Escrows, Holdbacks, and Purchase Price Security: Who Holds the Money and Who Gets It Back

Document type: Article Practice area: Corporate — Mergers and Acquisitions Jurisdiction: United States (Delaware and New York contract law) Last reviewed: 5 September 2026

The problem escrow solves

A buyer signs a purchase agreement full of representations. The sellers promise the financial statements are accurate, the company owns its intellectual property, there is no undisclosed litigation, and the taxes are paid. Then closing happens, the buyer wires the money, and the sellers distribute it to two hundred stockholders across eleven states and four countries.

Six months later the buyer discovers that a material customer contract was terminable on thirty days' notice, contrary to a representation, and the business is worth $20 million less than it paid.

The buyer now has a legal claim and no practical way to collect it. It can sue the sellers, but the sellers are individuals and trusts and funds in wind-down, and the money is gone. It has an indemnity, and the indemnity is worth what the indemnitors can pay.

Escrow answers this. A portion of the purchase price is not paid to the sellers at closing; it is deposited with a neutral third party and held for a period. If the buyer has a claim, it makes it against a fund that exists. If it does not, the money is released to the sellers.

Everything else in escrow practice is detail — but the detail is where the money is.

The three kinds of escrow, and why they should not be combined

The adjustment escrow

A purchase price adjustment reconciles the price to the closing balance sheet — working capital, cash, debt, transaction expenses. The adjustment can go either direction, and if it favors the buyer, the buyer needs a source of payment.

An adjustment escrow is small (typically 100–150% of the expected adjustment amount), short (releasing when the adjustment is finally determined, usually 90 to 150 days), and mechanically simple. Its release is triggered by a definite event — final determination of the closing statement — rather than by a claim.

The indemnity escrow

The classic. It secures the sellers' indemnification obligations for breaches of representations and covenants. It is larger, longer, and far more complicated, because release depends on whether claims have been asserted and what happens to them.

Historically these ran 10–15% of the purchase price for 12 to 24 months. Representation and warranty insurance has compressed that dramatically; in an insured deal the escrow is often 0.5–1% and exists only to fund the buyer's retention under the policy.

The special-issue escrow

Sometimes a specific problem is known at signing — pending litigation, a tax position under audit, an environmental remediation of uncertain cost, a customer consent not obtained, a regulatory approval outstanding. A dedicated escrow funds that specific exposure, with release tied to the specific resolution.

Keep these separate. Combining an adjustment escrow with an indemnity escrow means the buyer's adjustment claim competes with its indemnity claims for the same fund, and the release schedules conflict. Separate accounts, separate release triggers, separate claim procedures.

Sizing: what the number should be

The escrow amount is a negotiation, but it should be a reasoned one.

Factors pushing the number up:

Sellers who are numerous, dispersed, or hard to collect from;
Sellers who are funds that will dissolve;
A business with identified risk areas — litigation, regulatory exposure, revenue recognition complexity;
A short survival period, which means the buyer must find problems fast;
No representation and warranty insurance.

Factors pushing it down:

A creditworthy single seller who will remain in existence;
Insurance covering the representations;
A long survival period with a solvent indemnitor;
Robust setoff rights against future payments — an earnout, a note, or a rollover interest.

The right analytical frame is not "what is customary" but "what does the buyer need to be able to reach, and for how long?" A $500 million deal with one investment-grade corporate seller may need no escrow at all. A $40 million deal with sixty individual sellers may need 15% for two years.

The tail problem

Fundamental representations — organization, authority, capitalization, title to shares, tax — typically survive far longer than general representations, sometimes to the statute of limitations. An escrow rarely covers that period, which means the buyer's recourse for a fundamental breach in year four is against the sellers personally, pro rata, subject to whatever cap the agreement sets.

This gap is real and frequently unaddressed. Options: a longer escrow for a smaller amount covering only fundamentals; a guarantee from a creditworthy seller; insurance with a longer policy period; or simply accepting the risk with eyes open.

The escrow agent: a deliberately unhelpful party

The most common misunderstanding about escrow agents is that they will make decisions. They will not, and their agreements are drafted to make sure of it.

An escrow agent — usually a bank's corporate trust department or a specialist escrow provider — undertakes to:

Hold the funds in a segregated account;
Invest them in specified permitted investments (typically a money market fund or deposit account);
Release them only on receipt of a document conforming exactly to the agreement's requirements; and
Do nothing else.

Their agreements contain sweeping protective provisions: no duty to investigate, no obligation to determine the validity of any notice, entitlement to rely conclusively on any document appearing genuine, no fiduciary duty, indemnification by both parties, the right to interplead the funds into court if instructions conflict, and the right to resign on notice.

Three practical consequences follow.

First, the release mechanism must be mechanically unambiguous. The agent will release on "joint written instructions signed by Buyer and the Seller Representative" or on "a final non-appealable order of a court of competent jurisdiction." It will not release on "such amount as is properly due." If your release trigger requires judgment, the agent will interplead and the parties will litigate.

Second, the agent's form controls. Escrow agents use their own agreements and negotiate them narrowly. The commercial terms — timing, notice, release — must be drafted into the escrow agreement and be consistent with the purchase agreement. Inconsistency between the two documents is the single most common escrow drafting error, and the escrow agreement generally governs the agent's obligations.

Third, the agent will resign if the parties fight. Escrow agents are paid a few thousand dollars a year and will not absorb litigation risk. Build in a successor mechanism.

Choosing the agent

A bank corporate trust department offers institutional stability and familiar forms; expect slow response times and rigid procedures.
A specialist escrow provider is faster and more flexible on mechanics, and often integrates payment distribution to numerous sellers.
Counsel as escrow agent is common in small transactions and generally a mistake in larger ones — the conflict on a disputed release is acute, and the firm's insurance may not cover it.
Confirm FDIC or SIPC coverage, permitted investments, and what happens if a money market fund breaks the buck. On a $30 million escrow held for two years, the investment terms are not trivial.

Release mechanics: where the disputes are

The claim notice

Everything turns on this. The typical structure:

Buyer delivers a Claim Notice to the Seller Representative and the escrow agent before the survival expiration.
The Seller Representative has a period (commonly 20–30 days) to deliver an Objection Notice.
If no timely objection, the claim is deemed accepted and the agent releases the claimed amount to the buyer on joint instructions or on the buyer's certification.
If objected to, the parties negotiate for a period, then resolve by litigation or arbitration, and the agent releases on a final order or joint instructions.
On the release date, the agent releases the balance less amounts subject to pending claims.

The four drafting decisions inside that structure

What must a Claim Notice contain? Draft this carefully and symmetrically. Requiring too much — a detailed calculation, supporting documents, a legal analysis — creates a trap where a good claim fails on a technicality. Requiring too little lets a buyer preserve the entire escrow with a one-line placeholder notice on the last day.

The balanced formulation: a notice must state, "in reasonable detail to the extent then known," the facts giving rise to the claim, the representation or covenant alleged to be breached, and a good faith estimate of the amount if determinable. Add expressly: failure to provide any particular detail does not invalidate the notice except to the extent the sellers are actually and materially prejudiced.

What is the consequence of a late objection? Deemed acceptance is standard and appropriate — but only if the objection period is realistic and the notice actually reached the right person. Provide for notice to the Seller Representative and to its counsel, with email delivery deemed received.

How is a disputed claim quantified for retention purposes? If the buyer claims "at least $5 million," how much does the agent retain? The answer should be the buyer's good faith estimate, subject to a mechanism for challenging an obviously inflated figure. Without this, a buyer can hold the entire escrow hostage to a small claim.

Who instructs the agent? In practice, joint written instructions. Build a covenant: each party shall execute joint instructions consistent with the outcome, and a refusal is itself a breach. This gives the aggrieved party a specific performance claim rather than an interpleader.

The Seller Representative

In a deal with many sellers, one person or entity acts for all of them. This appointment is one of the most important and least examined provisions in the transaction.

The representative provisions should address:

Scope of authority — to receive notices, negotiate, settle claims, execute instructions, and bind all sellers;
Irrevocability, and binding on successors and transferees;
Exculpation and indemnification by the sellers, funded by an expense fund withheld at closing (typically $250,000–$1,000,000). Without a funded expense reserve, the representative cannot afford to defend a claim and will simply settle.
Reliance by the buyer — the buyer must be entitled to rely conclusively on the representative's actions;
Successor mechanism if the representative resigns or dissolves.

A recurring failure: appointing the founder or the lead investor as representative without an expense fund and without exculpation. When a claim arrives, that person is personally exposed to defense costs and to claims from the other sellers, and they respond by disengaging.

Interpretation: what courts do with escrow disputes

Escrow disputes are contract disputes, and they are decided on ordinary principles — which, in Delaware and New York, means the text governs where it is clear.

Delaware's approach is stated in Estate of Osborn v. Kemp, 991 A.2d 1153 (Del. 2010): a contract is read as a whole, effect is given to every provision, and a contract is ambiguous only when its terms are reasonably susceptible to more than one meaning — not merely because the parties disagree. Courts will not create ambiguity to reach a preferred result.

Where ambiguity does exist, extrinsic evidence enters. GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2011) reversed a summary judgment that had resolved an ambiguous agreement on the papers, holding that where competing readings are each reasonable, the meaning is a question of fact.

And in Salamone v. Gorman, 106 A.3d 354 (Del. 2014), the court emphasized reading defined terms consistently throughout an agreement and giving effect to the structure the parties chose — an approach with direct application to escrow agreements, which are full of defined terms cross-referenced from a separate purchase agreement.

The practical lesson is unromantic: escrow disputes are won by whoever drafted the notice provision and the release trigger more precisely. There is no equitable overlay that rescues a party from a clear mechanism, and courts are unsympathetic to arguments that the result is unfair when the parties wrote the mechanism themselves.

Representation and warranty insurance and the reshaping of escrow

Over the past decade, buy-side representation and warranty insurance has become standard in middle-market and larger private transactions, and it has changed escrow practice fundamentally.

The mechanics. The buyer purchases a policy covering breaches of the sellers' representations, with a policy limit (often 10% of enterprise value), a retention (commonly 0.5–1% of enterprise value, dropping after a period), and exclusions. The purchase agreement is then drafted so that the buyer's sole recourse for representation breaches — other than fraud — is the policy.

The escrow consequence. Rather than a 10% indemnity escrow, the deal has a small escrow funding half the retention, with the buyer bearing the other half. Sellers receive substantially all the purchase price at closing. This is the primary reason sellers pay for the policy despite it being a buy-side product.

What escrow still does in an insured deal:

Funds the seller's share of the retention;
Secures the purchase price adjustment;
Secures indemnities that the policy excludes — and the exclusions matter enormously.

The exclusions to examine:

Known issues disclosed in diligence or on the schedules;
Purchase price adjustment amounts;
Forward-looking statements and projections;
Certain tax matters, particularly transfer pricing and net operating loss availability;
Specific industry exclusions — asbestos, PFAS, wage and hour, medical billing, cyber in some markets;
Fraud carve-backs, which vary in scope.

A structural point counsel miss: in an insured deal, the sellers no longer have skin in the game for representation breaches, which changes their incentives during disclosure schedule preparation. Buyers should not relax diligence because they have a policy; the policy excludes what diligence would have found.

Tax, accounting, and the questions asked too late

Who owns the escrow for tax purposes? Generally the sellers, if the escrow is part of the purchase price and the sellers are entitled to it absent a claim. That means the sellers report the escrowed amount, and the income earned on it, even before receiving it — unless the transaction qualifies for installment reporting or the escrow is a genuine contingency.

Who pays tax on the escrow income? The agreement must say. Common approaches: income is allocated to the sellers and distributed annually to fund the tax; income follows the principal; or income is retained and allocated on release. Whichever is chosen, the escrow agent needs a tax identification number and reporting instructions, and the agent will insist on them before funding.

Installment sale treatment. Where the escrow release is contingent, the sellers may be entitled to defer gain until release. This interacts with the imputed interest rules and can be valuable. It requires the escrow to be genuinely contingent rather than a mere payment delay.

Purchase accounting. For the buyer, escrowed consideration is generally part of the purchase price and recorded as such, with subsequent releases to the buyer treated as adjustments — but the treatment of contingent consideration under applicable accounting standards has nuance, and the deal team should confirm with the buyer's auditors before agreeing to a structure.

Unclaimed property. An escrow that outlives its participants — a seller who dies, a fund that dissolves, an individual who cannot be located — becomes unclaimed property subject to state escheat. The escrow agreement should specify a jurisdiction and a process, and the paying agent should have current addresses. On a deal with several hundred selling stockholders, this is not hypothetical.

Drafting the escrow agreement: provision by provision

The escrow agreement is short — usually fifteen to twenty pages, most of it the agent's protective boilerplate — but every commercial term matters. Work through it in this order.

Parties and appointment. Identify the buyer, the Seller Representative (not the individual sellers), and the agent. Confirm the representative's authority is established in the purchase agreement and recited here.

Deposit. The exact amount, the wiring instructions, and the timing. In a deal with a purchase price adjustment, confirm whether the escrow is funded from the price or in addition to it — this affects the sellers' proceeds calculation and, occasionally, the merger consideration disclosed to stockholders.

Investment. Specify permitted investments, who bears investment risk, and what happens on a loss. Money market funds and insured deposit accounts are standard. Add a provision requiring the agent to liquidate as needed to make a release without penalty, and confirm there is no lock-up that would delay a release.

Income and taxes. State who is treated as owner for tax purposes, who receives the income, whether income is distributed currently, and who provides the tax identification number and forms. Agents will not fund without this and will withhold if it is missing.

Claims and release. The heart of the document, discussed above. Ensure exact consistency with the purchase agreement's indemnification article — including defined terms, notice addresses, survival dates, and cure periods.

Release schedule. State each release date and amount with precision, including any tiered release (for example, half at twelve months, the balance at twenty-four). Address whether amounts retained for pending claims are drawn from the current tranche or spread across tranches.

Instructions and dispute resolution. Define what a joint written instruction looks like, who may sign, and how signatures are verified. Agents increasingly require callback verification for wire instructions — build the time for it into the release timetable. Specify the effect of a court order: "final and non-appealable" is standard, and it means the agent will not act on an interim order.

Agent's fees and expenses. Who pays, and from where. If fees come out of the escrow, the sellers are paying, and the amount should be disclosed to them.

Resignation and successor. The agent may resign on notice; provide a mechanism for appointing a successor and for the agent to deposit funds with a court if none is appointed. Without this the funds can be interpleaded on the agent's initiative.

Indemnification of the agent. Universal and non-negotiable in substance. Negotiate the allocation between buyer and sellers, and confirm it does not extend to the agent's own gross negligence or willful misconduct.

Notices. Include email as a permitted method with deemed receipt, copy counsel for each party, and require the parties to keep addresses current. A claim notice sent to a stale address is the kind of error that decides cases.

Escrow in specific contexts

Escrow in a stock deal with dissenting stockholders

Where some stockholders dissent and seek appraisal, their shares are not converted and they are not entitled to escrow proceeds. But the merger consideration calculation, the per-share escrow allocation, and the paying agent's distribution instructions all assume a fixed share count. Build a mechanism for reallocating the escrow among the non-dissenting holders if the dissenting shares drop out, and specify who bears the cost of the appraisal proceeding.

Escrow in an asset deal

Simpler in principle, because the sellers remain in existence and there is usually one of them. The escrow still matters where the seller will distribute proceeds and dissolve, or where the sellers are a group. Watch for successor liability claims that fall outside the indemnity and therefore outside the escrow.

Escrow with a fund seller

A private equity or venture fund selling a portfolio company faces a specific problem: it wants to distribute proceeds to its limited partners and close the fund, and an escrow prevents that. Funds negotiate hard for small, short escrows and for insurance instead.

Where an escrow is unavoidable, funds sometimes distribute proceeds subject to a clawback obligation on their limited partners. From the buyer's perspective this is materially worse than an escrow — recourse runs to dozens of limited partners under a fund agreement the buyer is not party to — and buyers should price it accordingly or insist on the escrow.

Escrow and bankruptcy

If a seller becomes a debtor, is the escrow property of the estate? The answer depends on whether the seller retains an interest in the escrowed funds. Where the escrow is a genuine third-party arrangement and the seller's right is contingent, courts have generally held that the funds are not property of the estate to the extent of the buyer's claim — but the analysis is fact-specific and the automatic stay may still complicate release.

Practical protections: provide that the escrow is held for the benefit of both parties as their interests appear; avoid language suggesting the escrow is merely a deferred payment of the seller's money; consider a security interest in the escrowed funds in favor of the buyer, perfected by control; and, if the seller's credit is a real concern, use a letter of credit instead.

Escrow in cross-border deals

Additional considerations: the currency of the escrow and who bears exchange risk; whether the agent can hold funds outside the United States; withholding tax on escrow income; whether local law recognizes the escrow's segregation from the seller's assets; and enforcement of any resulting judgment. For deals involving a seller in a jurisdiction with exchange controls, an escrow held in that jurisdiction may be unreachable, which defeats the purpose.

Administering the escrow after closing

Escrows fail through neglect more often than through disputes. A short administrative discipline prevents most problems.

At closing. Confirm funding actually occurred and obtain the agent's acknowledgment. Circulate the escrow agreement, the release schedule, and the notice addresses to everyone who will need them — including the buyer's finance team, who will otherwise not know the money exists.

Calendar everything. The survival expiration dates for each category of representation. Each scheduled release date. The objection period for any claim notice. The expiration of any special-issue escrow trigger. Set reminders 60 and 30 days before each survival expiration, because a claim not noticed before survival expires is gone regardless of merit.

Monitor for claims. The buyer's integration team, not its deal lawyers, will be the first to encounter a breach. Brief them on what an indemnifiable breach looks like and on the deadline. This single briefing recovers more escrow money than any drafting refinement.

Keep the representative engaged. Sellers scatter after closing and the representative loses interest. Confirm the expense fund is intact, that the representative has current contact details for the sellers, and that someone will actually receive a claim notice.

Reconcile before each release. Compute the release amount, the retained amount for pending claims, and the income allocation, and circulate the computation before instructing the agent. Disagreements found at this stage are cheap; disagreements found after a release are not.

A worked example: the Aldergrove notice fight

The deal. Torvik Composites acquires Aldergrove Materials for $180 million. There are forty-three sellers, led by founder Beatriz Salcedo, who is appointed Seller Representative. The parties agree an $18 million indemnity escrow for eighteen months, plus a $2.5 million adjustment escrow. No representation and warranty insurance.

The escrow agreement provides:

Buyer may deliver to the Escrow Agent and the Seller Representative a written notice (a "Claim Notice") specifying in reasonable detail the nature and basis of the claim, the representation or covenant alleged to have been breached, and Buyer's good faith estimate of the Losses. If the Seller Representative does not deliver a written objection within twenty (20) days, the claim shall be deemed accepted.

Month sixteen. Torvik's general counsel, Anselm Rioux, discovers that Aldergrove had been under-accruing warranty liability on a product line, and the true exposure looks like $9 million to $14 million. He needs to preserve the claim before the eighteen-month survival date, which is six weeks away — but the engineering analysis is not finished.

What he does. He delivers a Claim Notice describing the product line, the accrual methodology, the specific representation regarding the accuracy of the financial statements and the adequacy of reserves, the facts discovered, the analysis underway, and a good faith estimate of "not less than $9,000,000, subject to completion of the ongoing engineering review."

Salcedo's objection. Her counsel objects on day nineteen, disputing both the breach and the amount, and separately argues that the notice is defective because it does not state a fixed amount and does not attach supporting documentation.

How this resolves. The defectiveness argument fails, and it fails for a reason drafted eighteen months earlier: the agreement required detail "to the extent then known" and added a clause providing that a notice would not be invalid for want of particular detail absent actual material prejudice. Torvik's notice was as detailed as the facts permitted.

But a second fight is live, and it is about money now rather than money later: how much does the agent retain past the release date? The agreement says amounts "subject to pending claims" are retained. Torvik says $14 million — the top of its range. Salcedo says the notice claimed $9 million and that is the cap.

The agreement does not say. This is the gap.

The parties negotiate: the agent retains $11 million, releases $7 million to the sellers, and the parties agree that if the final determination exceeds $11 million, Salcedo will pursue the sellers pro rata for the excess, backed by a covenant in the purchase agreement that survives. Eleven months later the claim settles at $6.8 million, and the balance is released.

Three drafting lessons.

The "to the extent then known" qualifier and the no-prejudice clause saved an eight-figure claim. Without them, Torvik's notice was vulnerable.
The retention amount for an unliquidated claim must be specified. Say expressly that the retained amount equals the buyer's good faith estimate, with a mechanism — an expert determination, or a court application — for a seller who believes the estimate is unreasonable.
Twenty days is short. A Seller Representative with forty-three principals and no in-house counsel cannot meaningfully evaluate a complex claim in twenty days. Thirty is better, and the deemed-acceptance consequence should be tied to a clear notice provision.

Negotiating the escrow: what each side should push for

Escrow terms are negotiated late, often by associates, after the principals have agreed the headline terms and lost interest. That is precisely why the terms are worth a partner's attention: the money at stake is real, and the counterparty is likely to concede points that would be defended fiercely if raised earlier.

What buyers should insist on. A release trigger that does not require the sellers' cooperation for undisputed claims, so that a representative who simply stops responding cannot freeze the fund. A claim notice standard that tolerates incomplete information at the time of notice. A retained-amount rule tied to the buyer's good faith estimate. A covenant requiring both parties to execute joint instructions consistent with any determination, enforceable by specific performance. Survival periods long enough to allow one full audit cycle plus a quarter — twelve months is often too short because the first annual audit under new ownership is where accounting breaches surface. And an express statement that the escrow is not the exclusive remedy for fraud or for breaches of fundamental representations.

What sellers should insist on. A short, definite release schedule with tranches, so that money starts flowing back. A cap on the amount retained past a release date for pending claims, and a mechanism — expert determination is efficient — for challenging an inflated estimate. A realistic objection period, thirty days rather than twenty, running from actual receipt. A funded representative expense reserve. Interest and income for the sellers' account, distributed at least annually. A prohibition on the buyer asserting claims it knew about at closing, if the deal is on a no-sandbagging basis. And an express statement that the escrow is the buyer's sole recourse for representation breaches other than fraud, if that is the deal — this is the single most valuable seller protection and it must be in both the purchase agreement and the escrow agreement.

What both sides should want. Consistency between the purchase agreement and the escrow agreement, checked line by line by someone who reads both. A named individual at the escrow agent with a backup. A dispute mechanism proportionate to the amounts — a full arbitration for a $200,000 claim is a waste, and a tiered mechanism with expert determination for smaller claims saves both sides money.

The consistency check nobody runs

Before signing, put the purchase agreement's indemnification article next to the escrow agreement and confirm, item by item: the defined terms match; the survival dates match to the day; the notice addresses match; the claim notice content requirements match; the objection period matches; the release dates and amounts match; the definition of a final determination matches; and the treatment of the adjustment escrow is the same in both. Discrepancies appear in roughly a third of transactions, because the two documents are drafted by different people at different times, and each discrepancy is an argument waiting to happen.

When the escrow becomes the deal

A final observation. In transactions with substantial identified risk — pending litigation, a disputed tax position, an unresolved regulatory matter — the escrow can become the mechanism through which the parties allocate the risk they could not price.

This is a legitimate and often elegant use. Rather than arguing about whether a pending patent case is worth $2 million or $20 million and adjusting the price accordingly, the parties can escrow an amount, define the outcome that releases it, and let the litigation decide. Both sides get a fair answer, and neither has to be right today.

Design points for a risk-allocation escrow:

Define the resolving event precisely — a final non-appealable judgment, a settlement approved by both parties, a specified regulatory determination, or the expiry of a limitations period.
Decide who controls the underlying matter. If the buyer controls the defense and the sellers fund it, the sellers need consent rights over settlement; if the sellers control it, the buyer needs protection against a settlement that imposes non-monetary obligations on the business.
Address defense costs — whether they come out of the escrow, and whether they count against any cap.
Provide for partial release as the exposure becomes clearer, rather than an all-or-nothing outcome years later.
Set an outside date after which the escrow releases regardless, so that an indefinitely pending matter does not trap the money forever.

Handled this way, the escrow stops being a credit-support device and becomes a genuine contractual settlement of an unresolvable disagreement — which is, in the end, what good transactional drafting mostly is.

The alternatives, and when each is better

Holdback. The buyer simply withholds part of the price and pays it later, subject to setoff. Cheaper — no agent, no fees, no escrow agreement — and gives the buyer possession of the money, which is a large practical advantage. Sellers should resist, because the money sits with the party that will decide whether to pay it, and collecting from a buyer who has decided not to pay requires litigation.

Setoff against future payments. Where the transaction includes an earnout, a seller note, or rollover equity, the buyer can be given a right to set off indemnity claims. Effective, free, and heavily negotiated. Sellers should insist that setoff apply only to finally determined claims, not merely asserted ones, or the buyer will withhold earnout payments pending resolution of any dispute.

Letter of credit. A seller who wants its cash at closing can post a standby letter of credit instead. The seller pays a fee to its bank, ties up borrowing capacity, and gets its money. The buyer gets a draw right against a bank. Drafting point: define the draw conditions precisely, because a letter of credit is independent of the underlying deal and the bank pays on conforming documents alone.

Guarantee. A creditworthy parent or principal guarantees the sellers' obligations. Free to the buyer, and only as good as the guarantor. Confirm the guarantor's financial condition and include covenants against distributions that would impair it.

Insurance. Discussed above. Converts a credit problem into a coverage problem, which is usually a better problem.

Nothing at all. Where the seller is a large, solvent, continuing entity and the deal is small relative to it, an escrow adds cost for no benefit. The right question is always whether the buyer can collect, not whether escrow is customary.

Quick reference

Size the escrow to the collection problem, not to custom. Ask who the indemnitors are, whether they will exist in two years, and what else the buyer can reach.

Separate the adjustment escrow from the indemnity escrow. Different triggers, different timelines, different disputes.

Assume the escrow agent will do nothing that requires judgment. Every release trigger must be mechanical.

Draft the claim notice provision as though you will be on both sides of it, because on the next deal you will be.

Fund the Seller Representative's expenses and give the representative exculpation, or the representative will disengage exactly when the sellers need one.

Check the escrow agreement against the purchase agreement line by line. Inconsistency is the most common and most expensive drafting failure in this area.

Calendar the survival dates and brief the integration team. Most escrow money is lost to a missed deadline, not to a lost argument.