Meaning
Contractual resolution of funds held in a third party account ensures that post closing liabilities are satisfied before the final purchase price is fully distributed. An escrow holdback settlement occurs after the survival period for representations and warranties expires. The buyer and seller must agree on any deductions for breaches or adjustments before the escrow agent can release the remaining balance.
Release Mechanism
Funds are released according to the timing and conditions specified in the share purchase agreement. Usually an escrow holdback settlement takes place twelve to twenty four months after the acquisition. The parties issue joint instructions to the bank to move the cash.
Liability Offset
Claims made against the funds during the holdback period reduce the eventual payout to the sellers. If a tax liability or a legal dispute arises that was not disclosed, the buyer uses the escrow holdback settlement to recoup the loss directly from the segregated funds. This protection prevents the buyer from having to sue individual former shareholders for small amounts.
Closing Distribution
Closing of the account marks the end of the buyer’s primary recourse against the purchase price. Any interest earned on the account during the holding period is typically allocated during the escrow holdback settlement according to the original agreement. The total amount received by the selling entity is only certain once the last dollar leaves the escrow account.
