Escrow
A portion of acquisition proceeds held by a neutral third party for a period, to cover potential post-closing claims.
In an M&A deal, a portion of the total purchase price — commonly 10-15% — is held in escrow with a neutral third-party agent for a set period (typically 12-18 months) rather than paid out immediately to sellers. It protects the buyer against claims that arise after closing, such as breaches of the seller's representations and warranties or unexpected liabilities discovered post-acquisition.
If no valid claims are made against the escrow during the holding period, the funds release to the sellers in full; if the buyer successfully asserts a claim, the disputed amount is deducted from the escrow before the remainder is released.
The headline price of an acquisition isn't what lands in sellers' accounts on closing day, and escrow is one of the biggest reasons. A meaningful slice of the deal sits out of reach for a year or more while the buyer's claim window stays open, so the 'we sold for $X' announcement overstates near-term liquidity. Negotiating the escrow percentage, the survival period, and what can trigger a claim is negotiating real money.
An escrow and a holdback do the same economic job but differ mechanically. An escrow sits with a neutral third-party agent under a written escrow agreement; a holdback is simply retained by the buyer. Sellers generally prefer escrows because the money is segregated and governed by an agreement.
Representation and warranty insurance can shrink the escrow substantially: when the buyer buys a policy, the insurer becomes the main recourse for covered breaches, and sellers can negotiate a much smaller escrow. Separate, smaller escrows for purchase-price adjustments (such as working-capital true-ups) and a fund for the sellers' representative's expenses also come out of seller proceeds.
A $50M acquisition sets aside $6M (12%) in escrow for 18 months to cover representation and warranty breaches. If no claims arise, sellers receive the full $6M at the end of the escrow period on top of the $44M already paid at closing.
Negotiate the escrow percentage and duration as real deal terms, not boilerplate — a large escrow held for a long time meaningfully delays when sellers actually see their full proceeds, and representation and warranty insurance can sometimes reduce the escrow amount needed.
What's a typical escrow percentage in an acquisition?
Commonly 10-15% of the total purchase price, held for roughly 12-18 months, though the exact figures vary by deal size, risk profile, and whether representation and warranty insurance is used to reduce the amount held back.
How is an escrow different from a holdback?
Both hold back part of the price against post-closing claims. An escrow is held by a neutral third-party agent under an escrow agreement; a holdback is retained directly by the buyer. Sellers usually prefer escrow because the funds are segregated.
Does representation and warranty insurance eliminate escrow?
It can reduce it substantially, and sometimes close to zero, because the insurer becomes the primary recourse for covered breaches. Smaller deals use it less often because the premium can be expensive relative to deal size.
What happens to escrowed funds if the buyer makes a claim?
The buyer sends a claim notice before the survival period ends. If the sellers don't object in time, or the claim is resolved in the buyer's favor, the agent releases that amount to the buyer and the rest to the sellers at the end of the period. Disputed claims can extend the hold.
How much do sellers actually receive after escrow?
Hypothetically: a $60M acquisition puts $6M into an indemnification escrow for 15 months and $600,000 into a working-capital escrow, so sellers get $53.4M at closing. If the buyer later wins a $900,000 claim, $5.1M of the indemnification escrow is released at the end of the period. Assuming the adjustment escrow is released in full, sellers realize $59.1M — and $6.6M of it arrives more than a year after closing.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.