Guides / Deal structure

How earnouts and holdbacks work when selling a book

Holdbacks, earnouts, clawbacks and vendor take back notes allocate risk in four different ways, and advisors use the words interchangeably. Here is what each one does, what Canadian sellers actually agreed to, and the drafting details that cause the arguments.

Key takeaways

• A holdback withholds money the buyer has not yet paid. A clawback takes back money the seller already has. Those are not the same risk.
• Realized Canadian terms: a 10% holdback over 18 months with lifestyle withdrawals excluded, a one-year per-client clawback, and 25% down with 75% over 12 monthly instalments.
• One repeat Canadian buyer paid 100% upfront at 3.25x, after using 90% upfront with a 10% retention holdback measured at one or two years on his three prior acquisitions.
• Down payments across the realized deals we could source ran 25% to 100% with a median of 90%, and several US deals closed at 90% to 100% non-refundable cash.
• A high cash-at-close percentage is a competition signal: SRG's advocated sales averaged 75% down against 61% for private deals.
• The measurement date, the market-movement carve-out and the definition of a lost client decide more money than the holdback percentage does.

Four mechanisms show up in advisor book deals and advisors use the names interchangeably. They should not. A holdback withholds part of an agreed price until a retention test is met. An earnout makes part of the price contingent on performance that has not happened yet. A clawback pays the seller in full and requires repayment if clients leave. A vendor take back note is not contingent at all: it is deferred purchase price, a debt the buyer owes regardless of what the clients do.

The distinction is who is holding the money while the risk plays out, and who has to sue to get it. Under a holdback the buyer holds the money and the seller has to prove entitlement. Under a clawback the seller holds the money and the buyer has to chase it. Under a vendor note the seller is an unsecured creditor of a buyer whose ability to pay depends on a book the seller no longer controls.

The realized Canadian terms are thin but specific, and they are worth reading before you negotiate your own.

The four mechanisms compared

One general point before the detail. Canadian practitioner guidance puts the typical down payment at 25% to 50%, with the balance paid out of earnings through a vendor take back note, and notes that full cash settlement happens only where the buyer is well capitalised (George Hartman of Market Logics and Julia Haggerty of Advisor Finance, in Investment Executive). The FP Transitions norm reported for Canada is similar: a modest down payment plus a three to five year earnout (Advisor.ca). The realized deals that made it into the trade press look nothing like that, which tells you something about which deals get written up.

What Canadian sellers actually agreed to

Twyla Hardham of Safe Harbour Financial Solutions in Kelowna bought a book of roughly 320 clients at three times recurring revenue and financed it through Manulife Bank. The structure included a 10% holdback for 18 months, and the detail that matters: withdrawals for lifestyle reasons were carved out of the holdback test (Globe Advisor). She retained 95% of the clients. The deal closed as a share purchase because the seller wanted the lifetime capital gains exemption, even though the buyer would have preferred an asset purchase.

Elke Rubach of Rubach Wealth in Toronto paid three times annual recurring revenue for a book of 650 clients and negotiated a clawback rather than a holdback: if a client left within the first year, the retiring advisor repaid the amount allocated to that client (Globe Advisor). The per-client allocation is the part to copy. It converts a vague argument about percentages into an arithmetic question with an answer.

Samuel Lichtman of Millen Wealth Advisors in London, Ontario bought a 20-household book at one year's revenue, paying 25% up front with the remaining 75% in twelve monthly instalments (Globe Advisor). Note what the low cash-at-close bought the buyer: a price negotiated down on size, the seller's exit, and one client holding 20% of the book's assets. Weak leverage shows up in the multiple and the structure at the same time.

The buyer identified as Mr. Sanche, of Insight Wealth Management, went the other way and paid 100% upfront for a 60-household book at 3.25x recurring revenue. His three prior acquisitions had used 90% upfront with a 10% retention holdback measured after one or two years (Globe Advisor). He dropped the holdback for a book of engaged, responsive clients. That is the trade in one sentence: a seller who can evidence engagement can sell the holdback away.

One more Canadian structure worth knowing, because it is not a holdback at all: dealer financing over seven years where the dealer deducts the loan payments directly from the buyer's commission (Globe Advisor). Convenient, and it ties the buyer to the platform for the life of the loan.

The US cross-check, and what cash at close signals

United States data, labelled as such, because the structures are not directly transferable. Across the realized deals we could source, down payments ran from 25% to 100% with a median of 90%. Several US transactions brokered by Succession Resource Group closed at the top of that: 90% non-refundable cash plus staff expenses on a 3.82x deal (SRG), 100% cash with no contingencies on an Oregon practice (SRG), and 90% at closing with the remainder within six months on an Ameriprise franchise (SRG). Others were more structured: 75% cash down with a four-month lookback period (SRG), and 70% cash on positive consent with the balance within twelve months plus growth bonuses (SRG).

Those are brokered deals with competing bidders, and the cash percentage is a direct read on competitive tension. SRG publishes that its advocated sales achieve 6.91% more value and 75% average down payments against 61% for private deals (SRG). In one process, the three formal offers all carried at least 80% down; in another, the average down payment across the offers received was around 80% (SRG). Buyers bid cash when they are worried about losing the deal.

The counterweight is that the wider, unbrokered market looks nothing like this. FP Transitions' series shows average down payments of 27% to 37% between 2013 and 2018, with the balance carried on seller notes of four to five years at around 4% (FP Transitions 2019 Trends in Transactions and Valuation Study). Two US datasets disagree by a factor of two on the same question. The gap is selection: one covers brokered, bank-financed deals, the other covers the long tail of seller-financed small books. Canadian practitioner guidance of 25% to 50% down sits with FP Transitions, not with the press releases.

On frequency, 52.60% of the 176 deals SRG closed in 2024 carried a retention clause or clawback, 56.8% used seller financing, 25.3% were all-cash, and 51.3% were fully paid within twelve months of closing. Seller notes averaged 5.94 years at 4.9% (SRG). Read that as a rough prior for how often you should expect a retention mechanism to be on the table: about half the time.

The mechanics that actually cause disputes

How retention is measured, and on what date

Retention can be measured on revenue, on assets, on households or on clients, and the four give different answers on the same book. Revenue is the fairest proxy for what the buyer purchased. Assets are the easiest to manipulate with market movement. Households ignore the fact that losing your three largest is not the same as losing three of your smallest. The average target in SRG's 2024 closed deals was 88.00% of annual gross revenue measured one year after closing (SRG), which is a reasonable anchor and a US one.

Pick one measurement date, name it in the agreement, and agree the data source. A single date creates a cliff risk if the market is down that week, so a trailing average over the final quarter of the measurement period is worth asking for.

Whether market movement is excluded

This is the largest unpriced risk in any asset-based test. A book priced on assets and tested on assets transfers the entire market risk of the measurement period to the seller, for no compensation. The precedent for how much that can matter is a US deal renegotiated from 3.14x to 2.82x revenue purely because of the February and March 2020 market drop between offer and close (SRG). Either test on revenue at the original fee schedule, or carve market movement out explicitly.

The same logic drives the carve-out Hardham negotiated. A retiree taking scheduled lifestyle withdrawals is doing exactly what the financial plan says they should, and treating those withdrawals as attrition penalises the seller for the client's age profile, which the buyer saw in diligence and priced.

Who controls the relationship during the measurement period

Once closing happens, the buyer services the clients and the seller's payment depends on how well the buyer does it. That asymmetry is the structural weakness of every retention mechanism, and it is why the seller's transition obligations and the buyer's service obligations belong in the same document. If the seller is required to make introductions, the buyer should be required to meet the clients. Canadian transfers make this concrete: under the rules carried into CIRO, transfers require written client authorization and client information cannot be disclosed without prior written client consent (CIRO). A buyer who is slow with the paperwork can fail the retention test without a single client deciding to leave.

Clients who leave for unrelated reasons

Death, emigration, a client's own business failure, a divorce that splits an account, a corporate plan moving to a group provider. None of these is a transition failure and all of them reduce revenue. List the excluded events. Then decide the formula for the ones that do count. The P&C brokerage convention is clean and transfers well: the deduction equals the lost accounts' historical commission multiplied by the purchase multiple, measured over a twelve-month retention period (Borlak).

Avoid cliffs. US practice includes formulas where missing a 95% retention test forfeits the entire retention payment, alongside earnout periods of three to four years and CAGR targets of 10% to 15% (Kitces). A growth-based earnout is a particularly poor fit for a retiring advisor, who has no ability to influence the result and every reason to dispute the accounting.

Two things that are not retention risk

First, the insurance trap. On transferred policies the carrier may keep paying renewal revenue to the originating advisor even after the file transfers: you can transfer the file, but in some cases you are not going to get paid, so you need to be aware of that (Elke Rubach, Globe Advisor). No holdback fixes that, because the client has not left. Confirm assignability carrier by carrier before pricing insurance trailers into the deal.

Second, tax treatment, which routinely moves more money than the retention mechanism does. A captive program paying 2x gross revenue as ordinary income can net the seller less than a third of a 4x share sale qualifying for the lifetime capital gains exemption (Wealth Professional). How a holdback or earnout is characterised for tax, and when it is included in income, is a question for your accountant before you sign, not after.

What to do with this

Everything above is contractual. The percentages are negotiable, the definitions are where the money is, and none of it is legal or tax advice: retention clauses, clawbacks and vendor notes need your own lawyer and your own accountant, and the share versus asset question needs both. Sellers who can evidence client engagement and a clean revenue base have the strongest argument for a high cash-at-close percentage, which is the same argument that supports a higher multiple.

If you are preparing to go to market, get a defensible number first and then negotiate structure from it: list your book confidentially, see what buyers are looking for, and work through the arithmetic in the $50M book deal structure example, which shows exactly what a 10% holdback does to both sides of a real cash flow.

Common questions

What is the difference between a holdback and an earnout?

A holdback is part of an agreed price that the buyer keeps back and pays over only if a condition, usually client retention, is met. An earnout makes part of the price contingent on future performance that has not happened yet, such as revenue growth over three to five years. A holdback protects a price you have already agreed. An earnout means you have not finished agreeing the price.

Is a 10% holdback standard in Canada?

It is the most commonly reported Canadian figure. One buyer negotiated a 10% holdback over 18 months with lifestyle withdrawals excluded from the test, and a repeat buyer described 90% upfront with a 10% retention holdback measured after one or two years as his usual structure. That is three data points, not a standard, and the rest of the terms matter more than the percentage.

Should I accept a clawback instead of a holdback?

A clawback pays you the full amount at closing and obliges you to repay if clients leave, so you hold the cash and the buyer holds the collection risk. Buyers often prefer a holdback for that reason. If you accept a clawback, expect the buyer to want it allocated client by client and possibly secured, and get your own lawyer to review the repayment trigger.

What counts as a lost client during the retention period?

Whatever your agreement says, which is exactly why it must say something specific. Death, a lifestyle withdrawal from a RRIF, a client moving provinces, a market decline that shrinks the asset base and a client who leaves because they dislike the new advisor are five completely different events. Define them separately and state which ones reduce the payment.