When a buyer quotes a price, ask how much you'll receive at closing. The total can combine closing cash, withheld proceeds and conditional future payments. Pull them apart, and find out who would hold any proposed escrow.
You need a payment schedule that shows what's available at closing and what conditions attach to later proceeds. In a fictional simplified example, a $5 million total comprising $3.75 million closing cash, a $750,000 holdback and a $500,000 contingent earnout leaves $1.25 million subject to later conditions. Assume no other adjustments, expenses or payoffs; the agreed documents determine the actual payments.
Reviewing an LOI or purchase agreement with earnout or holdback provisions? Get experienced M&A counsel before signing. Request a consultation →
Test the pathway to payment before accepting the headline
In the LifeWise episode, Alex describes earnout provisions that often carry hidden obstacles and moving goalposts, and he asks whether the outcome is realistically attainable and, if so, what pathway gets there. Take those questions to the operating covenants, calculation records and release conditions in your draft. An earnout metric and an indemnity holdback need different evidence before you see the money.
The video starts at 10:19 of the June 25, 2025 LifeWise with Cindy Jennings episode. The passage addresses earnout attainability; compare that question with the separate release conditions for your holdback.
1 How Is the Holdback Funded and Released?
Read a proposed holdback alongside the risks it secures, the claim procedure and the exposure you keep after it's released. The right amount and period depend on the deal. Find out early whether the buyer keeps the proceeds or funds a separate escrow. Those two setups raise different custody and recovery questions.
A holdback is conceptually simple. The buyer withholds an agreed amount from closing proceeds. Some agreements place it with a third-party escrow agent; others leave it with the buyer. Before you count the amount as secured, confirm who holds it, how it was funded and who sends the release instruction. For an escrow securing representation or warranty claims, the buyer must follow the agreed claim procedure. Read the notice requirements and the instructions for releasing the undisputed balance. If the buyer keeps the money, the agreement needs its own payment and enforcement terms.
| Holdback Feature | Term to verify in the documents | Seller's Goal |
|---|---|---|
| Amount | Agreed amount and funding evidence | Does the amount fit the identified risks and the exposure you keep? |
| Duration | Agreed claim and release dates | Line up release dates with survival periods, notice rules and the handling of unresolved claims |
| Deductible (basket) | Agreed threshold and deductible or tipping-basket treatment | Check how the threshold applies and which claims are excepted |
| Indemnification cap | Agreed cap, scope and exceptions | Negotiate the recovery limit for covered claims and identify exceptions |
| Claim timeliness | Check the notice deadline and required claim detail | Require buyer to assert specific claims promptly, not park vague notices |
Why the indemnification cap matters as much as the holdback amount
The withheld amount and the limit of liability answer different questions. Check whether escrow is an exclusive source of recovery, which parties have liability and which exceptions preserve other remedies. A negotiated cap may cover only specified claims. Have counsel read the cap together with the survival, fraud, tax and other carveouts. The escrow balance may not end your exposure.
Negotiating the indemnification and escrow provisions in your purchase agreement? These terms determine your actual exposure post-closing. Request a consultation →
2 The Earnout: Payment for Future Performance
An earnout makes additional purchase consideration contingent on agreed financial performance or milestones after closing. Its value depends on the metric, the calculation rules, the operating commitments and the payment obligation. Ask the buyer how it plans to integrate the business, then test each provision against that plan before you put any value on the headline earnout amount.
Terms that define the earnout
- ●Metric: Revenue, gross profit, earnings before interest, taxes, depreciation and amortization (EBITDA), or an agreed operational milestone
- ●Period: Negotiated start and end dates, with rules for partial periods
- ●Structure: Threshold (minimum to earn anything), target (full earnout), stretch (bonus)
- ●Measurement: Annual, quarterly, or cumulative over the earnout period
- ●Payment: Cash, stock, or combination
Drafting risks that can reduce an earnout if the contract allows them
- ✗If the buyer folds the business into a larger entity, the earnout metric may be hard to measure separately
- ✗If the contract lets the buyer change accounting methods, the metric may be calculated differently than you assumed
- ✗If new overhead or intercompany costs can be allocated to the acquired business, they may reduce the measured result
- ✗If nothing requires the buyer to support the business, it may put resources elsewhere
- ✗If key people can be moved or removed, the drivers of the result may change
Define the earnout duties and dispute forum
Separate a calculation dispute from a claim about how the buyer operated the business. An accountant’s assignment should identify the calculations and accounting questions it may decide, with a separate route for covenant or other legal claims. The Delaware Court of Chancery’s September 4, 2024 Fortis Advisors opinion illustrates the significance of the specific efforts covenant the parties negotiated. It supplies a drafting lesson, not a universal earnout obligation or a prediction about another dispute.
Operational autonomy covenant
Specify the operating commitments the parties actually agree to, including any restrictions on integration, staffing, pricing or resource allocation. Define the changes the buyer may make and what happens if it breaches. Write the agreed commitments into the purchase agreement so counsel can check the duty and remedy against the final terms.
Defined accounting methodology
Agree on the metric, accounting hierarchy and specific adjustments. Have the accountant test a sample calculation using the proposed definitions. Spell out any departure from historical practice so both sides can see its effect before signing.
Independent accountant mechanism
If buyer and seller dispute the earnout calculation, an agreed accountant can address the calculation questions assigned to it. Identify the appointment process, information rights and limits of authority, while preserving the chosen forum for legal claims.
Reporting rights
Negotiate the reports, supporting records and access needed to test each calculation. State when they are due, who receives them and how record-access problems affect the objection process. Verify that these rights appear in the executed agreement.
Earnout terms in your LOI? The language that decides whether you collect sits in the purchase agreement, so plan for it before you sign the LOI. Request a consultation →
3 Holdback vs. Earnout: At a Glance
| Dimension | Holdback | Earnout |
|---|---|---|
| Purpose | Protect buyer from seller's past liabilities | Pay seller for future business performance |
| Certainty of recovery | Depends on custody, release conditions and unresolved claims | Uncertain: depends on performance and on what the contract lets the buyer do |
| Trigger for non-payment | Valid indemnification claim by buyer | Result under the agreed formula, subject to covenants and remedies |
| Dispute mechanism | Claim/objection process per purchase agreement | Contractual calculation process and separate forum for legal claims |
| Negotiated amount | Agreed amount and funding evidence | Agreed formula, threshold and payment cap, if any |
| Seller's influence post-closing | Timely objections, claim defense and release enforcement | Depends on the seller’s agreed role and contractual information rights |
Which M&A Advisor Negotiates Escrow Holdback and Earnout Terms for a Seller?
The seller’s M&A counsel addresses payment duties, release conditions, operating covenants and remedies in the transaction documents. The accountant tests the financial definitions and the calculation. Decide who does which job up front. If an escrow agent is involved, make sure its instructions match the purchase agreement.
Selling your business and trying to maximize your net proceeds after holdback and earnout provisions? Request a deal assessment. Request a consultation →
Build the closing and deferred-payment schedule
List the amount paid at closing, the amount withheld, the earnout formula and any separate seller note. For each line identify the payer, the recipient, the due event and the supporting document. Read that schedule beside the funds flow. A headline total can combine amounts with very different conditions and collection risks.
Check whether one claim can delay another payment
Have counsel review the setoff, cross-default and reservation provisions. A buyer may propose using an asserted indemnity claim to reduce an earnout or note payment. Settle how a disputed claim is treated while the parties resolve it, and whether the undisputed balance must still be paid. Then make sure the purchase agreement, escrow instructions and any note give the same answer.
Assign evidence for release
Identify the reports or notices that start each review period. For escrow, check who sends the release instruction and whether a joint instruction or final determination is required. For an earnout, identify who prepares the calculation and supplies the records. Keep a copy of each notice and record its actual delivery under the contract.
Prepare the dispute route before signing
Separate a disagreement about arithmetic from a claim that the buyer breached an operating covenant. State which questions the accountant may decide and which belong in the selected legal forum. Check appointment procedures, information access and fee allocation. Read each one in the proposed agreement.
Bring the LOI, the current purchase agreement and any proposed escrow instructions to counsel. Tell counsel what operational changes the buyer intends and which financial records exist to measure the earnout. With those in hand, counsel can work through the payment conditions, who calculates what and the remedies if something goes wrong, before you commit to the structure.
Frequently Asked Questions
What is the difference between an earnout and a holdback?
A holdback withholds an agreed part of the closing proceeds for the purposes specified in the documents. The buyer may hold it or an escrow agent may hold it under separate instructions. An earnout makes additional consideration contingent on agreed performance or milestones. For each one, read the payment conditions, who has custody and what remedies you'd have.
Why might the parties use an earnout?
An earnout can address a disagreement about future performance by tying part of the consideration to a defined result. Specify the metric, measurement period and payment formula. Before you agree to the amount, think through how integration, staffing, customer allocation and accounting choices could move the result.
Can operational changes affect the earnout?
Yes. Integration, cost allocations or changes to staffing can affect the agreed metric. Identify the operating commitments actually negotiated, any permitted changes and the remedy for breach. The enforceable duty depends on the contract and governing law. Counsel can help you separate the calculation process from a legal claim about performance of those commitments.
How does a working-capital adjustment differ?
A working-capital adjustment compares the agreed closing-date measure with a target. An earnout depends on later performance or milestones. A holdback secures the purposes assigned to it. Check all three against the settlement statement and any setoff provisions, so each amount lands in the right calculation and remedy.
What holdback amount and release period should a seller accept?
Compare the proposed security with the actual representations, identified risks and agreed limits of liability. Review who holds the money, how it is funded, what permits a claim and how the undisputed remainder is released. Then check the amount, deadlines, baskets and exceptions against the buyer's proposed recovery rights.
Can a deal contain both mechanisms?
Yes. Build a payment schedule that lists closing cash, withheld proceeds and contingent consideration separately, with the release conditions, calculation owner and dispute route for each. Then check whether the agreement permits setoff between amounts and how contested claims affect sums that would otherwise be payable.
Who reviews these terms for a seller?
M&A counsel addresses contractual duties, release conditions, limits and remedies. The accountant tests the financial definitions and calculations. Where a separate escrow agent is used, reconcile its instructions with the purchase agreement. Settle who handles what before you assume the accountant or agent covers every kind of dispute.
Related Resources
LOI vs. Purchase Agreement
How holdback and earnout terms first appear in the LOI and how they tighten in the definitive agreement.
ComparisonAsset Purchase vs. Stock Purchase
How deal structure interacts with holdback and earnout mechanics, especially in asset deals with PPA.
GuidePurchase Agreement Negotiation
Review the purchase agreement’s indemnification, earnout and other negotiated provisions.
Legal ServicesM&A Attorney Services
Sell-side and buy-side M&A counsel. Alex Lubyansky leads engagements, reviews documents and leads negotiation and closing, with an associate supporting.
Legal counsel for this topic
Acquisition Stars handles M&A transactions nationwide and works with securities counsel on securities matters. Alex Lubyansky leads the M&A engagements.
Closest fit for this topic Purchase agreement attorney Purchase agreement drafting and negotiation for buyers and sellers.