M&A Escrow Agreement: All You Need to Know

Mergers and acquisitions (M&A) are complex transactions that involve the acquisition of one company by another. During the due diligence process, buyers may uncover unexpected liabilities or disputes, which can put their investment at risk. To mitigate these risks, many M&A transactions involve an escrow agreement. In this article, we’ll explore what an M&A escrow agreement is, how it works, and why it’s important.

What is an M&A Escrow Agreement?

An M&A escrow agreement is a contractual arrangement between the buyer, seller, and escrow agent that ensures that a portion of the purchase price is held in escrow for a period of time after the transaction closes. The purpose of the escrow is to provide a source of funds to cover any claims or disputes that arise after the closing date. The amount held in escrow is typically a percentage of the purchase price, and the length of the escrow period is negotiable but is typically between six months and two years.

How Does an M&A Escrow Agreement Work?

An M&A escrow agreement requires the buyer to deposit a portion of the purchase price into an escrow account held by a third-party escrow agent. The funds are held in the account until the escrow period expires or until a claim is made. If a claim is made, the escrow agent will release the funds to the party that prevails in the dispute.

The escrow agreement should specify the circumstances under which a claim can be made, the type of claims that are covered, and the procedures for making a claim. For example, if the buyer discovers undisclosed liabilities or breaches of representations and warranties after closing, they may be able to make a claim against the escrow funds. Similarly, if a third-party asserts a claim against the seller for a pre-closing liability, the buyer may be able to make a claim against the escrow funds.

Why is an M&A Escrow Agreement Important?

An M&A escrow agreement is important because it provides a measure of protection for both the buyer and the seller. For the buyer, it ensures that they have a source of funds to cover any unexpected liabilities or disputes that arise after closing. For the seller, it provides a mechanism for resolving any post-closing claims without having to negotiate a separate settlement agreement.

In addition to providing protection, an M&A escrow agreement can also help facilitate the transaction by giving the buyer confidence that any issues that arise after closing will be dealt with fairly and efficiently. This can make the buyer more willing to pay a higher purchase price, which can benefit the seller.

Conclusion

An M&A escrow agreement is a valuable tool for managing risk in complex transactions. It provides a source of funds to cover any claims or disputes that arise after closing, which can protect both the buyer and the seller. If you’re involved in an M&A transaction, it’s important to work with an experienced attorney who can help you negotiate and draft an escrow agreement that meets your needs.