Same headline price, very different deals: value what retention clauses and earn-outs really pay.

An earn-out and retention valuation shows what an agency deal is worth once its retention clauses, clawbacks, deferred payments and earn-outs are taken into account, not just its headline price. It values the business itself, then sets out what each party can expect to pay or receive under the terms, when, and with what risk, so offers can be compared on the same basis. The fee is set by the revenue of what is being sold: $1,495 + GST under $2 million, delivered in 2 business days. Delivery time starts once payment and all required information have been received.

Why do agency deals use retention clauses and earn-outs?

An agency's income depends on clients choosing to stay after the owner changes, and neither side knows in advance how many will. The ATO describes earnout and deferred consideration arrangements as a way of structuring a business sale to deal with uncertainty about its value. Agency deals use them in ways that suit each kind of income.

A rent roll sale may hold back some of the price until a retention period ends and reduce it for each management lost in that window. An insurance book sale may adjust the price for renewals that do not come through. A mortgage book sale may turn on the trail income still running at a later date. A marketing, digital or creative agency may be sold with an earn-out on revenue or profit, or on key retainers staying. A recruitment business may tie later payments to billings or to consultants staying. A travel agency sale may depend on corporate accounts and supplier income agreements carrying over.

What is the difference between headline price and effective price?

The headline price is the number announced. The effective price is what the seller ends up receiving and the buyer ends up paying for the business it keeps: the headline price, less clawbacks for clients lost in the retention window, plus any earn-out payments, plus or minus settlement adjustments, with later payments counted in today's money and weighed for the chance they are paid.

Two deals with the same headline can have very different effective prices. A lower headline with light retention terms can leave the seller better off than a higher headline with a long retention period and a strict clawback. For the buyer, a high headline paid largely by earn-out may cost less than it appears if the targets are hard to reach. Our report sets out both figures, and the assumptions that link them.

How do the terms relate to market value?

Market value is what a hypothetical willing but not anxious buyer and seller would agree at arm's length. It is not the terms of one particular contract. But the risk the terms allocate is real: a buyer knows some clients will leave, and either pays less up front or asks the seller to carry the losses through retention. A valuation reflects that risk once, either in the income or in the evidence, and not twice.

The same point applies to comparable sales. The ATO lists an inappropriate choice of comparable assets among common valuation issues, and a sale price quoted without its retention or earn-out terms is not comparable to one paid in full at settlement. Where we rely on transaction evidence, we compare on the same terms or adjust for the difference, and say so.

What should you read closely in a retention or earn-out clause?

What a clause means, and whether it is enforceable, is for your lawyer. These are the points that most affect value.

• ·The measurement period, when it starts and when payments are made
• ·What counts as a lost client or management, and whether losses caused by the buyer's own decisions, such as a fee increase or staff change, are excluded
• ·Whether new clients won in the window offset losses
• ·For earn-outs, how revenue or profit is defined and who controls the costs that affect it
• ·Caps, floors and any acceleration if the buyer sells or restructures
• ·How held-back money is secured, and who holds it
• ·The seller's handover duties and any restraint
• ·How a disagreement about the count or the calculation is resolved

How are earn-outs treated for CGT?

Your tax adviser decides. The ATO explains that look-through treatment under Subdivision 118-I can apply to an earnout right created on or after 24 April 2015 where, among other conditions, the future benefits are not reasonably ascertainable when the right is created, the sale caused CGT event A1 for an active asset, all benefits are provided within 5 years after the end of the income year of the sale, the benefits depend on the economic performance of the asset or business and reasonably relate to it, and the parties deal at arm's length.

Under look-through treatment, the ATO says a valuation of the earnout right is not required: the payments adjust the seller's capital proceeds and the buyer's cost base as they are made. Where the conditions are not met, the rights are separate CGT assets, which may then call for a market value at the contract date.

What can a valuation do for each side?

For a seller, it compares offers on the same footing and shows what you are likely to receive, and when. For a buyer, it shows what you are likely to pay for the business you keep, and how sensitive that is to client losses. Where an earnout right sits outside look-through treatment, it can value that right at the contract date. If a count or calculation is already disputed, an expert report is a separate engagement; see Expert valuation reports for agency owner disputes and court.

What does an earn-out and retention valuation cost?

The band is set by the revenue of what is being sold, not by the headline price. If you want two or more offers compared in the same report, tell us when you enquire and we confirm the scope in writing.

The band is set by the annual revenue, excluding GST, of what is being valued: a rent roll's annual management income when the rent roll is valued on its own, an insurance or mortgage book's annual recurring income when the book is valued on its own, or the agency's total annual turnover when the whole agency, or shares or units in it, are valued. A business on exactly $3 million is Medium, and one on exactly $10 million is Large. Add-ons: +$495 per retrospective (past) valuation date, and +$795 per additional entity. Delivery time starts once payment and all required information have been received.