Last verified April 2026 · M&A deal terms
Escrow in Business Acquisitions: Indemnity, R&W, and Earnout Escrows (2026 Guide)
If you are buying or selling a small business or a SaaS company, you will encounter escrow three times: at the indemnity holdback, at the reps and warranties backstop, and at any earnout payment. Here is how each works and what percentages to expect.
Why M&A Deals Use Escrow
When you buy a business, you are acquiring assets, liabilities, contracts, employees, and relationships that have been represented to you in a disclosure schedule. Some of those representations may turn out to be wrong - a hidden tax liability, an undisclosed lawsuit, inventory that does not exist. The seller knows more than the buyer, and the buyer cannot fully verify everything before closing.
Escrow solves this by withholding a portion of the purchase price from the seller until the post-closing period - typically 12-18 months - during which problems are likely to surface. If a representation turns out to be false, the buyer makes an indemnification claim against the escrow. If the post-closing period expires without claims, the seller receives the remaining balance.
This structure aligns incentives: the seller has skin in the game during the handover period and cannot simply collect the full purchase price on day one and disappear. It gives the buyer recourse without necessarily suing the seller directly.
The Three Escrow Types in M&A
1. Indemnity (General) Escrow
The most common structure. A percentage of the purchase price is withheld at closing and held by an escrow agent. The buyer can make claims against this escrow for breach of representations and warranties, undisclosed liabilities, tax issues, or other specified matters. After the indemnification period expires (typically 12-18 months), the remaining balance is released to the seller.
Main Street (under $1M)
10-15% holdback
12 months
Mid-market ($1M-$50M)
8-12% holdback
12-18 months
Large deals ($50M+)
5-10% + R&W insurance
18-24 months
2. Reps and Warranties Escrow (or R&W Insurance)
In the 2010s, M&A deals used a dedicated R&W escrow (separate from the general indemnity escrow) specifically backstopping the seller's representations and warranties about the business. In the 2020s, this has largely been replaced by R&W insurance - an actual insurance policy that covers buyer losses from rep and warranty breaches.
R&W insurance is now standard on deals above $10M and increasingly used on deals as small as $3M. The buyer pays the premium (typically 2-4% of the policy limit). The deductible or retention is usually 0.5-1% of the deal value. Major underwriters include AIG, Allianz, Liberty Mutual, and Berkshire Hathaway Specialty.
For smaller deals where R&W insurance is not cost-effective, the general indemnity escrow serves this function. Sellers strongly prefer R&W insurance because they receive a larger portion of the purchase price at close without waiting 18 months.
3. Earnout Escrow
Earnouts are common in deals where the buyer and seller disagree on the business's future value. Instead of bridging the gap with a higher price, part of the price is contingent on hitting post-closing revenue, EBITDA, or other milestones. The earnout amount sits in escrow until the measurement date.
Earnout escrows are contentious because both parties have incentives to influence the measurement: the buyer may cut costs that reduce EBITDA in ways the seller finds unreasonable; the seller may have inflated pipeline numbers. Clear, objective metric definitions in the purchase agreement are essential. Earnout escrows typically cover 1-3 years of performance measurement periods.
Who Holds the Escrow?
For mid-market and large deals, the escrow agent is almost always a commercial bank trust department. Common choices include JPMorgan Chase, Citibank, Wilmington Trust (now M&T Bank), U.S. Bank Corporate Trust, and Wells Fargo Corporate Trust. The bank holds funds in a segregated trust account, applies interest at agreed rates, and disburses per the escrow agreement instructions - which require joint written instruction from both buyer and seller (or a court order in a dispute).
For small deals ($250k-$2M), Escrow.com is increasingly used as a lower-cost alternative to a bank escrow agreement. Bank escrow agreements typically require a minimum fee ($2,500-$10,000) that is not economical on small deals. Escrow.com charges 0.89% with no minimums, making it practical even for $300k transactions.
Key Negotiation Points
| Issue | Buyer Preference | Seller Preference |
|---|---|---|
| Holdback size | Larger (12-15%) | Smaller (5-8%) |
| Holdback period | Longer (18-24 months) | Shorter (12 months) |
| Claim threshold (basket) | Small basket (many claims qualify) | Large basket (limits nuisance claims) |
| Cap on liability | Full purchase price | Escrow amount only (no personal liability) |
| Interest on escrow | Buyer keeps interest | Seller keeps or splits interest |
| Release schedule | Single release at period end | Partial early releases (e.g., 50% at 12 months) |