Holdback (price retention)

A holdback is a portion of the acquisition price that the buyer keeps back temporarily instead of paying it at closing, in order to secure itself against certain identified risks. Unlike an Escrow, where the funds are placed with a third-party agent, the holdback stays in the buyer's hands, which will release the sum to the seller only at the end of an agreed period and provided no adverse event has materialised.

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The holdback also differs from an Earn-out: the latter is an additional price conditioned on the future performance of the business, whereas the holdback is a mere retention of security on an already fixed price. It most often serves to cover the possible triggering of the Asset and liability warranty or the settlement of a specific dispute known at the time of the transaction.

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Concretely, on a price of 10 MCHF, the buyer retains 0.8 MCHF for eighteen months to cover a pending tax dispute. If no reassessment arises, the sum is paid to the seller at the end of the period; failing that, it is drawn down to the extent of the loss.

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Its negotiation covers the amount retained, the duration and the release conditions. For the seller, a holdback held by the buyer carries a higher recovery risk than an independent escrow, which makes it a point of attention when structuring a sale supported by mergers and acquisitions advisory.