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In Mergers and Acquisitions (M&A) transactions, escrow is a financial arrangement where a portion of the purchase price is held by a neutral third party. This ensures that funds are available to address any claims, indemnities, or post-closing adjustments that may arise. The escrow account holds the funds until all specified conditions are met, protecting both the buyer and the seller from potential risks and ensuring compliance with the agreed terms.
Consider an M&A transaction where Company A acquires Company B for $10 million. To safeguard against potential post-closing liabilities, $1 million is placed in an escrow account. If Company A discovers undisclosed liabilities within the agreed-upon period, they can claim compensation from the escrow funds. Once all conditions are fulfilled, the remaining funds are released to Company B. This arrangement provides security and ensures both parties adhere to the transaction terms.
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