Escrow
In M&A, an arrangement under which a portion of the 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 give the buyer a funded source of recovery for indemnification claims, though a disputed claim is typically released only on joint instructions or a final order.
Sizing
Escrow size and duration are negotiated, and the release date is commonly tied to the survival period for general representations. Where the buyer obtains representations and warranties insurance (RWI), the escrow is usually smaller and sized to part of the policy retention and any specific known risks.
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. A third-party escrow removes the buyer credit risk, though disputes over release can still arise.
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 common in private-target deals, and some deals reduce or omit the escrow when the buyer relies on RWI.
Companion article: Selling Your Business in Texas