deal-structures
In M&A, escrow means a slice of the price parked with a third party (or held back) to secure warranty claims, specific indemnities or adjustment true-ups. It is risk collateral, not a second earnout.
Escrow answers a simple problem: the seller has the cash, the buyer has the company, and claims take time. A portion of the price — often 5–15% on mid-market deals without W&I, sometimes much less with insurance — sits with an escrow agent and releases on a schedule unless claims are notified.
A holdback is economically similar but the buyer keeps the money. Sellers usually prefer a true escrow agent. Neither is earnout: escrow is about whether past representations and warranties were true, not about future performance.
Warranty and indemnity insurance can shrink general escrow to a residual deductible. Specific known issues (tax, environmental, a named lawsuit) often stay in a separate special escrow because underwriters exclude them. IBA-style private M&A practice in Europe has normalised this split.
€30m price. €1.5m general escrow, 18-month release, basket €150k, de minimis €25k. €0.8m special escrow for a tax matter, 36 months. At month 12 the buyer notifies a €200k warranty claim on inventory. The parties settle at €120k from escrow; the rest later releases to the seller.
Buyers want a long, large escrow. Sellers, especially private equity funds distributing to LPs, want cash at closing and will pay for W&I to get it. Founder sellers feel escrow as a delayed payday.
One escrow mixing earnout, WC true-up and warranty claims with no waterfalls. No claims procedure. Escrow agreement that does not match the SPA. Forgetting interest allocation.
Escrow does not increase the seller’s net worth if the cap is already the escrow. Fraud and wilful breach, if carved out of the cap, can still chase the seller personally.
Escrow quantum should follow identified issues in diligence, not a round percentage copied from the last deal. When findings are structured, the special-escrow schedule writes itself.