The buyer is demanding we lock up fifteen percent of our transaction proceeds in a traditional indemnity escrow account for two years to cover potential representation breaches. How do we structure a transition to Representation and Warranty Insurance to maximize our cash at close while keeping the buyer fully protected?

Question

Tyler Smith · Accepted Answer

Traditional indemnity escrows lock up a significant portion of your hard-earned cash at close, exposing you to prolonged negotiation and potential disputes over minor representations and warranties. To maximize your walk-away proceeds, you should push for Representation and Warranty Insurance, or RWI, as the primary remedy for indemnity claims.

RWI shifts the risk of breach from your balance sheet to a third-party insurer. This allows you to reduce the escrow amount from fifteen percent down to a survival fund of less than one percent, which is typically used to cover the policy's deductible or retention amount.

To make this transition palatable to a skeptical buyer, introduce RWI early in the deal cycle. Present it as a win-win: the buyer gets a credit-worthy insurance company backing the representations, while you receive almost all of your cash at the closing table.

Agree to split the policy premium with the buyer. The cost of the premium is a small price to pay to unlock fifteen percent of your transaction value on day one.

Ensure your financial records are meticulously organized to facilitate the underwriting process. A clean Quality of Earnings report and a well-documented operating system will speed up the insurer's due diligence, making it easier to secure a comprehensive policy that protects both parties and ensures a clean, lucrative exit.