Escrow and holdback
A portion of the purchase price kept back at closing to cover claims that arise afterwards, released once the claim period passes.
Also called: Indemnity escrow · Purchase price holdback
Escrow is the buyer's practical remedy. Representations and warranties give them the right to be compensated if something turns out to be untrue, but chasing a seller who has already spent the money is slow and uncertain. So a defined amount is held — with a third-party escrow agent, or simply withheld by the buyer — for a defined period, and any valid claim is paid from it first.
The negotiation covers four variables: how much, for how long, what it covers, and whether it is the buyer's only remedy. Amounts and periods vary by deal size and risk profile. A cap that makes the escrow the exclusive remedy is materially better for the seller than one that leaves them personally exposed beyond it, and it is worth trading other points to get there.
A separate holdback often exists for a specific known issue — an unresolved tax position, a contract awaiting consent, a receivable in dispute. Those are usually released on the specific event rather than on a calendar date, and the release condition should be written so that it can actually be satisfied.
Where sellers get caught
- Agreeing an escrow with no cap on liability beyond it.
- Vague release conditions on a specific holdback, which can leave money stranded indefinitely.
- Forgetting that escrowed funds are still taxable to you in most structures even before release — confirm treatment with your accountant.
Common questions
How long is money usually held?
Commonly tied to the survival period of the general representations, often around twelve to twenty-four months, with longer periods for tax and other fundamental matters. It is negotiated, not fixed.
Can I get interest on escrowed funds?
Often yes, if the escrow is held in an interest-bearing account. Who receives the interest is negotiable and worth raising, since it is usually conceded easily.
Related terms
Representations and warranties
Statements of fact about the business made by the seller in the purchase agreement, which the buyer relies on and can claim against if untrue.
Indemnification
The contractual obligation to compensate the other party for losses arising from breaches of the agreement or from specified known risks.
Representations and warranties insurance
An insurance policy covering losses from breaches of the seller's representations, allowing a smaller escrow and a cleaner exit.
Earnout
Part of the purchase price paid only if the business hits agreed performance targets after closing.
Guides that use this term
Where escrow and holdback comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.