KEN KIRSCHENBAUM, ESQ ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE You can read all of our articles on our website. Having trouble getting our emails? Change your spam controls and whitelist ken@kirschenbaumesq.com ****************************** Thorney issues in buy sell transaction Part 2 May 2 2025 ******************* Thorney issues in buy sell transaction Part 2 ******************* The hold back often causes some confusion. The hold back refers to the amount that the buyer is not paying to the seller at closing because that fund of money is used as collateral to secure the seller's attrition guarantee. How is this "fund" handled? Is there actually a fund or is it just a debt? Some transactions call for the Hold Back to be deposited into an escrow account. That account can be maintained by the seller's or buyer's lawyer, depending on who is willing to undertake the responsibility for holding the escrow. In the end it shouldn't matter who holds it because the reason for the escrow and how it gets disbursed should be well defined and described so that there is no misunderstanding and no dispute about disbursing the fund. Very often a disbursement will require consent of both seller and buyer, and even when consent isn't required the Escrow Agent will want to get consent to be sure there is no dispute on distribution. Most deals do not require the hold back to be deposited into escrow. This is important in the deal for the buyer because it's less funds the buyer needs to come up with at the closing. With hold backs running 10 to 20% or more the amount of the hold back fund can be substantial; sometimes enough so that a buyer would not be able to come up with the funds for an escrow deposit. Buyers will argue that the fund should not be deposited into escrow because 1) buyer doesn't have the available funds and 2) the parties should expect at least part of that fund to be applied to accounts which have attritted; been lost during the guarantee period, so why should buyer have to post the funds in the first place. Sellers may be concerned that the buyer won't have the funds when the guarantee is over, or that a buyer would be less likely to argue over the fund if it's already been paid into escrow as opposed to having to be paid from buyer's operating account. This issue is a matter of negotiation. The typical deal permits the buyer to withhold the hold back amount without posting in escrow. If your buyer is a hedge fund expect the buyer to want to post in escrow, and of course a seller should have no objection to that. The hedge fund wants all the allocated funds for the deal disbursed at time of closing so they post it in escrow. Who is entitled to interest on the hold back or an escrow and who should pay the Escrow Agent charges? Of course it is a matter of negotiation, but in my view the seller is entitled to the purchase price at time of closing. The hold back is set up to protect the buyer for the attrition during the guarantee period. If the hold back is held back by the buyer there is typically no interest on the amount held back. This is likely because there is no actual fund earning interest; the buyer doesn't have this money yet and hopes to either have it by the time the buyer needs it a year later, or the amount that will actually be paid will be less, sometimes a lot less, than the hold back. If however the buyer has posted the hold back in an escrow account the interest, in my view, belongs to the seller. Buyer could argue that the interest should follow the funds as they get distributed, so that if the fund is split 50/50 each party gets half the interest. This might create an accounting and tax reporting nightmare for the escrow agent who would prefer to report the interest to one party, period. In smaller deals the escrow may not earn interest because it's not worth the effort. The Escrow Agent should charge only a nominal amount, if anything, and only if there is more than disbursing funds. I would normally object to using a financial institution that wants to charge based on the size of the fund unless its the buyer who wants to pay the cost. The buyer wants the hold back in escrow so it knows it will get it back, but otherwise it would have been paid at closing to seller. Reminder: K&K is available to represent you if buying or selling. If you're ready to sell K&K will also broker your sale for you at significant savings. 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