We're in the letter of intent stage with a buyer for our specialty retail business (about $1.8M revenue, SDE around $400k). Buyer's attorney is pushing for a 10% escrow holdback for taxes. That feels high to me. What have others actually seen in deals this size? We're an S-corp if that matters.
Tax Holdbacks
How much cash gets kept for tax holdbacks?
10% of purchase price or 10% of the tax liability? Big difference. For S-corp deals I've seen holdbacks closer to the actual estmated tax exposure, not a blanket percentage.
We sold a C-corp years back and the holdback was brutal. But S-corp should be cleaner. Are theyy worried about payroll taxes or income tax? Those are different risks.
Should've been clearer. 10% of enterprise value held for 12 months, released after buyer's accountant reviews the final tax return. Payroll taxes are current, no issues there. They're mainly worried about a state nexus thing from a few years ago.
A nexus issue from a few years ago sounds like something that should be quantified, not held back at 10% on a vibes basis. Ask for their specific exposure calc.
We did 5% for 18 months on a $3M deal. Felt long at the time but it was fine. 10% for 12 months isn't insane but I'd push back on the percentage, maybe 6-7%.
Honestly the holdback number matters less than the release mechanics. Who controls it, what triggers release, what what happens if they 'forget' to release it. Get that in writing.
This. Had a buddy whose holdback got held hostage over a $400 discrepancy For four extra months. The real cost was his attorney's fees.
Also — is it a holdback or an escrow? Different legal animals. If it's sitting in escrow with a third party, that's better for you than buyer holding it in their own account.
It's third-party escrow, which is reassuring. I'm going to push for 6% with a 9-month release and and a defined nexus cap. Appreciate the reality check, all.
Solid plan.And get your own CPA to sign off on the nexus estimate before you agree to any number. Don't let their accountant set the ceiling.
One more thing — check if the escrow earns interest and who keeps it. Ours was like $600 over 18 months, but it's the principle.