Holdback (escrow)
A holdback is a portion of the purchase price kept back at closing — often in escrow with a lawyer — and released later once agreed conditions are met or a claim period expires. It exists so a buyer has something to recover against if a seller’s representations turn out to be wrong.
Without a holdback, a buyer who discovers an undisclosed liability after closing is left suing a seller who has already been paid and may have distributed the proceeds. The holdback converts that lawsuit into a set-off, which is a materially better position.
What holdbacks typically cover
- Breaches of the seller’s representations and warranties discovered after closing
- Working capital or inventory that turns out lower than the agreed target
- Tax, payroll or regulatory liabilities that surface post-closing
- Specific known risks — a pending claim, an unresolved consent, a disputed account
Holdback versus earn-out
They are often confused but do opposite jobs. A holdback is money the seller has earned and expects to receive unless something goes wrong. An earn-out is money the seller has not yet earned and receives only if the business performs. A seller should treat a holdback as probable and an earn-out as possible.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryEscrow and Holdbacks in an Ontario Business Sale
- 03Treadstone LawLegal commentaryBuying & Selling a Business
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