07 Apr When the Past Isn’t Prologue: Using Holdbacks to Bridge Uncertainty in a Business Sale
Most people envision selling a small business as a straightforward transaction: a purchase price is agreed upon, the deal closes, and the seller walks away with the proceeds. In many cases, that’s exactly how it works.
But not every deal fits that model, particularly when parties agree on the value of the business as it has performed historically but differ on what comes next.
When that gap exists, a holdback is one tool that can help. Rather than forcing a resolution at closing, a holdback sets aside a portion of the purchase price to be paid later, conditioned on the business’s performance over a defined period. It’s a way of saying: we can agree on what the business was worth; let’s share the risk of what it becomes.
When a holdback makes sense
Holdbacks tend to work best in situations where the future is genuinely uncertain – not as a matter of general business risk, but because something specific and identifiable has changed or is about to.
Here in New Mexico, we’ve seen this play out in businesses built around imported goods. A wholesale distributor of kitchenware sourced from China, or a Santa Fe retailer specializing in handwoven rugs and textiles from India and Turkey, may have a clean earnings history and a defensible valuation – but if tariff exposure, supply chain disruption, or shifting trade relationships could materially affect future revenues, a buyer is going to price that uncertainty into their offer. A holdback can give the seller a path to their number if the business weathers that uncertainty, while giving the buyer some protection if it doesn’t.
Other situations where a holdback can help bridge the gap:
- Customer or revenue concentration, where the departure of one key account would materially change the picture
- A key event pending at or near closing – a contract renewal, a licensing decision, a significant operational transition
- Performance that has been uneven over several years in ways that are difficult to underwrite, where the trend line matters more than any single year
What the financing structure allows
Before a holdback can be considered, it’s worth understanding what the deal’s financing structure will permit. SBA lenders underwrite historical performance, and they do not lend against future earnings projections. So if you’re basing part of your value on your business’s future earnings potential – no matter how real that potential seems to you (an expanded sales team, a major new contract, or new product lines) – an SBA underwriter will file that under “nice to know” and move on.
This limits how holdbacks can be structured in SBA deals, and since the majority of business acquisitions rely on SBA financing, it’s a constraint that needs to be understood early. Even buyers who aren’t relying on SBA financing often think the same way – conservatism around unproven future value tends to be the default, not the exception.
When a holdback isn’t the right tool
Not every deal that involves uncertainty is a good candidate. A holdback requires both parties to remain engaged after closing – measuring performance, interpreting results, and in some cases, disagreeing about them. That ongoing relationship has to be workable.
A holdback generally isn’t a good fit when:
- The seller needs full cash at closing
- The valuation gap is too large – generally more than 25 to 30 percent
- The seller will have little or no involvement post-closing, leaving the performance metrics outside their influence
- The metrics themselves can’t be cleanly defined and agreed upon in advance
It’s also worth noting that holdbacks are most relevant to businesses of a certain scale. For a smaller owner-operated business – a neighborhood ice cream shop, a single-chair salon – the added complexity rarely justifies the structure. Below a certain threshold, a cleaner deal at an adjusted price usually serves both parties better.
When the mechanism doesn’t fit, the price has to
This is the point that sellers sometimes find difficult to hear. If the future is genuinely uncertain, and a holdback isn’t workable, that uncertainty doesn’t disappear – it just gets absorbed somewhere else. In most cases, it gets absorbed into a lower purchase price.
Some degree of year-to-year variability is normal in any business, and it shouldn’t automatically trigger a holdback or a price adjustment. The real questions are: how much variability, what kind, and what does the trend line say? When the honest answer is that past performance is unlikely to predict future results – because something external has shifted – then the deal has to reckon with that, one way or another.
For some sellers, accepting a lower price in exchange for a clean, final transaction is the right call. It avoids the ongoing complexity and the potential for post-closing disagreement that more structured arrangements can introduce. For others, a holdback offers a genuine path to the number they believe the business deserves – if it performs the way they expect it will.
The key is recognizing which situation you’re in early enough to structure the deal accordingly.
