Understanding the Meaning of Indemnity Holdback in M&A Transactions

What Is a Seller Holdback and How Does It Work?

Before we dive into the concept of indemnity holdback, let's first understand what a seller holdback is and how it works. When you're about to buy a company, a seller holdback can be a valuable tool to offset the risk of issues arising post-closing, leading to a faster and smoother close.

What Is a Seller Holdback?

A seller holdback is an amount of money that the seller agrees to keep in escrow after the closing of a transaction. This amount serves as a form of security for the buyer, as it can be used to cover any potential indemnification claims or losses that may arise after the deal is finalized.

Why Is a Seller Holdback Important?

A seller holdback is important for several reasons. First, it provides a level of protection for the buyer, as it ensures that the seller has a vested interest in resolving any issues that may arise post-closing. Second, it allows the buyer to offset any losses or damages they may incur as a result of breaches in the seller's representations and warranties.

Examples of Seller Holdback

To better understand how a seller holdback works, let's take a look at a few examples:

• Example 1: In a merger and acquisition (M&A) deal, the buyer and seller agree to a seller holdback of $1 million. This amount will be held in escrow for a specified period of time, typically 12 months. If any issues or claims arise within that period, the buyer can use the holdback amount to cover their losses.
• Example 2: In another M&A transaction, the buyer and seller agree to a seller holdback of 10% of the total purchase price. This holdback amount will be released to the seller after a certain period, usually 18 months, if no claims or issues arise.

How Seller Holdback Works

The process of implementing a seller holdback involves several steps:

1. Agree to a Reasonable Percentage: The buyer and seller must agree on a reasonable percentage of the total purchase price that will be held back as a seller holdback.
2. Decide on a Reasonable Duration: The parties must also determine the duration for which the holdback amount will be kept in escrow. This period can vary depending on the nature of the transaction and the potential risks involved.
3. Set Reasonable Conditions: The terms and conditions for releasing the holdback amount should be clearly defined in the purchase agreement. These conditions may include the absence of any claims or disputes, satisfactory performance of the seller's obligations, and adherence to any non-compete or transition service agreements.
4. Put Seller Holdback in Escrow: The holdback amount is typically held in a separate escrow account, managed by a neutral third party. This ensures that the funds are secure and can be easily accessed if needed.

Indemnity Holdbacks

Now that we have a clear understanding of seller holdbacks, let's focus on indemnity holdbacks. An indemnity holdback is a specific type of seller holdback that is used to protect the buyer against potential losses or damages resulting from breaches of representations and warranties made by the seller.

What Is the Purpose of a Holdback?

The purpose of a holdback, including an indemnity holdback, is to provide the buyer with a measure of protection and recourse in the event that issues or claims arise after the closing of a transaction. By holding back a portion of the purchase price, the buyer can ensure that they have a means to cover any losses or damages they may incur as a result of the seller's actions or representations.

What Is a Holdback in a Transaction?

In a transaction, a holdback refers to a portion of the purchase price that is withheld by the buyer and held in escrow after the closing. This holdback amount serves as a form of security for the buyer, allowing them to offset any losses or damages they may incur as a result of breaches in the seller's representations and warranties.

What Is a Typical Holdback in M&A?

The typical holdback amount in an M&A transaction can vary depending on various factors, such as the size of the deal, the industry, and the specific risks involved. However, a common range for holdback percentages is between 5% and 15% of the total purchase price.

How Do You Calculate Holdback?

The calculation of a holdback amount involves determining the percentage of the total purchase price that will be withheld. This percentage is usually agreed upon by the buyer and seller during the negotiation process. For example, if the total purchase price is $10 million and the agreed holdback percentage is 10%, the holdback amount would be $1 million.