Escrow
Escrow is money from the purchase price held by an independent third party — a bank or a law firm — for an agreed period after completion, to be paid to the seller if no claim arises and to the buyer if one does. It gives a buyer's warranty and indemnity claims a fund to be paid from without suing the seller for it.
- Also known as
- Escrow account, Retention, Holdback
- Used at
- completion, funded out of the purchase price
- Binding
- yes; the escrow agreement is signed with the sale agreement
- Typical size
- 5–15% of the price; larger where there is no warranty insurance
- Typical period
- 12–24 months, matching the general warranty period; longer for specific risks
- Parties
- buyer, seller and the escrow agent, who releases funds only on joint instruction or an award
How an escrow works in practice
A warranty is only as good as the seller's ability to pay when it is broken, and once the price has been paid out to a dozen shareholders, three of them abroad and two of them funds that have distributed the proceeds, the ability is doubtful. Escrow solves that by keeping part of the price where both sides can reach it. At completion the buyer pays most of the price to the sellers and the rest to the escrow agent; the escrow agreement says when it is released and on whose instruction.
The size and period follow the risk. A fintech with a clean diligence and warranty insurance in place may have a small escrow, or none, because the insurer stands behind the warranties instead. One with a regulatory finding, an open tax query or a customer concentration will have a larger escrow, sometimes with a separate tranche held against the specific risk for as long as that risk lives — a tax escrow until the assessment period closes, a regulatory escrow until the supervisor's review is closed.
Escrow and earn-out are different money moving in opposite directions: escrow is the seller's money, held back until the buyer's claims are known; an earn-out is the buyer's money, paid only once the seller's targets are met. Both appear in most fintech deals, and both need a mechanism for disputes that does not require a court.
Example
A £30m share purchase completes with £3m (10%) paid into escrow with the buyer's solicitors for 18 months, and a further £600,000 held in a separate tranche against a safeguarding reconciliation the FCA had queried. At month nine the buyer notifies a warranty claim for £420,000 over a mis-stated merchant contract; the sellers dispute it, the independent accountant finds £310,000, and that sum is released to the buyer. At month 18 the remaining £2.69m goes to the sellers; the safeguarding tranche is released to them a year later when the regulator closes its file.
Common mistakes
- An escrow that releases automatically on a date, regardless of claims notified before it. - No agent, or the buyer as agent — the point is that neither side controls the money. - Sellers who do not read the release mechanism and find that a notified claim freezes the whole fund, not just the claimed amount. - Buyers who rely on escrow for risks that will outlive it, such as tax. - Confusing escrow with the reserve account a payment provider holds against merchant risk — the words are used for both, and they are different things.