A holdback is the part of the purchase price the buyer does not pay at closing and keeps back, in its own account or in escrow, until the clients who came with the practice have returned and paid. In a CPA practice sale the published broker guides put it between 10% and 40% of the price, most often 20% to 30%: CT Acquisitions describes the standard 2026 structure as 70% to 80% cash at closing and 20% to 30% contingent on client retention over two to three years, and 90% at closing with a 10% holdback when an individual CPA buys with an SBA 7(a) loan. Look-back pricing applies the same test to the price itself. After twelve or twenty-four months the buyer looks back at what the transferred clients paid and the price is recomputed, even when every dollar was paid at closing. An earnout goes further and pays most of the price as a share of collections over three to five years. In California the 90-day client consent rule in 16 CCR 54.3 decides when client files can move, and it should decide when the measurement window starts. What the seller receives at the end is set by five definitions in the purchase agreement: which clients are on the base list, which fees count, how long the window runs, which losses are excluded, and who settles a disagreement over the numbers.
The structures below are as the broker guides that publish them describe them (CT Acquisitions, Accounting Practice Sales, Poe Group Advisors, Berkshire Business Sales), with the Journal of Accountancy, the Treasury regulation on contingent payment sales and the California Board of Accountancy’s practice-sale regulation, each read October 21, 2026 and linked at the end. What the price is before any of this applies is in how much CPA firms sell for; the tax on each deferred dollar is in how the sale of an accounting practice is taxed; and the 90-day notice that starts the clock is in selling confidentially in California.
- 01Holdback: part of the price withheld at closing, by the buyer or in escrow, and released against the fees the transferred clients pay. CT Acquisitions, 2026: 70% to 80% cash at closing and 20% to 30% contingent over two to three years; an individual buyer with SBA financing, 90% and a 10% holdback.
- 02Look-back: the price itself is recomputed after twelve or twenty-four months on collections or billings from the transferred clients. Accounting Practice Sales lists the formulas: dollar for dollar, 50 cents per dollar, no adjustment inside a 10% band, and caps in either direction. With all cash at closing, a shortfall becomes a refund you pay.
- 03Earnout: a down payment, traditionally 20% of the price, then a share of collections for years, traditionally 20% a year for four. The seller carries the retention risk for the whole period, and the Journal of Accountancy warned in 2015 that a large contingency weakens the buyer’s reason to serve the whole client list.
- 04California: client records cannot move until each client consents or 90 days pass without an objection (16 CCR 54.3). Clients who object, and clients the notice never reaches, never transfer. The agreement should say how both count and start the measurement window after the notice period.
- 05Tax: a price that cannot be fixed by the end of the year of sale makes the deal a contingent payment sale, reported on the installment method (Treas. Reg. 15a.453-1(c)). Deferred payments carry imputed interest under IRC 483 unless the agreement states adequate interest.
What is a holdback when you sell a CPA practice?
It protects the buyer against client losses. The asset in a practice sale is a list of clients who are free to leave, and Accounting Practice Sales says as much in its buyer guidance: no person owns the clients, and no one can force them to stay. A buyer who pays the full price at closing carries all of that risk. A holdback moves part of it back to the seller for a defined period, on the theory that the seller’s introductions and presence through the first season decide how many clients give the new owner a try. In the deals we see in California tax practices, the holdback is measured on the first filing season’s collections, which is why the seller’s role through that season is negotiated together with it.
Where the money sits is a separate decision. In an escrow, a holder such as a bank, a trust company or a law firm controls the funds under written instructions and pays them out when the condition is met. In a buyer holdback, the buyer keeps the money, and Fasthoff Law Firm’s July 2026 review of escrows and holdbacks sets out the consequence: the seller takes the buyer’s credit risk, and if the buyer enters bankruptcy before paying, the seller may hold only a general unsecured claim. The protections are a parent guaranty, a letter of credit, a security interest, or a funded account, and Fasthoff notes that an acquisition subsidiary may have little capital of its own after it moves operations or assets to affiliates.
The size of the contingent part depends on the buyer and the size of the deal. Poe Group Advisors says it works competing offers so sellers reach 70% to 100% cash at closing, and that bank financing is widely available for transactions under about $5 million; above that size seller financing, contingent payments and rollover equity are more common, particularly in private equity deals. Poe accepts a contingency where a few very large clients carry the practice or a partner or employee could compete for them.
What a holdback or look-back pays at your retention
Four inputs give the cash at closing, the amount released or refunded after the look-back, and the final price for six structures the broker guides describe. Retention is the fees the transferred clients paid in the first twelve months, as a percentage of what the same clients paid in the twelve months before closing.
Cash at closing
Released to you after the look-back
Final price
Final price as a share of the headline
Headline price $900,000 (1.0x of $900,000 in fees). The buyer pays 80% at closing and holds 20% back. After the window the whole price is recomputed dollar for dollar on what the transferred clients paid, and the holdback absorbs the difference.
Headline price P = fees times the multiple; r = retention, capped at 100% except in the earnout. Whole price repriced: final = P × r, 80% paid at closing. Only that part repriced: final = 0.8P + 0.2P × r (the CT Acquisitions example). 10-point band: final = P × the lower of 1 and r + 0.10. 50 cents per dollar: final = P × (1 − 0.5 × (1 − r)). All cash: P at closing, final = P × r, the difference refunded. Earnout: 0.2P at closing plus 20% of fees × r for four years, assuming the retained fees stay level (the traditional terms described by Accounting Practice Sales). Interest, escrow fees and tax are not included; the agreement’s definitions decide the real number.
How does look-back pricing work?
Accounting Practice Sales describes look-back pricing this way: after a period of time the buyer looks back, determines the collections or billings from the clients who came with the practice, and the sales price is adjusted accordingly. The method does not require seller financing. The seller can receive all cash at closing and then owe a refund if the adjustment at the end of the period is negative, or the buyer can hold part of the price back so the adjustment comes out of money the seller has not yet received. APS describes a twelve-month look-back as one in which the seller guarantees that each client will show up at least once, which is a narrower promise than an earnout that depends on the buyer keeping the clients year after year.
The formula is where look-backs differ. APS lists the variations it sees: a dollar-for-dollar adjustment, which is common; 50 cents for each dollar increased or decreased; an adjustment that applies only after a 10% decrease or increase in actual collections; and caps on the adjustment in either direction. CT Acquisitions describes a further version in which only the deferred part moves: if 90% of the original revenue is retained, the seller receives 90% of the remaining payment. Two offers with the same headline price can pay very different amounts on the same retention, as the next section shows.
A look-back can also move the price up: APS’s variations cover dollars increased as well as decreased, with caps either way. A seller who expects to bring in new work can ask for the upside, or at least for new clients and referrals to be excluded from both sides of the calculation.
The same practice under six structures
Transferred clients who paid $900,000 in the twelve months before closing, priced at 1.0x, under the six structures in the calculator. Retention is measured once, at twelve months; the earnout assumes the retained fees stay level for four years.
| Structure | Cash at closing | Final price at 95% retention | At 88% | At 80% |
|---|---|---|---|---|
| 20% held back, whole price repriced dollar for dollar | $720,000 | $855,000 | $792,000 | $720,000 (holdback fully used) |
| 20% held back, only the held-back part repriced | $720,000 | $891,000 | $878,400 | $864,000 |
| 20% held back, no adjustment inside a 10-point band | $720,000 | $900,000 | $882,000 | $810,000 |
| 20% held back, 50 cents per dollar of fees lost | $720,000 | $877,500 | $846,000 | $810,000 |
| All cash, look-back refund dollar for dollar | $900,000 | $855,000 (refund $45,000) | $792,000 (refund $108,000) | $720,000 (refund $180,000) |
| Earnout, 20% down, 20% of fees a year for four years | $180,000 | $864,000 over four years | $813,600 over four years | $756,000 over four years |
At 95% retention the six structures pay between $855,000 and $900,000 on the same headline. At 80% they pay between $720,000 and $864,000, a spread of $144,000, and the all-cash look-back requires the seller to write a check for $180,000 a year after closing. The earnout looks comparable on the total and is the weakest on timing. Most of it arrives over four years, with no interest paid unless the agreement provides for it, and it falls with every client lost in years two to four, which this table does not show. Among the four holdback structures, repricing only the held-back part protects the seller most and repricing the whole price protects the buyer most. Between them sit the band, the reduced rate per dollar and a cap on the adjustment, all variations APS describes.
How is retention measured, and which lost clients should count?
The retention percentage depends on definitions written before closing. APS warns that if collections are used, everything must be spelled out from the beginning, including whether new clients or referrals count and how collections are applied and accounted for. CT Acquisitions recommends defining retention as the percentage of trailing twelve-month revenue from the acquired clients, measured at months 12, 24 and 36, with the buyer obliged to serve the clients to professional standard and with carve-outs for losses the buyer controls. The table lists what each definition should say.
| Item | What the agreement should define | Why it moves the number |
|---|---|---|
| Base list | A schedule of the transferred clients by name, each with the fees paid in the twelve months before closing, attached at signing | Every later number is a percentage of this one. A base built from billings while retention is measured on collections understates retention by the write-off rate |
| Collected or billed | Fees billed for services in the window and collected within a stated number of days after it | APS notes that both are used. Collections lag the season; a window that closes before the last invoices are paid understates retention |
| Window | Twelve months, or the first filing season through the extension deadline for individual returns, starting after the 90-day notice period | A tax practice earns most of its fees in one season. A window that closes before the extensions are filed leaves out work the clients came back for |
| Fee changes | Whether price increases by the buyer count, and whether a client lost after one counts against you | CT Acquisitions asks that the buyer neither undercharge nor overcharge. Berkshire Business Sales reports buyers running off low-fee individual clients with large price increases |
| New services and new clients | Whether new work for transferred clients and referrals from them are inside or outside the calculation | Berkshire notes that buyers treat new revenue as theirs, while the attrition the seller’s referrals used to replace still counts against the seller |
| Natural attrition | A carve-out for deaths, moves out of the area, retirements and business closures, or an allowance per year | CT Acquisitions cites carve-outs of 5% to 10% a year for normal churn; Berkshire puts natural attrition in an accounting firm at 5% to 15% a year |
| Clients who object or are not reached | Whether clients who object under 16 CCR 54.3, and clients whose notice comes back, leave the base list or count as lost | Their records never transfer. Removing them from the base at the end of the notice period reprices only the clients the buyer received |
| Clients who follow a staff member | Whether a client lost to an employee the buyer kept, and who then left, counts against you | California employees cannot be held by a non-compete or a client non-solicit (see what happens to your staff); after closing their retention is the buyer’s to manage |
| Buyer conduct | Carve-outs for losses after an office move beyond an agreed distance, a change in service or turnaround, or the buyer dropping a class of client | The Journal of Accountancy’s 2016 retention guidance warns against moving the office and changing policies in the first seasons; APS holds that the buyer has almost all of the control over retention |
The California rule needs its own clause in the agreement. Under 16 CCR 54.3 each client receives a written notice asking consent to transfer their records; consent is presumed after 90 days without an objection, and no records move before then. A client who objects gets the records back, and a client the notice cannot reach stays with you for at least four years. You keep each notice and every consent or objection for four years, which makes them the best evidence of who was on the list. Fix the base list at the end of the notice period as the clients whose records transferred, and start the retention clock on that date.
Is an earnout the same as a holdback?
An earnout is the larger and longer version of the same risk transfer. APS describes the traditional terms that many accountants still assume are the only way practices change hands: a down payment of 20% of the estimated price and then 20% of collections each year for the first four years. Berkshire Business Sales describes the history the same way, 20% to 30% down and an earnout. Buyers like the structure because the payments come out of the practice’s own fees and almost all of the retention risk sits with the seller, who by then has little control over the clients’ experience.
The criticism is consistent across the sources. Harry Olson, in the Journal of Accountancy in 2015, described earnouts in which the seller receives 20% or less at closing and buyers who served the top 20% to 30% of the client list and let the rest go. Brannon Poe, in a piece Poe Group updated in August 2026, adds that earnouts keep the seller in the practice longer than a hand-off needs, which tends to start control disputes; that buyers on earnouts lost a higher share of clients than cash buyers in Poe’s experience; and, citing SRS Acquiom data for business sales generally, that about two-thirds of earnout deals give rise to disputes over escrowed funds. Olson wrote that the few large-earnout deals his firm handled were usually structured that way because of problems in the selling firm that ruled out bank financing or made it less attractive to buyers.
Earnouts are still used, and for two reasons the sources accept: a client concentration in which a few accounts carry the practice, and a partner or employee who could take clients. Above $2 million to $3 million in fees, where platforms price on EBITDA, part of the price is commonly paid as an earnout alongside rollover equity, as how much CPA firms sell for sets out. If an earnout is on the table, the definitions above run for four years instead of one.
What to negotiate before you sign
The holdback is negotiated in the letter of intent. These are the terms to settle there, in roughly the order they affect the money.
- What moves, and the limit. Whether retention reprices only the held-back amount or the whole price, and whether your exposure is capped at the holdback. Without a cap, a whole-price look-back can require a refund of money paid to you at closing and already taxed.
- The band and the rate. No adjustment inside a band (APS cites 10%), or 50 cents per dollar of shortfall. Either one absorbs ordinary attrition without a separate carve-out.
- The floor. CT Acquisitions reports walk-away clauses below 50% to 60% retention, under which the buyer stops paying and the seller may refund. Agree on the floor and what happens beneath it in writing; a floor tied to clients who objected or were never reached is one you cannot control.
- The window. Start it when the 90-day notice period ends and close it after the extension season, so one full filing season, its extensions and their collections fall inside.
- The base list and the exclusions. Attach the client schedule at signing. Exclude natural attrition (or allow a percentage a year), clients who object or are not reached under 54.3, and losses that follow buyer decisions on office location, fees or service.
- Reporting and access. A collections report by client, a deadline for the buyer’s final statement, and your right to review the billing records behind it.
- The dispute route. A short objection period and an independent accountant to settle calculation disputes, the route Fasthoff describes for accounting disputes, with contract disputes going to a court or an arbitrator.
- Where the money sits. Escrow with a named holder, or a buyer holdback backed by a guaranty, a letter of credit or a security interest. Keep the retention holdback separate from any escrow that secures indemnity claims, with its own amount and release date, as Fasthoff recommends for funds that secure different obligations.
- Release on the buyer’s own changes. Full release if the buyer resells or merges the practice, moves the office beyond the agreed distance, or stops serving a class of transferred clients before the window closes.
- Interest. Stated interest at or above the applicable federal rate on any amount paid more than a year after closing, which also settles the imputed-interest question below.
Your own covenant belongs in the same discussion. Business and Professions Code 16601 lets a seller of goodwill agree not to carry on a similar business in the area where the business was carried on, for as long as the buyer carries on a like business there. A buyer may ask to set off claims under that covenant or the agreement’s representations against the holdback (Fasthoff lists an earnout offset among a buyer’s recovery sources). Require a claim notice and the same dispute route first.
How is a holdback taxed?
When part of the price depends on retention, the amount you will receive cannot be determined by the end of the year of sale. Treasury Regulation 15a.453-1(c) calls that a contingent payment sale and reports it on the installment method unless you elect out. If the agreement states a maximum price, basis is allocated as if the maximum will be paid, and when a retention adjustment later reduces the maximum, the gross profit ratio is recomputed for the payments received in and after that year. Without a maximum but with a fixed payment period, basis is spread in equal annual amounts over that period; with neither, over 15 years. A holdback with a stated amount and a twelve-month window is the simple case: the headline price is the maximum, and the adjustment reduces it.
Interest is the second point. IRC 483 treats part of a deferred payment as interest when the payment is due more than six months after the sale under a contract with some payment due more than a year after it, and the contract does not state adequate interest; the test rate is the applicable federal rate. A release at month thirteen, an earnout over four years or a two-season look-back meets that test, and the imputed interest is ordinary income to you. Stating interest at or above the applicable federal rate in the agreement avoids the recharacterization and pays you that interest in cash.
Two drafting points keep the character of the payment where it belongs. The holdback should be described as part of the price for the goodwill, adjusted for retained fees, so it is installment gain and not compensation for your transition work; Olson’s 2015 article in the Journal of Accountancy explains why payments recast as deferred compensation cost the seller ordinary rates plus payroll or self-employment tax. And money in escrow that you cannot draw on until a real condition is met is generally not constructively received when it is deposited, as Fasthoff summarizes the rule in Treas. Reg. 1.451-2. A look-back that pays everything at closing and then requires a refund puts the full gain in the closing year and leaves the refund for a later year’s return, which is one more reason to keep the at-risk amount unpaid until it is measured. The reporting forms, the California treatment and a year-by-year model are in how the sale of an accounting practice is taxed and the after-tax proceeds calculator.
What the seller does during the window
The holdback is earned in the first season. The client letters go out after signing, and the Journal of Accountancy’s retention guidance asks that they explain why this buyer was chosen and how long you will stay (templates in letters for selling a CPA practice). Then come introductions to the largest clients in person and your availability for calls through the season. Write your role, hours and pay into the agreement, separate from the price. In the deals we see, the stay runs one season, or two where the look-back does.
How holdbacks work in a sale to WIN
Wilshire Intelligence Network buys established CPA and tax practices across California and pairs each one with a practicing CPA who becomes its owner. The equity capital is committed before we make an offer, so there is no SBA loan and no financing contingency. Our offers pay the majority of the price in cash at closing, with a retention-linked holdback or a seller note where the structure helps both sides, and the letter of intent states the price, the cash at closing and the holdback mechanics, with funding confirmed. The firm keeps its name, its office and its people. You stay two or three seasons at meaningful compensation and introduce your successor client by client, or step back sooner. The first step is one call with our CPA team; we send a written valuation, with terms, within 24 hours of it, and the call commits you to nothing.
Sources
- CT Acquisitions, Accounting Practice Sale: A 2026 Owner’s Guide (modified October 14, 2026): 70% to 80% cash at closing, 20% to 30% contingent over two to three years (20% to 40% in its retention FAQ), the 90% example, walk-away below 50% to 60%, individual buyers at 90% with a 10% holdback, retention definitions and carve-outs of 5% to 10% a year. Read October 21, 2026.
- Accounting Practice Sales, Show Me the Money: How Accounting and Tax Practices are Sold (collection pricing, look-back variations, cash and fixed seller financing), republished by MICPA as Ready to sell? How Accounting Practices are Sold (November 10, 2025), and Who Should Bear the Risk of Client Retention?. Read October 21, 2026.
- Poe Group Advisors, 5 Reasons to Avoid an Earnout When Selling Your Accounting Practice (Brannon Poe, CPA; modified August 20, 2026), including the SRS Acquiom figure on earnout disputes. Berkshire Business Sales and Acquisitions, What is an Earnout in an Accounting or CPA Practice Sale? (April 19, 2023). Read October 21, 2026.
- Journal of Accountancy, Harry L. Olson, Maximize proceeds in accounting firm sales (November 2015) and How to keep clients after an accounting practice sale (September 2016). Read October 21, 2026.
- 16 CCR 54.3, Sale or Transfer of Licensee’s Practice (operative April 1, 2024): written notice, 90-day presumed consent, return of records on objection, retention of unreachable clients’ records and of notices for four years. Business and Professions Code 16601. Read October 21, 2026.
- Treas. Reg. 15a.453-1(c), contingent payment sales (stated maximum selling price, fixed period, 15-year recovery); 26 U.S.C. 483, interest on certain deferred payments. Read October 21, 2026.
- Fasthoff Law Firm, Escrows and Holdbacks in M&A Deals: Funding Post-Closing Obligations (July 6, 2026): escrow control, buyer credit risk in a holdback, separate funds for separate obligations, claim procedures, and the constructive receipt rule in Treas. Reg. 1.451-2. Read October 21, 2026.
This article is general information for California practice owners and is not legal, tax or investment advice. Holdback, look-back and earnout terms, the retention definitions and the tax reporting of contingent payments should be settled with counsel admitted in California and your tax adviser before you sign a letter of intent.
Denis is a practicing tax and accounting professional and the principal of VistaTax, a practice serving individuals and closely held businesses: individual and business tax preparation, tax planning, bookkeeping, financial reporting and payroll. As WIN’s founding CPA he anchors the licensed side of the structure and sits at the table for every transition. More about WIN’s team.