Retention clauses on accountancy practice sales

A retention clause holds back part of the price of an accountancy practice, and a clawback clause reduces it, if the transferred clients do not stay with the buyer or bill less than expected. Both exist because clients cannot be sold and remain free to choose their accountant, so the buyer only pays for the goodwill that actually transfers. The definitions, the measurement period and the cap decide whether the clause is fair to both sides.

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Why do practice sales use retention and clawback clauses?

ICAEW’s helpsheet on buying and selling fees makes the central point: purchasing fees is not buying clients. Clients have the right to choose their accountant (section 320 of the ICAEW Code of Ethics), so what the buyer pays for is a right to an introduction and recommendation, plus the chance to sell services to those clients. ICAEW treats that payment as a sale and purchase of goodwill.

Because the goodwill only has value if clients actually move and keep paying, buyers want the price linked to what transfers. ICAEW calls a later reduction in the amount payable, where clients are lost or fees are lower than expected, a clawback. It says clawback avoids paying for something that does not materialise, gives the seller a reason to make the deal succeed, and that a limit on the maximum clawback should be agreed.

In practice the terms are used loosely, but there are two mechanisms:

Retention or recalculation. Part of the price is held back and the final figure is worked out from fees actually billed to transferred clients over an agreed period.
Refund clawback. The full price is paid and the seller repays part of it if retention falls below an agreed level.

Retention is easier for the buyer to enforce because it simply pays less. A refund clawback leaves the buyer chasing money from a seller who may have retired.

How is a typical clause built?

ICAEW notes that value is often based on gross recurring fees, turnover, future fee income or profitability, with a multiple applied, and that there is no single correct multiple. The clause then sets:

the client schedule, listing each client and the fee used in the price;
the completion payment;
the measurement period, often the first year of billing after completion;
the formula that recalculates the price from fees billed in that period;
a cap on any reduction, and sometimes a cap on any increase;
the dates and method for paying the balance.

ICAEW also points out that payment over a period can be considered a loan, so interest may be expected or reflected in a higher price. A seller who accepts a long retention is lending to the buyer and should price that in.

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Which definitions decide the outcome?

Most disputes come from definitions written quickly. The agreement should say clearly:

Which clients count. Only scheduled clients, and how a client that incorporates, merges or is sold is treated.
Which fees count. Recurring compliance fees only, or also one off work. Whether fee increases the buyer introduces, and new services the buyer sells, are excluded so the seller is not paid for the buyer’s effort.
Billed or collected. Measuring cash received exposes the seller to the buyer’s credit control. Measuring fees invoiced at the seller’s old rates is neutral.
Losses caused by the buyer. If clients leave because of the buyer’s own service, fee rises or staff changes, the seller will argue those fees should be added back.
Clients who cease. Death, retirement or closure of a client business is a risk both sides can see in due diligence and should allocate.
Clients returning to the seller. ICAEW says the agreement should cover what the seller may do about acting for the clients sold, and may need a formula for compensating the buyer if clients return to the seller.

What should a seller negotiate for?

A cap on the total reduction, as ICAEW recommends, and a short measurement period.
Add backs for clients lost through the buyer’s actions, and exclusion of the buyer’s fee increases from any upward adjustment the buyer wants to share.
A right to see the buyer’s billing records for scheduled clients, and expert determination for disputes.
A defined handover role. ICAEW says the agreement should cover the seller’s involvement and the buyer’s right to reduce or end it. If the buyer cuts the seller out early, the clawback should reflect that the seller lost the chance to help retain clients.
Security or a firm timetable for the deferred amount.

What should a buyer negotiate for?

A client schedule tied to due diligence. ICAEW lists confirming information, fee levels and charging structure, quality of work and files, and profitability and overheads as points to check.
A measurement period that starts once clients have been told and have consented. ICAEW says clients must be informed and consent before the buyer does any work, and that new engagement letters should be obtained. Client data issues are covered in transferring client data when selling a practice.
A right to set off reductions against unpaid instalments rather than relying on a refund.
Restrictions on the seller acting for sold clients, and covenants for staff who move across; see restrictive covenants for practice staff. If staff transfer, check TUPE when buying an accountancy practice as well.

How does a price that can move affect tax and accounts?

For the seller’s capital gain, HMRC’s Capital Gains Manual (CG14850) says the treatment depends on the nature of the future payments and that the contract must be read. Where the future amounts are ascertainable at the date of disposal, CG14881 says the full amount goes into the disposal proceeds, and under section 48 of the Taxation of Chargeable Gains Act 1992 relief can be claimed if part later proves irrecoverable (CG14930). Where the amount depends on events after the sale, such as fees billed in the next year, it is unascertainable (CG14940); the value of the right to future payments is included in the proceeds following Marren v Ingles (CG14950), and each later payment is a disposal of that right (CG14970). CG14940 adds that a maximum does not make the payment ascertainable in the maximum. CG14970 also confirms that a later disposal of such a right does not qualify for further Business Asset Disposal Relief. More detail is in earn outs and deferred consideration.

A buyer preparing accounts under FRS 102 that treats the purchase as a business combination includes the estimated adjustment in the cost if it is probable and can be measured reliably (paragraph 19.12), adjusts the cost if the estimate changes (paragraph 19.13A) and shows any unwinding of discount as a finance cost (paragraph 19.13B). See accounting for earn outs and contingent consideration.

How does it work in numbers?

Illustration only. A buyer agrees to pay 1 times scheduled recurring fees of £150,000. It pays £60,000 on completion. The balance is recalculated at 1 times fees billed to scheduled clients in the first 12 months, with any reduction capped at £30,000. Fees lost because of the buyer’s own fee increases are added back.

Step	Amount
Fees billed to scheduled clients in year one	£128,000
Add back: two clients lost after the buyer raised fees	£6,000
Recalculated price	£134,000
Reduction from £150,000 (within the £30,000 cap)	£16,000
Balance due after completion payment of £60,000	£74,000

Without the add back the seller would have lost a further £6,000 for clients it did not control. Without the cap a poor year could have wiped out most of the deferred price.

What mistakes come up?

No client schedule, so nobody can agree which fees count.
No cap, leaving the seller exposed to the buyer’s handling of the clients.
Measuring cash collected rather than fees billed.
Ignoring clients who return to the seller, or seller involvement that the buyer ends early.
Assuming Business Asset Disposal Relief covers later earn out receipts.
Leaving the deferred amount unsecured and interest free over several years.

The wider deal is covered in buying an accountancy practice.

Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.