An escrow account is a financial account managed by a third party, such as a bank or an attorney, and is used to hold funds or assets until specific conditions are met.
In the context of M&A, the escrow account serves as a safeguard for both the buyer and the seller, protecting them from the risks associated with the transaction.
One of the primary benefits of using an escrow account in M&A is that it ensures that the seller fulfills its obligations under the transaction. For example, if the seller has made representations or warranties about any specific condition of the assets being sold, the buyer may require that a portion of the purchase price be held in escrow until those representations and warranties have been proven true. This ensures that the buyer has recourse if the seller's representations and warranties are false or inaccurate.
Likewise, escrow protects the buyer as well. If the seller has obligations to perform specific tasks or meet certain conditions, the buyer can require that a portion of the purchase price be held in escrow until those obligations have been met. This protects the buyer from the risk of failing to fulfill his duties and provides the buyer with recourse if the seller breaches the agreement.
Another benefit of using escrow in M & A is that it can facilitate the transaction with a neutral third party to manage the funds and assets involved. The third-party escrow agent can help ensure that the transaction proceeds smoothly and provide oversight and accountability that might not be present if the funds were transferred directly from one party to the other.
There is also an indemnity escrow, which involves holding back a portion of the purchase price to cover any losses or damages that may arise after the transaction has been completed. This is often used when potential liabilities are associated with the assets being sold, such as environmental or regulatory risks.
The use of escrow is a critical component of any M&A transaction. It protects both the buyer and the seller from the risks associated with the transaction to ensure that the transaction proceeds smoothly. By holding funds or assets in escrow until certain conditions are met, both parties can have confidence that their interests are protected.
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Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $10 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the Global M&A Network as well as the #1 Sell-side Exclusive M&A Advisor in the World by Pitchbook’s Global League Tables.