The buyer is demanding a fifteen percent cash escrow held back for eighteen months to cover potential indemnity claims. How do we use Reps and Warranties Insurance to structure the deal and protect our cash-at-close?

Question

Tyler Smith · Accepted Answer

A large cash escrow held back in a bank account for eighteen months is a major drag on your liquidity at close. It keeps a substantial portion of your hard-earned wealth tied up and at risk of buyer disputes over representations and warranties. To protect your cash, you should push to structure the deal using Reps and Warranties Insurance, commonly known as RWI.

With RWI, an insurance policy is purchased to cover potential losses resulting from breaches of your representations and warranties in the purchase agreement. This allows you to negotiate a much smaller indemnity escrow, often as low as one-half of one percent of the transaction value, which is used simply to cover the insurance deductible. The buyer gets the security they need from a highly rated insurance company, and you get to walk away with nearly one hundred percent of your cash at closing.

To make this work, introduce RWI during the LOI phase. Specify who will pay the insurance premium, which is typically split between buyer and seller or covered entirely by the buyer as a deal cost. Ensure your financial and legal records are immaculate by conducting a Step by Step Exit Business Integrity Review before diligence begins. This clean operational state makes your company highly insurable and keeps underwriting fees low. By substituting a cold cash escrow with a robust insurance policy, you de-risk your exit and secure your proceeds.