Escrow

What Is Escrow in M&A?

In the context of mergers and acquisitions, an escrow is a mechanism where a portion of the transaction proceeds — typically 5–15% of the purchase price — is deposited with an independent escrow agent (usually a bank or trust company) at closing. The funds are held for a defined period and released to the seller only if no valid indemnification claims are made by the buyer, or after claims are resolved.

Escrow arrangements give the buyer a readily accessible pool of funds to satisfy indemnification claims without needing to pursue the seller for payment (Corporate Finance Institute) — a particularly important protection when the seller is a financial sponsor that may distribute proceeds to investors shortly after closing.

How Escrow Works

At Closing

1. The buyer pays the full purchase price as part of the sell-side M&A process, but a portion is directed to an escrow account rather than to the seller
2. The escrow agent (a bank or trust company) holds the funds pursuant to an escrow agreement signed by all parties
3. The seller receives the balance of the purchase price directly

During the Escrow Period

• The buyer may submit indemnification claims against the escrowed funds if breaches of reps and warranties or other indemnifiable events are discovered
• The seller may dispute claims, triggering a resolution process (negotiation, then arbitration or litigation if necessary)
• Undisputed claims are paid from escrow; disputed amounts remain held pending resolution
• Interest earned on escrowed funds is typically allocated to the seller (as the economic owner of the funds)

At Release

• Upon expiration of the escrow period (typically aligned with the survival period for general reps and warranties), remaining funds are released to the seller
• Amounts subject to pending but unresolved claims are retained until those claims are settled
• Some escrows have scheduled partial releases (e.g., 50% released at 12 months, remainder at 18 months)

Escrow Agreement Key Terms

The escrow agreement is a standalone contract between the buyer, seller, and escrow agent that governs:

• Escrow amount — the dollar value or percentage of the purchase price to be escrowed
• Escrow period — the duration the funds are held (typically 12–24 months)
• Release conditions — the circumstances under which funds are released to the seller or paid to the buyer
• Claim procedures — how the buyer submits claims and how the seller objects
• Dispute resolution — the mechanism for resolving contested claims (joint instruction, arbitration, or court order)
• Investment of funds — how escrowed funds are invested during the holding period (typically low-risk instruments)
• Fees — escrow agent fees and which party bears them

Escrow vs. Holdback

A related but distinct mechanism is a holdback, where the buyer retains a portion of the purchase price directly rather than depositing it with a third party. Key differences:

	Escrow	Holdback
Held by	Independent third party	The buyer
Seller’s security	Higher — neutral agent	Lower — buyer controls funds
Administrative cost	Escrow agent fees	Minimal
Common in	Larger transactions	Smaller or middle-market deals

Sellers generally prefer escrow over holdback because the neutral agent provides greater assurance that funds will be released if no valid claims arise.

Negotiation Dynamics

• Escrow size — buyers push for larger escrows (15–20%); sellers prefer smaller amounts (5–10%) or none at all
• Duration — buyers want longer periods; sellers want shorter ones to access their proceeds sooner
• Release schedule — sellers negotiate for partial early releases to reduce the amount at risk over time
• Interaction with RWI — when reps and warranties insurance is used, escrow amounts are often reduced significantly or eliminated (a consideration covered in our guide to selling a business)

Escrow in Asia Pacific

Escrow practices in Asia Pacific M&A vary by market and transaction size. In Australia and Japan, escrow arrangements are standard for mid-market and larger transactions. In Southeast Asian markets, escrow infrastructure may be less developed, and parties sometimes use alternative security mechanisms such as bank guarantees or parent company guarantees. Cross-border transactions must navigate currency denomination, interest allocation, and tax treatment of escrowed funds across jurisdictions. AI-native platforms like Amafi help advisors structure appropriate security mechanisms for cross-border Asia Pacific transactions.