The buyer is demanding a fifteen percent general indemnity escrow held for two years to cover potential post-close breaches. How do we structure the deal to unlock this cash at closing while still satisfying their risk requirements?

Question

Tyler Smith · Accepted Answer

Buyers naturally want to hold back a significant portion of the purchase price in a general indemnity escrow to protect themselves against potential breaches of representations and warranties in the purchase agreement. However, letting fifteen percent of your hard-earned cash sit in an escrow account for two years is highly inefficient and subjects your proceeds to unnecessary risk.

To unlock your cash at closing, propose using Representation and Warranty Insurance, or RWI. An RWI policy shifts the risk of post-close indemnity claims from you, the seller, to a third-party insurance provider. This allows you to walk away from the closing table with nearly all of your cash.

When negotiating the deal structure, suggest splitting the cost of the RWI premium and diligence fees fifty-fifty with the buyer. This is a highly attractive proposition for the buyer because it provides them with a larger pool of capital and a longer survival period for claims than a typical seller-funded escrow would offer.

By implementing RWI, you can reduce the required indemnity escrow from fifteen percent to a nominal survival fund of around one-half of one percent of the transaction value. This small escrow is typically released within twelve months, ensuring you receive your full purchase price quickly while protecting both parties from unforeseen post-close liabilities.