M&A Glossary
Escrow: holding back part of the price
Escrow is an account where part of the price sits blocked for an agreed period after closing. It protects the buyer in case the seller’s representations turn out to be untrue. It is the compromise between a buyer who wants security and a seller who wants the money now.
How it works
The parties agree that at closing a defined share of the price goes not to the seller but to an account operated by a bank or notary. The funds are released after the security period, less any buyer claims that were raised and either accepted or resolved.
Typical size
- 5 to 15 per cent of the price
- higher where risks are identified
- lower with W&I insurance
Typical period
- 12 to 24 months
- longer for tax exposure
- up to the limitation period
What to negotiate
- who receives the interest
- de minimis threshold
- partial release schedule
- who pays the account fees
Alternatives to escrow
Escrow is not the only way to secure claims. It is often replaced by deferred payment, a bank guarantee, set-off against future earn-out instalments, or warranty and indemnity insurance. The last of these is gaining ground in Poland, because it lets the seller leave with the full amount while the buyer keeps protection.
The better documented the risks disclosed before signing, the smaller the escrow. It is one of the most measurable returns on proper preparation for a sale.
Frequently asked
Questions about escrow.
Who is entitled to interest on escrow funds?
It is negotiated. Most often interest follows the capital, going to whichever party ultimately receives the funds. It is worth writing down, because over two years on several million the amount matters.
Can a company be sold without escrow?
It can, particularly in smaller transactions and with a buyer who knows the sector well. The alternative is usually warranty insurance or a shorter deferral of part of the price.
When are the funds released?
At the end of the agreed period, often in tranches: part after twelve months, the rest once the tax limitation period expires. Amounts subject to a raised claim stay blocked until the claim is resolved.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge