Earn-outs appear to offer a neat solution to one of the hardest problems in the sale of a financial planning business: the buyer and seller disagreeing about what the business is worth.

The seller expects recurring income and client relationships to continue and wants the price to reflect that value. The buyer is reluctant to pay in full for income that may fall away when clients are introduced to a new owner or adviser. An earn-out bridges the gap by making part of the consideration dependent on agreed targets being achieved after completion.

In principle, this aligns the parties’ interests. The seller is rewarded if the acquired client bank performs as expected, while the buyer is protected from paying for revenue that does not transfer. In practice, earn-outs frequently become a source of disagreement because the outcome depends on three difficult questions: how performance is measured, who controls it and how precisely the rules have been documented.

Financial planning transactions introduce a further complication. The principal asset is often a collection of personal, trust-based client relationships. A seller can make careful introductions and a buyer can provide an excellent service, but neither can compel a client to consent to a transfer, accept a new adviser or remain with the firm. Client transition therefore creates a material risk that can be managed but never fully controlled.

Choosing the right measure

An earn-out can be linked to revenue, gross profit, EBITDA, recurring revenue, client retention, assets under advice or management, or another operational or financial measure. The appropriate metric depends on the business and the risk the buyer is seeking to address.

Revenue is relatively easy to understand and may be harder to manipulate than profit. However, revenue alone says little about the cost of generating it. A financial planning firm could meet a revenue target by recruiting expensive advisers, increasing marketing expenditure or accepting lower-margin clients. The seller might earn additional consideration even though the acquired business contributes less profit than the buyer anticipated.

An EBITDA-based earn-out is intended to capture profitability, but it introduces more variables. Decisions about adviser remuneration, support staff, central overheads, integration expenses, regulatory costs and management charges can all affect the calculation. A buyer that allocates group costs to the acquired business may reduce its reported EBITDA even where recurring revenue remains strong.

Gross profit can provide a middle ground, although the agreement must define which costs are deducted. In financial planning transactions, retained clients or retained recurring revenue will often be the most direct measure because the buyer’s central concern is whether the seller’s clients will successfully transition and remain after the founder’s departure.

That measure brings its own difficulties. A client may stay with the buyer but withdraw part of their portfolio, reduce the services they receive or cease paying ongoing advice fees. Investments may fall in value because of market movements, reducing percentage-based fees even though the relationship remains intact. A client may die, divorce, move abroad, spend capital or transfer assets for reasons unrelated to either party’s conduct. Clients may also be moved between entities, advisers or charging structures within the buyer’s group.

These are not simply drafting problems. They expose an important distinction between controllable and uncontrollable risk. The parties can regulate how clients are approached, who services them and how revenue is recorded. They cannot control the client’s personal circumstances, preferences or ultimate decision. The earn-out metric therefore allocates not only business-performance risk, but also the risk of independent client behaviour.

The transition risk

In many financial planning acquisitions, the value being purchased depends on clients transferring their trust from the seller to the buyer. That process is rarely instantaneous. Clients may need to consent to new terms, data transfers, adviser appointments or changes in provider arrangements. Even where no formal consent is required for every aspect of the transaction, clients remain free to leave.

The seller may have advised a family for decades. The relationship may be personal to the founder rather than institutional to the firm. A buyer can acquire the company, its records and its contractual rights, but it cannot acquire loyalty in the same way. The legal completion of the transaction and the commercial transfer of the client relationship are different events.

This creates a risk that is only partly within either party’s influence. The seller may conduct warm handovers, attend joint meetings and reassure clients about continuity. The buyer may retain key staff, preserve service standards and introduce replacement advisers carefully. Those measures can improve the prospects of retention, but they cannot guarantee it.

An earn-out based on retained revenue may protect the buyer economically, but it does not make the underlying risk controllable. Instead, it transfers some or all of that risk back to the seller. That may be commercially justified, particularly where the purchase price assumes high retention, but the allocation should be explicit. A seller should not assume that strong historic loyalty makes the earn-out certain, and a buyer should not assume that every departure demonstrates a failure by the seller.

The agreement should also address what counts as a successful transition. Is a client retained when they sign the buyer’s terms, when their first fee is collected or only after they remain for a specified period? Does partial retention count? How are joint clients, connected family members, trusts and corporate clients treated? What happens when a client delays a decision beyond the earn-out period?

Without clear answers, a mechanism intended to measure transition risk may simply create a second dispute about whether the transition occurred.

Control after completion

Earn-outs are often described as incentives for sellers to maintain performance. That assumes the seller remains able to influence the outcome.

Once completion takes place, the buyer owns the business. It may change the firm’s pricing, investment proposition, platform relationships, technology or service model. It may replace advisers, combine teams, close offices or require clients to accept different engagement terms. Even when a seller stays in an advisory or management role, their authority may be narrower than it was before the sale.

In a financial planning business, those decisions can directly affect client retention. A client who was willing to move with the seller may object to a new charging structure, a less personal service or a change in investment approach. Conversely, the buyer may reasonably conclude that changes are necessary for regulatory, operational or commercial reasons.

Consider a seller entitled to an additional £1 million if £5 million of annual recurring revenue is retained. After completion, the buyer integrates the business into its wider group and transfers several client relationships to another subsidiary. The clients remain within the buyer’s group, but their income is no longer recorded in the acquired company. Whether that income counts towards the earn-out will depend on the agreement.

The same tension can arise when the buyer makes commercially reasonable decisions that suppress short-term performance. Investment in new technology, a change in fee structure, reassignment of clients or the termination of an unsuitable or unprofitable relationship may be sensible for the combined business but damaging to an earn-out measured over the following 12 or 24 months.

Sellers commonly seek protections requiring the buyer to maintain service levels and resources, preserve key personnel, consult on material changes and refrain from diverting clients or revenue. Buyers resist restrictions that prevent them from managing an asset they have purchased or meeting their own regulatory obligations.

Neither position is inherently unreasonable. The drafting must strike a workable balance between the buyer’s right to run the business and the seller’s right to a fair opportunity to receive the contingent price. The agreement should regulate matters the parties can control without pretending that client decisions themselves can be guaranteed. A promise that the buyer will use “reasonable endeavours” to retain clients may offer little comfort unless the agreement explains what that requires in practice.

Ambiguity creates conflict

Even a commercially sensible earn-out can fail if its terms are vague.

Suppose the parties agree that the seller will receive £500,000 if “revenue from retained clients” exceeds £3 million during the first year. That phrase raises immediate questions. Does revenue mean invoiced income or cash received? Are refunds deducted? What happens to work completed during the earn-out period but billed later? Does income count if a client moves to another entity in the buyer’s group? Is a client retained if they continue using one service but discontinue another?

The treatment of events outside the parties’ control must also be considered. Should revenue reductions caused by market movements be disregarded? What happens if a client dies, becomes incapacitated, spends capital or transfers assets following a divorce? Should a client departure count against the seller where the client objects to a change introduced by the buyer? There is no universally correct answer, but leaving these matters unstated invites disagreement.

Accounting policies create further scope for dispute. EBITDA must be defined rather than treated as a universally understood figure. The agreement should address exceptional items, acquisition and integration costs, group charges, changes in accounting policy, bad-debt provisions and transactions with connected companies.

The parties must also agree how performance will be reported and verified. The documentation should specify who prepares the calculation, when it must be delivered, what client and financial information the seller can inspect, and how objections are raised. Any information rights must be designed with confidentiality, data protection and regulatory duties in mind. A clear dispute-resolution process, often involving an independent accountant for technical accounting questions, can prevent a disagreement from escalating into litigation.

Specificity does not eliminate every dispute, but it removes many of the most predictable ones. Worked examples can be particularly valuable, including examples involving partial withdrawals, market falls, client deaths, intra-group transfers and departures caused by changes to the buyer’s service model. If the formula behaves unexpectedly when applied to realistic scenarios, it is better to discover that during negotiation than after the money is due.

A useful mechanism for a risk that cannot be eliminated

Earn-outs can unlock financial planning transactions that might otherwise fail. They allow a confident seller to participate in the future value of the client bank and protect a cautious buyer against paying in full for recurring revenue that does not survive the transition.

But the language of alignment can conceal two structural tensions. The seller’s payment depends on future performance while control of the business usually passes to the buyer. At the same time, the most important participants in the transition—the clients—are not parties to the sale agreement and remain free to make their own decisions.

An earn-out cannot eliminate that uncertainty. It can only allocate its financial consequences. It is most likely to work when the chosen measure reflects the commercial purpose of the deal, the seller has a realistic opportunity to support the transition, the buyer is constrained from undermining it and the agreement distinguishes between matters within the parties’ control and genuinely independent client behaviour.

Without those elements, the mechanism intended to bridge a valuation gap may simply postpone the argument until after completion, when client relationships, the parties’ working relationship and a substantial part of the purchase price are all under greater strain.