Escrow and Holdbacks
Also known as: Escrow, Holdback, Indemnity Escrow
An escrow or holdback sets aside part of the purchase price after closing to cover potential claims, such as breaches of the seller’s representations.
An escrow or holdback is a portion of the purchase price, commonly 5 to 15 percent, that is not paid to the seller at closing. It is held by a third party or retained by the buyer for a defined period to cover potential post-closing claims.
What it protects against
If the seller’s representations and warranties turn out to be untrue, or a working capital true-up favors the buyer, the escrow is the first place the buyer looks to be made whole, without having to chase the seller for payment.
Release and disputes
The escrow is released to the seller once the claim period ends, assuming no claims. The size, duration, and claim terms are all negotiated, and they often move in tandem with whether the deal carries representations and warranties insurance.