When it comes to buying or selling a business, closing the deal doesn’t always mean the end of negotiations. Certain risks may extend beyond the closing date, and that’s where escrow arrangements and holdbacks come into play.
At Hadri Law, we work closely with clients to structure these tools strategically, balancing protection with fairness. Here’s what you need to know.
What Are Escrow and Holdbacks?
Both mechanisms are used to withhold a portion of the purchase price to manage post-closing risks. The difference lies in how and where the funds are held.
- Escrow: Funds are placed in a neutral third-party account (e.g., a law firm’s trust account or an independent escrow agent) and released once certain conditions are met.
- Holdback: The buyer simply withholds a portion of the price and agrees to pay it at a future date, subject to performance or resolution of potential issues.
Why Use Escrow or Holdbacks?
These tools are commonly used to:
- Cover potential indemnity claims related to breaches of representations and warranties
- Protect against tax liabilities, litigation, or undisclosed debts
- Ensure the seller complies with post-closing obligations (e.g., transition support, non-competes)
- Provide a buffer while financial statements or working capital adjustments are finalized
Typical Terms to Negotiate
| Term | What to Consider |
| Amount | Typically 5–15% of the purchase price, depending on the nature of the business |
| Duration | Often 12–24 months post-closing; longer for tax or litigation matters |
| Release Conditions | Can be time-based (automatic release after 12 months) or event-driven (no claims filed) |
| Escrow Agent Fees | Who pays the cost of managing the escrow account |
| Dispute Mechanism | How to resolve disagreements over release of funds |
Seller vs. Buyer Perspective
- Buyers want assurance they can recover losses if undisclosed liabilities arise post-closing.
- Sellers want to minimize the amount and duration of funds held, to maximize certainty and finality.
A well-drafted agreement strikes a balance — offering peace of mind to the buyer without unfairly tying up the seller’s proceeds.
Pro Tip: Reps & Warranties Insurance
For larger deals, representations and warranties (R&W) insurance is sometimes used instead of (or alongside) escrow. It covers specific breaches, giving sellers a cleaner exit while still protecting buyers. We can help you assess whether this is an option for your transaction.
How Hadri Law Can Help
Whether you’re a buyer looking to safeguard your investment or a seller seeking to minimize post-closing uncertainty, Hadri Law can:
- Structure escrow and holdback provisions that protect your interests
- Work with your accountants and escrow agents to ensure clarity
- Resolve disputes efficiently, should they arise
Final Thoughts
Escrow and holdback provisions are essential tools in M&A negotiations. They don’t just protect the deal they build trust. The key is in crafting clear terms suited to your unique risks and goals.
Connect with Hadri Law at 437‑397‑2374 or contact@hadrilaw.com to arrange your free consultation and get the legal support you need.