Glossary
Holdback and Escrow in M&A
A holdback is a portion of the purchase price kept back at closing, usually placed in escrow with a third party, and released later once agreed conditions are met. It protects a buyer against problems that surface after the deal closes but originated before it. At Treewalk we do not hold the funds or draft the agreement, but the diligence findings that justify a holdback, and the numbers used to size it, are our work.
First: which holdback do you mean?
This is worth clearing up immediately, because the same word means two different things and they get confused constantly, particularly in construction deals.
| M&A holdback | Construction holdback | |
|---|---|---|
| Also called | Escrow holdback, indemnity escrow | Retainage, lien holdback |
| What it is | Part of the purchase price withheld at close | Part of a contractor’s payment withheld on a project |
| Who holds it | An escrow agent, under the purchase agreement | The project owner or general contractor |
| Governed by | The share or asset purchase agreement | The construction contract and provincial lien legislation |
| Released when | Indemnity period ends, or conditions are met | Substantial completion and the lien period expires |
If you are buying a construction or project-based business, both exist in the same transaction. The target’s balance sheet carries construction holdbacks receivable from its own customers, and your purchase agreement may create an M&A holdback on top. They are unrelated, and treating one as the other distorts both the working capital calculation and the deal structure.
Construction and project-based businesses are a meaningful part of our diligence work. Of the quality of earnings reports we completed last year, at least ten were project-based or construction-based revenue companies using percentage-of-completion methods. In that sector, progress billing, revenue recognition and contract holdbacks stop being peripheral and become the first things we look for, because work in progress is where we most often find that presented revenue does not survive testing.
When a holdback earns its place
A holdback is the right answer when diligence surfaces a risk that is real but not yet quantifiable. Common triggers:
- Unrecorded liabilities. Something the diligence suspects but cannot fully size, such as misclassified contractors or accrued obligations that were never booked.
- Deferred revenue uncertainty. Where the obligation to deliver is unclear, or the balance itself is disputed.
- Inventory and warranty exposure. Obsolescence, or claims that have not yet come in.
- Customer concentration. Where the risk is that a dominant customer leaves shortly after close.
- Working capital true-up. Frequently handled through a dedicated escrow rather than the general indemnity, and sized against the net working capital peg.
- Litigation and environmental matters. Where exposure is known to exist but not yet resolved.
Holdback or earnout? They solve different problems
These get conflated, and the distinction is simple once stated.
A holdback protects against the past. The money is the seller’s unless something that already existed turns out to be wrong. The default is payment.
An earnout pays for the future. The money is not the seller’s unless the business performs. The default is non-payment.
If your concern is that the books may be hiding something, that is a holdback. If your concern is whether growth will materialize, that is an earnout. Using one where the other belongs puts the burden of proof on the wrong party, and sellers in particular should push back hard when a buyer dresses up a valuation gap as an indemnity holdback.
How the amount gets set
There is no standard percentage worth quoting, because the number should follow the specific risks diligence identified rather than a rule of thumb. What matters more than the headline figure:
- What it covers. A general indemnity holdback and a working capital escrow are different instruments and should be separated.
- How long it runs. Long enough for the risk to surface. Tax and regulatory matters typically need longer than operational ones.
- Release mechanics. Whether it releases in tranches or in one payment, and what the seller must do to trigger it.
- Claim threshold. A floor below which the buyer cannot claim, so the escrow is not consumed by trivial items.
- Whether it is the sole remedy. Materially different for a seller than a holdback that sits alongside uncapped liability.
Our role stops at the financial substance: identifying the exposure, quantifying it where the records allow, and recommending that it be dealt with in the structure. The agreement itself, the escrow arrangement and the release conditions are drafted by counsel.
Frequently asked questions
Is a holdback the same as escrow?
Not quite, though the terms get used interchangeably. The holdback is the withheld amount. Escrow is the arrangement holding it, usually with a neutral third party. A holdback can in principle be retained by the buyer directly, but escrow is the norm because it protects both sides.
How long do holdbacks usually last?
Long enough for the risk to appear, which depends on what it covers. A working capital true-up resolves within months of close. Indemnity holdbacks against tax or regulatory exposure run considerably longer.
Can a seller negotiate the holdback down?
Yes, and the best lever is evidence. A holdback exists because a buyer is uncertain. Resolving the uncertainty during diligence, rather than arguing about the percentage, is usually what shrinks it. This is one of the strongest arguments for sell-side preparation before going to market.
Does a holdback show up in the working capital calculation?
The M&A holdback itself is a purchase price mechanism, not a working capital item. Construction holdbacks receivable are a different matter entirely: those are genuine balance sheet assets and belong in the working capital analysis. Conflating the two is a real and costly error on project-based deals.
Where to next
If diligence on your deal has turned up something real but hard to size, a holdback is often the structure that keeps the transaction alive. Our transaction advisory services team quantifies those exposures. Read buy-side due diligence for how they surface, and retainage if your target is a construction or project-based business. To talk through a specific deal, email Avnit Sekhon at avnit.sekhon@treewalk.com.
