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EscrowvsIndemnification

Escrow and indemnification are the two mechanisms that back a buyer's reliance on the seller's reps and warranties. One is the money; one is the promise.

The one-sentence difference

Escrow is a portion of the purchase price held by a third-party agent as security for potential indemnification claims. Indemnification is the seller's contractual obligation to make the buyer whole for specified losses (typically breaches of reps and warranties).

Side-by-side

DimensionEscrowIndemnity
What it isA cash holdback (the money)A contractual promise (the obligation)
Typical size5–15% of purchase priceCapped at 10–20% of purchase price (rep breaches); uncapped for fundamental reps and fraud
Duration12–24 months typically18-36 months for general reps; 6-10 years for tax and fundamental reps
Release triggerAutomatic on end-of-term absent open claimOn specific claim resolution
Who holds the moneyThird-party escrow agent (bank or specialist)Not applicable — indemnity is a promise, not money
BilateralHeld to buyer's benefit; released to seller absent claimSeller owes buyer; occasionally reciprocal for buyer reps
R&W insurance impactReduces required escrow materially (often to 0–2%)Insurance policy replaces most of the seller's indemnity obligation

When to use which

Use Escrow when

On virtually every private-company sale over $2M EBITDA — buyers require some form of holdback to secure indemnity claims that arise post-close.

Full article on Escrow →
Use Indemnity when

On virtually every M&A transaction. Indemnification is the primary risk-allocation mechanism in an SPA. Escrow is one way to secure it; personal guarantees, letters of credit, and R&W insurance are others.

Full article on Indemnification →

What they have in common

Both operate in service of the seller's reps and warranties. Both are heavily negotiated in the definitive agreement. Both are progressively replaced by R&W insurance in modern middle-market deals.

Frequently asked

Do I need both escrow and indemnification?

Every SPA has indemnification (it's the risk-allocation architecture). Not every SPA has escrow — R&W insurance has replaced escrow on many deals. But when there's no R&W insurance, escrow is the standard mechanism to secure indemnity.

How does R&W insurance change this?

R&W insurance replaces the seller's indemnity obligation (up to policy limits) with an insurance policy the buyer buys. Escrow drops to 0–2% of price (just to cover the retention / deductible). This is why R&W insurance has become the norm on $30M+ EV deals.

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