Quick answer
A retention is part of the sale price the buyer holds back at completion to cover warranty claims, then releases after an agreed claim period, less any claims properly notified. Australian sale agreements commonly use a claim window of one to two years. Plan your next move on completion cash, not the headline price.
Key points
- A retention is a second, later payment: the sale agreement sets the amount, the holder, the release date and the claim process
- Claim periods of one to two years after settlement are commonly described by Australian law firms
- Who holds the money matters: a buyer holding it is a debtor, a neutral stakeholder is safer
- A claim only reduces the retention if it is notified the way the contract requires
- Size your next purchase, and any bridge, on cash at completion, with the retention treated as upside
The contract is signed, the buyer is happy and then comes the clause: 10% of the price will be held back for twelve to twenty-four months. It is the part of a sale people skim, and it is the part that decides how much money you can spend next month.
A retention is a retaining wall in the drawing set. It holds something back so the rest can stand. This guide shows how it works, how to read the clause, what can eat into it, and how to plan around the cash you really hold at completion.
What is a retention in a business sale?
It is part of the price the buyer keeps rather than paying at completion. The buyer’s reason is simple: you have given warranties about the business (the accounts are accurate, the stock is saleable, no hidden disputes), and if one is wrong after they take over, they want money within reach instead of a lawsuit against you.
So the price splits into two payments:
- Completion cash. What lands at settlement, after the retention, any payout of your finance and your selling costs.
- The retention. What is released later, less any claim properly made.
It differs from an earn-out or deferred price. Those pay you for future performance or an agreed instalment. A retention is your own money held as security, and it only goes down if something goes wrong.
How long is a retention held, and how much is it?
The contract sets both, and there is no statutory number. What we can say is what the market describes. Australian law firms writing about business sales commonly describe warranty claim periods of one to two years after settlement, including LegalVision’s seller guidance, which tells sellers to push for a defined claim window. Tax warranties are often given a longer tail than commercial ones.
On size, treat it as a negotiation, not a rule. Ask three questions:
- Is it proportionate to the real risk? A clean, well-documented business with audited-style accounts deserves a smaller holdback than a cash-heavy one with loose records.
- Does it step down? Half released at twelve months and the balance at twenty-four is better than one lump at the end.
- Is it your only protection for the buyer? If the warranty cap in the contract is lower than the retention, the buyer is holding more than they could ever claim. That is a point to raise.
Who holds the money?
This is the question most vendors do not ask until it is too late. There are three common arrangements:
| Holder | What it means for you | Main risk |
|---|---|---|
| The buyer | The buyer simply owes you the balance | You are an unsecured creditor of the buyer’s business |
| A solicitor’s trust account | Neutral, released on joint instruction or per the contract | Release can stall if the buyer will not sign |
| An escrow-style arrangement | Separate account with set release rules | Setup cost and agreeing the terms |
Smaller deals sometimes leave it with the buyer because it is cheapest. As the vendor, that is the weakest position: if the buyer’s business struggles in the first year, your retention is a debt in a queue. If you can get the money into a neutral account, do. If you cannot, ask for a guarantee or security over the buyer’s assets and register it where it can be registered. Your lawyer will know the right mechanism.
What can reduce the retention before it is released?
Only a claim that meets the contract. That is the part vendors should read slowly. Typical conditions:
- Notice. The buyer must tell you in writing, within the claim period, in a form the contract describes. A phone call or vague email is often not enough.
- Detail. The notice must identify the warranty said to be breached and give a reasonable estimate of loss.
- Thresholds. Many contracts ignore small claims (a minimum per claim, or a basket) and cap the total.
- Time to respond. You usually get a period to dispute the claim before any money moves.
The Queensland firm Astris Law notes that Australian courts, including the Federal Court, have enforced notice and claim-period clauses as written, which cuts both ways: a buyer who misses the notice window can lose the claim, and a vendor who ignores a valid notice can lose the argument. Keep a calendar of every date in the clause and the name of whoever receives notices for you.
If you are told a claim is coming, do not wait for the release date. Ask for the facts early, because a small dispute resolved in month three is much cheaper than a large one in month twenty-three.
Could insurance replace the retention?
Sometimes. Warranty and indemnity insurance transfers some of the claim risk to an insurer. Upcover describes the cover as available to either the buyer or the seller, says it may reduce the risk of post-sale warranty claims, and notes that the policy’s own retention (like an excess) and structure affect the premium. Most Australian policies are bought by the buyer, so this is a negotiating point rather than something you can arrange alone.
If the buyer will accept a policy and a smaller holdback, you get more cash at completion. If the premium is on your side of the ledger, compare it to the cost of waiting for the retention. Exclusions apply, and the insurer will want the due diligence file, so ask early.
What does the tax side look like?
Briefly, and with your accountant: for most asset sales, the ATO’s CGT guide sets the timing of the main disposal event at the time the contract is entered into, not at completion or when the retention is paid. That means the tax on the sale generally follows the contract, while part of the money is still sitting with someone else. If the retention is later reduced by a valid claim, there are adjustment rules, so your accountant needs the contract before you spend the proceeds.
If you are using the small business concessions, the ATO’s page on small business CGT concessions sets out the eligibility tests. Build a tax reserve from completion cash, not from the retention you have not received.
What does the retention do to your next move?
Here is a worked example. It is illustrative, not a real deal.
| Amount | |
|---|---|
| Headline price | $1,200,000 |
| Less retention (10%) | $120,000 |
| Less payout of business finance | $450,000 |
| Less selling costs | $40,000 |
| Cash at completion | $590,000 |
| Tax reserve you set aside (assumed) | $120,000 |
| Cash you can commit | $470,000 |
Now the retention scenarios:
| Case | Retention released | Total received |
|---|---|---|
| Best case, no claims | $120,000 | $710,000 |
| Claim of $60,000 upheld | $60,000 | $650,000 |
| Dispute, release delayed past 24 months | nil for now | $590,000 |
The decision rule is simple. If your next purchase needs $500,000 and you sized it on the $710,000, a delayed release leaves you short. Size it on the $470,000 and the retention becomes a pleasant surprise rather than a hole.
Can you bridge the gap until the money arrives?
Often what pinches is the order of events. You may need to pay a deposit or fit out the next premises before completion, or between completion and the retention release. A short-term bridge can fill the first gap. It is repaid from completion cash, which is the firm part of the exit.
A lender looks at it the same way you should. It will want the signed contract (with the retention clause), your payout figure and the completion date, so it can see the net cash that will repay the loan. A retention that might be paid in eighteen months is a weak exit on its own. Our page on business sale proceeds and the sale exit show how those are assessed, and the exit evidence checklist lists the papers worth having ready. To test your own dates and amounts, use the bridging calculator.
If you want a quick read on where your sale leaves you, you can check your options in about a minute.
Is your sale split into two payments?
If part of your price is being held back, the question is not whether the retention will come. It is whether your plan stands up if it comes late. Lay the dates out, count only the cash you hold and leave room for the slow case.
We work with owners selling a business who need to move before the money fully lands, and we are straightforward about when a bridge is the wrong tool. Enquiring takes about 60 seconds and your credit file isn’t touched just for asking. Your details don’t go out to a pile of lenders; a real person reads your situation and phones you. Please fill the form in accurately, with the true completion date, the retention amount and what the cash is committed to, so we can match the right option first time.
Frequently asked questions
What is a retention in a business sale?
It is a portion of the purchase price that the buyer does not pay to you at completion. The money is held back as security for warranty and indemnity claims and paid to you after an agreed period, less anything the buyer has validly claimed. The sale agreement defines every part of this, so the wording matters more than any rule of thumb.
How long is a retention usually held?
Australian law firms commonly describe warranty claim periods of one to two years after settlement for business sales, and the retention is typically held for that window or part of it. Tax-related warranties can run longer. Your contract sets the actual date, so confirm it before you plan around it.
How much of the price do buyers hold back?
There is no fixed figure in Australian law. It is negotiated, and the sources we found describe it as a modest slice of the price rather than most of it. Pick a figure you could live without for the whole claim period, and ask for it to step down over time rather than release in one lump.
Who holds the retention money?
It can sit with the buyer, in a solicitor's or agent's trust account, or in an escrow-style arrangement controlled jointly or by a neutral party. For a vendor, a neutral holder is safer because the money is separate from the buyer's own finances. Ask your lawyer which structure the contract uses and who needs to sign for a release.
What if the buyer refuses to release the retention?
Start with the contract: was a claim notified in time and in the required form, and does it describe a real loss under a real warranty? If not, send a written demand for release, then negotiate or use the dispute clause with your lawyer. Delay is costly, so keep your own funding plan independent of that money.
Can warranty and indemnity insurance replace a retention?
Sometimes. Insurers offer warranty and indemnity cover that may reduce post-sale claim risk for either party, and it can be taken out by buyer or seller. Premiums are affected by the retention and structure of the policy. It can help you argue for a smaller retention, but it is an extra cost and exclusions apply.
Can I borrow against a retention I am owed?
A lender will rarely lend against it on its own, because the amount is uncertain until the claim period ends. The completion cash is a much firmer exit. A bridge is normally sized so that completion proceeds repay it, with the retention left as a bonus when it arrives.