In our purchase agreement negotiations, the buyer is demanding a fifteen percent indemnity escrow held for eighteen months, while our attorney wants Reps and Warranties Insurance. How does this impact our net deal value and risk?

Question

Tyler Smith · Accepted Answer

Indemnity provisions determine how much of your purchase price is genuinely yours at closing versus what remains at risk for post-closing claims. A buyer demanding a fifteen percent cash escrow held for eighteen months is effectively withholding a significant portion of your proceeds to protect against breaches of representations and warranties regarding historical taxes, customer contracts, employment disputes, or financial statements.

To protect your proceeds, push for Reps and Warranties Insurance (RWI). In modern middle-market transactions, RWI shifts the vast majority of operational rep breach risk from the seller to a third-party insurance underwriter. Under a standard RWI policy, the seller's indemnity escrow is typically reduced to roughly zero point five to one percent of enterprise value, held for only twelve months to cover the policy retention deductible. Once that retention is split between buyer and seller, your capital at risk shrinks by ninety percent.

Evaluate the cost of the RWI premium, which typically runs between two and three percent of the policy limit, plus underwriting fees. In competitive processes, the buyer often pays the premium or splits it with the seller.

If the transaction size is too small for an institutional RWI policy (generally deals under twenty to thirty million dollars in enterprise value), negotiate a strict cap on seller indemnity liability. Push for an escrow of no more than seven to ten percent for twelve months, establish a true deductible basket rather than a first-dollar tipping basket, and ensure that fundamental reps (such as ownership of stock and authority to sell) are separated from general operational reps.