Escrow

Escrow arrangements are a standard risk-allocation mechanism in M&A transactions. Rather than paying the entire purchase price at closing, the buyer withholds a negotiated percentage — typically 5% to 15% of deal value — and places it with an escrow agent (usually a bank or trust company) under an escrow agreement that specifies when and how funds can be released or claimed.

The primary purpose of an escrow is to provide the buyer with readily accessible recourse if the seller has breached any of its representations, warranties, or covenants in the purchase agreement. Without escrow, a buyer seeking to recover for a post-closing breach would have to pursue the seller directly — often a collection problem if deal proceeds have been distributed to individual selling shareholders or used to pay down seller debt.

Escrow accounts are typically governed by detailed release procedures. The escrow period commonly runs 12 to 18 months post-closing, after which any unclaimed balance is released to the seller. Claims against escrow require written notice specifying the alleged breach and the amount claimed; dispute resolution procedures are invoked if the seller contests the claim.

In representations and warranties insurance (RWI) transactions — which have grown substantially in middle-market M&A — the escrow may be reduced or eliminated because the insurance policy covers buyer losses from seller breaches, replacing the need for the seller to keep funds at risk. RWI policies are now standard in private equity deal processes, and escrow sizes in RWI deals are typically smaller (1% to 2% of deal value), often retained only for specific known issues or fraud coverage gaps.

For investors evaluating acquisitions, escrow arrangements and their terms signal how much risk-sharing was negotiated between buyer and seller, and whether the buyer has adequate post-closing protection relative to the complexity or uncertainty of the target business.