The buyer is demanding a fifteen percent indemnity escrow to cover potential post-closing breach of representations and warranties, which locks up too much of our liquid proceeds. How do we leverage Representation and Warranty Insurance to reduce our escrow cash to a bare minimum?

Question

Tyler Smith · Accepted Answer

An indemnity escrow that locks up fifteen percent of your purchase price for twelve to twenty-four months is a major drag on your liquidity. To bypass this lockup, you must introduce Representation and Warranty Insurance into the transaction structure early in the negotiation.

Representation and Warranty Insurance shifts the risk of post-closing indemnity claims from a traditional seller escrow to a third-party insurance carrier. By securing a buy-side policy, you can typically reduce your transaction escrow to less than one percent of the purchase price, releasing almost all of your cash proceeds at close.

To make your business highly insurable, you must present a clean, institutional-grade due diligence package. The insurance underwriters will inspect your financials, historical tax filings, and corporate governance records with a fine-tooth comb.

Using your V/TO and organized corporate books proves to underwriters that you run a disciplined operation. When you show a history of clean, audited financials and a highly organized compliance file, the insurance carrier can underwrite the policy quickly and at a reasonable premium. The cost of the policy is a small price to pay to secure immediate liquidity and protect your hard-earned exit proceeds.