Escrow

What It Means

Escrow refers to the process of holding all or part of the cash payment involved in the sale and purchase of a company in an account managed by a third-party for a period of time.

Why It’s Important

The funds held in Escrow protect both the Buyer and Seller. Funds placed into Escrow prior to the closing of an Acquisition assure the Seller that the Buyer has the capital to complete the transaction and a good faith interest in doing so. If the transaction is cancelled by either party prior to closing, as is often the case, the Buyer has the confidence of knowing that they will have an easy path to getting their money back.

After closing, a portion of sale price is commonly kept in Escrow, known as an Escrow Holdback, for a period of time. These funds are the first source of recourse for indemnification claims made by Buyers after the closing due to breaches in representations and warranties the Seller made in the Purchase Agreement. The terms of the Escrow Holdback can be a significant source of contention during Acquisition negotiations. As such, it is beneficial to have the details of Escrow Holdback expectations outlined in a Letter of Intent before serious Due Diligence begins.

Related Terms

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Articles

Follow the Money: Sources of Capital Used to Buy a Business

In this article, we will explore some of the more common sources of funding used to purchase a business, along with a few brief but important considerations for both buyers and sellers.

[Updated] Should the election results affect when you sell your business?

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What is an “add-back” expense anyway?

Expense add-backs are a common adjustment made to the P&L of companies that are positioned for sale. They are intended to represent expenses that would not have affected the company under different management. Legitimate add-backs can provide a significant boost to a company’s valuation.

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The COVID-19 pandemic has proven to be boom or bust for many businesses. In this article, we’ll explore 5 ways that the resulting economic climate is likely to affect the sale of a business, for better or worse.

Should you hire a business broker to sell your business?

Explore some key questions to ask when considering whether it makes sense to hire a business broker to sell your business.

Escrow

What It Means

Why It’s Important

Related Terms

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