The buyer is demanding a fifteen percent indemnity escrow for structural representations and warranties, but we want to substitute this with Reps and Warranties Insurance. How do we negotiate the cost split and retention limits to maximize our cash at close?

Question

Tyler Smith · Accepted Answer

An indemnity escrow that locks up fifteen percent of your purchase price for two years is a major liquidity drag. It keeps your hard-earned capital out of your hands and subjects it to post-close disputes. Replacing this escrow with Representations and Warranties Insurance is a highly effective way to get more cash at close. With RWI, the insurance policy, rather than your escrow cash, serves as the primary source of recovery for the buyer if there is a breach of representations. To make this work, negotiate for the buyer to purchase the policy while you agree to split the premium cost. The cost of the insurance is almost always a fraction of the capital you would otherwise have locked up in escrow. You should also negotiate a low seller retention limit, which caps your personal liability at a tiny fraction of the deal value, often less than one percent. This structure gives the buyer peace of mind while allowing you to walk away with ninety-nine percent of your cash at close. To secure this insurance at a reasonable rate, make sure your due diligence materials are pristine. Use your documented EOS® processes to show the underwriters that your financial and operational data is accurate and structured, which reduces their perceived underwriting risk.