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The Importance of Escrow Accounts in Mergers and Acquisitions

  • By Phil Press Institute 
  • Category: Writedowns 
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Escrow AccountsEscrow accounts are important risk-mitigating tools during the execution of transactions in mergers and acquisitions. The purpose of an escrow agreement is to hold a percentage of the value of the M&A, which is placed in one or more escrow accounts, which the buyer has access to. It allows the buyer to make claims against a seller and retrieve the funds if the seller fails to meet the terms of the purchase agreement.

Escrow Agreements

In the M&A context, escrow agreements have life spans. The percentage of the transaction held in escrow accounts will be held back and can only be retrieved after the termination of the agreement. Each party must employ a real estate attorney from the initial offer to the end of closing to ensure that negotiations benefit both parties and no party pulls out of the deal.

With holdback escrow accounts, the buyer can protect client assets and execute transactions with minimal risks throughout the M&A process. Deal structures during M&A’s can be volatile and complicated, and it benefits the buyer the most because purchasing presents bigger risks.

On top of protecting financial and client assets, escrow deals protect buyers from false representations and warranties, dishonorable sellers, and purchase price adjustments during economic instability. Holdbacks also ensure that sellers pay their share of advisors’ fees. Third-party escrow deals also help minimize the risks of post-closing target company devaluation.

Strategic and Financial Escrows

Escrow agreements benefit both financial and strategic M&A’s, but there are differences with respect to the execution. Strategic acquisitions can become hostile, and true mergers are quite rare, so it’s best to have risk mitigation tools throughout the process.

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Strategic buyers tend to put a large percentage of the assets in escrow until both parties satisfy all commitments of the agreement. Usually, the third party that holds the escrow funds provides end-to-end services to help clients manage financial risk throughout the merger or acquisition. In both financial and strategic transactions, escrows protect both the buyer and seller.

The nature and structure of business transactions allow many uncertainties and risks. A holdback escrow will serve as a bridge between differing views of value, enabling both parties to reach a mutually acceptable understanding.

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