Often, the entire amount of the purchase price in a business acquisition is not paid at closing. The part of the purchase price to be paid after closing is often referred to as the holdback. The purchaser typically wants to hold back part of the purchase price to be able to fund any losses sustained by the purchaser from the seller’s breaches. Although the most certain way to assure that this can be accomplished is to give the purchaser the unilateral right to set-off the holdback money against losses, well represented sellers will usually not agree to that. An alternative arrangement to use is an escrow to maintain the holdback. A set of procedures is agreed to that lays out what happens to the holdback upon a claim by the purchaser. The escrow agent must be chosen and is typically either the purchaser’s attorney, the seller’s attorney or an independent third-party. Another way to manage the holdback is to provide that a portion of it is released over time to the seller. You should also set forth the procedure that will be used to resolve a dispute over the holdback, such as mediation, arbitration or court. A previous nugget discussed dispute resolution procedures. In any event, in formulating how the holdback will work, there needs to be a balance between giving the purchaser enough protection to assure that it will be able to recover its losses and giving the seller comfort that it will receive its unpaid purchase price.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress
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