Understanding the Hold Back in the alarm buy sell agreement Part 8 May 12, 2025

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Understanding the Hold Back in the alarm buy sell agreement Part 8
May 12,  2025

Understanding the Hold Back in the alarm buy sell agreement Part 8

   This is the eighth article in the series regarding the buy sell agreement for an alarm account or business transaction. Note that when it comes to the buy sell agreement, like any agreement, the terms can be whatever the parties agree to, subject to conscionability, but that leaves a lot of room for negotiating terms and conditions of a transaction. This article, like the others, addresses what I consider to be a "standard" transaction in the alarm industry. I should also note that a standard transaction would not include a deal selling for hundred million or more, or less. The articles address the alarm companies selling between 50 and 50,000 accounts; above that there are usually other issues that would pertain to any other complex transaction.
   The typical alarm transaction includes seller's guarantee of the accounts being sole. That guarantee is collateralized by an amount that the buyer holds back, as in doesn't pay, at time of closing. After the guarantee period the buyer and seller figure out which accounts have been lost during the guarantee period and how much of the purchase price remains to be paid. There are many variable when negotiating the guarantee, but that is not the focus of this article; we will get to it another time.
   The account guarantee, also referred to as the attrition guarantee, is usually the reason for the hold back; the buyer and seller know that some accounts will be lost and the purchase price reduced, so buyer isn't required to pay the full price at closing and look to the seller for a refund after the guarantee period.
   The hold back, whatever it might be, is generally used for the attrition adjustment, and that is the focus of this article.
   Seller and buyer should share a common interest and ground, fixing the purchase price. After all, this is what the buyer will ultimately be paying for the assets purchased from the seller. Because of the attrition guarantee, and the expectation that there is likely to be some attrition, the buyer and seller know that the purchase price will be reduced; they just don't know by what amount.
   The attrition guarantee adjustment is generally the most significant price change in purchase price requring a formula and adjustment date. The buy sell agreement could have other adjustments, legitimate adjustments, such as Work In Progress adjustments. Another transaction may involve accounts that are still under warranty so the buyer will want to be indemnified for warranty work, just like Work in Progress that has to be completed even though the seller has been paid in full for that work. Most times these additional items are not significant and may not even be involved, so it's safe to say that in most transactions the hold back covers the attrition guarantee, and that's what it's for.
   In earlier articles I discussed representations and warranties that a buyer demands the seller give in the buy sell agreement. These include some appropriate demands, such as title to the assets and lien and encumbrance free assets, as well as compliance with certain closing requirements intended to insulate the buyer from liability for seller's debts. I also discussed some unreasonable demands by a buyer that the seller represent the legality of the contracts or the operation of every alarm system, as an example. These are all representations that the seller makes to get the deal done but does not expect to lose any money with because seller expects all the representations to be true and accurate, even though the seller is not likely to be in a position to make the representations in the first place.
   The buyers making the unreasonable demand for representations often also want to have the hold back stand as security for these representations. There are a few reasons why that should not be agreed to by sellers. First, unlike attrition, disputes regarding the representations may not be easily determined or agreed upon. A seller who has agreed to a hold back has not been paid the agreed purchase price but anticipates the adjustment date and should have a fair idea of how many accounts have been lost during the guarantee period; usually notice is required during the guarantee period. That would not necessarily be the case with a claim by buyer for misrepresentation. Since a seller doesn't anticipate any misrepresentation because seller would not make the representation in the first place, seller expects the balance of the purchase price, part or all of the hold back amount. For a buyer to claim other issues in dispute and seek to continue holding the hold back puts seller in a difficult position of having to fight for the balance of the purchase price rathen than requiring the buyer to fight for a refund or damages for breach of representations. Allowing the buyer to simply not pay the balance of the purchase price, something that was due at time of closing, seems unfair, and it is not customary in the alarm transaction that the hold back serve any purpose other than the collaterize the attrition guarantee.
   K&K is available as your counsel whether buying or selling. Give me a call.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com