Holdback

A holdback is a portion of the purchase price that is retained by the buyer (or held in escrow) after closing for a specified period to secure the seller's indemnification obligations or to cover potential purchase price adjustments. Holdbacks typically range from 5–15% of the purchase price and are held for 12–24 months.

Common reasons for holdbacks include: protecting the buyer against post-closing warranty claims, securing working capital adjustments, covering potential tax reassessments disclosed during due diligence, and retaining funds pending resolution of known litigation. At the end of the holdback period, any unclaimed amount is released to the seller.

Holdbacks differ from earn-outs: a holdback is a deferred portion of an agreed purchase price, held as security against known or potential risks; an earn-out is contingent consideration payable only if the business achieves future performance targets.

See also: Escrow, Indemnification, Representations and Warranties, Earn-Out.