What Is Holdback? | Agency M&A Definition
A holdback is a portion of the purchase price that the buyer withholds at closing, held in reserve for a specified period to cover potential post-closing liabilities, indemnification claims, or purchase price adjustments. Unlike an earnout, a holdback is money the seller has already earned — it is simply delayed in its release. Holdbacks in agency deals typically range from 5% to 15% of the total purchase price.
Holdback in Agency M&A
Holdbacks are a standard feature in marketing agency acquisitions because agencies carry risks that are difficult to fully quantify before closing. Client churn in the first 90 days, undisclosed tax liabilities, pending legal claims, or inaccurate revenue reporting can all surface after the buyer takes ownership. When selling a digital marketing agency, the buyer may hold back 10% of the purchase price for 12-18 months to protect against these scenarios. The holdback effectively acts as the seller’s guarantee that their representations and warranties in the purchase agreement are accurate. If no claims materialize during the holdback period, the full amount is released to the seller. If issues arise — say a major client was actually on a month-to-month agreement rather than the annual contract represented during due diligence — the buyer can draw from the holdback to cover losses. Sellers should negotiate specific and limited triggers for holdback claims, a clear timeline for release, and ideally a partial release schedule where 50% is released at 6 months and the remainder at 12 months, assuming no outstanding claims.
How Holdback Affects Agency Valuation
Holdbacks affect the seller’s effective proceeds and cash flow timing rather than the headline purchase price. A $3M deal with a 10% holdback means the seller receives $2.7M at closing and must wait 12-18 months for the remaining $300,000. For agency owners planning to reinvest, retire, or fund a new venture, this delay has real economic impact. From a buyer’s perspective, holdbacks are a less adversarial alternative to reducing the purchase price outright for perceived risks. Rather than arguing over whether the agency is worth 5x or 5.5x EBITDA, the buyer can offer 5.5x with a 10% holdback, creating a mechanism to adjust the effective price if specific risks materialize. Sellers can minimize holdback amounts by providing thorough documentation during due diligence and offering representations insurance.
Example
A search marketing agency sells for $2.4M (6x EBITDA of $400,000). The buyer withholds 10%, or $240,000, in a holdback account for 12 months. The seller receives $2.16M at closing. At month 8, the buyer discovers that a $120,000 annual client contract was overstated — the actual contract value is $85,000. The buyer files a holdback claim for $35,000 to cover the revenue shortfall. At month 12, the remaining $205,000 ($240,000 minus the $35,000 claim) is released to the seller, bringing total proceeds to $2.365M.
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