If you own a retainer-based agency, your client contracts are probably your single most valuable asset. A 12-person digital agency billing £800k per year with 80% retainer income has a very different sale profile to a project-driven shop of the same size. The buyer is paying for predictable recurring revenue. And that creates a specific set of tax and legal questions that most agency founders don't think about until they're deep in heads of terms.
This is a selling your agency tax guide focused on one thing: what actually happens to those retainer contracts when you sell, and how HMRC treats the value attached to them. Competitor guides talk about valuation multiples and CGT rates. They rarely cover the practical tax treatment of transferring ongoing client contracts in a sale. That gap is what we're filling here.
The Core Distinction: Share Sale vs Asset Sale
Before we get into retainer contracts specifically, you need to understand the two main ways an agency sale happens. This determines everything that follows.
Share sale. You sell the shares in your company to the buyer. The company continues to exist. All contracts, including retainer agreements, stay with the company. The buyer takes ownership of the company and inherits everything inside it, including the client relationships, the staff, the liabilities, and the retained profits.
Asset sale. You sell the individual assets of the business, such as the client contracts, the brand name, the goodwill, and the equipment. The company stays in your ownership. You wind it down afterwards, or keep it as a shell.
For retainer-based agencies, share sales are far more common. Why? Because the buyer wants continuity. They want the client to stay with the same legal entity, pay the same bank account, and keep the same contract terms. An asset sale requires novating every single retainer agreement, which means getting each client to sign a new contract with the buyer's company. That is a practical nightmare for a 30-client retainer book.
But share sales bring their own tax complications, particularly around how the purchase price is allocated and what happens to deferred consideration linked to client retention.
How Retainer Contracts Are Valued in a Sale
Most agency sales use a multiple of maintainable EBITDA. For a retainer-heavy agency, the multiple is typically higher than a project-based agency because the revenue is more predictable. A digital agency with 80% retainer income might sell for 4-6x EBITDA. A project agency might get 2-4x.
But the purchase price isn't just a single number. It's usually split into components:
- Consideration for shares. The base price for the company itself.
- Goodwill. The premium above net asset value that reflects the client relationships, brand, and recurring revenue.
- Deferred consideration or earn-out. Additional payments linked to future performance, often tied to client retention or revenue targets.
- Loan note or cash. The form of payment.
Here is where the tax treatment gets specific. In a share sale, the entire gain on disposal of shares is subject to Capital Gains Tax. If you qualify for Business Asset Disposal Relief (BADR), the rate is 18% on gains up to £1m. Above that, it's 20%.
But if the purchase price includes deferred consideration linked to retainer retention, HMRC may treat that differently. And if the buyer insists on an asset sale for their own tax reasons, the treatment of the retainer contracts changes entirely.
The Earn-Out Problem: When Retainer Income Becomes Deferred Consideration
Many agency sales include an earn-out. The buyer pays a chunk upfront, then additional amounts based on the agency hitting certain targets over 12-24 months. For retainer-based agencies, those targets are almost always tied to client retention and revenue.
Here is the tax trap. If the earn-out is structured as additional consideration for the shares, the full amount is capital in nature and qualifies for CGT treatment, including BADR if you meet the conditions. But if the earn-out is structured as a payment for services, or if it's linked to you staying on as a director and generating revenue, HMRC may treat it as employment income. That means income tax at your marginal rate (up to 45%) plus Class 1 National Insurance at 15% on the employer side and 2% on the employee side.
Let me give you a real example. A 12-person PR agency in Bristol sold for £1.2m. The deal was structured as £800k upfront for the shares and £400k earn-out over two years, based on retaining at least 80% of the retainer book. The founder stayed on as a consultant for 12 months. HMRC challenged the earn-out, arguing that because the founder was still providing services, the earn-out was remuneration for ongoing work, not consideration for the shares.
The founder ended up paying income tax at 40% plus NI on the earn-out, rather than 18% CGT under BADR. That cost them roughly £120k in extra tax.
The lesson: If your sale includes an earn-out linked to retainer retention, get the wording in the share purchase agreement reviewed by an specialist agency accountant before you sign. The distinction between "consideration for shares" and "remuneration for services" is a matter of contract drafting, not just tax law.
Goodwill and Retainer Contracts: What Are You Actually Selling?
In an asset sale, the retainer contracts are sold as part of the goodwill or as a separate intangible asset. Goodwill is the premium that reflects the value of the client relationships, the brand, and the ongoing revenue stream. In an agency context, goodwill and retainer contracts are almost inseparable.
For Capital Gains Tax purposes, goodwill is a chargeable asset. If you sell it personally (as a sole trader or partnership), the gain is subject to CGT at 18% with BADR or 20% otherwise. If you sell it through your company, the company pays corporation tax on the gain at 19% or 25%, and then you extract the proceeds as dividends or a capital distribution.
But here is the practical problem. If you sell the retainer contracts as part of an asset sale, you need to novate each contract to the buyer. Novation means the client agrees to terminate the existing contract with your company and enter a new contract with the buyer's company. If even one client refuses, that contract stays with your company and you're left managing a residual business.
Most retainer agreements include a change of control clause. Check yours. If the client has the right to terminate on change of control, you need their consent to novate. That gives them use. And if a client walks, the buyer will almost certainly adjust the purchase price downwards.
Deferred Income and Accruals: The Balance Sheet Trap
Retainer contracts create a specific accounting issue on sale. Most retainers are billed in advance. If a client pays £5,000 on the 1st of the month for that month's retainer, and you sell on the 15th, half of that £5,000 is deferred income on your balance sheet. It represents work you haven't done yet.
In a share sale, the deferred income stays with the company. The buyer inherits the obligation to deliver the work. But the buyer will adjust the purchase price downwards to reflect that they're taking on a liability without having received the cash benefit. In practice, this means the deferred income reduces the net asset value of the company, which reduces the purchase price.
In an asset sale, the deferred income stays with your company. You keep the cash, but you also keep the obligation to deliver the work. Unless you novate the contract, in which case the deferred income transfers to the buyer along with the obligation.
Either way, deferred income reduces what you actually walk away with. Many founders overlook this when calculating their expected sale proceeds. They see the headline multiple on EBITDA and forget that the balance sheet adjustments can knock 5-10% off the final price.
VAT and Retainer Contracts on Sale
VAT is another area where retainer contracts create complications. If you're VAT registered and you sell the business as a going concern (TOGC), the sale may be outside the scope of VAT. That means no VAT is charged on the sale price. But TOGC treatment only applies if the buyer intends to carry on the same business and is VAT registered themselves.
If the sale doesn't qualify as a TOGC, VAT at 20% may apply to the sale of goodwill and retainer contracts. That adds a significant cost to the buyer, who will either push the price down or insist on a share sale instead.
For retainer-heavy agencies, TOGC treatment is usually straightforward because the buyer is continuing the same business with the same clients. But if the buyer is not VAT registered, or if they plan to restructure the business significantly, TOGC may not apply. Get a VAT specialist to confirm this before you agree the deal structure.
Practical Steps Before You Sell
If you're thinking about selling your agency in the next 12-24 months, here are the practical steps to take now.
1. Review your retainer contracts. Check for change of control clauses, termination rights, and notice periods. If clients can walk on a change of control, that weakens your negotiating position with the buyer.
2. Clean up your balance sheet. Deferred income is a liability. The lower your deferred income at completion, the less the buyer will adjust the price. Consider shifting to monthly billing in arrears rather than in advance, or reducing the retainer period to weekly billing.
3. Structure the earn-out carefully. If you're staying on post-sale, make sure the earn-out is clearly linked to share consideration, not to your ongoing services. Your solicitor and accountant need to work together on this.
4. Check BADR eligibility. You need to hold at least 5% of the shares and be an officer or employee for two years before the sale. If you're planning to step down as a director before the sale, make sure the timing works.
5. Get a tax review before you engage a buyer. Once you're in negotiations, your flexibility on structure is limited. A pre-sale tax review with an specialist agency accountant can identify the optimal structure before you start talking to buyers.
At Agency Founder Finance, we work with agency founders on exit planning as part of our broader services. If you're starting to think about a sale, we can help you understand the tax implications of your retainer book before you commit to a deal structure. Get in touch for a confidential conversation.
For more on agency exits, read our guide on planning your agency exit strategy and our breakdown of capital gains tax for agency founders.
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