OnwardLearn · Selling · Step 9. Prepare to close
Money held back at closing, and why
The short version
- Part of the price is sometimes held back at closing, instead of paid to you, for a set period.
- It covers claims if something you promised in the purchase agreement turns out wrong.
- The money is usually held by a neutral third party, called an escrow agent, or kept by the buyer under agreed terms.
- Negotiate how much, for how long and what it can be used for.
- If no claims are made, it is released to you when the period ends.
What a holdback is
A holdback, or escrow, sets aside part of the price at closing. It gives the buyer a source of money if a problem appears after closing that you are responsible for under the purchase agreement.
When the period ends and no claims are made, the money is paid to you.
Common reasons for a holdback
- Claims under the purchase agreement. For example, an undisclosed debt or a statement about the business that proved wrong. Lesson 9.5 covers these.
- Working capital. If the cash, receivables and inventory left in the business at closing differ from the agreed amount, the price is adjusted after closing. Part of the price may be held until the final number is settled.
- A specific known risk. A pending dispute or a customer contract up for renewal.
- A rebate agreement, for buyers using an SBA loan. Lesson 8.5 covers this.
What to negotiate
- How much. The smaller, the better for you.
- How long. Long enough to cover the risk, and no longer.
- What it covers. Only claims defined in the purchase agreement.
- Who holds it. A neutral escrow agent is usually safer for you than the buyer.
- How claims work. How a claim is made, how you can dispute it and how disputes are settled.
- Release. When the money is paid out, and whether some is released partway through.
Count it as money later
Money held back is not money in hand. When you compare offers or plan your finances, count it separately, as money you expect to receive later. Lesson 3.7 covers the math.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- For your M&A attorney: "How much is being held back, for how long and for what?" Listen for: each purpose named, with the amount and the release date.
- For your M&A attorney: "How would a claim against the holdback work, and how can I dispute one?" Listen for: a clear process, with a neutral way to settle disagreements.
- For your accountant: "How is money held back taxed, and when?" Listen for: whether you are taxed at closing or when the money is released.
This names the question. Your CPA, your M&A attorney and your lender answer it for your situation.
When you’re ready
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