Escrow
An arrangement under which a portion of the M&A purchase price is held by a neutral third-party escrow agent for a specified period after closing, to fund post-closing indemnification claims by the buyer against the seller.
Escrow is an arrangement under which a portion of the M&A purchase price is held by a neutral third-party escrow agent (typically a bank or specialized escrow service) for a specified period after closing, to fund post-closing indemnification claims by the buyer against the seller. The escrowed funds provide secure, immediate recovery for buyer claims without requiring litigation against the seller.
Sizing
Traditional escrows: 5%–15% of purchase price held for 12–24 months. Modern RWI-driven structures: smaller escrows (often 0.5%–1% of EV) covering retention and specific known risks, with RWI providing the primary coverage above retention.
Holdback distinguished
A "holdback" is similar but retained by the buyer rather than by a neutral escrow agent. Holdbacks are mechanically simpler but expose the seller to buyer credit risk and create disputes over release timing. Escrows with reputable agents avoid both issues.
Release mechanics
Most escrow agreements provide: (1) automatic release of unreserved funds at the end of the survival period; (2) reserve mechanism for then-pending claims; (3) joint-instruction release; and (4) dispute-resolution procedures for contested claims.
Escrows are standard in middle-market and lower-middle-market deals; large deals often dispense with escrows entirely in favor of RWI. The escrow agent's standard form agreement typically governs absent significant negotiation.
Companion article: Selling Your Business in Texas