual state boards have varied in how proactively they have scrutinized APS arrangements by PE-backed firms.

SEC and PCAOB Independence Rules in Accounting Firm Acquisitions

Accounting firms that audit SEC-registered companies (public companies and certain investment vehicles) or broker-dealers subject to PCAOB oversight face the most complex independence analysis in M&A transactions. SEC Regulation S-X Rule 2-01 and PCAOB ethics standards impose detailed independence requirements that can create immediate structural problems when a non-CPA entity acquires a stake in an accounting firm with public company audit clients.

The Portfolio Company Problem

When a PE firm acquires an accounting firm that audits public companies, the PE firm's portfolio companies become financial relationships of the accounting firm's network for independence purposes. If the PE firm holds a significant ownership stake in a public company that the accounting firm audits, an independence impairment almost certainly exists: the accounting firm cannot be independent of its audit client if a significant owner of the accounting firm has a financial interest in the audit client. This problem is not hypothetical - it has required PE-backed accounting platforms to resign from public company audit engagements post-acquisition and has, in some cases, altered the structure of the PE investment to preserve independence. The independence analysis must be completed before the transaction closes, and parties may need to build representations and closing conditions around independence matters affecting the firm's public audit practice.

Non-Attest Services and Independence

SEC Rule 2-01 also prohibits accounting firms from providing certain non-audit services to their public company audit clients. These prohibited services include bookkeeping, financial information system design and implementation, appraisal and valuation services, actuarial services, internal audit outsourcing, management functions, human resource services, broker-dealer services, legal services, and expert services unrelated to the audit. In an APS structure where the services entity provides tax, consulting, and advisory services, the parties must ensure that non-attest services provided to public company audit clients by the services entity do not impair the attest entity's independence. The legal separation of the two entities may not be sufficient to avoid this problem if the services entity and the attest entity are sufficiently integrated in their operations.

Private Company, Not-for-Profit, and Government Audit Client Concentration

Most local and regional CPA firms serve primarily private company, not-for-profit, and governmental audit clients rather than SEC registrants. These client categories each carry their own risk and concentration considerations that affect valuation and deal structure.

Private Company Audits

Private company audit engagements are typically governed by AICPA standards rather than PCAOB standards, and the applicable independence and quality control frameworks are the AICPA's Code of Professional Conduct and its Statements on Auditing Standards. Private company audit clients present client concentration risk: if the firm's audit revenue is heavily concentrated in a small number of clients - particularly clients with private owners who have strong personal relationships with the engagement partner - there is meaningful risk that those clients will not follow the firm through an ownership change. Buyers should analyze which private company audit clients have a relationship with the firm's brand and institutional infrastructure versus which clients have a relationship primarily with a specific partner, as the latter group creates transition risk that cannot be mitigated by deal structure alone.

Not-for-Profit and Government Audit Requirements

Not-for-profit and government audit clients often require auditors to comply with Government Auditing Standards (the Yellow Book) issued by the U.S. Government Accountability Office, in addition to AICPA standards. The Yellow Book imposes additional independence requirements and quality control obligations. Government audit clients may also be subject to Single Audit requirements under the Uniform Guidance when they receive federal awards above the applicable threshold, which requires the auditor to comply with both the Yellow Book and the AICPA's SAS requirements. Government audit engagements often involve competitive procurement processes, and a change in the firm's ownership structure may trigger requalification requirements or requests for information from the government agency. Buyers should review the firm's government audit contracts to understand whether any change-of-control provisions would require client notification or consent.

IRS Circular 230 and State Tax Practice Registration Transfers

Tax practice is the most common revenue line in local and regional CPA firms, often comprising a larger share of revenue than audit in smaller practices. The regulatory framework governing tax practice transfers includes IRS Circular 230 at the federal level and state tax authority registration and licensing requirements at the state level.

Circular 230 Obligations

IRS Circular 230 governs the practice of CPAs, attorneys, enrolled agents, and other representatives before the IRS. In a tax practice acquisition, the acquiring firm's CPAs must evaluate whether any client relationships from the transferred practice create conflicts of interest under Circular 230 Section 10.29. The acquiring firm must also ensure that power of attorney designations on file with the IRS that name CPAs from the seller firm are updated to reflect the new practitioner responsible for the matter. This process requires coordinating with clients to execute updated Form 2848 authorizations, which can be time-consuming for firms with large numbers of active tax matters. Circular 230 also requires practitioners to exercise due diligence in the work they submit to the IRS, which means the acquiring firm must have quality control processes adequate to meet this standard before assuming responsibility for transferred client matters.

State Tax Practice Registration

Many states require firms that prepare state income tax returns to be registered with the state tax authority or state board of accountancy as a registered tax return preparer or licensed tax firm. These registrations are typically entity-specific and do not automatically transfer to a successor entity in an acquisition. Buyers must identify the states where the target firm performs tax work, determine what registration or licensure is required in each state, and plan the transition of those registrations as part of the closing process. Failure to maintain valid registrations can result in the firm being technically unable to prepare and file state tax returns in affected jurisdictions until registrations are transferred or obtained.

Partner Compensation Models and Their Impact on Deal Structure

Accounting firm partner compensation models vary along a spectrum from pure lockstep to pure eat-what-you-kill, with most firms occupying some position in between. The compensation model in place at the target firm has direct implications for how the deal is structured, what transition period is needed, and how integration risk is managed.

Eat-What-You-Kill Versus Lockstep

In an eat-what-you-kill (EWYK) compensation system, each partner's compensation is closely tied to the fees generated by their clients and the hours they personally bill. Partners with large books of business earn substantially more than partners with smaller practices, regardless of seniority. In a lockstep system, compensation is primarily determined by the partner's seniority tier, with all partners at the same level receiving similar compensation regardless of individual origination. A modified system blends origination credit with firm-wide profitability sharing. When a EWYK firm merges with a lockstep firm, the integration requires careful attention to how historically high-earning rainmakers will receive their compensation in the combined entity. Partners who have operated under EWYK may resist lockstep arrangements that reduce their personal compensation relative to their book of business, and retaining these individuals requires structuring appropriate compensation transition arrangements.

Succession-Driven Transactions and Compensation Expectations

Many accounting firm acquisitions are succession-driven: the seller's partners are approaching retirement age and need a buyer who will provide a fair return on their capital investment, transition their client relationships to qualified successors, and maintain the firm's service quality for existing clients. In these transactions, the selling partners' compensation expectations during a post-closing transition period - typically two to four years - are a central negotiating point. Sellers typically want compensation at or near their pre-close levels during the transition period; buyers want sellers to participate in the success of the combined firm rather than simply collecting a fixed salary while introducing clients before leaving. Earnout arrangements tied to client retention during the transition period are a common mechanism for aligning these interests. The earnout agreements guide provides additional context on how earnout mechanics are structured in professional services transactions.

Deferred Compensation, Phantom Stock, and Partner Capital Buyouts

The financial obligations that a buyer assumes or negotiates around in an accounting firm acquisition extend well beyond the purchase price itself. Deferred compensation plans, phantom stock arrangements, and partner capital account obligations are balance sheet items that must be identified, valued, and addressed in the deal structure.

Partner Capital Accounts

Partners in an accounting firm partnership or LLC typically maintain capital accounts representing their equity in the entity. These accounts are funded by initial contributions and by retained earnings allocated to the partner's account but not distributed. In an acquisition, partner capital accounts represent a liability of the firm to its partners that must be addressed at or before closing. Options include: the buyer assuming the obligation to return capital accounts to retiring partners over a defined period post-closing; the seller distributing capital accounts to partners from the sale proceeds before closing; or a combination approach where senior partners receive their capital returned at closing and remaining partners receive capital returned over a post-closing period. The tax treatment of capital account distributions depends on the entity structure and the nature of the assets in the capital account.

Phantom Stock and Deferred Compensation Plans

Many accounting firms have established deferred compensation plans that provide participating partners or senior employees with the right to receive a payment in the future based on a formula tied to the firm's value or to the participant's compensation history. Phantom stock plans specifically provide a notional equity interest that tracks the firm's value without conveying actual ownership. In an acquisition, phantom stock awards and deferred compensation obligations typically vest and become payable at closing, creating a cash obligation that reduces the effective proceeds available to the firm's equity owners. The buyer must identify all outstanding awards and deferred obligations during due diligence and must account for them in the purchase price calculation. For readers seeking broader context on equity-linked compensation structures, the rollover equity guide describes how similar instruments are used in other M&A contexts.

WIP, Unbilled AR, and Engagement Letter Assignment

Work in progress, unbilled accounts receivable, and engagement letter assignment are operational details with significant economic consequences in accounting firm transactions. These items require careful treatment in the purchase agreement and in the operational transition planning.

WIP Valuation and Treatment

WIP in an accounting firm represents time and costs incurred on client engagements that have not yet been billed. For audit and tax firms with annual engagement cycles, a large proportion of each year's billable work may be in WIP at any given point during the engagement cycle. Buyers and sellers negotiate WIP treatment in several ways. If WIP is included in the net working capital target, the purchase price is adjusted based on the closing-date WIP balance relative to a defined target. If WIP is excluded, the seller retains the right to bill for pre-closing work from the seller's account, and clients receive invoices from the seller for work performed before closing. The excluded WIP approach simplifies the net working capital calculation but creates confusion for clients who receive bills from a firm that no longer exists in the same form. The included WIP approach requires establishing a clear, agreed methodology for measuring and valuing WIP - which is more complex than it sounds because not all WIP is equally realizable.

Engagement Letter Assignment

Engagement letters are contracts between the accounting firm and the client for a specific scope of services. In an acquisition, the buyer must either assign existing engagement letters to the successor entity or obtain new engagement letters from each client for the successor entity. Assignment requires client consent under most engagement letter terms, and many engagement letters include provisions that limit assignment or terminate the engagement on a change in control of the firm. Obtaining new engagement letters from all clients is administratively burdensome but provides a clean starting point for the buyer's relationship with each transferred client. Buyers must also ensure that engagement letters include appropriate limitation of liability provisions and arbitration clauses that reflect the buyer's standard terms, as the seller's existing engagement letters may not contain terms acceptable to the buyer's professional liability insurer.

AICPA Peer Review Succession and Quality Control Transition

AICPA peer review is a mandatory quality control program for CPA firms that perform attest services. Most state boards of accountancy require firms that perform audits, reviews, or compilations under AICPA standards to undergo peer review every three years and to maintain a record of peer review compliance in good standing. In an accounting firm acquisition, the parties must address the status of the target firm's peer review program and plan for how quality control obligations will be maintained through and after the transition.

Peer Review Enrollment and Report Status

In due diligence, buyers should request and review the target firm's most recent peer review reports, any letter of response to peer review findings, any corrective actions required by the peer review committee, and confirmation of the firm's current enrollment status in the AICPA peer review program. A firm with a pass peer review report with no findings presents minimal risk. A firm with a modified or adverse report, or with open corrective actions, presents quality control risk that must be evaluated and potentially priced into the transaction or addressed as a closing condition. After a firm combination, the combined entity must notify its peer review administering organization of the combination and determine whether the successor entity's peer review schedule and enrollment status are affected.

SOC 2 and Data Trust Considerations

Accounting firms that handle significant volumes of sensitive client financial and tax data are increasingly expected to maintain SOC 2 Type II compliance as evidence of their data security controls. Some larger commercial clients specifically require SOC 2 compliance as a condition of engagement, particularly for firms providing outsourced accounting, payroll, or technology services. In an acquisition, buyers should review the target firm's SOC 2 status, any findings from recent SOC 2 audits, and the firm's data security infrastructure. A firm that has not yet obtained SOC 2 compliance may require post-closing investment in data security controls to maintain existing clients and compete for new engagements where SOC 2 is required. The cost of obtaining SOC 2 compliance for the first time, including the systems investment and the audit cost, should be factored into the integration budget.

Malpractice Tail Coverage and Independence Rules in Continuing Audits

Professional liability insurance for accounting firms shares the claims-made structure that applies to law firms, and the tail coverage considerations are similar. The independence questions that arise in continuing audits post-close, however, are unique to the accounting context and require specific analysis.

Accounting Firm Tail Coverage

When an accounting firm's claims-made policy lapses at or after closing, any malpractice claim arising from pre-closing work made after the policy lapse is uninsured unless tail coverage is in place. The allocation of tail coverage costs in accounting firm transactions follows a pattern similar to that in law firm deals: the seller typically purchases tail coverage for pre-closing work, and the buyer obtains ongoing coverage for post-closing work. The tail period should be long enough to address the statute of limitations for malpractice claims in the relevant jurisdiction, which varies but is typically three to six years. For firms with complex audit work or clients in industries with elevated litigation risk - financial services, real estate, life sciences - a longer tail period is advisable. The M&A transaction services team at Acquisition Stars addresses tail coverage as part of standard transaction closing conditions.

Independence in Continued Audit Engagements

When an accounting firm acquisition results in the combined entity continuing audit engagements that were previously performed by the acquired firm, the combined entity must evaluate its independence with respect to each continuing audit client. The acquirer's existing client relationships, financial interests, and business relationships are now attributed to the combined entity and may create independence problems with respect to the acquired firm's audit clients. This analysis must occur before the transaction closes, not after. If independence impairments are discovered that cannot be resolved through divestiture of the conflicting relationship, the parties may need to restructure the transaction or plan for the orderly resignation from affected audit engagements.

Client Concentration Haircuts and Purchase Price Structuring

Client concentration is consistently among the most important risk factors in accounting firm valuation. A firm with highly diversified revenue across a large number of clients presents a different risk profile from a firm where a small number of clients generate a dominant share of revenue, and this difference is systematically reflected in purchase price multiples and deal structure.

Measuring and Pricing Concentration Risk

Buyers typically analyze client concentration at the top five, ten, and twenty client levels, and at the level of individual clients who represent more than specified percentage thresholds of total revenue - commonly five, ten, fifteen, and twenty percent. A firm where no single client represents more than five percent of total revenue is considered well-diversified. A firm where multiple clients each represent more than ten percent of revenue presents meaningful concentration risk that is typically addressed through purchase price reduction, earnout structuring, or closing conditions requiring confirmation of client continuity. Where a single client represents more than twenty percent of total revenue, buyers may insist on representations and warranties specifically addressing that client's status, or may structure a portion of the purchase price as an earnout tied to that client's revenues during a specified post-closing period.

Non-Compete and Non-Solicit Provisions for Accounting Professionals

Unlike law firms, accounting firm transactions are not categorically prohibited from including non-compete and non-solicitation covenants. State law governs the enforceability of these provisions, and the legal framework differs meaningfully from the professional rule prohibition applicable to attorneys. Buyers routinely include non-compete covenants for selling partners covering a defined geographic area and period, and non-solicitation covenants prohibiting the solicitation of transferred clients or key employees. The enforceability of these provisions is subject to state law requirements of reasonableness in geographic scope, duration, and the legitimate business interest being protected. Buyers should review the framework applicable to non-competes in the states where selling partners reside and practice, as well as recent state legislative changes affecting non-compete enforceability, including restrictions enacted in several states that limit or prohibit non-competes for specified categories of workers. The non-compete and non-solicit guide provides additional context on the general legal framework, which must be applied to the accounting firm context with attention to state-specific rules.

Buyers and sellers in accounting firm transactions should also review the Professional Services M&A pillar guide, the earnout agreements guide, the rollover equity guide, and the M&A transaction services overview for context on the broader transaction framework within which these professional services-specific issues operate.

Frequently Asked Questions