The buyer wants to set up a massive seller-funded indemnity escrow for reps and warranties, but we want to use Representation and Warranty Insurance to walk away clean. How do we structure the deal to shift this liability to an insurer while maintaining our target valuation?

Question

Tyler Smith · Accepted Answer

A traditional indemnity escrow traps a significant portion of your purchase price in a bank account for years, leaving you exposed to post-close claims and eroding the cash you actually pocket at closing. To avoid this, you should introduce Representation and Warranty Insurance into the deal structure early in the negotiation process.

First, present the deal to the buyer as a clean-exit transaction. Under this structure, the buyer purchases a buy-side Representation and Warranty Insurance policy, which serves as their primary source of recovery for any breaches of your representations and warranties. This allows you to reduce your indemnity escrow to a nominal amount, often less than one percent of the deal value, which is typically released after twelve months.

Second, address the cost of the policy. The premium and underwriting fees for Representation and Warranty Insurance are typically divided between the buyer and the seller. You should agree to split these costs, as the minor expense of the policy is far outweighed by the immediate release of your purchase price at closing.

Third, use your documented operating systems and clean financial records to secure favorable insurance terms. Insurers will closely analyze your operational discipline during underwriting. By presenting your documented processes, clean historical scorecards, and institutionalized Accountability Chart, you prove to the insurer that your business is run with low operational risk, which lowers the policy premium and eliminates exclusions.

By structuring the deal with Representation and Warranty Insurance, you shift the transaction risk to a third-party insurer, protect your hard-earned valuation, and walk away from the closing table with maximum liquidity.