The buyer is demanding that fifteen percent of the purchase price be held in an indemnity escrow account for twenty-four months to cover potential post-close representation and warranty breaches. How do we negotiate these terms down?

Question

Tyler Smith · Accepted Answer

An indemnity escrow of fifteen percent for twenty-four months is highly restrictive and locks up your capital. Your goal is to minimize both the amount of cash held back and the length of time it is withheld.

To negotiate these terms down, you should propose Representation and Warranty Insurance, or RWI. With RWI, a third-party insurer steps in to cover losses from potential breaches, allowing you to reduce the buyer's escrow requirement to a fraction of their original ask, often down to one percent or less.

If RWI is not feasible due to transaction size, negotiate a tiered release schedule. For example, insist that half of the escrowed funds be released at the twelve-month mark, with the remaining balance released at eighteen months.

Additionally, establish a clear liability basket and cap. Ensure the basket is a deductible rather than a first-dollar threshold, meaning you are only responsible for claims that exceed a certain amount, and cap your total liability at a low single-digit percentage of the deal value.

By using these structural guardrails, you can protect your closing proceeds and ensure you are not left waiting years to access your hard-earned capital.