Most sales of advice firms do not pay the full price on completion day. A portion, often a large portion, is held back and paid only if the business performs after you have handed over the keys. That held-back portion is the earn-out, and the terms that govern it will matter more to your final number than the headline multiple ever will.
An earn-out is not the same thing as deferred consideration, though the two travel together and are often confused. Deferred consideration is money you are owed, paid later, with the amount fixed at completion. An earn-out is money you might be owed, with the amount decided by what the business does over an agreed period after the sale. One is a debt; the other is a bet. The distinction matters enough that we cover deferred consideration and how to protect it separately.
This article deals with the bet: what it is, why buyers like it, and the questions an owner should have answered, in writing, before agreeing to one.
What an earn-out actually is
In a typical earn-out, the buyer pays a proportion of the price on completion and the balance in one or more tranches over the following one to three years. Each tranche is conditional on the business hitting agreed measures: usually retention of recurring income, retention of FUM, or client numbers staying above a threshold. Hit the measure, the tranche pays. Miss it, the tranche shrinks or disappears.
The logic is straightforward. In an advice business the value walks around: it sits in client relationships, in the persistency of recurring income, and often in you personally. A buyer paying a multiple of recurring income wants to know that income will still be there in two years. The earn-out transfers that uncertainty from the buyer to you. You are, in effect, insuring the buyer against the risk that your clients do not stay.
That is not automatically unfair. If you are confident in your client bank, an earn-out can be the mechanism that gets you a higher total price than a buyer would pay in cash on day one. The problem is not the concept. The problem is that during the earn-out period, the thing being measured is running inside someone else's business, under someone else's control, and the contract you signed decides whether that matters.
Why buyers like them
Three reasons, and it is worth understanding all of them, because they shape how hard a buyer will resist changes to the structure.
First, risk transfer, as above. Second, financing: an earn-out lets the buyer fund part of the purchase out of the income the acquired business generates, rather than raising it all upfront. This is one of the reasons private-equity-backed consolidators, whose acquisition programmes run on external funding, use earn-outs almost universally. Third, retention: an earn-out keeps you engaged, motivated and available during the handover, because your money is on the table alongside the buyer's.
None of these reasons is improper. But notice that all three serve the buyer. The seller's interest in an earn-out is only ever the higher total price it can support, which means the seller's job in negotiation is to make sure the conditions attached to that higher price are ones the seller can actually influence.
Question one: what exactly is measured?
This is the question everything else hangs off, and vague drafting here is where most earn-out disputes begin. "Retention of recurring income" sounds precise until you ask what counts.
Is the measure gross recurring income as invoiced, or income net of adviser charges the buyer chooses to rebate? Measured against the figure in the sale agreement, or against a due-diligence figure that was itself an estimate? If a client dies, does that loss count against you? If a client is moved to a lower-fee service tier by the buyer's own advice process, whose loss is that? If the buyer's Consumer Duty review concludes that some of your legacy fee arrangements should be reduced, does the earn-out absorb the reduction?
Every one of those is a real scenario, and every one should have a written answer before completion. The general principle to push for: you should be measured on things that reflect client loyalty, not on things that reflect the buyer's commercial decisions. Deaths, buyer-initiated fee changes, and clients the buyer chooses to off-board should be carved out of the measure or treated as retained. If the buyer resists carve-outs for events entirely within its own control, that tells you something about how the earn-out is expected to behave.
Ask too whether the measure is a cliff or a slope. A cliff pays the full tranche at, say, 90 per cent retention and nothing at 89. A slope pays proportionately. Slopes are almost always fairer to sellers, because a cliff turns a small shortfall into a total loss and creates an incentive for arguments about measurement at exactly the point where the money turns on them.
Question two: who controls the levers?
During the earn-out you will usually be working inside the buyer's business, often as an employee or consultant, and the retained income arrangements attached to these deals commonly run many months. The question is what you can still control.
Can the buyer change the charging structure applied to your former clients? Move them onto its own platform, with the disruption and attrition a platform migration brings? Reassign your clients to its own advisers? Change the service proposition, the review frequency, the branding your clients recognise? Each of those decisions is legitimate business integration from the buyer's side, and each of them can move the very numbers your earn-out is measured on.
You will rarely get a veto over how the buyer runs its own business, and it is unrealistic to ask for one. What you can reasonably ask for is a set of specific protective covenants: an obligation on the buyer to conduct the business in the ordinary course during the earn-out period, not to take steps intended to reduce the earn-out, consultation rights before your former clients are migrated or reassigned, and carve-outs (as above) so that buyer-initiated changes do not count against your measure. The strength of these clauses varies enormously between deals, and their absence is a much better reason to renegotiate than a half-turn on the headline multiple.
Question three: what happens if the buyer restructures?
Consolidators reorganise. Books of clients are merged, subsidiaries are collapsed into the parent, advice entities are combined, businesses bought last year are folded into businesses bought this year. If your former client bank is merged into a larger book, how is "your" recurring income identified two years later? If the entity that owes your earn-out is dissolved into its parent, who now owes it?
The sale agreement should answer both. Look for an obligation that the earn-out survives any group reorganisation, that your clients remain separately identifiable in the buyer's systems for the full measurement period, and that if the buyer sells the business on before your earn-out has finished paying, the obligation either transfers to the new owner or accelerates and pays out. Onward sale mid-earn-out is not a remote possibility in this market; acquisition programmes change hands, and an earn-out with no acceleration clause can leave you negotiating with a new owner who feels no ownership of promises made by the old one.
Question four: caps, floors and the shape of the payout
Most earn-outs are capped: there is a maximum you can earn however well the business performs. Fewer have floors. Ask for one. A floor converts part of the earn-out into what is effectively deferred consideration, payable regardless of performance, and it changes the negotiating dynamic for everything above it.
Ask also about the currency of the payment. Cash is cash. Shares or loan notes in the buyer are a different proposition entirely: you are swapping a claim on your own business, which you knew, for a claim on theirs, which you do not. If any part of the price is paid in the buyer's paper, the questions in this article multiply rather than shrink, and the buyer's own debt position becomes your problem. Note as well that the way an earn-out is structured affects when tax falls due, sometimes on money you have not yet received; how earn-outs are taxed covers that trap on its own.
Question five: how are disputes actually resolved?
Assume there will be a disagreement about the numbers. Not because either side is dishonest, but because the measure is being calculated by the buyer's finance function, from the buyer's systems, about a period in which you no longer had access to the data.
The agreement should give you information rights during the earn-out period: regular reporting of the measured figures, in an agreed format, with the underlying data available on request. It should set out a mechanism for challenging a calculation, typically referral to an independent accountant acting as expert rather than arbitrator, with a defined timetable and a rule on who pays the costs. And it should say what happens to the disputed tranche while the dispute runs; an undisputed portion should be paid on time, not held hostage.
If the draft agreement is silent on any of this, the practical position is that the buyer calculates, the buyer decides, and your remedy is litigation. That is not a mechanism, it is an absence of one.
Question six: what happens if the buyer fails?
An unpaid earn-out is an unsecured debt. If the buyer becomes insolvent before your final tranche is paid, you stand in the queue with the other unsecured creditors, behind the banks and the secured lenders, and in a debt-funded acquisition group that queue can be long.
This is not a theoretical concern in this market. The FCA's multi-firm review of consolidation in the advice and wealth management sector, published on Fri 31st Oct 2025, raised specific concerns about debt-funded acquisitions and about regulated firms being required to upstream cash to service external debt at group level. A buyer whose model depends on debt at the holding-company level is a buyer whose covenant is worth examining before you agree to wait three years for a third of your price.
Protections exist, and your lawyer should press for them: security over assets, a parent-company or group guarantee from the strongest entity in the structure, escrow for part of the deferred amount, or acceleration of all outstanding payments on an insolvency event or covenant breach. You will not get all of them. Which ones you get, and from which entity, is a fair test of how seriously the buyer takes its own promises. The FCA review also gives you a legitimate, neutral question to ask any acquirer: how is the group funded, and what are the obligations on the regulated entities within it?
Taking this to your lawyer
You do not need to draft any of this yourself. You need to arrive at your solicitor's office knowing which questions matter, because a corporate lawyer who does not know the advice sector will not automatically ask about platform migrations, Consumer Duty fee reviews or FUM measurement. The list is short enough to take in on one page:
- What exactly is measured, against what baseline, and which client losses are carved out as buyer-initiated?
- Is the payout a cliff or a slope, and is there a floor as well as a cap?
- What conduct-of-business covenants and consultation rights apply during the earn-out, and what survives a restructuring or onward sale?
- What are my information rights, and what is the dispute mechanism, timetable and cost rule?
- What security, guarantee or acceleration protects me if the buyer fails?
An earn-out is not something to refuse on principle. Structured well, it is how a confident seller gets paid properly for a client bank that stays. Structured badly, it is a discount dressed up as a price. The difference is decided in the drafting, and the drafting is decided by the questions you ask before you sign. The wider context, including which structures suit which firms, sits across the rest of the how firms are sold pillar; if you have not yet settled the more basic choice, start with asset sale or share sale, because it shapes everything downstream, the earn-out included.
Before any of that, it helps to know roughly what is at stake. If you want a number of your own to react to before the structural questions begin, the free IFA valuation calculator gives you a range and explains the factors affecting it.