Taking Advantage of Holdbacks in Business Purchase Transactions
Updated: Feb 17
Due Diligence in M&A Transactions
Due diligence is an imperative step in any merger or acquisition (M&A) deal as it allows the parties to assess the risks associated with the transaction. Both parties need to understand all aspects of the target company, including financials, legal issues, operational issues, and potential liabilities. This helps ensure that buyers get what they expect and sellers get what they deserve. The purchaser and vendor should also respectively conduct their own due diligence to protect their interests in any potential deal.
Holdback Provisions in Business Purchase Transactions
Regardless of how thoroughly due diligence is conducted, it does not eliminate all the risks associated with purchasing a business. Holdback amounts provide both parties with protection in case anything goes wrong. These amounts are a percentage of the purchase price that is held back from the vendor’s proceeds at closing, to ensure that any post-closing liabilities or obligations are paid. The range and length of time of holdback amounts vary based on the circumstances, though the riskier a transaction the higher and longer the holdback amount. Specifically, buyers want to ensure that they will not be stuck with any unexpected costs. On the other hand, the seller will not be comfortable with the buyer simply holding back an amount. Instead, they will ask that the holdback amount be held by a third-party agent, usually a law firm. This provides the vendor with the security that the amount is available for them in the event the purchaser is subsequently unable or unwilling to make payments.
Holdback provisions, tailored to the details of each transaction, are included in the purchase contract. Due diligence can lead to concerns over the accuracy of the representations made by the seller, the profitability of the business, and the possibility of the existence of verbal promises made to employees or vendors that the seller did not reveal. A holdback provision is drafted to address the specific concerns associated with a particular transaction.
Let Us Help You
When it comes to buying or selling a business, many legal considerations must be taken into account. Whether you are an individual looking to purchase a business or an organization looking to sell one, having the assistance of a law firm can make the process simpler and more efficient. At our law firm, we have the expertise and resources necessary to help you with every step of the transaction. From evaluating potential buyers/sellers to drafting contracts and providing legal advice throughout the process, we can ensure that your transaction is completed in a timely and cost-effective manner. Contact us today for more information about our services for business transactions.
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.