Mind Your Business: Retention Clauses

By Steve Michaels

October 2009

Question:  I am in the process of purchasing an answering service and want to put a retention clause in place.  How does a retention clause work?

Answer:  A retention clause states that an account has to be on service with the buyer for a certain amount of time and have made their payments in order to be considered a viable account and included in the purchase price.  I've seen retention clauses anywhere from thirty days to one year, although one year is extreme.

There is a full retention clause where the purchase price of an account is not paid until after certain criteria are met.  Alternately, there is a sliding retention clause where a percentage is paid over time. 

Lastly, there could be a combination of both.  For example, you could have a six-month retention, with the first three months as a full retention and the balance as a sliding retention.  For an account billing $1,000 per month and the buyer paying nine times the billing, the account would have to stay with the buyer for the first three months, and then the seller would receive $3,000 per month for the next three months.

There could be certain stipulations made for full retention, such as no price increases, no DID number changes, or no changes to the level of service.  A retention clause takes some the risk away from the buyer.  No retention means that the buyer is taking all of the risk.  If no changes are planned, then retention is largely a mute point.  However, if the accounts will be moved, staff added, or rates increased, then the seller may object to a retention clause because the seller must take the risk for the buyer's actions.

A buyer wants a retention clause to insure that the accounts being purchased are well-paying accounts that will generate a cash flow into the future.  The longer the retention the better.  The seller doesn't want a retention clause at all, asserting that the accounts are on service, viable, and satisfied; if the buyer wants to come in and make changes, then the buyer should take the risk. 

There are valid points to both arguments, and this is something that is negotiable.  Lately, due to the economy retention clauses are making a comeback.

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.