Mergers & Acquisitions ('M&A') Escrow

Mergers & Acquisitions ('M&A') Escrow is an arrangement used in mergers and acquisitions to hold part of the transaction funds with an independent third party.

Instead of all money passing directly between buyer and seller at completion, an agreed amount is paid into an escrow account. The funds are held there and released only when agreed conditions are met.

M&A Escrow is commonly used to manage post-completion risk. This includes warranty and indemnity claims, price adjustments, deferred consideration and earn-outs.

M&A Escrow is suitable for buyers and sellers involved in share or asset transactions where some risk remains after completion.

It is commonly used where there is uncertainty around liabilities, future performance or final purchase price. It is also used where parties want a neutral mechanism to manage post-completion claims without relying on future enforcement.

Advisors often recommend M&A Escrow in transactions involving overseas sellers, complex group structures or situations where warranty and indemnity insurance is in place.

M&A Escrow is usually put in place at completion of the transaction.

It is used where part of the purchase price is held back to cover potential claims, adjustments or future payments. In some cases, escrow is also used earlier in the deal, for example to hold a good-faith deposit or regulatory security.

Escrow is particularly common in UK-led transactions with cross-border elements, where enforcement risk or timing uncertainty needs to be managed carefully.

Escrow involves holding real money, independently and in advance, so that payment does not depend on a future claim being accepted.

Bonds and insurance rely on a third party promising to pay later, subject to conditions, exclusions and their own financial capacity at the time of claim.

Unresolved risk at completion

Even in well-run transactions, not all risks can be fully resolved by the time a deal completes. Some issues only emerge after the buyer has taken control of the business, despite extensive due diligence.

Buyers may worry about unknown liabilities, historic compliance issues or matters that were not visible during the transaction process. Sellers, on the other hand, may be concerned about money being withheld for risks that never materialise.

Without a neutral mechanism, these concerns can lead to delayed completion, protracted negotiations or reliance on trust that neither party is comfortable giving.

Warranty and indemnity exposure

Warranties and indemnities are intended to allocate risk, but enforcing them after completion can be difficult in practice. Claims may take time to resolve and often involve disagreement over evidence, timing or quantum.

Buyers may be left relying on the seller’s ongoing solvency or willingness to engage. Sellers may face uncertainty about how long they remain exposed and how much could ultimately be claimed.

Without escrow, parties often fall back on litigation or negotiation, both of which can be slow, expensive and damaging to relationships.

Completion mechanics and price uncertainty

Many M&A deals include mechanisms that adjust the purchase price after completion. Completion accounts, working capital adjustments and locked-box leakage claims can all leave part of the consideration unsettled for months.

This can create tension between buyer and seller, particularly where there is disagreement over calculations or accounting treatment. In the meantime, one party may be holding funds that the other believes it is entitled to receive.

Without escrow, these situations can lead to disputes or delayed settlement, even where the deal itself has otherwise completed successfully.

Deferred consideration and earn-outs

Deferred consideration and earn-outs are often used where future performance is uncertain or where buyer and seller have different views on value. While commercially attractive, they can be difficult to administer.

Disputes may arise over whether milestones have been met, how performance is measured or whether the buyer has acted in good faith. Sellers may worry about whether funds will be paid at all, while buyers may be concerned about paying too early.

Without a clear mechanism, deferred payments can become a source of long-running disagreement after completion.

Credit, counterparty and enforcement risk

After completion, the seller may have distributed proceeds, exited the jurisdiction or reorganised its affairs. This can make enforcing contractual claims more complex.

In UK-led transactions with overseas sellers or group structures, enforcement may involve unfamiliar legal systems or practical barriers. Even where a claim is valid, recovery may be uncertain.

These risks are often recognised during negotiations but can be hard to address without a practical holding mechanism.

Completing deals where risk remains

In some transactions, the commercial terms are agreed but the parties cannot fully align on how residual risk should be handled.

Buyers may want security that sellers are unwilling or unable to provide directly. Sellers may resist open-ended obligations or prolonged exposure.

Without a neutral solution, these issues can delay or prevent completion, even where both parties want the deal to proceed.

Certainty and neutrality

M&A Escrow provides a neutral and independent way to hold funds outside the control of both buyer and seller.

Agreed amounts are set aside at completion and administered by a third party. Funds are released only in line with the escrow agreement, not at the discretion of either party.

This removes the need for trust in the counterparty and replaces it with a clear, documented process.

Managing warranty and indemnity risk

Escrow provides a practical source of recovery for warranty and indemnity claims. If a claim arises and the agreed conditions are met, funds can be paid from escrow without relying on future enforcement.

Where warranty and indemnity insurance is in place, escrow commonly supports the retention or excess. In these cases, escrow and insurance work together to allocate risk clearly and efficiently.

This can simplify claims handling and reduce friction between the parties.

Supporting completion mechanics

By holding part of the purchase price in escrow, parties can complete transactions on time while allowing post-completion processes to run their course.

Escrow provides a clear pool of funds for completion account adjustments or other price mechanisms, reducing the scope for dispute over payment timing.

This allows the deal to close cleanly, even where final numbers are still being agreed.

Structuring deferred consideration and earn-outs

Escrow can be used to hold deferred payments or earn-out amounts pending the achievement of agreed milestones.

This gives sellers comfort that funds are available and protected. At the same time, it protects buyers from paying before conditions are met.

Clear escrow mechanics can reduce the likelihood of disputes and provide a predictable framework for future payments.

Reducing enforcement and cross-border risk

By placing funds under the control of an independent escrow agent, parties reduce reliance on litigation or cross-border enforcement.

Where claims are agreed or determined, payment can be made directly from escrow. This avoids the need to pursue assets in another jurisdiction or to rely on the seller’s ongoing presence.

This is particularly valuable in UK-led transactions with international elements.

Facilitating deal completion

Escrow is often used as a practical compromise where parties cannot fully agree on risk allocation.

Funds are set aside, the deal completes, and remaining issues are dealt with later under a clear framework. This can unlock transactions that might otherwise stall.

Advisors frequently see escrow as a deal-enabling tool rather than simply a security measure.

Benefits for buyers

For buyers, M&A Escrow improves certainty and recoverability.

It provides confidence that funds will be available if claims arise and sets clear limits on exposure. Buyers also benefit from a defined process for accessing funds, rather than relying on negotiation or enforcement after completion.

Benefits for sellers

For sellers, escrow provides clarity and finality.

Exposure is capped to agreed amounts and time periods. Funds are governed by clear release and return conditions, rather than being subject to unilateral withholding.

Where no claims arise, escrowed funds are released back to the seller in line with the agreed timetable.

Benefits for advisors and stakeholders

For legal and financial advisors, escrow provides a clean, neutral mechanism that integrates easily into transaction documents.

Lenders, investors and insurers often view escrow as strengthening deal governance and reducing execution risk. It can also provide reassurance to boards and other stakeholders involved in the transaction.

M&A Escrow can be used in several different ways, depending on how risk is allocated in the transaction. There is no single standard structure.

Common arrangements include holdbacks to cover warranty and indemnity claims, escrow to support completion accounts or price adjustments, escrow for deferred consideration or earn-outs, and escrow to support warranty and indemnity insurance retentions.

Escrow may also be used to hold good-faith deposits, regulatory security or other amounts that need to be set aside temporarily as part of the deal.

Yes. M&A Escrow arrangements are almost always tailored to the specific transaction.

Different escrow amounts may be used for different risks. For example, one escrow may cover general warranties, while another supports a specific indemnity or earn-out. Release conditions, time limits and claims processes can also vary depending on the nature of the risk.

Escrow can be combined with warranty and indemnity insurance, guarantees or other forms of security. Advisors often recommend this layered approach where transactions are complex or where risk needs to be allocated carefully between buyer and seller.

All escrow arrangements are administered through the dospay digital escrow portal.

The portal provides a single place where authorised parties can view account balances, payment history and escrow status. It also supports the submission and tracking of information required for payments or releases, in line with the escrow agreement.

Using a digital portal reduces reliance on email chains and manual reconciliation. It improves transparency and creates a clear audit trail for payments and releases. Advisors often find this helpful when reviewing payment history or responding to queries during the life of the project.

M&A Escrow works by holding an agreed part of the transaction funds outside the control of both buyer and seller.

At completion, the buyer pays the escrow amount into an independent escrow account. The balance of the purchase price is paid directly to the seller.

The escrowed funds then sit in the account while the post-completion period runs. They are used only if agreed conditions are met.

The sale and purchase agreement and related transaction documents continue to govern the deal. They define the warranties, indemnities, adjustment mechanics and claims process.

The escrow agreement sits alongside those documents. It does not change the parties’ rights. It simply sets out how money is held and when it may be released or returned.

Release conditions in the escrow agreement are usually linked directly to provisions in the sale agreement, such as agreed claims, completion account outcomes or earn-out calculations.

Only parties authorised under the escrow agreement can give instructions to the escrow agent. This is agreed at the outset and documented clearly.

Instructions are usually tied to specific events, such as the issue of a certificate, confirmation of a milestone or the occurrence of a payment default. The escrow agent checks that the instruction matches the agreed conditions before acting.

This approach ensures that payments are controlled, predictable and not dependent on informal requests or unilateral decisions by one party.

Only parties authorised under the escrow agreement can give instructions to the escrow agent. This is agreed and documented at the outset.

Instructions are usually tied to specific events, such as agreement of a claim, finalisation of completion accounts or confirmation that no claims have arisen within an agreed period.

The escrow agent checks that instructions match the agreed conditions before acting. Informal or unilateral requests are not accepted.

Below is a practical view of the steps that parties typically follow when using M&A Escrow.

1. Deposit escrow funds at completion
   At completion, the buyer deposits the agreed escrow amount into the escrow account. The remainder of the purchase price is paid to the seller.
2. Funds held during the post-completion period
   The escrowed funds are held independently while warranty periods run, completion accounts are prepared or earn-out conditions are assessed.
3. Assess agreed conditions
   Claims, adjustments or earn-out outcomes are assessed in line with the sale agreement and the escrow agreement.
4. Release or return funds
   If agreed release conditions are met, funds are paid from escrow to the buyer or another agreed party. If no claims arise, or if return conditions are met, funds are released back to the seller.
5. Handle uncertainty or disputes if they arise
   If there is disagreement or uncertainty, the funds remain held while the agreed process is followed.
6. Close the escrow arrangement
   Once all escrowed funds have been released or returned, the escrow account is closed in line with the agreement.

Setting up an M&A Escrow account starts with agreement between the buyer and seller on how escrow will be used in the transaction. This includes the escrow amount, the purpose of the escrow and the conditions for release or return of funds.

Once this is agreed in principle, an escrow agreement is prepared. This document aligns with the sale and purchase agreement and sets out how the escrow account will operate after completion.

At the same time, we begin the account opening and onboarding process. These steps run in parallel so that the account is ready to receive funds at completion.

The time needed to open an M&A Escrow account depends on the parties involved and the complexity of the transaction.

For straightforward UK-led transactions, account opening can usually be completed within a short period once the required information has been provided and the escrow agreement is agreed. Deals involving overseas parties, complex ownership structures or multiple escrow purposes may take longer.

Most delays arise from incomplete information rather than from the escrow process itself.

To open an M&A Escrow account, standard onboarding checks are required. These are similar to the checks required when opening a bank account or instructing a law firm.

This usually includes confirming the identity of authorised individuals, the ownership and control of the buyer and seller entities, and the source of the escrow funds.

We may also need high-level information about the transaction, so the escrow account can be set up correctly and in line with the agreed structure.

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The following information is typically required to open an M&A Escrow account:

• Details of the buyer and seller
• Identification information for authorised individuals
• Corporate documents showing ownership and control
• Source of funds information for the escrow amount
• Agreed escrow amount and purpose
• Summary of release and return conditions
• Target completion date and transaction timetable

Providing this information clearly and early helps ensure the account can be opened without unnecessary delay and is ready for completion.

An M&A Escrow account is usually funded by the buyer at completion.

The escrow amount is agreed as part of the transaction and paid into the escrow account at the same time as completion takes place. The balance of the purchase price is paid directly to the seller.

In some cases, escrow may also be funded in stages, for example where deferred consideration or earn-outs are involved. The funding approach is set out clearly in the escrow agreement.

Payments from an M&A Escrow account are made only when the agreed release conditions are met.

These conditions are set out in the escrow agreement and usually link back to the sale agreement. Examples include agreement of a warranty claim, finalisation of completion accounts or confirmation that no claims have arisen within an agreed period.

When a release request is made, we check that the agreed conditions have been satisfied before releasing funds in line with the escrow agreement.

If instructions are disputed or unclear, we will not release the funds.

Instead, the funds remain held safely in the escrow account while the parties follow the process set out in the escrow agreement. This may involve clarification, confirmation from an agreed third party, or the use of the dispute resolution process under the underlying contract.

This approach protects both parties. It ensures that money is not released prematurely and that funds remain available once the position is resolved.

If a party to the underyling contract becomes insolvent, we continue to operate under the escrow agreement.

Because the funds are held in escrow and not in the control of either party, they are protected from being used for other purposes. We will follow the agreed instructions and any applicable insolvency process, as set out in the escrow agreement.

In practice, this can provide greater certainty than relying on funds held directly by one of the parties, particularly where payment timing or entitlement is being considered as part of an insolvency situation.

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What happens if DOS & Co. becomes insolvent?

All escrow funds are segregated (kept separate from our own funds), safeguarded (protected by law from our own creditors) and kept liquid and unencumbered at the Bank of England. In the event of our insolvency, we have set aside regulatory capital that will be used by our administrators to 'unwind' our affairs - this will usually involve working with the parties to agree the identity of a new escrow agent who will 'step in' to carry out our obligations under the escrow agreement.