To secure their target multiple, the buyer is demanding a fifteen percent cash holdback in escrow for general representations and warranties. How do we negotiate the use of Buy-Side Representations and Warranties Insurance to replace this escrow so we can walk away with maximum cash at close?

Question

Tyler Smith · Accepted Answer

In a typical transaction, buyers demand that ten to fifteen percent of the purchase price be held in escrow for twelve to twenty-four months to cover potential breaches of representations and warranties. For an owner, this cash holdback is a major risk, as buyers can make questionable indemnity claims post-close to claw back their purchase price.

To protect your net proceeds, you should push for Buy-Side Representations and Warranties Insurance, often abbreviated as RWI. Under an RWI policy, an insurance carrier steps into the shoes of the seller for almost all operational and financial representation breaches. This allows you to negotiate a nominal indemnity escrow, often as low as one-half of one percent of the enterprise value, which is typically released after twelve months.

To secure RWI on favorable terms, your books and operational records must be highly organized. Underwriters will review your corporate records, employment agreements, tax filings, and Quality of Earnings reports. By presenting a highly structured business, you make the underwriting process simple. The cost of the policy premium can be split between you and the buyer, but the ability to walk away from the closing table with ninety-nine percent of your cash makes RWI one of the most strategic tools for protecting your exit proceeds.