What is Holdback?
The Short Answer
Holdback explained simply
A holdback is when a buyer keeps a portion of the purchase price after a business sale closes. They do this until certain conditions are met. These conditions are usually tied to things like financial performance, legal issues, or specific deliverables from the seller. It acts as a safety net for the buyer, making sure the seller follows through on their promises or to cover potential problems that might come up after the sale.
Real-World Example
The Software Company Sale
Imagine a software company is sold for $1 million. The buyer agrees to pay $900,000 at closing and hold back $100,000. This $100,000 will be released to the seller if the software achieves a certain user growth target within six months of the sale. If the target isn’t met, the buyer might keep a portion or all of the holdback to cover the shortfall.
Why this matters
Holdbacks protect buyers from unexpected issues after a sale. For sellers, it means they might not get all their money upfront, but it can help close a deal by giving the buyer confidence. It’s a way to share risk and ensure both parties are committed to the post-sale success.
Always clearly define the conditions for releasing the holdback in the purchase agreement. Ambiguity can lead to disputes and delays in payment.
Always clearly define the conditions for releasing the holdback in the purchase agreement. Ambiguity can lead to disputes and delays in payment.
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