Escrow

Escrow exists because a buyer cannot fully verify, in the weeks before closing, that everything
the seller has represented about the business is true. Warranties get given, a disclosure schedule
gets written, and then the deal closes anyway on the strength of promises that have not yet been
tested by time. Escrow is the mechanism that makes those promises mean something: part of the
price is held by a neutral third party rather than paid straight to the seller, and stays there
until the period for finding a problem has passed.

For a seller, escrow is money that is legally yours but not yet in your account, sitting behind a
process someone else controls the trigger for. For a buyer, it is the difference between a
warranty that is enforceable in practice and one that is only enforceable in theory, against a
seller who may already have spent the proceeds and moved on. Both readings are correct, which is
why escrow terms are negotiated almost as hard as the price itself.

An escrow arrangement has a few load-bearing variables, and each is worth pinning down before
signature rather than after a dispute starts.

Who holds it. A neutral third party — typically an escrow agent or law firm, sometimes a
bank — administers the account under an agreement both sides sign, so neither party unilaterally
controls the release.

How long it is held. The escrow period needs to be long enough to catch problems that
realistically surface after closing — a tax assessment, a customer contract dispute, a warranty
breach discovered during integration — without being so long that the seller's money is tied up
indefinitely against risks that have effectively passed.

What releases it, and what claims against it. The agreement defines what counts as a valid
claim, what evidence is needed, and what process resolves a disagreement about whether a claim is
valid at all — ideally something faster and cheaper than litigation, such as a named independent
arbiter with a deadline.

What happens at the end. If no valid claim has been made, the held amount (or what remains of
it after any claims are settled) releases to the seller. If a claim is pending when the period
ends, the agreement should say whether the disputed portion stays held or releases regardless.

Escrow is frequently combined with, or replaces, the seller's exposure under representations and
warranties: rather than suing a seller who may be judgment-proof after the fact, the buyer simply
draws on money that was never fully released in the first place.

Escrow is not a cap on the seller's liability unless the agreement says so. A buyer can, in
principle, exhaust the escrow and still pursue the seller separately for a larger claim, unless
the deal documents explicitly make escrow the seller's sole and exclusive remedy for the kinds of
claims it covers. Sellers should push for that language; buyers should think carefully before
giving it up entirely.

Vague trigger language invites disputes. "Material breach," undefined, is an argument waiting
to happen. The clearer the agreement is about what counts as a claim, what evidence is required,
and what threshold has to be crossed, the less the escrow period turns into a standoff near its
final weeks.

Watch the interaction with a working capital adjustment. If the working capital
adjustment is still being disputed when the escrow period
is meant to end, sellers can find both mechanisms tied up in the same argument at once. Settling
one dispute process at a time, with clear sequencing, avoids that pile-up.

A seller who needs the escrowed cash to fund what they do next should say so early. If part of
the seller's plan depends on that money arriving on schedule, it changes how hard they negotiate
the period length and the claim process — better to know that going in than to discover it under
pressure near the end.

Escrow is one of GetDeal's fixed deal-room stages on the M&A track — a dedicated Escrow
stage sits between the deal being signed and the deal being fully closed, visible to both sides on
the same shared stage tracker rather than reported separately by each side. The Legal
Framework stage is where the underlying agreement, including the escrow terms themselves, gets
drafted and signed before the deal moves into that stage.

The Playbook lists every stage in the deal room, what unlocks at each one, and which agreement is
signed when — worth reading before a founder or buyer negotiates escrow terms whose consequences
land months after the deal has otherwise closed.