Keeping Sale Proceeds at Work Instead of in Escrow

The situation

The plan looked simple on paper. Mihaela, Parminder and Ranjit had spent almost two decades building a network of physiotherapy and rehabilitation clinics across northern Ontario, starting from a single storefront near Elliot Lake and expanding, one small community at a time, into a dozen or so locations serving patients referred through local hospitals and family practices. Mihaela had come out of hospital administration, Ranjit's background was in physiotherapy itself, and between them they had built something a national consolidator now wanted to fold into a larger platform. After months of informal talks, the three had settled on the broad strokes of a sale in the range of thirty to fifty million dollars. One purchase agreement, one closing date, everyone walks away together.

Except the three of them were not, in fact, walking away together. Mihaela wanted a clean exit at closing; she was ready to retire and had no interest in staying involved with the business in any capacity. Parminder, who had run day-to-day operations for years and knew every clinic manager by name, agreed to stay on for a two-year transition under contract to the buyer, helping integrate the clinics into the larger network. Ranjit wanted something different again: he asked to roll a portion of his proceeds into equity in the buyer's platform rather than cashing out entirely, betting that the consolidation strategy would keep paying off after this deal closed.

None of that was unusual on its own. Staggered departures and partial rollover equity show up often enough in a deal of this size, and buyers are generally used to accommodating them. The trouble started when the buyer's first term sheet arrived with a standard security mechanism attached: ten percent of the purchase price, held by an independent escrow agent for eighteen months, to secure any indemnification claims that surfaced after closing. It was the kind of clause that gets initialed without much discussion in a great many deals, because it looks like boilerplate.

Here it was not boilerplate, because the three sellers were not going to be in the same position, at the same time, when that eighteen-month window eventually closed. Mihaela would be long gone and had no appetite for monitoring a claims process from retirement. Parminder would still be inside the business, potentially fielding the very operational issues that could give rise to a claim in the first place, an awkward position for someone whose own money was sitting in the same pot. Ranjit's rollover equity meant part of his return was already tied to the buyer's post-closing performance, entirely separate from the escrow question. A single frozen pot of money, divided by formula whenever claims eventually resolved, was heading toward becoming a source of friction between three people who had otherwise agreed on almost everything about this sale.

The risk we had to size

Before we could propose an alternative to escrow, we needed to know what the eighteen-month window was actually protecting against, and how likely those risks were to materialize. A multi-site clinic network carries a specific set of exposures: billing and coding practices under provincial health insurance rules and private benefit plans, employment claims from a workforce spread across several small northern communities, and lease obligations tied to clinic locations that varied widely in condition, landlord, and remaining term. We went through the representations and warranties schedule line by line with the sellers, category by category, asking what a realistic claim would actually look like if one arose at all, rather than accepting the buyer's round percentage as the natural starting point.

The early term sheet from the buyer's counsel had proposed a broad set-off right, allowing the buyer to withhold funds against essentially any breach of any representation in the agreement, not just the indemnification-specific claims that are the normal subject of a holdback or escrow. Read narrowly, that clause would have let the buyer treat almost any post-closing disagreement as grounds to freeze part of the purchase price. It was a mistake on the buyer's side, likely a drafting shortcut rather than a deliberate strategy, but it became the turning point for the file. A set-off right that broad implicitly conceded something useful to us: that the buyer was comfortable managing the security internally, through its own books and its own accounting, rather than insisting on a rigid, arm's-length escrow mechanism run by a third party. Once we saw that concession sitting in their own draft, we had the opening we needed. If the buyer was already prepared to hold the funds itself and manage claims against them directly, there was no principled reason it also needed an independent escrow agent sitting in the middle, adding cost and rigidity without adding any real protection.

We sized the realistic exposure at a fraction of the ten percent the buyer had proposed to hold back. Billing and coding compliance, based on the clinics' audit history over the preceding several years, looked low-probability and, where issues had arisen before, minor and quickly corrected. Employment exposure was the more credible category, given the size of the workforce and the disruption a transition of this scale tends to cause, but even a generous estimate of potential claims came in well under the amount the buyer had proposed to hold back. Lease exposure was smaller still, since most locations were on straightforward commercial terms with no unusual assignment restrictions. That category-by-category analysis let us argue for a smaller holdback, structured differently, without giving the buyer any real reason to think its protection had weakened.

What we did

1. Quantified the realistic claims exposure by category, going back three fiscal years through the clinics' own billing audit history, employment records, and lease files rather than accepting a generic percentage, so the negotiation over holdback size was grounded in specific, defensible figures instead of the buyer's standard-form assumption about what a company this size ought to hold back regardless of its actual claims history.
2. Flagged the buyer's overly broad set-off language as a drafting shortcut rather than a considered position, and raised it directly with the buyer's counsel in a collaborative rather than accusatory way, in a manner that let us argue a buyer-held structure, properly limited, was already implicit in their own first draft rather than a concession we were asking them to make from scratch.
3. Proposed a holdback note in place of third-party escrow, under which the buyer retained a defined, smaller portion of the price as an interest-bearing obligation recorded on its own books, rather than parking a larger sum, un-invested, with an outside escrow agent for a year and a half at the sellers' expense in lost return on money that was, after all, already theirs.
4. Negotiated the set-off right down to three named categories, tying it specifically to breaches of the health-billing, employment, and lease representations rather than the open-ended language in the first draft, which would have let the buyer treat almost any post-closing disagreement, including ordinary operational friction during the transition, as grounds to withhold funds, so the holdback could no longer be used to pressure the sellers over unrelated disputes.
5. Built payout dates around each seller's actual exit instead of a single release date for all three, so Mihaela's portion released on the standard indemnity schedule regardless of the others' status, Parminder's tracked the milestones in her two-year transition contract, and Ranjit's rollover portion was carved out of the holdback calculation entirely, since it was already governed separately by the equity subscription documents.
6. Set a hard cap on aggregate set-off at a figure tied directly to our exposure analysis rather than the buyer's initial percentage, so no single claim, or combination of claims across categories, could ever consume more than that defined ceiling, leaving the remainder to release on schedule regardless, which gave all three sellers a concrete number to plan their own post-closing finances around rather than an open-ended risk.
7. Drafted a claims notice and response procedure into the note itself, requiring the buyer to give written notice within a fixed number of days of any claim it wanted to set off, and extending that notice to all three sellers, not only whichever one remained active in the business day to day, so no one seller could be outmaneuvered by a claim raised after their own departure.
8. Reviewed the final structure individually with each seller in separate meetings rather than a single group session, walking Mihaela, Parminder and Ranjit through exactly what happened to their own portion of the holdback under every plausible scenario before anyone signed, so agreement to the final terms was genuinely informed rather than assumed from the group's earlier consensus on price alone.

The outcome

The deal closed with a holdback note in place of the escrow account the buyer's first draft had proposed. The amount held back was smaller than the buyer's initial ask, tied to a defensible category-by-category estimate of realistic claims rather than a round ten percent, and it accrued interest for the sellers' benefit instead of sitting idle with a third-party agent for a year and a half. The buyer accepted the smaller figure once it saw the exposure analysis, and accepted the narrower set-off categories once it recognized, from its own earlier draft, that it had never really needed the broader language in the first place.

Nothing was given up to get there. The buyer retained meaningful protection against the categories of claim that actually mattered for a clinic business of this kind, and the set-off right, while considerably narrower than first proposed, still let the buyer act quickly if a genuine issue surfaced during the holdback period. What changed was who controlled the timing and the mechanics of release, and how clearly each seller's individual position was addressed inside a single agreement that had started out treating all three as one undifferentiated group.

The eighteen-month period passed without a single claim being asserted against the holdback. Mihaela's portion released on schedule with no involvement required from her at all, exactly as she had wanted at the outset. Parminder's two-year transition contract with the buyer ran its course on its own separate timeline. Ranjit's rollover equity remained tied to the buyer's ongoing performance, as intended from the start. Because the structure had been built around three different exits rather than one shared pot, no dispute ever arose between the sellers about how the money should be divided when claims never materialized; there was nothing left to argue over by the time each portion came due, because each portion had already gone to the person it was always meant for.

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