By Christine Michaels
Question: In selling part of my business, I accepted a clause that allowed the buyer to hold back $10,000 from the total purchase price with his attorney to verify my accounts. The holdback period is for sixty days after closing. It is now past the sixty-day period, and I still don’t have my money. The buyer and I are disputing how much of the $10,000 should go to me and how much to him. I also have to spend more money on using my attorney to contact the buyer’s attorney to help resolve the dispute. In the future, how do I avoid this mess?
Answer: Our experience has been that some buyers are more comfortable having a holdback period of thirty to ninety days after closing of a business purchase to address this and similar issues. This can include unexpected liens against the business or to verify the customer base. Sometimes this can become a delicate issue to resolve between both buyer and seller – especially if there is any account loss during the holdback period. At times, a holdback is confused with a retention clause, which states that accounts have to remain in service with the buyer for a certain time.
If a seller accepts a holdback clause as part of the condition of the sale, I suggest that the holdback funds should be held by a neutral third party, not the attorneys of either the seller or the buyer. A neutral third party, such as an escrow company or broker, is not influenced by either the buyer or seller and has to abide by the strict terms of the holdback agreement. (In some cases, an escrow company will charge for this service.) I have also observed that usually both buyer and seller find that the neutral third party is more approachable, less intimidating, and more accessible to work with. I recommend this approach.
[From Connection Magazine – Jul/Aug 2010]