Insight

M&A: In a Sale Transaction, Holdbacks Reduce the Seller’s Proceeds

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Most sales of businesses include holdbacks for various reasons.  This is money that the Buyer “holds back” from the Seller to cover any number of cash needs that may arise after the closing that are rightfully the obligation of the Seller.  For instance, the Seller may agree to indemnify the Buyer for any rep and warranty claims made in the 12 months following the closing.  The Buyer will likely require that an amount likely to cover any such claims will be held back, sometimes in escrow and sometimes not.  It is not unusual to see 10%, even up to 20% of a sale price, held back for payment at a future date, usually in a year or less.  Hopefully, for the Seller at least, if no claim is made by the Buyer against the holdback, the Seller ultimately receive this part of the purchase price.  In situations like these, we often recommend the parties purchase Reps and Warranties Insurance, which is a way to avoid or lessen the holdback.

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David Traversi, Partner, Newport (david.traversi@newportllc.com)

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