Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Escrow Release Schedule Traps M&A Sellers
Transcript
- Lucas: You close a deal. The champagne is warm but you don't care — you've just sold your company. And then you discover that a chunk of the purchase price — say, 15 percent — is sitting in an escrow account, and you won't see it for 18 months. Luna: That's the escrow release schedule. And it's one of those terms that sellers rarely focus on until after signing because they're so fixated on the headline number. Lucas: Exactly. Most sellers assume 'escrow' means 'money in the bank, just delayed.' But the release schedule determines whether you get your cash in one lump sum after six months — or dribs and drabs over two years, often tied to conditions the buyer controls. Luna: Give me a concrete example. One where a seller got burned. Lucas: I worked with a founder in the industrial distribution space — let's call his company Acme Supply. He sold for about $30 million. The buyer put 12 percent of the purchase price into escrow. That's $3.6 million. Luna: Which, for a founder whose entire net worth was tied up in that one company, is a lot of money to have in limbo. Lucas: Massive. And the escrow agreement had a phased release: one-third at six months, one-third at twelve months, and the final third at eighteen months — with the release of each tranche conditioned on the buyer's 'satisfactory completion of post-closing adjustments.' Luna: Which sounds reasonable on paper, but gives the buyer a lot of discretion. Lucas: Exactly. In this case, the working capital adjustment was resolved within 90 days. There were no indemnity claims. But the buyer's CFO kept delaying sign-off on the first tranche, citing 'ongoing review of inventory accounting.' That first $1.2 million didn't get released until month nine. Luna: So the buyer used the escrow schedule as a leverage tool — not because they had a legitimate claim, but because they could slow-walk the process. Lucas: Correct. And the seller had no contractual right to force an earlier release. The agreement said 'within a reasonable period after the conditions are satisfied.' But 'reasonable' isn't a date. Luna: Let's talk about the common structures. What are the typical release schedules in middle-market deals? Lucas: There are three main ones. The simplest is a single-tranche release: one lump sum at the end of the survival period — usually 12 to 18 months for reps and warranties. That's clean, but it means the seller waits a long time for all their money. Luna: And if there's a small claim near the end, the entire release can get held up. Lucas: Exactly. That's the risk. Then there's the milestone-based release, which is what Acme had — tranches tied to specific events, like completion of the working capital adjustment or expiration of the indemnity period for fundamental reps. The problem is that those milestones often depend on the buyer's certification. Luna: So the buyer controls the trigger. Lucas: Right. The third structure is a rolling release. That's common in larger deals. A portion of escrow is released every quarter, regardless of claims, but the seller has to wait for the full period. For a $50 million deal with a 10 percent escrow, you might get $1.25 million every quarter for four quarters. Luna: That gives the seller predictable cash flow, but it still ties up capital for a full year. Lucas: It does. And the key negotiation point for sellers is to push for a fixed date release — not conditioned on the buyer's satisfaction. You want language that says 'within 10 business days after the six-month anniversary of closing,' period. Luna: And what about tying the release to the survival period of the reps? I've seen that work. Lucas: That's actually the best approach. Most reps survive for 12 to 18 months. So you negotiate that the escrow releases in full 10 days after that survival period ends — unless a claim has been filed. If a claim is filed, only the amount reasonably related to the claim stays in escrow; the rest gets released. Luna: That prevents the buyer from using a small claim to freeze the entire escrow. Lucas: Exactly. And it's a very standard provision in well-negotiated SPAs — the 'release of uncontested amounts' clause. But you have to ask for it. The buyer's first draft will almost never include it. Luna: Before we go further — I want to acknowledge something. If this kind of practical detail is helping you think about your own deal, you're exactly the listener we make this show for. The reason this stays free and ad-free is that listeners who find value in it occasionally support us at buy me a coffee dot com slash fexingo. No pressure, but it's what keeps these conversations going. Lucas: Yeah, and we mean that genuinely. You get something useful, we get to keep doing this without selling your attention. Now — back to the escrow. One more structure I want to flag is the 'earn-out hybrid' escrow. Luna: Where the escrow release is tied to earn-out milestones? That sounds like a double trap. Lucas: It can be. Some buyers will propose that a portion of the escrow releases only if the company hits certain revenue targets in year two post-close. That is incredibly dangerous for the seller because now you're tying your post-closing consideration to performance you no longer control. Luna: And the buyer can change strategy, cut marketing, or reassign your team — and suddenly the earn-out fails, and the escrow doesn't release. Lucas: Right. I saw this in a tech deal last year. The seller agreed to a $2 million escrow with half releasing on a $5 million revenue milestone in year two. The buyer decided to pivot the product line six months in, revenue came in at $3.8 million, and that $1 million stayed in escrow indefinitely — even though no indemnity claim existed. Luna: So the seller essentially gave the buyer a free loan, plus the buyer got to decide whether to pay it back. Lucas: Exactly. And the remedy is to keep the escrow separate from any earn-out. Escrow is for indemnity. Earn-out is for performance. They should never be in the same bucket. Luna: What about the size of the escrow? Is there a standard percentage? Lucas: In the middle market, 10 to 15 percent of the purchase price is common. But I've seen as high as 20 percent for deals with heavy working capital adjustments or regulatory risk. The trend over the last three or four years has been toward lower escrows — partly because reps and warranties insurance has become so common. Luna: Right — if the buyer has RWI, they don't need as big an escrow because the insurer covers breaches. Lucas: Exactly. In those deals, escrows often drop to 5 to 7 percent, just to cover the deductible and any excluded claims. So if you're a seller and the buyer insists on a 15 percent escrow, ask why. They may be self-insuring, which means they're expecting to use that money. Luna: That's a red flag worth exploring. Let's talk about the escrow agent — who holds the money, and does that matter? Lucas: It matters more than most sellers think. Usually it's a major bank or a title company. The agent's role is purely custodial — they hold the funds and release them upon joint instruction from buyer and seller. But if there's a dispute, the agent is typically not allowed to release funds without both parties' consent or a court order. Luna: So a buyer who wants to delay can simply refuse to sign the release instruction, and the agent is stuck. Lucas: That's exactly what happened in a deal I advised on last year. The buyer and seller had a minor disagreement over a $50,000 working capital adjustment. The buyer's legal team refused to sign the release for the entire $4 million escrow. The seller had to file a demand for arbitration just to get the rest of the money released. Luna: Which cost time and legal fees — and the buyer knew that. Lucas: Exactly. The fix is to include a 'no-dispute release' provision. The SPA should say that if no claim has been formally noticed within a certain period, the escrow agent is authorized to release the funds based solely on the seller's certification. That shifts the burden to the buyer to proactively file a claim if they want to hold the money. Luna: That's a powerful clause. I also want to mention something we see in cross-border deals — escrows held in different currencies, with release schedules tied to currency conversion triggers. Lucas: Yes — that adds another layer. If the escrow is in euros but your operating currency is dollars, a delay in release could mean you get hit by FX movements. I've seen sellers lose 5 to 8 percent just because the release happened three months later than planned. Luna: So the lesson is: the escrow release schedule isn't a back-office detail. It's a deal term that directly affects your liquidity and your risk. Lucas: Absolutely. And the best time to negotiate it is before signing. Once the SPA is signed, the buyer has no incentive to let go of that leverage. So sellers: push for a fixed-date release, tie it to the rep survival period, include an uncontested release clause, and keep earn-outs completely separate. Your future self — and your bank account — will thank you. Luna: And if you're in the middle of a deal right now, take a look at your escrow section. Is it a single paragraph? That's a red flag. A well-negotiated escrow release schedule should be at least two or three pages, with clear triggers, timelines, and dispute procedures. Lucas: Good advice. That's it for today. Next time, we'll dig into another term sheet landmine that sellers overlook. Until then, keep your deal terms tight.