A holdback (also called an escrow holdback or deferred payment) is a portion of the purchase price — typically 5 to 15 percent — withheld from the seller at closing and held in trust (or by the buyer's lawyer) for a defined period, usually 12 to 24 months. The holdback is released to the seller at the end of the holdback period only if no indemnification claims have been made by the buyer under the purchase agreement. If the buyer discovers a breach of a representation or warranty (for example, undisclosed tax liability or a misrepresented customer contract), they can set off the value of the claim against the holdback rather than suing the seller for cash. Holdbacks are one of the most effective buyer protections in Canadian SMB transactions because they create a tangible incentive for sellers to provide accurate information during due diligence and in the purchase agreement's representations. From the seller's perspective, a holdback delays full receipt of proceeds and represents risk if the buyer makes spurious claims. Well-drafted holdback provisions specify: the amount, the release mechanism, the dispute resolution process, what claims qualify for set-off, and whether interest accrues on the holdback balance during the period.
A buyer acquires a New Westminster gym for $980,000. The PSA includes a $98,000 holdback (10%) for 18 months. Nine months after closing, the buyer discovers that two supplier contracts were terminated by the supplier prior to closing — a breach of representations. The buyer deducts $35,000 from the holdback to cover early cancellation penalties and additional procurement costs.
Deal structure decisions have major tax and liability consequences in Canada. Ali works with your accountant and lawyer to make sure the structure that closes also protects you.