Escrow and retention when you sell

When you sell a business, you rarely receive every pound or dollar of the headline price on completion day. A slice is often held back for a period afterwards. Buyers call this escrow, retention or a holdback. The names vary, but the idea is the same: some of your money sits aside until agreed conditions are met, or until a claim window closes.

In this article we explain what escrow and retention usually cover, why buyers ask for them, how long funds are typically held, what releases the money, and how to keep the amount proportionate.

What escrow and retention mean

Escrow usually means a portion of the purchase price is paid into a third-party account — often a solicitor's or escrow agent's account — rather than straight to you. Retention can mean the same thing, or that the buyer simply withholds the amount and pays it later under the sale agreement. Either way, you have sold the shares, but part of the consideration is not yet in your pocket. The sale documents should say how much is held, who holds it, what interest if any accrues, and the rules for release or deduction.

Why buyers ask for it

Buyers use a holdback as security for warranty and indemnity claims, for adjustments after completion accounts are finalised, or for specific risks spotted in diligence — tax, customer contracts, litigation or regulatory items. Recovering money after you have been paid in full can be slow. Holding a defined sum for a defined period covers that risk without asking you for a personal guarantee of the warranties.

Typical holdbacks

There is no single market rule. In many SME share sales the held amount is a modest percentage of the price, sized to the warranty package and any known issues rather than to the whole enterprise value. Larger holdbacks tend to appear where diligence has flagged something material. What matters more than the label is whether the figure matches a real risk — and whether the rest of the price is paid cleanly on completion.

How long the money is held

Hold periods often track the general warranty claim window, commonly around twelve to twenty-four months for trading warranties, with longer periods for tax or title. Some deals release the escrow in stages — for example half after twelve months if no claim is outstanding, and the balance later. A shorter, staged release is usually better for you than an open-ended pot that sits until every claim period expires.

What releases the funds

Clear release mechanics protect both sides. Typically the money is paid to you automatically on the release date unless the buyer has given written notice of a claim in the agreed form, and only then can a matching amount stay held while the claim is resolved. Vague wording that lets the buyer delay payment without a proper claim notice is a common trap. Your solicitor should insist on objective triggers, notice requirements and a process for resolving disputed amounts.

How escrow differs from an earn-out

An earn-out is extra consideration that depends on future performance after you sell. Escrow and retention are usually money you have already earned under the agreed price, temporarily held against claims or adjustments. Mixing the two confuses the deal: one is contingent upside, the other is security for risk. You can have both in one transaction, but they should be negotiated as separate workstreams with their own amounts, timelines and release tests.

Questions to ask early

Raise the holdback before you fixate on the headline number:

• How much of the price will be held, and is it escrow with a third party or a simple retention by the buyer?
• What risks is the holdback meant to cover — general warranties, specific indemnities, completion accounts, or something else?
• How long will funds be held, and will any of it release in stages if no claim is outstanding?
• What exact notice and evidence must the buyer give to stop an automatic release?
• Does interest accrue on the held sum, and who receives it?

Keep the held amount proportionate

A holdback should reflect a realistic claim risk, not become a second negotiation of the price. Push for a figure that sits sensibly against the warranty package, ask whether warranty and indemnity insurance could shrink or replace it, and favour staged releases over a single late date. If one diligence issue is driving a larger retention, ring-fence that issue with a capped indemnity and a shorter clock where you can. Organised disclosure and clean financials often do more to reduce holdbacks than hard bargaining alone.

How we approach this

When we buy a business, we favour clear, proportionate holdbacks with defined release dates rather than open-ended retentions. We want owners to understand exactly how much sits aside, why, and when it comes across if no claim arises. If you are thinking about a sale and want to talk through how price, escrow and claim periods might fit together, a short, confidential call is a sensible first step, with no obligation either way.