Sellers celebrate when heads of terms are signed. It is the moment the number becomes real, and it feels like the hard part is over. In practice the price is usually decided in the eight weeks that follow, when the buyer stops taking your word for the fee book and starts taking it apart.
This is written from the buyer's side of the table, because that is the side we sit on. It is not an argument that buyers are ruthless. Most of what happens in due diligence is a buyer trying to answer one question honestly: do these earnings survive the seller leaving? Everything below is a version of that question. If you understand what is really being asked, almost none of it needs to cost you money.
Heads of terms are typically non-binding on the commercial points. What binds is usually exclusivity, confidentiality and who pays costs. The price sits there as a conditional offer: this is what we will pay if the firm is what you have described. Retrading, in the sense of a buyer moving the number after diligence, is not bad behaviour in itself. It is bad behaviour when the buyer knew the issue before signing and used exclusivity to soften you up. The way to tell the difference is whether the reduction traces back to something genuinely new.
Which is why the most valuable thing you can do at heads of terms is not to argue the multiple. It is to define the measurement. Write down what counts as recurring fee income, how work in progress and debtors will be valued, and what happens to a client who resigns between signing and completion. A deal that has defined its terms argues about arithmetic. A deal that has not argues about meaning, and the party with the money usually wins that argument.
The first thing a buyer does is rebuild your fee book from source data, not from your summary. Every client, every service line, every invoice for two or three years. The purpose is to separate fees that will arrive again next year without anyone selling them from fees that had to be won.
Compliance work is recurring: year-end accounts, corporation tax, personal tax returns, payroll, bookkeeping, audit, company secretarial. Genuinely one-off work is not: an R&D claim that has run its course, a restructuring, a grant application, a one-time systems migration, a probate job. In the middle sits the awkward category, advisory retainers and management accounts, which are recurring only if there is a signed arrangement and a track record of the client paying it more than twice.
Sellers rarely misrepresent this on purpose. They just report gross fees, because that is what the pricing conversation was about. But a firm that quotes gross fees when a tenth of them are project work is quoting a base the buyer will not accept, and that gap is the single most common source of a reduced price. Our note on how UK accountancy practices are valued explains why the multiple attaches to gross recurring fees rather than turnover.
Next comes the concentration analysis: your clients ranked by fee, largest first. Two numbers matter. The percentage of fees represented by the top ten, and the percentage represented by the largest single client. Below roughly 20% for the top ten is comfortable. Above 35% the buyer is buying relationships rather than a fee book. A single client above 10% creates what buyers call a cliff, where one phone call takes a visible slice of the earnings away.
The response is usually structural rather than a price cut. The large client is carved out of the priced base and paid for only if it is still there at the end of the earn-out. That is defensible, but it moves money from your completion payment into a payment you may never receive, so it should be negotiated as hard as the headline.
Three ratios tell a buyer more about a firm than the profit line does. Average fee per client reveals whether you have a hundred substantial relationships or six hundred small ones with the administrative cost that implies. Realisation, the proportion of time recorded that actually gets billed, exposes under-pricing: a firm realising 65% has a repricing conversation waiting for whoever owns it next, and buyers price that awkwardness in. Lockup, the days between doing work and being paid for it, tells the buyer how much cash the business will swallow after completion. A practice at 90-plus days of lockup will not usually lose price for it, but it will find a completion accounts mechanism that adjusts for working capital, and that mechanism can move a five-figure sum.
Buyers pull a sample of client files, and the sample is not random: it is weighted toward your largest clients and your riskiest work. They are looking for a current engagement letter signed by the client, correct scope, correct entity, and complete customer due diligence. Under regulation 40 of the Money Laundering Regulations 2017, due diligence records must be kept for five years from the end of the business relationship, so a buyer reasonably expects a complete file for every live client and recent leaver.
Ancient or missing engagement letters almost never produce a headline price cut. They produce a specific indemnity, a longer warranty period, occasionally a condition that the gaps be closed before completion, and a general impression that quietly hardens every other position the buyer takes. This is the cheapest category of problem to fix in advance, and the most reliably left until it is expensive.
The buyer will ask for the claims history, the current policy, and the register of notified circumstances: matters reported to insurers that have not become claims. A live notified circumstance is not fatal, but it will usually attract a retention held out of the completion payment for a defined period.
The regulatory floor is worth knowing, because buyers check it. ICAEW's Professional Indemnity Insurance Regulations, in force since 1 September 2024, set a minimum limit of indemnity of £2 million for any single claim and in the aggregate (regulation 3.2). A firm with gross fee income below £800,000 must instead hold two and a half times its gross fee income, subject to a floor of £250,000 (regulation 3.3). The maximum aggregate excess is capped at the higher of £3,000 or 3% of gross fee income (regulation 3.7). And when a firm ceases public practice, regulation 2.8 requires cover for at least two years afterwards, with all reasonable steps to maintain it for a further four — six years in total. Run-off is a real cost of exit and it belongs in your net proceeds calculation, not in a footnote.
On a business or asset transfer, employees assigned to the business transfer automatically to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006, with their terms and continuity of service intact. A share sale does not trigger TUPE, because the employing company does not change. Either way, the buyer maps who actually does the work: which manager runs which client, who the client rings first, and who has the technical knowledge that is not written down anywhere.
If the honest answer to most of those questions is you, the deal will shift toward deferred consideration and a longer earn-out. That is not a punishment. It is a buyer declining to pay upfront for earnings that may leave the building with the seller.
The following is illustrative — a composite built to show the arithmetic, not a real firm or a real transaction. Take a practice with gross fees of £1,200,000. Heads of terms are agreed at 1.15x gross recurring fees, plus work in progress at book value of £38,000, giving an indicative £1,418,000.
Total off the headline: £296,150, leaving £1,121,850 — a reduction of about 21%. Notice the shape of it. Every pound of the reduction came from the first three items, which changed the earnings being bought. The paperwork failures, the insurance circumstance and the lockup cost nothing in price. They cost warranty exposure, a held retention and a cash adjustment. That distinction is the whole game.
Buyers reduce the price when diligence changes the earnings. One-off fees dressed as recurring, clients already leaving, work in progress that will never convert, fee levels that cannot be sustained without a repricing fight — these change what the buyer is actually acquiring, so they change what it is worth.
Buyers do not usually reduce the price for risks that are contingent and quantifiable. Historic paperwork, a notified circumstance, an unresolved employment matter, an open enquiry: these go into warranties, indemnities and retentions, because a warranty costs the buyer nothing unless the risk is real. Understanding which bucket a finding belongs in tells you when to negotiate hard and when to concede quickly. Sellers routinely get this backwards, fighting the warranty schedule line by line while accepting a recurring-fee restatement without asking to see the workings.
A buyer's confidence is built in the first week of diligence. These are the items that, in our experience of reviewing fee books, separate a firm that gets through in four weeks from one that takes twelve:
Set aside ninety minutes and run three calculations on your own fee book. First, tag every fee line recurring or one-off and total them; if more than 10% of what you have been calling recurring would not arrive next year without being sold again, restate your base yourself before a buyer does it for you. Second, rank clients by fee and work out the top-ten percentage and the largest single client percentage. Third, count the live clients with an engagement letter signed in the last three years, and divide by total clients.
The decision rule is simple. If the one-off proportion is above 10%, or the largest client is above 10% of fees, or fewer than 80% of clients have a current engagement letter, you are not ready to sign heads of terms — you are ready to spend two quarters fixing it first. Our guide to preparing your firm for sale covers the rest, and earn-outs explained deals with the deferred half of the price, which is where most of these findings end up landing.
Yes, and it is normal. Heads of terms are almost always expressed as non-binding on the commercial points, so the price in them is an offer conditional on the firm being what the buyer was told it is. What binds are usually the exclusivity, confidentiality and costs clauses. That is not a trap; it is how deals work, because nobody can commit to a number before they have seen the fee book. The protection is not to demand a binding price, which no buyer will give. It is to make sure the heads of terms state precisely how recurring fees, work in progress and debtors will be measured, so a later argument is about arithmetic rather than interpretation.
As a working rule, a buyer starts paying real attention once a single client passes about 5% of fees, and starts restructuring the deal once one passes 10%. The top ten combined matters just as much: below roughly 20% of fees is comfortable, and above 35% the buyer is no longer buying a fee book, it is buying a handful of relationships. The response is rarely a flat refusal. It is to carve the large clients out of the priced base and pay for them only if they are still there at the end of the earn-out. The effect on your proceeds is the same as a price cut, but it arrives later and it is reversible if the clients stay.
Fix them first, without question. Refreshing engagement letters and completing customer due diligence costs you time and a modest amount of money; letting a buyer find the gaps costs you negotiating position at the worst possible moment. Under regulation 40 of the Money Laundering Regulations 2017, due diligence records must be kept for five years from the end of the business relationship, so a buyer expects a complete file for every live client and recent leaver. Gaps rarely produce a headline price cut on their own. What they produce is a specific indemnity, a longer warranty period, and a general impression of a firm that has been run loosely, which quietly infects every other negotiation in the deal.
A price cut permanently reduces what you are owed, and you never get it back. A retention holds an agreed sum out of the completion payment for a fixed period, typically twelve to twenty-four months, and releases it to you if the identified risk does not materialise. A warranty is a statement you make about the firm that costs you nothing unless it turns out to be untrue, in which case the buyer claims against you. Buyers cut the price for anything that changes the earnings they are buying. They use retentions for identified but uncertain risks, such as a notified insurance circumstance. They use warranties for unknown risks, which is why the warranty schedule is always the longest part of the agreement.
On a business or asset transfer, employees assigned to the business transfer automatically to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006, keeping their terms and their continuity of service. A share sale does not trigger TUPE at all, because the employing company is unchanged. Either way, the buyer will look hard at who actually does the client work. If the answer is largely you, the price moves toward deferred consideration and the earn-out gets longer, because the buyer is being asked to pay for earnings that may leave with you. A capable second tier who intend to stay is one of the few things that reliably supports the top of a valuation range.
Due diligence is not an audit and it is not a trust exercise. It is a buyer testing a single proposition: that the earnings they are being shown will still be there once the person who built them has gone. Every line item above is a proxy for that. Recurring versus one-off asks whether the income repeats. Concentration asks how many phone calls could remove it. Engagement letters and AML files ask whether the relationships are documented or merely remembered. Staff analysis asks whether the knowledge lives in the firm or in one head.
Sellers who understand that stop treating diligence as an interrogation and start treating it as the case they need to make. The evidence for that case is assembled over quarters, not weeks — which is the real reason preparation, not negotiation, is where practice sale prices are actually set. If you want to understand the buyer's side more fully, our Practice Group pages set out how we approach acquiring UK professional services firms.
This article is general information about how buyer due diligence tends to run, not tax, legal or investment advice, and Founder Capital LLP is not authorised or regulated by the Financial Conduct Authority. Nothing here is an offer or invitation to invest; any investment opportunities we reference are available only to professional investors, certified high-net-worth individuals and self-certified sophisticated investors, are not open to retail investors, and capital is at risk and returns are not guaranteed. Your own figures and circumstances will differ, so please take specific advice from a qualified solicitor and tax adviser before you act.
