- A holdback keeps part of the price unpaid after closing, and escrow keeps it with a neutral third party, so money is available if a problem appears.
- The terms of a holdback are set by the sale agreement, so the amount, length and release conditions must be written clearly.
- Without a valid WSIB purchase certificate, the WSIB says it may hold the buyer liable for what the vendor owes up to the sale date.
- A holdback is a backup, not a substitute for checks such as a lien search and a purchase certificate.
After you close on a business, problems sometimes surface: an unpaid bill, a hidden claim, or inventory that is not what the seller described. If you have already paid the seller everything, getting money back can be slow and uncertain.
A holdback is one way to manage that risk. This article explains the basics of holdbacks and escrow, what the agreement should say, and the checks that work alongside them.
What holdbacks and escrow are
A holdback means that part of the purchase price is not paid to the seller on closing. You keep it, or it is held for you, for an agreed period. If a problem covered by the agreement appears, you can claim against that money. If not, it is released to the seller at the end of the period.
Escrow is similar, except a neutral third party holds the money, often a lawyer or trust company, under written instructions. Escrow can feel fairer to both sides because neither one controls the funds while the clock runs.
| Feature | Holdback | Escrow |
|---|---|---|
| Who holds the money | The buyer | A neutral third party |
| Main benefit | Simple, with funds close at hand | Neither side controls the funds |
| Main risk | The seller may worry the buyer will not release it | Needs separate written instructions and may involve a fee |
| Released when | Conditions in the sale agreement are met | Conditions in the escrow terms are met |
What the agreement needs to say
A holdback is only as good as the wording behind it. If the agreement is silent or vague, you may end up arguing about whether you were entitled to keep the money. The details are for your lawyer to draft, but these are the usual terms to settle.
- The amount held back, as a dollar figure or a share of the price
- How long it is held, with a clear release date
- Which problems you can claim for, such as unpaid debts of the seller or inaccurate statements about the business
- How you give notice of a claim and how quickly you must do so
- What happens if the seller disputes the claim
- Whether interest is paid on the funds
- Who gives instructions to the escrow holder, if escrow is used
The more specific the claim process, the less room there is for disagreement later. Sellers will often push for a smaller amount and a shorter period, so expect negotiation.
The problems a holdback is meant to cover
A holdback is most useful for risks you cannot fully measure before closing. One example is a debt the seller owes to the WSIB. The WSIB issues purchase certificates to verify that a company selling, leasing or transferring all or part of a business has WSIB coverage. If the buyer does not obtain a valid certificate, the WSIB says it may hold the buyer liable for all amounts the vendor owes up to the sale date.
The request must be made before the date of sale, and it needs the seller's WSIB account number, the buyer's details, the sale date, the transaction type, the asset list and the purchase agreement. The certificate is valid for 30 days from the issue date printed on it, so if closing does not occur within that period, a new certificate must be requested.
Other common reasons to hold back money include an unresolved dispute with a customer or supplier, uncertainty about inventory, or a tax question that cannot be answered before closing. Whether a given risk is worth a holdback is a negotiation point to discuss with your lawyer and accountant.
Checks to do before you rely on a holdback
A holdback does not remove the need to investigate. Searching for liens is a good example. Ontario's Access Now service lets a buyer search the Personal Property Security Registration system for liens against a seller's assets. The listed fees include $8 for an online response and $8 for a certificate response.
Tax and information issues also deserve attention. If you and the seller want no GST/HST payable on the sale, the section 167 election is made jointly on Form GST44. To use it, the buyer must acquire all or substantially all (at least 90%) of the property needed to carry on the business, not just individual assets. It cannot be used if the seller is a GST/HST registrant and the buyer is not. A holdback should not be a way of leaving a tax question unresolved, so ask your accountant how it affects your deal.
If personal information is shared during due diligence, PIPEDA s. 7.2(1) lets the parties to a prospective business transaction use and disclose it without consent if they have an agreement requiring the recipient to use it solely for purposes related to the transaction, protect it with appropriate safeguards, and return or destroy it if the deal does not proceed. The information must also be necessary to decide whether to proceed and, if so, to complete the deal. This is why non-disclosure agreements usually contain these terms.
What to do next
Talk through your concerns with your lawyer before the offer is finalized, since the holdback terms will be part of the sale agreement. Be ready to explain which risks worry you most, because that guides how much to hold back and for how long.
- List the risks you could not fully check before closing
- Ask your lawyer whether a holdback or escrow suits your deal
- Request the WSIB purchase certificate before the sale date
- Run a lien search on the seller's assets
- Confirm the tax steps with your accountant, including any GST/HST election
- Make sure the release date and claim process are written clearly
Frequently asked questions
How much should be held back?
There is no set amount. It depends on the size of the risks, what you could verify before closing, and what the seller will accept. Your lawyer and accountant can help you judge a sensible figure for your deal.
Does a holdback replace a WSIB purchase certificate?
No. The WSIB says that without a valid certificate it may hold the buyer liable for all amounts the vendor owes up to the sale date. The request must be made before the date of sale, so do it as part of closing preparation.
How long is a WSIB purchase certificate good for?
It is valid for 30 days from the issue date printed on it. If closing does not occur within that period, a new certificate must be requested.
Is escrow better than a holdback?
Neither is better in every case. Escrow puts a neutral party in charge of the funds, which can reassure a seller, while a holdback is simpler. The right choice depends on the deal and how much the two sides trust each other's handling of the money.
Sources
- CRA – Buying a business — canada.ca
- CRA – Buying a business (business registration) — canada.ca
- WSIB – Buying or selling your business — wsib.ca
- Justice Laws – PIPEDA s. 7.2 — Justice Laws (federal)
- Ontario.ca – Register or search on Access Now — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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