How Escrow Accounts Protect Buyers & Sellers in M&A Deals –
Mergers and acquisitions (M&A) involve high stakes—millions (or billions) of dollars change hands, and both buyers and sellers face risks. What if financial statements were misrepresented? What if hidden liabilities surface after the deal closes?
This is where escrow accounts come in. At Secured Trust Escrow, we act as an independent third party, securely holding funds until all conditions of the deal are met. In this guide, we’ll explain how M&A escrow works, why it’s essential, and how it protects both sides.
Why Escrow is Essential in M&A
M&A deals are complex, and trust isn’t always enough. Escrow provides a neutral, secure way to:
✔ Protect buyers from undisclosed liabilities or breaches of contract.
✔ Assure sellers they’ll get paid if they meet their obligations.
✔ Prevent disputes by clearly defining fund release conditions upfront.
Without escrow, buyers might withhold payments unfairly, or sellers could disappear after receiving full payment—leaving the buyer with unresolved issues.
Common Types of M&A Escrow Accounts
Not all escrow accounts are the same. The most common types in M&A include:
1. Holdback Escrow
A portion of the sale price (often 10-20%) is held back for a set period (e.g., 12-24 months) to cover potential indemnification claims.
2. Reps & Warranties (R&W) Escrow
Funds are reserved in case the seller’s representations and warranties (e.g., financial accuracy, legal compliance) turn out to be false.
3. Earnout Escrow
If part of the deal includes future performance-based payments, escrow ensures sellers receive their earnout if milestones are met.
4. Tax Liability Escrow
Holds funds to cover potential pre-acquisition tax exposures that may arise after closing.
How Long Do Funds Stay in Escrow?
Escrow periods vary but typically last:
– 6-12 months for standard indemnification holdbacks.
– 12-24 months for tax or legal liability coverage.
– Longer for earnouts (until performance targets are achieved).
The exact timeline is negotiated in the purchase agreement.
What Happens if There’s a Dispute?
Disputes over escrow releases are common. Here’s how they’re resolved:
✔ Mediation – A neutral third party helps negotiate a settlement.
✔ Arbitration – A binding decision made by an arbitrator.
✔ Court Litigation – Rare, but possible if mediation fails.
At Secured Trust Escrow, we help facilitate fair resolutions while ensuring compliance with the escrow agreement.
Why Choose a California-Based Escrow Agent?
If your M&A deal involves California businesses, working with a local escrow provider offers advantages:
✔ Knowledge of state laws (e.g., California’s strict escrow regulations).
✔ Faster fund handling (no delays from out-of-state banks).
✔ Personalized service (direct access to escrow officers).
Escrow isn’t just a formality—it’s a critical risk management tool in M&A deals. Whether you’re a buyer or seller, using a trusted escrow agent like Secured Trust Escrow ensures a secure, transparent, and fair transaction.
Need M&A Escrow Services in California?
Contact Secured Trust Escrow today for a consultation!
