Very few practices sell for 100% cash on day one, and for a sound reason: 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 fairly. Structured well, they're reasonable and align both sides; structured badly, they're a trap that leaves you chasing money you may never see. This guide explains the difference, why buyers use them, how to protect yourself, and how they're taxed.
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 (see below), 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 fairly — and, importantly, it signals a buyer who intends to look after clients rather than strip the book, because their own consideration depends on clients being happy. A buyer who wants everything contingent and nothing up front is a warning sign; a buyer who pays a solid majority on completion and links a sensible slice to retention is behaving reasonably.
Worked example: 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 actually influence, sets a fair floor, and isn't wiped out by the loss of a single client the buyer mishandled. 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, not overall firm profit — 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 actually arrives. The practical risk is paying tax on value you don't ultimately receive — which is why the earn-out design and the tax analysis have to be done together, before you sign. This is general information, not advice; take your own.
The real term is trust
Because deferred structures depend on what happens after you've handed over, they only work when you trust the buyer to run the practice properly. No drafting fully substitutes for that. It's the strongest argument for selling to a buyer you've actually met, can judge, and can hold to their word — rather than an anonymous process where the person paying your earn-out is a stranger.
Frequently asked questions
What's the difference between deferred consideration and an earn-out?
Deferred consideration is a fixed amount simply paid later. An earn-out is contingent on future performance — usually client retention over 1–3 years — so the amount depends on what happens after completion.
Are earn-outs fair when selling an accountancy practice?
They can be very fair, because retention risk is real and sharing it signals a buyer who'll look after clients. The key is that the earn-out measures something you can influence, has a sensible floor, and protects you against losses caused by the buyer's own actions.
How much of the price is usually paid on completion?
Commonly 50–70% as cash on completion, with the rest deferred and/or linked to retention over one to three years. A buyer wanting little or nothing up front is a red flag.
Do I pay tax on an earn-out before I receive it?
Potentially. Contingent consideration is generally valued at completion as a separate chargeable asset, with a further adjustment when received — so you can face a tax charge before the cash arrives. Take tax advice before agreeing the structure.
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