Definition
A holdback is part of the purchase price that the buyer keeps back at completion and pays to the seller later, once a set period has passed or agreed conditions are met. Unlike escrow, the money stays with the buyer rather than a third party. In the UK a similar arrangement is often called a retention, although retentions are sometimes held in escrow.
Escrow is an arrangement in which an independent third party holds money until agreed conditions are met. In a business sale it keeps part of the price available to cover claims after completion.
Worked example
A fictional buyer pays C$1,500,000 for Northshore Pet Supplies Inc., a fictional Canadian retailer. The agreement says:
- C$1,350,000 is paid at closing
- C$150,000 is held back for 12 months
- the buyer may deduct agreed losses from warranty breaches or a shortfall in the stock count
A physical stock count after closing finds C$20,000 less stock than the seller warranted. The buyer deducts that amount and pays the seller C$130,000 at the end of the year.
Why buyers care
A holdback gives you direct protection: if something the seller promised turns out to be wrong, you recover from money you still hold rather than chasing the seller. It can also be simpler and cheaper than setting up escrow.
Sellers often resist holdbacks because they must trust the buyer to pay, so expect negotiation over the amount, the period and how disputes are settled. Set clear rules in the purchase agreement for what can be deducted, how you must notify the seller and when the balance is due. If part of the price is seller finance, a right to set claims off against that loan can work in a similar way. Take legal advice, and check how any holdback fits with your lender's terms.
Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest after completion. It is also called vendor finance or a seller note.