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
| Dimension | Escrow | Indemnity |
|---|---|---|
| What it is | A cash holdback (the money) | A contractual promise (the obligation) |
| Typical size | 5–15% of purchase price | Capped at 10–20% of purchase price (rep breaches); uncapped for fundamental reps and fraud |
| Duration | 12–24 months typically | 18-36 months for general reps; 6-10 years for tax and fundamental reps |
| Release trigger | Automatic on end-of-term absent open claim | On specific claim resolution |
| Who holds the money | Third-party escrow agent (bank or specialist) | Not applicable — indemnity is a promise, not money |
| Bilateral | Held to buyer's benefit; released to seller absent claim | Seller owes buyer; occasionally reciprocal for buyer reps |
| R&W insurance impact | Reduces required escrow materially (often to 0–2%) | Insurance policy replaces most of the seller's indemnity obligation |
When to use which
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 →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.