Our earlier note on earn-outs set out what a fair one looks like. This one is about what happens when the earn-out you signed is not fair, or is fair on paper but ambiguous in practice — because that is where most of the arguments actually start. A seller agrees a headline price split 60% on completion and 40% over two years, tied to retained fee income. Eighteen months later, a third of that deferred consideration is contested. Not because the number in the accounts is wrong. Because nobody agreed, precisely enough, what "retained" means.
Strip away the legal drafting and an earn-out is a bet, split between buyer and seller, on whether the fee income at completion survives the transition. The standard structure pays a majority on completion — commonly 55–70% — with the balance paid in one or more tranches over one to three years, scaled up or down against a target: usually gross recurring fee income from the client base identified at completion, sometimes profit. Fee-based measurement is the fairer of the two, because a seller can genuinely influence whether a client stays through a good handover. A seller cannot influence the buyer's staffing, pricing or technology decisions after completion, which is exactly why profit-based earn-outs are harder to accept: they make a seller's money depend on choices someone else is making.
This is the single most argued-over mechanic in practice-sale earn-outs, and it is almost always because the sale agreement defines the target in one line and leaves the counting method to be worked out later. Questions that need an answer in the agreement, not in correspondence eighteen months after completion, include: is retention measured client-by-client, or as a pooled fee total where one client's growth can mask another's loss? Does a client who reduces their scope of work — dropping payroll but keeping accounts, say — count as partially lost, or fully retained? What happens to a client who is transferred to a different office or division within the buyer's wider group, rather than lost to a competitor? And is retention tested on a single snapshot date, or averaged across the period, which produces a very different number if a client leaves in month two versus month twenty-two?
None of these questions has one universally correct answer. What matters is that the sale agreement answers them explicitly, with worked definitions and a named methodology, rather than a single sentence referring to "retained fee income" and leaving the mechanics to be inferred.
A buyer who owns the client relationships from completion day is entitled to run the business as they see fit — but if they reprice fees upward, cut back service levels, or change the team a client deals with, and the client leaves as a result, that loss did not come from anything the seller failed to do. Without a clause addressing this directly, most earn-out schedules simply count the lost fee income against the seller regardless of the cause, because the target is defined mechanically against an opening baseline with no carve-out for the buyer's own conduct. A properly drafted schedule either restricts the buyer from making material pricing or service changes to the identified client base during the earn-out window, or excludes any client loss demonstrably caused by such a change from the retention calculation. Sellers who skip this clause are, in effect, insuring the buyer's post-completion decisions with their own deferred consideration.
Client relationships in professional services often sit with an individual fee-earner as much as with the firm. If that person leaves during the earn-out — through resignation, redundancy, or simply being managed out by new ownership — clients frequently follow, or drift away over the following renewal cycle, regardless of anything the seller does. The dispute is over attribution: a resignation the seller might have prevented through better retention terms is a different animal to a redundancy the buyer chose to make to cut cost. Our note on what happens to your team when you sell covers the retention side of this in more depth; from an earn-out perspective, the fix is the same as with pricing changes — name the scenario in the agreement and decide, in advance, whose shortfall it is.
Illustrative figures only, constructed to show the mechanism — not drawn from any particular deal. A £2,000,000 practice sale is structured as 60% on completion (£1,200,000) and 40% over two years (£800,000, split into two £400,000 tranches), tested annually against an opening gross recurring fee income target of £1,300,000. At the year one test, actual retained fee income comes in at £1,150,000 — a £150,000 shortfall. Of that shortfall, genuine, unrelated client attrition (a client relocating abroad, one going into administration) accounts for £50,000. The buyer repriced one client's fees by 20% mid-year, prompting that client to leave, accounting for £60,000. And the fee-earner who handled a third client was made redundant by the buyer three months after completion, and that client left within the quarter — a further £40,000.
| Agreement with carve-outs | Agreement without carve-outs | |
|---|---|---|
| Year 1 target fee income | £1,300,000 | £1,300,000 |
| Actual retained fee income | £1,150,000 | £1,150,000 |
| Shortfall excluded (buyer repricing + buyer-driven redundancy) | £100,000 | £0 |
| Shortfall counted against seller | £50,000 | £150,000 |
| Retention ratio applied | 96.2% | 88.5% |
| Year 1 tranche (of £400,000) paid | £384,600 | £353,800 |
The gap on a single year's tranche is £30,800. If the same pattern repeats in year two, the two-year gap on identical underlying facts is roughly £61,600 — on a deal where the only thing that changed between the two outcomes is three sentences of drafting agreed, or not agreed, before signature.
None of this removes the basic logic of an earn-out, which is sound: relationships transfer over time, not on completion day, so it is reasonable that some of the price follows them. What a precisely drafted schedule removes is the argument about whose fault a shortfall was, which is the argument that actually costs sellers money.
This article is general information about how earn-outs are structured and disputed in UK professional-services practice sales, not legal, tax 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. The transaction figures in this article are illustrative and are not drawn from any particular deal. Please take specific legal and tax advice before you sign a sale agreement.
Most earn-outs on accountancy, legal and IFA practice sales run one to three years from completion, with two years the most common single period. Shorter windows are used when the buyer already has a strong existing relationship with the client base, or where the seller is staying on in a limited handover role rather than a full working capacity. Longer periods, beyond three years, are unusual outside very large consolidator deals, because by that point the business being measured reflects the buyer's management and investment decisions far more than anything the seller handed over, which makes the earn-out a weak proxy for what it was originally meant to test.
A fee-based earn-out measures whether client relationships and their fee income survived the transition — something a departing seller genuinely influences through a good handover. A profit-based earn-out measures the buyer's overall profitability after completion, which is shaped by the buyer's own pricing, staffing, technology and overhead decisions, none of which the seller controls once they have handed over the keys. Sellers should push hard for fee-based measurement; a profit-based structure puts a seller's deferred consideration behind decisions someone else is making, which is a materially different and harder-to-justify risk to accept.
This is one of the most common sources of dispute, and it is entirely foreseeable, which is why it needs to be addressed in the sale agreement rather than argued about afterwards. Without a clause covering it, a buyer can reprice fees, change the service team, or alter turnaround times during the earn-out window, and if clients leave as a result, the seller's deferred consideration falls anyway. A properly drafted earn-out schedule restricts the buyer's ability to make material changes to pricing or service during the measurement period, or carves out any resulting client loss from the retention calculation entirely.
Yes, and this is frequently missed at heads of terms stage. If a fee-earner who holds key client relationships leaves during the earn-out — whether they resign, are made redundant by the buyer, or are simply managed out — clients often follow them or drift away regardless of anything the seller does. Whether that counts against the seller depends entirely on how the sale agreement defines the departure: a resignation the seller could reasonably have prevented is treated differently to a redundancy the buyer chose to make, and the agreement should say so explicitly rather than leaving it to be argued after the event.
Broadly, yes — deferred consideration is generally taxed when it becomes due and payable rather than all at completion, which spreads the tax liability across the earn-out period rather than concentrating it in year one. The detailed mechanics, including how Business Asset Disposal Relief interacts with deferred and contingent consideration, are covered in our separate guide to tax on selling a practice. Because the rules turn on exactly how the earn-out is structured and documented, this is an area to take specific advice on from your accountant before heads of terms are signed, not after.
