How do acquirers use indemnity escrows and post-closing working capital true-ups against sellers, and how do we protect our net proceeds before signing the purchase agreement?

Question

Tyler Smith · Accepted Answer

Signing a purchase agreement does not mean you collect every dollar of the headline valuation. Acquirers routinely use indemnity escrows and net working capital true-ups as post-closing mechanisms to claw back cash if diligence uncovered ambiguities in your operations.

An indemnity escrow holds ten to fifteen percent of your purchase price in an escrow account for twelve to eighteen months to cover potential breaches of representations and warranties. If your corporate records are sloppy, your taxes are un-audited, or your employee classifications are questionable, the buyer will file claims against that escrow after closing.

A net working capital true-up adjusts the final purchase price based on the current assets and liabilities delivered at closing versus an agreed-upon target. If the working capital peg is calculated unfairly or seasonality is ignored, you may end up writing a check back to the buyer on Day 90 post-close.

To protect your net proceeds:

- Invest in Rep and Warranty insurance (RWI) to cap your personal escrow liability, shifting the breach risk to a third-party underwriter.
- Define working capital precisely during letter of intent negotiations, using a trailing twelve-month average that normalizes seasonality and excludes cash and transaction expenses.
- Audit your balance sheet and resolve all disputed receivables, stale inventory, and aged payables before setting the working capital baseline.

Controlling these mechanics during runway preparation prevents you from leaving millions behind in post-close clawbacks.