What is a holdback or escrow in a business sale in British Columbia?
This answer covers the law of British Columbia.
A holdback is a portion of the purchase price that is set aside rather than paid out in full at closing. Escrow is similar, but the money is held by a neutral third party rather than the buyer; how it works depends on the agreement and is worth confirming with a lawyer.
Buyers use these tools because some problems surface only after closing. A buyer who skips a PST clearance certificate can be liable for an amount equal to the seller's outstanding PST, and employees who stay generally carry their past service with them, so the buyer takes on the seller's obligations to them, unless the seller ended their employment before the sale or a trustee in bankruptcy sold the business as a going concern. Whether a holdback or escrow suits your deal depends on your situation, so it is worth confirming with a lawyer.
The details of any holdback or escrow depend on your deal, so it is worth going over them with a lawyer. As a reference point, a court claim generally must start within 2 years after it is discovered, and a signed written acknowledgment of liability can extend that period. A lawyer can help you write release and claim terms clearly.
Key takeaways
- A holdback is price the buyer keeps back at closing, while escrow means a neutral third party holds the money.
- Buyers use them because problems such as unpaid PST can surface after closing.
- How a holdback or escrow is set up depends on your situation, so it is worth confirming with a lawyer.
- A court claim generally must start within 2 years after it is discovered, and a signed written acknowledgment of liability can extend that period.