The buyer wants two separate escrow holdbacks at close: three percent for net working capital true-ups and seven percent for general indemnification. How do we negotiate separate release triggers, timelines, and dispute mechanics so our closing proceeds are not trapped indefinitely?

Question

Tyler Smith · Accepted Answer

Buyers routinely combine or cross-collateralize working capital adjustments and indemnity claims to hold seller proceeds hostage. Permitting these funds to mingle creates an open-ended dispute vehicle where minor inventory questions can freeze your entire indemnity release.

You must insist on complete contractual separation between these two escrow buckets.

For the working capital escrow:
- Limit the holdback duration to ninety or one hundred twenty days post-close. This is ample time for the buyer accounting team to produce the closing balance sheet.
- Require automatic release of all undisputed funds on day ninety, with only the exact disputed variance remaining in escrow pending CPA resolution.
- Prohibit cross-collateralization. The purchase agreement must state that working capital deficits cannot be collected from the indemnity escrow, and indemnity claims cannot attach to the working capital escrow.

For the general indemnity escrow:
- Set the release schedule to twelve months, aligning with one full audit cycle, rather than eighteen or twenty-four months.
- Require a true indemnity basket (deductible) rather than a dollar-one tipping basket, preventing the buyer from making nuisance claims for small operational hiccups.
- Establish that any claim notice must include specific documented damages and third-party evidence, not speculative contingent liabilities.

Separate escrow accounts at the paying agent bank and clear contractual language protect your liquidity. Do not sign a single omnibus escrow agreement that gives the buyer unilateral holdback leverage over both balance sheet true-ups and rep warranties.