Escrow and Indemnity Agent

When to use

Use this when diligence has produced findings and someone must turn them into contractual protection. The trigger is the first mark-up of the indemnity article, or a seller resisting how much consideration is held back at close. Reach for it when the argument has become "what is market" and nobody has tied the numbers to the findings.

What it does

It produces a risk-allocation position: each finding mapped to an instrument, a general cap, a basket with its threshold and de minimis, survival periods by rep category, a sized escrow, and the insured versus uninsured comparison.

Method

1. Start from the diligence register, then split it. Known and unknown risk take different instruments.

   • Take every material finding with its exposure and rough probability; a number with no finding behind it is a negotiating position, not a risk.
   • A quantified known issue belongs in a price cut or a specific indemnity with its own cap and escrow; the general indemnity covers what diligence missed.
   • Never let a known issue sit inside the general cap; it eats cover the buyer needs for the unknown.

2. Set the general cap. Express it against enterprise value.

   • Mid-market caps run 10 to 20 percent of value; fundamental reps — title, authority, capitalization — and fraud sit outside it, up to full consideration.
   • State the sandbagging position: whether the buyer keeps a claim for a breach it knew about at signing.

3. Choose the basket. Tipping or deductible, never both.

   • A tipping basket pays from the first dollar once claims pass the threshold; a deductible pays only the excess. The same threshold moves very different money.
   • Add a de minimis so small claims cannot be aggregated to tip the basket.

4. Set survival, then size the escrow. Match the period to the risk; the escrow is security, not the cap.

   • General reps 12 to 24 months, long enough to clear one audit cycle; tax and fundamental reps to the statute of limitations plus a tail; specifics to the life of the exposure.
   • Escrow is a fraction of the cap, often 5 to 10 percent of value, released at the survival date or in two tranches, and is not the same instrument as a holdback or a seller note with set-off.

5. Test representation and warranty insurance. It moves who pays, not what is covered.

   • A limit at 10 percent of value costs 2 to 4 percent of the limit, with retention near 0.5 to 1 percent of value that often halves after twelve months; it is worth most where the seller cannot stand behind the reps.
   • The insurer excludes known matters, so a policy retires the general escrow but never the specific indemnity behind a register finding.

Inputs

• Enterprise value, the consideration mix, and the diligence findings register with severity and estimated exposure
• The draft rep package, and which reps the parties treat as fundamental
• Seller profile: single corporate, fund with a fixed life, or many holders
• RWI indications: limit, premium, retention, and the exclusions

Output format

• Each finding mapped to an instrument: price, specific indemnity, escrow, condition, or insurance
• The general cap as a percentage of value, with the items outside it named
• Basket type, threshold, de minimis, and the sandbagging position
• Survival periods by rep category, and the escrow amount, term, and release schedule
• The insured versus uninsured comparison, and what the policy will not cover
• Present all terms in prose, never as markdown tables

Example

For Verity Labs (fictional, illustrative) at an enterprise value of 250, the general cap is 10 percent, or 25, secured by an escrow of 5 percent, or 12.5, for eighteen months, behind a deductible of 1.25. Diligence found roughly 6 of unremitted sales tax across three states, so it sits outside both the basket and the cap: a specific indemnity capped at 9, or 1.5 times the estimate, with its own 6 of escrow running to the statute of limitations plus sixty days. Insurance changes the shape, not that item. A limit of 25 costs about 0.75 in premium, at 3 percent of the limit, with retention of 1.875, or 0.75 percent of value, halving after a year; the general escrow then falls to 1.25, freeing 11.25 of consideration at close. The sales-tax indemnity and its 6 survive, because the insurer will not cover what the register already names.