A holdback is any part of a Canadian deal's purchase price kept back from the seller at closing to secure the buyer's indemnity claims — distinct from a vendor take-back note, which finances the purchase rather than protecting against breach.
A holdback and a vendor take-back solve different problems and Canadian practice keeps them separate: a holdback is "a portion of the purchase price withheld at closing, or placed with a third party such as a lawyer or trust company, for a defined period after closing," protecting the buyer if the seller's representations turn out to be wrong, while a vendor take-back is seller financing — a promissory note repaid over time, usually with interest and its own collateral — that helps the buyer fund the purchase. As the same source puts it, "they are not substitutes for each other," and deals frequently carry both at once.
Drawing against a holdback is not automatic. a buyer must confirm the loss falls under a representation, warranty or indemnity; confirm it is within the survival period for that category of claim; give written notice with a good-faith estimate; clear the deal's basket and cap thresholds; and then follow the specific release mechanics the agreement or escrow document sets out — "generally not unilaterally," since most agreements need either the seller's agreement the claim is valid or resolution through the agreement's own dispute mechanism before disputed funds actually move. If a valid claim exceeds what is left in the holdback, the buyer pursues the seller directly for the shortfall, within whatever cap applies: "a holdback is a convenience, not a limit on the seller's total exposure, unless the agreement specifically says otherwise."
A fund buys a target for $5M. The seller wants the full price at closing; the fund's diligence team insists on a $500,000 (10%) holdback for 12 months, tied to the indemnity survival period for the representations that matter most — tax and employment liabilities. Separately, and for an unrelated reason, the seller agrees to finance $750,000 of the price as a three-year vendor take-back note to help the fund's acquisition vehicle bridge its senior debt. Eight months in, a tax reassessment surfaces a real, notified claim inside the survival period; the fund draws it from the still-open holdback rather than touching the take-back note, which keeps amortizing on its own separate schedule.
See also: Escrow account · Purchase price true-up.
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