Glossary
Holdback
On this page5 sections
What it is
A holdback is a portion of the purchase price that is not paid at closing. It is released later — on a date, on conditions being met, or on defined exposures having passed.
Its purpose is to fund a promise. An indemnity on its own is a claim against whoever the seller turns out to be in two years. A holdback is money that has not left your side of the table.
Holdback or escrow?
A holdback you retain yourself is simplest and creates the worst dynamic: you are sitting on money the seller believes is theirs, and you decide when to release it. An escrow places the same money with a third party under agreed terms, which costs a little and removes the argument. For anything material, escrow is usually the better structure.
How to size it
Not with a percentage. Work from the exposures diligence actually found, and for each one ask what the plausible worst case is in money, when it would surface, and whether you could attribute it to the seller. Add them up.
A number derived from identified risks is also far easier to defend across the table than a percentage you cannot explain — which is the practical reason to do it this way as well as the analytical one.
Getting the mechanics right
Most disputes about a holdback are about the release process rather than whether the risk was real. Settle in the drafting: what triggers a claim and by when it must be notified, what happens to disputed amounts, whether release is staged by exposure type, and who earns the interest.
Staged release is usually easier to agree than one long date over everything — a receivables holdback can release early while a tax or environmental holdback runs to match its own clock [1] .
What to do with it
Put the principle into the letter of intent before diligence begins, so it is normal process rather than a late tactic. See escrow, holdbacks and indemnities and the letter of intent.
Frequently asked questions
How much should I hold back?
Reason it from the exposures diligence actually found rather than from a percentage. For each one, ask what the plausible worst case is in money, when it would surface, and whether you could attribute it to the seller. A figure derived from identified risks is also far easier to defend across the table than one you cannot explain.
Should the money sit with me or with an escrow agent?
For anything material, an escrow agent. A holdback you retain yourself creates the worst dynamic in the deal: you are sitting on money the seller believes is theirs, and you decide when to release it. An escrow costs a little and removes the argument.
How long should a holdback run?
Long enough for the risk to surface, which means the period should follow the exposure rather than a default. Tax exposure runs until the relevant assessment period closes; a customer risk usually shows within a renewal cycle; environmental can take longer than either. Staged release by exposure type is usually easier to agree than one long date over everything.
Sources cited on this page
Every mutable number on this page — program caps, tax rules, thresholds, filing deadlines — traces to one of these primary sources. Rules change; check the source before you act on the number.
- 1 NYS Department of Taxation and Finance. Tax Bulletin ST-360: Purchasers' Obligations to Pay Sales Taxes (Bulk Sales). https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/purchasers_obligations_to_pay_sales_taxes.htm
Educational only — not legal, tax, lending, or investment advice. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. See the editorial policy and methodology for how sourcing and review work.