Contents
- Deferred consideration vs earn-out
- Why buyers use them
- How to protect yourself
- How earn-outs are taxed (in brief)
- Choosing a buyer you trust
- Questions
Part of the price for a practice is normally paid after completion, because the value of a practice is in client relationships that have to transfer successfully. Deferred consideration and earn-outs are how buyers share that risk with the seller. A well-structured arrangement gives buyer and seller the same interest in keeping clients. A badly structured one can leave you chasing money you may never receive. The two terms mean different things, and they are taxed differently.
Deferred consideration vs earn-out
- Deferred consideration is part of a fixed price, simply paid later — for example, a set sum in instalments over 12–24 months. The amount is certain; only the timing is deferred.
- Earn-out is part of the price that's contingent on performance after completion — usually client retention over one to three years. The amount depends on what happens next.
The distinction matters commercially and for tax, so be clear which one you're agreeing to.
Why buyers use them
The single biggest risk in buying a practice is that clients don't stay through the transition. Tying part of the price to retention shares that risk between buyer and seller. A buyer who accepts that link intends to look after clients after completion, because the deal only works for both sides if clients stay happy. Be wary of a buyer who wants everything contingent and nothing up front. A reasonable offer pays a solid majority on completion and links a smaller part to retention.
Example of a retention earn-out
Headline price £300,000, structured as £210,000 on completion and up to £90,000 over two years tied to retaining the transferred fees.
| Scenario | Fees retained | Earn-out paid | Total received |
|---|
| Strong handover | 95% | £85,500 | £295,500 |
| Average | 88% | £79,200 | £289,200 |
| Poor transition | 70% | £63,000 | £273,000 |
A well-drafted earn-out measures the fee base you can influence, sets a fair floor, and protects your payment if a client leaves because the buyer mishandled them. A poorly drafted one leaves you exposed to decisions you no longer control.
How to protect yourself
- Measure what you can influence. Base an earn-out on retention of the transferred fees. Overall firm profit can be moved by the buyer's own decisions after completion.
- Agree the maths up front. Define precisely how the fee base is measured, over what period, and with what adjustments — in the heads of terms.
- Cap the downside. Sensible floors so normal, expected churn doesn't erase the payment.
- Stay involved during handover. A phased step-down protects retention — and therefore your earn-out.
- Protect against buyer actions. Provisions for what happens if the buyer's conduct (a fee hike, poor service, letting a client go) causes a loss.
- Understand the tax. Contingent consideration is taxed differently to fixed — you can owe tax before you're paid.
How earn-outs are taxed (in brief)
The commercial and tax sides must be joined up. Fixed deferred consideration is generally brought into the CGT computation at completion. A contingent earn-out is treated, under the Marren v Ingles principle, as a separate chargeable asset valued at completion, with a further gain or loss when the cash arrives. The practical risk is paying tax on value you don't ultimately receive, so the earn-out design and the tax analysis have to be done together, before you sign. This is general information and is not tax advice. Take your own advice before agreeing a structure.
Choosing a buyer you trust
Deferred structures depend on what happens after you've handed over, so they work when you trust the buyer to run the practice well. Careful drafting limits the damage a buyer who runs it badly can do to your payment, but it cannot remove that risk. That is a strong reason to sell to a buyer you have met, can judge and can hold to their word. In an anonymous process, the person paying your earn-out may be someone you have never met.
