It’s common to have Indemnity Escrows in M&A transactions. As we discussed in Deal Note® 105, escrows are designed to protect the buyer by holding back a portion of the purchase price to address any potential post-closing adjustments. In today’s Deal Note®, we address what sellers can generally expect when it comes to Indemnity Escrows.
Indemnity Escrow amounts can vary substantially based on the facts and circumstances of a given sale, but commonly have a range from 5% to 10% of the transaction value, in the middle market of the aerospace and defense industry. Typical terms are 12 to 24 months but can be longer if there are extenuating circumstances. Usually, if no claims arise, the funds are typically released in one installment at the term of the escrow period. In some cases, the escrow can be released in installments. It is also common for buyers and sellers to negotiate whether or not the indemnity “basket tips”, which is a topic for a future Deal Note®.
Our experience over the past 23 years is that roughly 82% of all indemnity escrows have been released to the seller, with the balance of 18% being retained / returned to the buyers. When there have been claims against indemnity escrows, our experience has been that resolutions have been reached between the parties without the need for litigation in more than 90% of our deals. While our experience indicates that indemnity escrows pose limited risk to the seller, we always advise our clients to assume a worst-case scenario in this regard and be willing to close on the transaction assuming the entire indemnity escrow could be lost.
Have a great day everyone,
Max McFarland
Associate
