The buyer is demanding a standard indemnity escrow equal to ten percent of the purchase price to cover potential breach of contract claims, which ties up our cash for two years. How do we use Rep and Warranty Insurance to reduce this holdback to almost nothing?

Question

Tyler Smith · Accepted Answer

Indemnity escrows are a major drag on your realized cash at close. You can replace this high-risk holdback by introducing Rep and Warranty Insurance, known as RWI, into the transaction structure. RWI is an insurance policy that covers the buyer's losses if you accidentally breached a representation or warranty in the purchase agreement. By using RWI, you can negotiate the indemnity escrow down to a minimal survival fund, often less than one percent of the transaction value. The buyer gets the security of an A-rated insurance policy, and you get to walk away with nearly one hundred percent of your cash at close. To make your business an attractive candidate for RWI, you must show the insurers that you run a tight ship. Documented core processes, a clean cap table, and a history of hitting your quarterly Rocks prove to the underwriting team that your operations are transparent and low-risk. Allocate a portion of your deal expenses to cover the insurance premium. It is a small price to pay to unlock millions of dollars of your hard-earned equity on day one.