Selling an Accountancy Practice: Restrictive Covenants, Client Retention and PI Risk

Selling an accountancy practice is rarely as straightforward as agreeing a valuation and signing a sale agreement. In many transactions, the real negotiation is not the headline price but how risk is allocated and managed after completion.

This guide explains the key legal issues accountancy practice owners should consider before signing heads of terms or a sale agreement.

Why Selling an Accountancy Practice Is Not Just About Valuation

For accountancy practice owners in England and Wales, key areas to consider include restrictive covenants, client goodwill and retention, deferred consideration, professional indemnity insurance, client transfer mechanics and the allocation of historic liabilities. These points can affect not only the net proceeds of the sale, but also your ability to work after completion and your exposure to claims long after the business has been sold.

The legal issues will also depend on how the transaction is structured. An asset sale will usually require more detailed provisions dealing with the transfer of client relationships, employees, records, engagement letters and goodwill. A share sale may leave the contracting entity unchanged, but will usually involve greater focus on historic liabilities, warranties and indemnities. Partnership, LLP and merger structures raise their own issues around retiring partners or members, capital accounts, profit shares, regulatory continuity and client communications.

Many sellers only appreciate the significance of these issues once draft agreements are circulated. By then, commercial expectations may already be fixed, making renegotiation more difficult. Therefore, understanding these risks early can help protect both the value of the transaction and your long-term commercial position.

Key Legal Issues in Accountancy Practice Sales

Commonly, the key aspects in accountancy practice sales are:

• Restrictive covenants limiting future work or business activity; 
• Earn-outs and other forms of deferred consideration linked to client retention or recurring fee income;
• The transfer of goodwill, client relationships and client records;
• Client notification and data protection compliance;
• Employee transfer issues, including whether TUPE applies;
• The cost, duration and scope of run-off professional indemnity cover; and
• Warranty, indemnity and disclosure risk within the sale agreement.

Addressing these points early, ideally at heads of terms stage, often leads to smoother negotiations and better long-term outcomes for the parties.

Restrictive Covenants in Accountancy Practice Sales

Restrictive covenants are contractual promises limiting what a seller can do after completion. In a business sale, buyers rely on these clauses to protect the goodwill, confidential information, workforce stability and client relationships they are purchasing.

Restrictive covenants given in connection with the sale of a business are usually assessed in a different commercial context from employment covenants. A buyer who has paid for goodwill is entitled to a reasonable degree of protection. However, the restriction must still go no further than is reasonably necessary to protect a legitimate business interest.

Common restrictive covenants include:

1. Non–compete

A non-compete covenant usually prevents the seller from owning, operating, being employed by, consulting for or otherwise being involved in a competing accountancy practice for a specified period and, where appropriate, within a defined geographical area. Whether these clauses are enforceable depends heavily on the surrounding circumstances, including the size of the practice, the nature of the client base and the value attributed to goodwill. For example:

• A small local practice serving nearby SMEs is unlikely to justify a nationwide restriction. A narrower restriction focused on the local trading area is generally easier to justify and enforce.
• A larger regional accountancy firm with a broader client base may support wider restrictions where the buyer can demonstrate a legitimate need to protect established commercial relationships.

Restriction periods in business sale agreements commonly range from one to three years, although enforceability will depend on the nature of the practice, the client base, the seller’s role, the geographic reach of the business and the value attributed to goodwill. Longer restrictions require careful justification and should not be assumed to be enforceable simply because they appear in the sale agreement.

2. Non–solicitation and Non–dealing

A non-solicitation clause prevents the seller from actively approaching former clients to encourage them to move their work away from the buyer.

A non-dealing clause is broader and may prevent the seller from acting for those clients even where the client makes the first approach and there has been no solicitation by the seller.

Because non-dealing restrictions interfere with passive client choice, they should usually be drafted more narrowly than non-solicitation restrictions. In particular, they should normally be limited to clients with whom the seller had material dealings during a defined pre-completion period and to services which compete with the business being sold.

These restrictions are particularly important in accountancy practice sales because client relationships are often personal and long-standing. Buyers want reassurance that the seller cannot immediately rebuild the same client base elsewhere. However, restrictions drafted too broadly can unfairly limit future earning opportunities.

Key drafting points include:

• How “client” is defined. Broad wording may capture historic contacts, dormant clients, one-off advisory clients, connected entities, personal tax clients, low-fee clients or individuals who have not generated meaningful recurring revenue.
• The period used to identify relevant clients. Restrictions covering every client from several previous years may be significantly harder to justify than those focused on recent active relationships.

Disputes over client contact frequently arise after completion, particularly where deferred consideration depends on client retention.

3. Confidential Information 

Restrictive covenants should also sit alongside robust confidentiality provisions. Sellers will usually retain knowledge of client affairs, pricing, fee levels, internal systems, employee details and referral relationships. The sale agreement should make clear what confidential information the seller may retain, what must be returned or deleted, and how any ongoing consultancy or handover role will be managed.

Employees, TUPE and Staff Retention

Where the transaction is structured as an asset sale, employee transfer issues should be considered at an early stage. Depending on the circumstances, TUPE may apply, with consequences for consultation, transfer of employment liabilities and post-completion integration.

This is particularly important for accountancy practices where client relationships may sit with managers, payroll staff, tax specialists or other key employees rather than only with the owner. The buyer may need those employees to transfer in order to preserve goodwill, while the seller will want clarity on which employment liabilities are retained or assumed.

Employee Restrictions After Completion

Buyers commonly seek protection against the seller recruiting key employees into a competing venture after completion.

Restrictions focused on senior staff or strategically important employees are often enforceable. Wider restrictions affecting all former employees, regardless of role or relevance, may be harder to justify.

The commercial context also matters. In smaller practices, losing a small number of experienced staff shortly after completion can materially affect client retention and the integration process.

Deferred Consideration and Clawback

1. Deferred Consideration

Many accountancy practice sales involve deferred consideration, where part of the purchase price depends on future client retention, recurring fee income or the collection of fees from transferred clients. This reflects commercial reality: buyers are usually paying for future recurring revenue rather than a guaranteed list of clients.

Typical structures include:

• A percentage of recurring fees generated from transferred clients over a defined period
• Deferred instalments linked to client-retention or fee-income targets
• Clawback provisions allowing the buyer to recover part of the purchase price if clients leave within a specified period after completion

Deferred consideration can align incentives effectively, but it also creates fertile ground for disputes because the buyer’s conduct after completion may directly affect the seller’s entitlement to payment. For example, a seller whose earn-out depends on recurring fees may face reduced payments if the buyer restructures client teams, changes pricing models or alters service levels shortly after completion.

The seller should therefore consider protections around the buyer’s post-completion conduct. These may include obligations to maintain reasonable service levels, avoid material changes to pricing without good reason, keep proper records of transferred client income, consult the seller before terminating key client relationships and provide regular statements showing how deferred consideration has been calculated.

2. Clawback Provisions

Clawback clauses require particularly careful drafting because clients may leave for reasons entirely outside the seller’s control. Clients may leave because:

• The buyer changes fee structures, staffing arrangements or service levels after completion
• Economic conditions affect the client’s business
• The client no longer requires the same level of accountancy support
• Key employees leave during integration

In those circumstances, it may be unfair for the seller to bear the full financial consequences.

The sale agreement should clearly define:

• How client retention is measured;
• Whether calculations are based on billed fees, collected fees or recurring annual fees;
• What happens where the buyer changes pricing, staffing or service levels;
• Whether client losses caused by the buyer’s conduct are excluded from clawback;
• What evidence the buyer must provide;
• Which client losses count towards any adjustment; and 
• Whether disputed calculations can be referred to an independent accountant or expert.

Without clear drafting, earn-out and deferred consideration disputes are common in professional services M&A transactions.

Can Business Clients be Sold as Part of the Sale?

Clients cannot be sold in the same way as physical business assets because they remain free to choose their professional adviser at any time.

What is actually being sold is goodwill, meaning the commercial benefit of established client relationships, recurring fee income, reputation and trading history, and the expectation of future instructions. This distinction is important because it affects:

• How the purchase price is structured; 
• Whether deferred consideration is appropriate; 
• How restrictive covenants are drafted; and
• How risk is allocated between buyer and seller.

A buyer can never obtain a guarantee that every client will remain after completion, and the legal documents should acknowledge that.

Client Transfer Mechanics and Data Protection

The sale agreement should deal with how client relationships and client records will transfer in practice. This may include client notifications, new or updated engagement letters, transfer of working papers, access to tax records, payroll information, company secretarial records, AML/customer due diligence material and HMRC agent authorisations.

Buyers will usually want access to client information before and after completion to support integration and client retention. Sellers need to ensure that any disclosure or transfer of personal data is lawful, proportionate and consistent with professional obligations, confidentiality duties and UK GDPR requirements.

The parties should also consider whether existing engagement terms contain limitations of liability, exclusions, fee provisions or termination rights that need to be preserved or replaced after completion.

Personal Goodwill and Post-Completion Handover

In many smaller accountancy firms, goodwill is closely tied to the individual owner or partner rather than the firm’s name alone.

Buyers therefore often ask sellers to remain involved after completion, either as employees or consultants, to support client retention and handover. These arrangements may include:

• Employment agreements where the seller continues managing client relationships during a transition period
• Consultancy arrangements supporting introductions, business development or specialist technical work after completion

These arrangements should be considered alongside restrictive covenants and deferred consideration because all three areas are commercially connected.

Any post-completion role should be carefully documented. The seller’s duties, time commitment, authority to communicate with clients, remuneration, reporting lines and termination rights should be clear. This is particularly important where the seller’s earn-out depends on client retention but the buyer controls pricing, staffing and service delivery.

Professional Indemnity Insurance and Run-off Cover

1. Why PI Risk Continues Post Completion

Selling an accountancy practice does not remove liability for historic professional work. Claims relating to negligent advice, tax planning, compliance failures, audit work or corporate transactions may arise years later.

As a result, professional indemnity insurance remains critically important even after the practice has ceased trading. This is particularly important because professional indemnity policies are usually written on a claims-made basis. In broad terms, this means that the relevant cover is the policy in place when the claim is made, not necessarily the policy in place when the work was carried out. Sellers should therefore ensure that historic work remains covered after completion or cessation of practice. Buyers also want reassurance that historic liabilities are adequately insured and that they are not inheriting uninsured exposure.

2. What Run–off Cover is

Run-off cover is professional indemnity insurance covering claims made after the practice has ceased trading in relation to work carried out before completion.

The duration and structure of run-off cover vary depending on the circumstances, insurer requirements and regulatory obligations. The duration and structure of run-off cover will depend on the circumstances, policy terms, insurer requirements and the seller’s professional body or regulatory obligations. Requirements may differ depending on whether the practice is regulated by ICAEW, ACCA, another professional body, or is subject to specialist requirements such as audit regulation. The cost can be significant, particularly for firms involved in higher-risk work such as tax planning, corporate finance or transactional advisory services.

Key areas to focus on include:

• Who pays for the cover
• How long it remains in place
• Whether the level of cover is adequate
• Whether exclusions or policy limits create gaps in protection

These issues should be expressly addressed within the sale agreement and aligned with the warranty and indemnity package.

Responsibility for Historic and Future Work

Sale agreements usually distinguish between:

• Work carried out before completion, which typically remains the seller’s responsibility
• Work carried out after completion, which becomes the buyer’s responsibility

Problems can arise where projects continue across completion, where the buyer relies on or updates historic advice, or where a client complaint relates partly to pre-completion work and partly to post-completion service delivery. Warranties and indemnities also require careful review. If contractual obligations are wider than the protection available under the PI policy, the seller may face personal exposure long after completion.

Sellers should also consider limitation periods when assessing run-off cover, warranty survival periods and indemnity exposure. Professional negligence, breach of contract and negligent misstatement claims may arise years after the relevant advice was given. Where documents are executed as deeds or where latent damage issues arise, the risk period may be longer than the seller initially expects.

Warranties, Indemnities and Disclosure

The warranty package is often one of the most heavily negotiated parts of an accountancy practice sale agreement. Buyers will usually seek warranties covering the accuracy of client lists, recurring fee income, client complaints, professional negligence claims, regulatory compliance, AML records, engagement letters, fee disputes, employee matters, tax liabilities and ownership or control of client files.

Sellers should ensure that warranties are properly qualified by disclosure and that any indemnities are limited by scope, time and amount where appropriate. Particular care is needed where contractual indemnities are wider than the protection available under the seller’s professional indemnity insurance. Otherwise, the seller may be left with personal exposure even where the relevant professional work was insured at the time it was performed.

Why Early Legal Advice Matters

Many accountancy practice owners focus primarily on valuation and only seek legal advice once heads of terms have already been agreed. By that stage, the commercial framework may already contain assumptions about earn-outs, restrictive covenants, liability allocation, run-off cover, employee transfer and the seller’s post-completion role. By that stage, key assumptions around restrictive covenants, deferred consideration, liability allocation and post-completion obligations may already be embedded in the transaction.

Early legal advice can help identify:

• Overly restrictive non-compete, non-solicitation and non-dealing clauses
• Unbalanced earn-out and clawback arrangements
• Inadequate protection around PI and run-off exposure
• Warranty and indemnity risks that do not align with insurance cover

Addressing these areas at an early stage is usually far more effective than attempting to renegotiate them shortly before completion. In many accountancy practice sales, the most significant financial risks emerge after the deal has completed rather than before it is signed.

Tax structuring should also be considered at an early stage, including whether the transaction is structured as a share sale, asset sale, partnership transfer, LLP transfer or merger. Sellers should take tax advice on capital gains, VAT, employment tax, earn-out treatment and any incorporation or pre-sale restructuring issues. The legal documentation should be prepared alongside that tax advice.

How The Jonathan Lea Network can help

The Jonathan Lea Network advises accountancy practices, professional firms and business owners on sales, acquisitions, mergers and restructures.

We assist with:

• Reviewing and negotiating heads of terms and sale agreements;
• Drafting and negotiating sale and purchase agreement including on restrictive covenants and deferred consideration provisions;
• Advising on goodwill, client retention and liability allocation; 
• Assessing warranty and indemnity exposure in light of PI arrangements; and
• Coordinating with all parties including brokers, accountants, insurers and tax advisers throughout the transaction process.

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. Following an initial discussion, we can provide a clear scope of work, a fee estimate (or fixed fee where appropriate), and confirm any information or documentation we would need to review. VAT is charged at 20%.

Contact Us

We will respond to most enquiries with both an indicative scope of work and a fee estimate, as well as the offer of a complimentary 20-minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.

In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 and £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified)

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. We first need an overview of the background and your issues, together with any significant documents, to provide an indicative scope of work and fee estimate. 

 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.