Escrow and holdback, explained simply
Rather than pursue a seller for money after closing, the buyer keeps a portion of the price aside. If no claims arise, the funds are released to the seller at the end of the period.
Common types are an indemnity escrow for breaches of the seller’s promises (often 12 to 18 months), a working capital escrow to secure the true-up and a special escrow for a specific known risk.
Amounts held back at closing
IllustrativeAlder Creek Manufacturing, $ millions
Diligence findings often determine the size and type of each escrow.
Escrow and holdback compared
| Escrow | Holdback | |
|---|---|---|
| Who holds the funds | Independent escrow agent, often a bank | The buyer |
| Seller protection | Stronger | Weaker |
| Cost | Agent fees | No agent fees |
| Typical use | Larger deals | Smaller deals |
Worked example
| Alder Creek escrow | $ millions | Period |
|---|---|---|
| General indemnity | 2.0 | 18 months |
| Working capital | 0.5 | Until the true-up |
| Employee claim (specific) | 0.3 | Until resolved |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
After the true-up, $0.1 million is paid to the buyer from the working capital escrow and $0.4 million is released to the seller.
Why it matters in a deal
Escrows give the buyer practical protection and the seller certainty over the maximum at risk.
Red flags
- Large special escrows, which signal serious known risks
- No escrow where the seller will be difficult to reach after closing