The buyer wants to hold back a separate working capital escrow of five percent of the purchase price to cover potential post-closing balance sheet adjustments. How do we minimize this holdback and set up a tight dispute resolution timeline?

Question

Tyler Smith · Accepted Answer

A working capital escrow is designed to protect the buyer if the net working capital at close falls below the agreed-upon target. However, buyers often try to use this holdback as a piggy bank, dragging out the adjustment process to delay releasing your cash.

To protect your proceeds, you must minimize both the size of the escrow and the timeline for resolution. First, negotiate the escrow down to a reasonable amount, typically no more than one to two percent of the purchase price. Argue that since you are already agreeing to a rigorous post-close adjustment process, a massive holdback is unnecessary and penalizes you.

Second, establish a strict, fast-paced timeline in the purchase agreement. Define exactly how many days the buyer has to present their closing balance sheet, usually 60 to 90 days post-close. Then, limit your review period to 30 days.

If there is a dispute, require that both parties must attempt to resolve it within 15 days before submitting the disagreement to an independent accounting firm. This neutral third party should have a mandate to make a final, binding decision within 30 days.

Use your weekly Level 10 Meeting to track these timelines post-close. By running a tight, disciplined process, you prevent the buyer from sitting on your cash and ensure a clean, prompt exit.