The buyer wants to hold back 15 percent of the purchase price in an indemnity escrow to cover contractor classification risks. How do we use Representations and Warranties Insurance to eliminate this?

Question

Tyler Smith · Accepted Answer

Buyers often demand that ten to fifteen percent of the purchase price be locked up in an escrow account for over a year to cover potential breaches of representations and warranties. This tied-up cash delays your liquidity and subjects you to the risk of frivolous claims. To avoid this, negotiate the use of representations and warranties insurance, known as RWI, to replace the traditional indemnity escrow. Under an RWI policy, the insurer takes on the risk of most operational and financial breaches, allowing you to walk away from the closing table with almost all of your cash. While the buyer may ask you to split the insurance premium, this cost is a fraction of the value of having your capital immediately liquid. Ensure the policy has a low deductible and covers key operational areas, like tax compliance and employee classification. Keep your corporate records clean and your systems documented so the insurance underwriters can complete their diligence quickly. By presenting a highly structured business, you make the underwriting process simple and keep the transaction moving forward without leaving your hard-earned money locked in a bank account you do not control.