Holdbacks and Escrows Explained for PT Practice Sellers

You agree on a price. Then you learn that some of it will not reach you at closing. Part of it will be held back for a while.

That is a holdback or an escrow. Both are common in practice sales. Neither is a reason to panic. But both deserve close attention, because the terms decide whether that money comes back to you.

What they are

A holdback is a portion of the purchase price the buyer keeps for a set period after closing. An escrow is similar, but the money sits with a neutral third party, called an escrow agent, instead of the buyer.

In both cases, the money is still part of your price. It is just not paid at closing. It is released to you later if no valid claims are made against it.

What they cover

A holdback or escrow protects the buyer if something you promised in the purchase agreement turns out to be wrong. In that agreement, you make statements about the practice. These are called representations and warranties.

For a PT practice, those statements often cover things like:

• The equipment is in the condition described
• The financial statements you provided are accurate
• There are no undisclosed claims, disputes or payer audits
• Billing was done in line with payer rules
• You own the assets you are selling

If one of those turns out to be false and the buyer suffers a loss, the buyer can make a claim. The holdback or escrow is the first place that claim gets paid from.

Some deals also use a separate, smaller holdback for working capital or other post-closing adjustments. Those settle once final numbers are confirmed.

How the mechanics usually work

The details vary by deal, but the general pattern looks like this. A set amount is withheld from the cash at closing. It sits with the buyer or the escrow agent for an agreed period.

If the buyer believes it has a valid claim during that period, it must give you written notice. The notice should explain the claim and the amount. You then have a chance to respond or dispute it.

At the end of the period, any amount not subject to a pending claim is released to you. Some agreements release the money in stages instead of all at once.

Negotiating the size

The size of a holdback is negotiable. Buyers tend to ask for more when they see more risk. Sellers can reduce that ask by reducing the risk.

Say a buyer offers $2,000,000 and asks for a $200,000 holdback. That is 10 percent of the price. If your records are clean and diligence goes smoothly, you may be able to bring that down. A clear billing history and organized financials give you a factual basis to ask.

Also ask how the holdback relates to your total exposure. Is it the only source of payment for claims, or can the buyer come after you for more? Those caps and limits matter at least as much as the holdback itself. Your transaction attorney should review them carefully.

Negotiating the release

The release terms decide when you actually get paid. A few points are worth pushing on.

First, the length of the period. Shorter is better for you, as long as it is long enough for the buyer to discover real problems.

Second, staged release. Releasing part of the holdback partway through the period gets you money sooner.

Third, how disputes work. If the buyer makes a claim you disagree with, there should be a clear process. Only the disputed amount should stay held. The rest should still be released on schedule.

Fourth, a minimum claim size. Small claims should not tie up your money. A threshold keeps trivial items from holding up release.

From a seller's view, an escrow with a neutral agent is often more comfortable. The buyer cannot simply decide not to pay. The agent follows the written instructions both sides signed.

A holdback kept by the buyer depends more on the buyer's good faith and financial health. If you accept one, the release terms need to be especially clear.

Your next step

Before you go to market, pull your billing history, any payer audit correspondence and your equipment list. Fix or document anything that could become a claim. The cleaner your records, the stronger your position when the holdback is negotiated.